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September 12, 2024

Large cap funds: Stability and growth for education goals

Large-cap-funds

Quality education is a guaranteed pathway to success, economic empowerment, and a bright future. In India, education is revered – it equips a generation with skills to help them sustain a beautiful life for themselves and their families. However, access to education is not uniform. Rising education costs stand in the way of millions of bright minds. The rising costs of higher education necessitate careful financial planning to ensure that children have the resources to pursue their dreams. One effective strategy to achieve this goal is to invest in mutual funds, particularly Large Cap Funds

Importance of Investing for Education Goals

Investing for your child’s education goals is a proactive approach to securing financial stability for your child’s future. By starting early and investing consistently, you can accumulate a substantial sum to cover tuition fees, living expenses, and other related costs. This eliminates the burden of relying solely on loans or savings, allowing your child to focus on their studies without the stress of debt. 

Why Choose Large-cap Funds for Investing in Education? 

Investing in large-cap funds for education financing offers several advantages that make them a prudent choice. Large-cap funds invest primarily in well-established companies with substantial market capitalizations, providing stability and consistent returns. This stability is crucial for long-term financial planning, especially for educational expenses, as these funds are less volatile compared to mid-cap or small-cap investments.  

Furthermore, large-cap companies often pay dividends, contributing to wealth accumulation over time. By choosing large-cap funds, investors can benefit from diversified exposure to leading firms across various sectors, reducing risk while aiming for capital appreciation, making them an ideal option for funding educational pursuits. 

What are Large Cap Funds?

Large cap funds invest primarily in stocks of large-sized companies. These companies typically have a market capitalization of billions of dollars and are often well-established and financially stable. Large cap funds are known for their relatively lower volatility compared to other fund categories, making them suitable for new investors seeking a balance between risk and return. Examples of Large Cap Funds are Larsen & Toubro, HDFC, State Bank of India, Tata Consultancy Services, etc.  

The investment universe of large cap funds typically includes stocks of well-known companies across various sectors and industries. This diversification can help mitigate risks and provide exposure to different economic trends.

Characteristics of Large Cap Funds 

  • Lower Volatility: Large cap funds generally exhibit lower volatility compared to small cap or mid-cap funds, making them suitable for risk-averse investors. 
  • Stability: Large cap companies tend to be more stable and less susceptible to sudden market fluctuations, providing a sense of security for investors. 
  • Dividend Payouts: Many large cap companies pay regular dividends to their shareholders, which can generate additional income. 
  • Growth Potential: While large cap funds may not offer the same explosive growth as small cap funds, they can provide steady and consistent returns over the long term. 

Benefits of Investing in Large Cap Funds for Education Goals

  • Stability and Lower Volatility: The relatively lower volatility of large cap funds can help protect your investment from significant losses, ensuring that your education savings remain on track. 
  • Potential for Steady Growth Over the Long Term: Large cap funds have a history of delivering consistent returns over the long term, making them a suitable choice for education goals that require a long-term investment horizon. 
  • Diversification Across Sectors and Industries: By investing in a large cap fund, you gain exposure to a diversified portfolio of companies across various sectors and industries, reducing your risk of significant losses. 
  • Managed by Experienced Fund Managers: Large cap funds are managed by experienced professionals who have the expertise to select and manage investments effectively. 

Aligning Large Cap Funds with Education Goals

To effectively align large cap funds with your education goals, consider the following factors: 

  • Identifying the Investment Horizon: Determine the time period between your initial investment and the anticipated education expenses. This will help you choose funds with appropriate investment horizons. 
  • Determining the Risk Tolerance: Assess your risk tolerance to understand how comfortable you are with market fluctuations. This will help you select funds that align with your risk profile. 
  • Choosing the Right Large Cap Funds Based on Goals and Risk Profile: Research and select large cap funds that match your investment goals and risk tolerance. Consider factors such as the fund’s performance history, expense ratio, and investment philosophy. 

Building a Portfolio with Large Cap Funds

  • Importance of Asset Allocation: Diversify your investment portfolio by allocating a portion of your funds to large cap funds and other asset classes such as equity funds, debt funds, and gold. This helps to manage risk and potentially enhance returns. 
  • Role of Large Cap Funds as the Core of the Portfolio: Large cap funds can form the core of your investment portfolio, providing a stable foundation and reducing overall risk. 
  • Complementing Large Cap Funds with Other Asset Classes: Consider complementing your large cap funds with other asset classes to achieve a balanced portfolio. For example, you can add mid-cap or small-cap funds for growth potential, debt funds for income generation, and gold for diversification

Case Study: Investing in Large Cap Funds for Child’s Education

Scenario: Investing for a 5-year-old child’s education. Starting early gives an investor plenty of time to achieve their goal, multiply their returns and start with a small amount SIPs as well. Here’s why large cap funds are a good investment choice:  

  • Regular SIPs: Invest a fixed amount monthly in a large cap fund through Systematic Investment Plan (SIP). This helps build discipline and reduces the impact of market volatility. 
  • Long-Term Horizon: Maintain a long-term investment horizon of 15-20 years to allow the power of compounding to work effectively. 
  • Rebalancing: Periodically review and rebalance your portfolio to ensure that it remains aligned with your goals and risk tolerance. 

By consistently investing through SIPs in a large cap fund, you can accumulate a substantial sum over time. The projected growth and future value of the investment will depend on factors such as the fund’s performance, market conditions, and the amount invested. 

Tips for Investing in Large Cap Funds for Education

  • Start Early and Invest Regularly through SIPs: The earlier you start investing, the more time your money has to grow. Regular SIPs help build discipline and reduce the impact of market volatility. 
  • Review and Rebalance the Portfolio Periodically: Regularly review your investment portfolio to ensure that it remains aligned with your goals and risk tolerance. Rebalance as needed to maintain your desired asset allocation. 
  • Consider Tax Implications and Benefits: Understand the tax implications of investing in mutual funds and take advantage of any available tax benefits. 

Top 10 Large Cap Mutual Funds

S.No. Fund Name 3-Yr Annualized Performance 
IDBI India Top 100 Equity Fund Direct-Growth 16.79 % 
IDBI India Top 100 Equity Fund Direct Growth 16.48 % 
ICICI Prudential Blue chip Fund Direct Plan-Growth 15.72 % 
Kotak Blue chip Fund Direct-Growth 15.21 % 
Mahindra Manulife Large-Cap Pragati Yojana Direct-Growth 15.07 % 
Baroda BNP Paribas Large-Cap Fund Direct Plan – Growth Option 14.65 % 
SBI Blue chip Fund Direct-Growth 14.44 % 
Mirae Asset Large-Cap Fund Direct Plan-Growth 14.13 % 
Mirae Asset Large-Cap Fund Direct Plan Growth 13.99 % 
10 Invesco India Large-Cap Fund Direct Plan-Growth 13.99 % 
Top 10 Large Cap Mutual Funds

Source: Morningstar 

Disclaimer: This is not investment advice. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. Consult your financial advisor before investing.  

Conclusion 

Investing in large cap funds can be a powerful tool to achieve your education goals. By starting early, investing regularly, and diversifying your portfolio, you can create a solid financial foundation for your child’s future. Remember to conduct thorough research, align your investments with your specific needs, and seek professional advice if necessary. With careful planning and disciplined investing, you can help your child achieve their educational aspirations. 

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You need to get your basics of spending right as your first step.     Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
8 ways you can invest in mutual funds

8 ways you can invest in mutual funds

What is a mutual fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Each mutual fund portfolio is managed by a fund manager who has a great deal of experience in the industry. Their decisions are substantiated and are taken after following the thorough research done by the AMC's research analysts. As individual investors, we do not have enough time to perform such research to make a well-informed choice on “Where to invest to gain maximum returns?” or “Where to invest in the long-term?” We may also not have enough capital to make a diversified portfolio to sustain the blows of market fluctuations. Mutual funds provide a one-stop solution for both issues. Why should one invest in mutual funds? a) Money managed by experts The fund manager and his army of research analysts are experts in the field of investing. They make informed choices with respect to every penny and always aim to provide the promised objective to their pool of investors. b) Liquidity Redemption requests are handled with great ease in fund houses. The investor can also buy/sell his units in the secondary market (in an open-ended fund) for redemption (withdrawal) of the units. c) Diversification Despite having low ticket sizes for investment, an investor can receive returns that mimic or beat the market performance. He/she can own a portfolio that is diversified across market capitalization or across sectors or different companies to sustain the blows of volatility. d) Lower cost The funds charge a small % of the NAV or your gains from the fund as a management fee which is also known as the expense ratio. These are also regulated by SEBI and have an upper limit to ensure that the funds do not overcharge the investors. e) Fund switch options One can invest in a debt fund and have the plan to have a systematic transfer into equity or vice versa to match the risk appetite, financial goals, and other factors. f) Tax saving with equity linked savings scheme (ELSS) Mutual funds also allow you to save some part of your income and claim it for tax deduction under 80C. Rupee Cost Averaging: Investing in Mutual funds through SIPs averages the cost of purchase/unit. Regulation: Funds are highly regulated and are designed to ensure retail investor protection. Ways you can invest in mutual funds If you are a new investor, you will need to complete your Know Your Customer (KYC) compliances through distributors, online platforms, or mutual fund houses (KRA – KYC Registration Agencies) – SEBI registered intermediaries. This is a one-time mandated process by SEBI to prevent fraudulent transactions. 1. Through an agent An investor may contact an agent who would direct the investor to invest in different mutual funds based on risk appetite, investment horizon, goals, and other factors. There is no commission that is to be paid to the agent. The fee is paid by the fund house and is deducted from the expense ratio paid by the investor to the AMC. Login credentials are given by each fund house which enables the investor to receive real-time data on fund performance. 2. Asset Management Company (AMC) One can directly invest in the fund house through this route. However, the investor needs to perform some amount of research before choosing the fund and the fund house. He/she can walk into one of the fund houses for offline registration, post which, all the transactions can be performed online through their website. If an investor wants to invest in 5 different funds, each from a different fund house, he/she will have to visit 5 different offices. 3. Demat account The investor can directly invest in various funds of different AMCs, corporate bonds, government securities, ETFs, etc through one account. These can be managed from one single location – your Demat Account. However, one needs to pay an additional brokerage charge annually for maintaining the account in addition to the expense ratio (which is to be paid to the AMC). 4. Fintech investment platform These platforms are third-party mutual fund aggregators which aid the investor in investing the corpus after a detailed analysis of their risk profile, goals, investment horizons, and more and suggest the best funds to suit their requirements. They also offer the convenience of managing the investor’s portfolio through their user-friendly sites. Some of the popular firms are Groww, EduFund, Scripbox, FundsIndia, etc. 5. Stock exchanges One can invest through NSE or BSE, hence eliminating all the intermediaries/brokers. However, the investor needs to perform a thorough analysis before investing in any fund and ensure that the objectives of the fund match his/her financial goals, risk appetite, and other requirements. To go through this route, one needs to complete an online registration with NSE or BSE (a one-time process). 6. Registrar and Transfer Agents (RTAs) One needs to complete the application form and submit a bank draft or cheque at the branch office of the RTA post where one can visit any of the RTAs to start investing. Some of the popular RTAs are CAMS and Karvy. This route enables the investor to choose across multiple fund houses (instead of a single fund house – in the AMC route). 7. Mutual fund utilities It is a shared service platform that hosts all the fund houses (owned by several AMCs in the country) and is used for fund transactions. Investors can use this facility online or offline. 8. Investor service centers These are physical offices across the country belonging to RTAs or fund houses. They assist the investor with respect to all the steps in the investment journey – investment to redemption. FAQs What is a Mutual Fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Why Should One Invest In Mutual Funds? Mutual funds is the best way to enter the investment market. It helps you invest in multiple companies and the investment strategy is managed by experts. What are the ways to invest in mutual funds? There are many ways to invest in mutual funds: You can invest through an agent, directly with the AMC, through a Demat account, or through a third-party financial investment platform depending upon your goals and ambitions. Conclusion As an investor, you can use any of the above ways to invest in the mutual fund of your choice and enjoy the wealth generation that comes with compounding. You can start your investment journey by downloading the EduFund app and signing up. You can get started immediately and pay zero commissions.
A Guide to Taxation in Mutual Funds!

A Guide to Taxation in Mutual Funds!

In the early article, we discussed financial planning. In this article, we will try to under the taxation in the mutual fund system that applies to mutual fund investments.  Factors determining the taxation of Mutual funds  To know the taxation structure, first, you need to identify which type of mutual funds you have invested in and whether the fund you hold is an equity mutual fund or a debt-oriented mutual fund.   Along with this, the type of income that you are generating from the fund, whether a capital gain or dividend income - both these types of income are taxable in different ways.  Finally, your holding period is crucial in knowing the taxes applicable to your mutual funds' portfolio.  Earnings in mutual funds There are usually two ways in which money is earned in mutual funds: one through the selling of the mutual fund (capital gain) and the other through dividend income.   For example, if you are holding units of a mutual that you purchased at a NAV (Net Asset Value) of Rs. 100, and you sell it when its NAV of Rs. 150, you make a capital gain of Rs. 50; it is worth noting that capital gains tax accrues on the mutual funds' units only after redemption.   The tax will be payable when you file your income tax returns for the coming fiscal year.  The second way to earn from mutual funds is dividend income – the fund declares dividends for the holders based on the surplus that it has for distribution Dividends are taxable as soon as the dividend amount hits the bank accounts of the investors.   Source: Pexels Tax on capital gains  Here, there are again two parts to the story – whether the realized capital gains have come from equity mutual funds or debt mutual funds.   An equity mutual fund has an equity exposure of greater than 65%. For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).   When the holding period exceeds 12 months, the capital gains of Rs. 1,00,000 are exempt from taxes. Any amount upwards of Rs. 1,00,000 is taxable at 10%, along with the provision of indexation benefits.  For debt mutual funds (funds with greater than 65% exposure to debt instruments) - the holding period is considered short-term if it is less than 36 months; anything more than that is long-term.  For the short term, the tax rate is in accordance with your income tax slab. On the other hand, for debt funds held for more than 36 months, the gains are taxable at a flat rate of 20% post-indexation (plus, some cess and surcharge are added).  A possible third case is hybrid funds (funds with a mix of debt and equity) it is simple, their tax treatment is supposed to be on the basis of the fund's exposure to debt and equity.  If the hybrid fund is equity-focused: LTCG is charged at 10% on capital gains exceeding Rs. 1 lakh (without indexation), and STCG is charged at 10%. If the hybrid fund is debt-focused: LTCG is charged at 20% with indexation benefits, and STCG is charged per income tax slab.  Tax on dividends  Now, when it comes to taxation of dividends paid out on mutual funds, it is done by adding the dividend to the investor's taxable income, and then the individual income tax slab rate is applicable; this is in accordance with the amendments made by the union budget of 2020.  Earlier, dividends were tax-free in the hands of investors since the companies paid the Dividend distribution tax (DDT) before sharing the profits with the investors.   Dividends (received from domestic companies) of up to Rs. 10,00,000 per year were tax-free in the hands of the investors during this period. Dividends above Rs. 10 lakhs were subject to a dividend distribution tax of 10%.  STT Aside from the dividends and capital gains taxes, there is also a securities transaction tax (STT).   When you acquire or sell mutual fund units of an equity or a hybrid mutual fund, the government charges an STT of 0.001%. It is important to note that selling units of debt funds are exempt from the STT.  Important points to note  There are tax-saving equity funds as well. Investments made under the ELSS (Equity-linked savings schemes) qualify for tax exemption under section 80C of the Income-tax Act (exemption up to Rs. 1,50,000).   Please note that ELSS schemes come with a lock-in period of 3 years – that is, investors cannot redeem the units before three years. LTCG (long-term capital gains tax) is not applicable for gains up to Rs. 1,00,000.   For LTCG more than Rs 1 lakhs, the applicable tax rate is 10% without indexation.  Taxation in the case of SIP (Systematic Investment plans)  Let us understand this with the help of an example  An investor invests Rs. 10,000 every month from April 2021, and another investor invests Rs. 60,000 lump sum at the same time.   When both of them redeem their funds simultaneously, Rs. 10,000 will qualify for tax exemption for the SIP investor because the investment made in 2021 would exceed one year as of May 2021. In contrast, the entire capital gain isn’t taxable for the lump sum. Investing in the long term can be more tax-efficient than holding the units for a short duration. FAQs How much amount is taxed in mutual funds? If the investor claims redemption in less than 1 year of investment, it would fall under the Short-term Capital Gains (STCG) category. The tax rate would be 15% on the gains earned by the investor. If the investor holds the investment for more than a year, (say April 2020 – May 2021), the gains would be taxed at long-term capital gains (LTCG) tax of 10% Is SIP in mutual funds taxable? Yes, SIP in the mutual fund is taxable. The tax amount differs based on the duration and returns generated Which mutual funds are tax-free? Profits from the sale of ELSS fund units are considered long-term capital gains and have tax exemption. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
A simplified guide to Index funds

A simplified guide to Index funds

It is becoming increasingly obvious these days that investment is the best way for most people to achieve their financial goals. Costs of education are rising and the advantages of going to study abroad are becoming more and more obvious. For many people, these rising costs of education have necessitated a changed approach to finances. A good investment strategy and portfolio are clearly the way to go. However, many beginner investors do not know enough about investments and how or where to invest.  In this guide, we cover index funds: what they are, how they work, who should invest in them, and things to consider. If you have been thinking about investing in mutual funds or ETFs, read on to know more.  What is an Index fund? Index funds are a type of passively managed, equity funds. As the name suggests, these funds have a portfolio that is made to imitate a financial index, like BSE Sensex, NSE Nifty, etc. Both ETFs and mutual funds can be index funds. Returns from an index fund, typically mirror the growth of the index that they are tracking. How does an Index fund work? An index fund works by tracking a financial index. A financial index is a measure of the stock market or a subset of the stock market. An index fund consists of the same stocks that comprise a certain index, in the same proportions. So if, for example, a particular index fund is tracking Nifty, its portfolio will have the same 50 stocks that comprise Nifty. Then, the performance of the fund will depend on the performance of Nifty.  Unlike an actively managed fund, index funds do not have a team of analysts and experts constantly researching the market and creating strategies. The fund manager only ensures that the fund tracks its respective index as closely as possible. Things to consider when investing in Index funds 1. Risks and Returns Index funds are passively managed and track a financial index. This means that they are less volatile than other equity funds that are actively managed and hence, less risky. This is because actively managed funds strive to beat their benchmark but index funds track particular financial indices and try to remain as close to the benchmark as possible. This means the returns of an index fund usually replicate the performance of the index. This makes these funds reliable and lucrative during a market rally but less so during a slump.  One thing to keep in mind, however, is the tracking error. Most index funds do not replicate their respective indices exactly. There is a small deviation which is called a tracking error. You should always choose a fund with a low tracking error to reduce risk.  2. Investment timeline and goals Since index funds are considered lower-risk funds, they are suitable for investors looking to make long-term, passive, investments. These can be investments made for the future education plans of a very young child or retirement plans. With long-term investment windows, any short-term fluctuations can be balanced out or averaged. But if your goals are less long-term, for example, education plans for an older child, you should consider investing in a more actively managed fund. A good financial advisory service can help you make these decisions. 3. Investment costs and fees Index funds are passively managed. Since these funds track indices and don’t require active management, they incur lesser fees. An actively managed fund has to pay for analysts and experts to do research and create investment strategies. A passively managed fund does not have to do that. They have lower operating and management fees, transaction charges, etc. This means that these funds have a lower expense ratio ( the percentage of your total investment that you have to pay to the fund as management fees and other charges). 4. Taxation Index funds are subject to dividends distribution tax (DDT) and capital gains tax. DDT is deducted at source when the fund pays its dividends to stakeholders. DDT is generally applied at a rate of 10%. Capital gains tax is the tax levied on the capital gains made when you redeem units of your index fund. The amount of tax depends on your holding period. If you held the units for less than a year, then you will have to pay short-term capital gains tax (STCG) which is 15%. Capital gains from a holding period of above one year are considered long-term capital gains (LTCG) and are taxed at 10%. LTCG under Rs.1 Lakh is not taxable. Who should invest in an Index fund? Index funds are ideal for investors who want to invest in the equities market but do not want to take a lot of risks. If you are open to a long-term investment with relatively low but fairly predictable results, index funds can be a good option for you.  Keep in mind that index funds will follow the index and not give you any market-beating returns. If you are looking to make investments for your child’s education plans, you may want to stick to index funds for the stability they offer. However, a much better option would be a diversified investment portfolio with index funds as one of the components.  Education plans are rather high-stakes goals and so it is understandable to want to go safe. However, education, especially if you plan to study abroad, is also expensive. Actively managed equity funds tend to have generally higher returns. Keeping both in your portfolio can help you get the best of both worlds, general stability as well as good returns. Conclusion Index funds are a good and reliable way of passive investment for people who do not have the time to constantly monitor and manage their portfolios. They are especially useful when the markets are doing well and financial indices are on a general rise. However, recession and economic instability can cause a slump and bring down the value of index funds. To offset such eventualities, it is important to diversify your portfolio.  Financial planning, after all, requires active effort and involvement. The securities and assets you invest in should be properly aligned with your financial goals. If you lack the know-how or expertise to figure these out yourself, you can always consult a financial planner or other such services. For specific goals like education plans, you can hire specialized financial planning experts like EduFund. A good investor understands his investments and takes risks in accordance with his goals and his capacity. Therefore, putting in the time to figure out what kind of investor you are and what kinds of investments are best for you, is always a worthwhile endeavor. FAQs What are some best index funds? Some of the best index funds include IDFC Nifty 50 Index Direct Plan-Growth, Nippon India Index Fund S&P BSE Sensex Plan Direct-Growth, UTI Nifty 50 Index Fund, etc. Is it good to invest in index funds? Index funds provide you with low-cost investment methods. They can bring you better gains than fund managers do. Do index funds pay dividends? Since regulations require it, Index funds do pay dividends in most cases. TALK TO AN EXPERT
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