What is a mutual fund?

A mutual fund is a pool of money to meet a certain investment objective. This pool of money is directed by the fund manager who chooses how to invest the money.

What is a mutual fund?

A skilled fund managed would often make returns better than the market. This translates to wealth creation for the investor.

Just for illustration purposes, Rs 10,000 per month in an index would have grown to a portfolio of Rs 27 lakhs in 10 years. A skilled fund manager would have grown more.

Similarly, a mutual fund may also be chosen to invest as an alternative to a fixed deposit with a bank. You get a better return in a tax-efficient way.

The mutual fund industry is closely monitored by the government. Now, a mutual fund is the first level of choice for investors.

When you are starting, a mutual fund should be your first choice of investment vehicle. It is safe, regulated, liquid, and above all managed by professionals.

Do not waste time managing funds on your own. Start small with a mutual fund and see it grow.

Mutual Funds sahi hai

Trying to simplify finance, does it work?

These days there are so many finance influencers on YouTube, authors of personal finance books, and online and in-person courses on managing money, but are the investors getting any better?

Seeing things the way they are

A lot of YouTube influencers pass on strong advice to the novice investor. There are so many influencers who were promoting crypto until the fall happened.

There is no problem listening to these videos, but acting upon them can be disastrous. I believe that knowledge can help you advance but too much information will make you not act at all.

Here is a simple step-by-step process for managing your money better.

1. Cash flow analysis and net worth: Understand your inflow and outflow of funds, your current asset and liability position and what you want to achieve. There are many calculators to do this assessment. https://www.plutuscapital.co/calculators

2. Asset allocation: Based on the cash flow surplus and financial goals arrive at an asset allocation. You must also consider the risk profile that you would like to maintain whether it is aggressive, moderate, or conservative.

3. Execute and monitor: Implement the allocation and keep a watch.

These steps are so simple yet so difficult to implement.

Any financial outcome is a combination of your life situation, capital market conditions and your behaviour. All these three areas are dynamic and ever-changing.

Some things can be known, and some things cannot be known.

Life situations and capital market conditions can be observed, and a decision can be made. For example, you know that an increment or a promotion may happen, or you are about to change your job or get ESOPs encashed etc. These events can be known in advance and a decision can be made.

Similarly, capital market conditions can be sensed (over or undervalued markets) and a decision can be made.

However, personal behaviour is the most complex aspect that even professionals will have a challenge dealing with.

Here is a speech by Charlie Munger on “the psychology of human misjudgement”. This speech is all you need to know about human psychology.

Psychology+of+Human+Misjudgment

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Reading can help but will that make you wise?

Not really!

Awareness of ourselves will make us wise.

A finfluencer or a book author cannot make you wise because they are dealing with their own biases. They are just passing on those biases to you, invest in start-ups, invest in ETFs, invest in crypto etc. Who knows, maybe keeping your money in a bank’s FD is the best option.

One of the ways you can become a better decision maker whether about money or any other thing is to see life the way it is without adding any extra meaning. Easier said than done.

Our Indian tradition has given a lot of importance to ‘consciousness’ and not so much to ‘mind’.

When you are looking at a problem, you need to reflect on which aspect of your mind is dominating - ego, intellect, or memory. If your mind is at work, chances are that the decision is not optimal.

Ego will always make you stick to your decision (status quo bias). Intellect will not help you look past your analysis (overconfidence). Memory will restrict you to what you have seen in the past (anchoring).

To evaluate any problem, you need to ensure there is neutrality in your emotions. You should be able to see the problem vertically and horizontally and once you have decided, it will just ‘feel right’.

This sense can be applied to any problem you are trying to solve - investing, life, hiring a professional, relationship etc. The decision that feels right will turn out to be right. Pre-condition is the neutrality of the mind and seeing things as they are.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

How can US and Canadian NRIs invest in India?

Mutual funds, AIFs etc. are not tax-efficient solutions for the USA and Canada-based NRIs. There are more straightforward options to address this issue.

USA and Canada NRI Investment Options

The global economic environment is challenging, and the respite is not any time soon. High inflation is expected to stay in the western world, and it will keep interest rates elevated for some time. So much so that the USA is dealing with inflation that they last experienced these elevated inflation levels a few decades back. Globally, the future growth prospects do not look bright.

On the other hand, India managed its monetary policies better than a lot of western countries. Although RBIs current inflation target is 4% (with a 2% threshold), the average inflation over the last 20 years has been around 7% p.a. The latest data indicates 6.5% as India’s inflation rate. India’s primary concern about inflation is the oil price. Given that the global economy might be under low growth headwinds, India stands strong.

As per the world bank report, India is expected to be the highest-growing economy in 2023 and 2024. A young population, China +1, Production linked incentives, and India’s payment stack are some of the areas that can help India double its GDP in the next 5-7 years.

It’s not a surprise that NRIs want to invest in their home country. Indian tax laws and security laws are pro-foreign and NRI investors. Like most of the major countries in the world, India has a bilateral tax treaty in place. This means double taxation can be avoided for investors. Recently, SEBI has made KYC norms more stringent for NRIs so that money laundering issues can be avoided. Irrespective, there is a massive inflow of funds to India to capture the expected growth.

In India, NRIs and Residents are treated at par. However, local tax laws can wary. In India, a simple way to invest is by using mutual funds. The process of mutual fund investments for a US / Canada-based NRI is as easy as for resident Indians.

However, the local laws (USA IRS and Canadian tax laws) are not tax efficient for mutual fund investments. If you are an Indian living in the USA, it is most likely that you have come across the term PFIC. PFIC is an acronym used for Passive Foreign Investment companies.

Simply put, if you are invested in an Indian Mutual Fund, you must declare the investment and income in the US. If you are a joint income tax filler in the US, you are exempted up to Rs 50 lakhs ($25,000 each). However, if you are invested more than Rs 50 lakhs (Rs 25 lakhs singly), you are not just required to report to IRS but also pay taxes on the unrealised gains.

Indian tax laws do not differentiate but must follow FATCA rules and report to the US counterparts. Even if you don’t report to IRS, still the information is shared with the US authorities. A few mutual funds offer investments to US-based NRIs but beyond $25k, it does not make sense for US investors to allocate to Indian mutual funds. Similar laws prevail in Canada too.

One way to address this issue is to hold investments directly and not in a fund structure. This way you don’t have to pay taxes on the unrealised gains.

Additionally, Alternative Investment Funds (AIFs) fall in the same category as PFIC, making AIFs also not a good investment vehicle for US-based NRI investors. Another, investment option is investing in India using Portfolio Management Scheme. Investment using PMS is tax efficient both in India and in the USA. Interestingly, there are not many PMS accepting money from US/Canada-based NRIs.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337