India’s foremost Tax Saving Investment options for 2017: make your life easy!

We’re at the end of the year 2016 and hence, tax payers are engaged in searching for the top tax saving investment options for the forthcoming year to economize their income tax which is under section 80C.

All just depends on your planning, if you have done it ably, then you can surely save your income tax and also get a shield to your higher returns.

The following are the best tax saving investment plans for you:

ELSS Tax Saving Mutual Funds

ELSS stands for Equity Linked Savings Scheme. It doesn’t just help you to save tax but provides you with certain opportunities to grow your money.

It proposes you with the higher returns than that of any other tax saving investment plans in India.

ELSS tax saving mutual funds doesn’t provides you a guaranteed return but if you are ready to attain higher risk then it can benefit you with 12%-15% of fantastic returns on your investment.

You can get lowest locking-period of 3 years in ELSS funds.

The returns or capital gains from selling this fund would be free from tax.

PPF

Public Provident Fund (PPF) provides 8.1% annual interest rate. And Ministry of Finance is decreasing the rates year on year. Hence, it is the best investment option to save income tax.

It has lock-in-period of 15 years. Interest provided at the time of maturity would be tax free.

The annual investment up to Rs 1.5 lakh qualifies for the IT Rebate under section 80C of Income Tax Act.

Loan facility is from 3rd to 5th FY with the interest rate of 2% per annum.

And, withdrawal can be done from 6th FY.

Sukanya Samriddhi Account Scheme

Do you have a girl child? If yes, then you don’t have to worry for her future. You can invest up to Rs 1.5 lakhs in SSAS and get higher returns.

 The interest rate in the existing FY is 8.5%.

One can make investment till the age of their girl reaches 15 years. No deposits are made between the age of 16-21 years and the account gets matured when she reaches at the age of 21 years. The interest you will receive at maturity is free from tax.

Tax Saving Bank FD schemes

It is the one of the old and best investment options for tax saving.

Due to Demonetization, interest rates have gone down between 5.55 to 7.5% p.a.

It has a lock-in-period of 5 years. And the interest provided is taxable.

Senior Citizen Saving Scheme

SCSS account provides tax saving option for the individual of the age 60 years or more with the annual interest rate of 8.5%.

The maximum limit of investment is Rs 15 lakhs.

Its maturity period is 5 years and the interest is paid quarterly and is taxable.

Rajiv Gandhi Equity Saving Scheme

This scheme benefits the first time investors in security market who are earning annually up to Rs 12 lakhs.

RGESS was introduced with the goal of encouraging savings from small retail investors to enter domestic capital markets. The scheme also aims at improving the retail participation in equity markets, and to promote an ‘equity culture’ in India.

The highest limit of investment allowed is Rs 50,000 and these can be invested in BSE100 stocks or RGESS mutual funds. Thus, returns are not guaranteed.

SAVE TAX

Voluntary Provident Fund

It is the benefaction from employees to his provident fund account. This would be beyond the EPF (employee provident fund) contribution of 12%. A maximum contribution an employee can make is 100%.

The returns after the maturity are tax free.

New Pension Scheme (NPS) under section 80C

It is the low cost investment plan for tax saving purpose. The returns are not fixed in NPS.

You can invest up to Rs 500 monthly or Rs 6000 per annum. There is no limit for investment in NPS.

The interest provided is taxable under the Act.

National Saving Certificate (NSC)

This is the safest investment plan as NSC is issued by post office and principal along with interest is backed up by the Indian Government.

There is no maximum limit for the investment. It is a given for the period of 5 years with the annual interest rate of 8% which is provided at the interval of 6 months.

Interest received is taxable.

Invest in your Child’s Dreams: Best Investments for your Child’s Education

Unit Linked Investment Plan (ULIP)

It gives you the life risk coverage. But, there is no guarantee for returns. Returns of 5% to 11% would be provided depending on the type of scheme.

Its holding period is for 15-20 years.

Life Insurance Plans

When it comes to financial planning, life insurance is very effective.

One should go for term insurance plan as for high risk coverage and in low cost.

Pension Funds

It dispenses you with an income stream post retirement, which consists of deferred annuity and immediate annuity.

You can withdraw amount up to 60% of your collection, once you reach your age of retirement and have to re-invest the rest in an annuity fund which will benefit you with a monthly pension.

If you go for annuity plan, then you should have to invest in bulk at one time and then you’ll get monthly pension from the coming month.

Deduction on Stamp Duty

Under section 80C, taxpayers can claim deduction on the amount paid as stamp duty for property registration in their own name.

For deduction under Section 80C for total amount, including principal loan repayment, stamp duty and registration charges, the total amount cannot be over Rs 1.5 lakh.

Tuition Fees for two children

It would be deducted from your income under section 80C. The deduction will be on the actual payment of fee and not on books, bus fare, etc.

Salaried employees, however, cannot claim tax exemption under tuition fees if their child is studying abroad.

Home Loan Principal Repayment

You can get tax dispensation from home loan principal repayment in which interest is excluded from tax up to Rs. 2 lakhs which you could cover separately.

Manage your portfolio and enter into the next level of your financial status

The year 2016 has come to its end. And it’s high time to welcome a new year 2017 with a new start. The same applies to your portfolio. Get a new start to your portfolio with some new inventions, innovations and creativity.

Take your portfolio to equilibrium state

It’s the right time to take your portfolio in the stable condition, as the year is going to be over. Doesn’t matter if you are a buy-and-hold investor, you also need to maintain your portfolio on a periodic basis. So, you have to recheck your current financial standing, goals, and the implications of economic changes and the important activities or events that took place within a year like marriage, birth of a child, starting a business, getting into a new job, buying or selling property, etc

This will help you to bring your portfolio in a stable condition and will improve your financial well-being.

Why to make it stable?

Investors need to know why it is necessary to re balance their portfolio. Often, certain asset classes will do better than others over a given period of time.

Let’s take an example, within the period of last one year your equities could have done a good result but on the other hand, they would be a deep fall in your investment bonds. Suppose, your actual asset allocation in equity be 75% and in bonds be 25% and your end-year allocation be 85% equity and 15% in bonds. In this situation, you may get revealed in an unwarranted risk.

And, if your equity goes down and bonds rises up then, coming year you may have low risk but you’ll miss out all the heavy gains in the equity market.

Car purchase

Estimate the influence of latest policies

You must constantly check whether the portfolio is going towards your specified goals or not (which also comprehend the current and the future risk). Try to investigate things related to the impact of economic conditions in the coming year, such as potential interest rate decrease, government’s plan to reduce current account deficit and its potential to impact various several asset classes, including fixed deposits, government bonds, corporate bonds, equity market, commodities, real estate, etc… which would keep you up-to-date and you’ll be aware of all the new policies which would help to manage your portfolio in an effective manner.

Excellent time to get stabled

Changes are obvious in actual allocation percentage if there is huge instability in the financial markets. So, if you are allocating 20% to a particular asset class it is not often it will swing more than 20-30% beyond that allocation. It will also include trading cost which is concerned to buying and selling of asset classes. In this case, re balancing the portfolio will reduce the potential to zero level and result in positive effects.

Pune’s real estate unsold inventory reaches to 2.8 lakhs units

You should re balance your portfolio once in a year. And year end is the best time for it as it becomes wise to consider other year-end strategies such as tax loss harvesting and tax planning for next financial year.

Make sure your investment objectives have not changed in such a way that you need to change your asset allocation. Because changing your asset allocation would be a difficult task and may ruin your portfolio.

So, by re balancing or making it stable, you make peculiar trades to get a lump sum return on your asset allocation.

Reliance Home Finance came out with a new issue from December 22

The result of demonetization is creating such a big problem in the Indian market. It has been resulted in the overfill of liquidity in the Indian banking system and no one is able to decide how to use such excess liquidity in the scenario where there is no demand of money for new projects and even for existing ones. The banks and several institutions are making efforts to find people to take loans from them.

But, as we all know after every night there is a good morning. And this night is going to pass away very soon.

Among this uncertain condition, Reliance Home Finance Limited, an auxiliary of Anil Dhirubhai Ambani Groups (ADAG), Reliance Capital Limited has come with the new issue of non-convertible debentures (NCDs) from 22nd December 2016. Their offerings are for the individual investors whose rate of interest will be ranging from 8.90% to 9.40% for 3 to 15 years of investment period. The company has raised Rs 3500 crore in this issue and is going to be closed on 6th January 2017.

This issue has some of the pertinent features which are mentioned below:

Size and objective of the issue

The company set a goal to raise Rs 3500 crore from this issue which also includes the green shoe option of Rs 2500 crore. The company plans to use at least 75% of the issue proceeds for its lending and financing activities and to repay interest and principal of its existing borrowings and for other general corporate purposes the issue proceeds will be a maximum of 25%.

Coupon Rate & Duration of the Issue

The coupon rate of this issue is 8.90% per annum for the time period of 3 years and another rate of 9.05% per annum for the period of 5 years and other one of 9.15% per annum for 10 years and the last one of 9.40% for the period of 15 years.

coupon rate

Interest will be paid on annual basis and not for monthly or aggregate basis.

Call Option

RHFL will have the right to call back Series IV NCDs at the end of 10 years from the date of issuance. The company will do this if the interest rate falls and it is able to raise money cheaply after 10 years from today.

And if the company decides not to use its call option, then it will pay an extra 0.25% to the investors at the rate of 9.40% which will be 9.65% after 10 years duration from its date of issue.

Premature Withdrawal, Put Option 

There is no ‘Put’ option within these NCDs so, investors has no rights to surrender these bonds back to the company for premature redemption. But, if it is taken in the Demat form, then the investors has the rights to sell these NCDs to the National stock exchange (NSE) or the Bombay stock exchange (BSE).

Investor’s category and Allocation Ratio

The investors are divided into the following categories and each category has its fixed percentage in the allotment.

  1. Qualified Institutional Bidders (QIBs) – They has Rs 1050 crore i.e. 30% of the issue.
  2. Non-Institutional Investors (NIIs)– They has Rs 350 crore i.e. 10% of the issue.
  • High Net Worth Individuals (HNIs) including HUFs– Their 30% issue is reserved i.e. Rs 1050 crore.
  1. Resident Indian Individuals including HUFs – Their 30% issue is reserved i.e. Rs 1050 crore.

Allotment on First-Come First-Served (FCFS) Basis

Allotment will be done on FCFS basis and also date priority basis i.e. on the date of oversubscription. It will be made on the proportionate basis to all the applicants on whom it gets oversubscribed that day.

NRIs not let in

Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not allowed to invest in this issue.

Credit Rating & Nature of NCDs

CARE and Brickwork Ratings have rated the ‘Secured’ NCDs of this issue as ‘AA+’ with a ‘Stable’ outlook. From credit default point of view ‘AA+’ rated debt instruments are reflected to be majorly safe. Series I, II and III NCDs are ‘Secured’ in nature for which the investors will possess a right on certain assets of RHFL in case of any major financial trouble for the company. And, Series IV NCDs are ‘Unsecured’ in nature and have been rated ‘AA’ by these credit rating agencies.

To guerdon the investors of unsecured NCDs, RHFL has offered a higher rate of interest which consists of additional 0.25% coupon rate, over and above 9.15% for 10 years with secured NCDs.

Listing

The listing criterion of NCDs will be on both the stock exchanges i.e. NSE and BSE. It will take place within 12 working days from the closed date of issue.

Demat, Physical Application 

It is not compulsory to have a demat account to invest in the NCDs. So, investors can apply for it in the demat form or physical or certificate form. There are no mandative rules at all.

TDS

In NCDs, the interest income earned comes under taxable asset and the investors are required to pay the tax on interest income as per their tax slabs. If the NCDs are in physical or certificate form, then 10% TDS will be deducted from it (only if the annual interest income is more than Rs 5000). And, NDS made by demat account will not charge any TDS.

KARVY Private Wealth Report 2016

Key Points

  • In contrast to the previous year when wealth in physical assets had declined and those in financial assets had grown by 19% i.e. total wealth held by individuals in India has grown by 8.5% to Rs 304.2 lakh crore and individuals wealth in financial assets grew by 10.32%.
  • Due to ‘Jan Dhan Yojna’ which was initiated by the government of India, have seen a huge growth on account of the government by small savings and savings bank deposits.
  • Due to demonetization it is expected to slow down the GDP growth rate for a short time being in the coming year 2017 but it may regain its speed from the financial year 2018.
  • The Real Estate sector is expected to see a price correction in the urban markets, leading to an increase in demand within the people.

India: A vivid place among emerging markets

India’s GDP growth rate is 7.6% in 2015-16 which was 7.2% in the previous year 2014-15 and will go in increasing faster and due to this; India comes under one of the fastest growing economies in the world.The recent demonitisation exercise is expected to impact GDP growth in the short term,with the number averaging at 6-6.5%.

Foreign exchange reserves stood at around $360 billion.

Individual Wealth in Financial Assets

Bank Fixed Deposits

The total individual wealth in bank fixed deposits has grown almost 10.58% to whopping Rs 35.12 lakh crore as of financial year 2016.

Corporate Fixed Deposits

Individual wealth in corporate FDs fell further by almost 49% y-o-y to Rs 15,356.47 crore in financial year 2016.

NBFC Deposits

Total individual wealth in Non-banking financial company’s deposits grew at a reasonable 21.26% y-o-y in financial year 2016.

Equity

Total individual wealth in direct equities declined 13.84% to Rs 29.6 lakh crore.

How a 172 lakh crore cookie is spilt up

Insurance

Total individual wealth in the asset class grew 7.6% to reach Rs 25.48 lakh crore in financial year 2016.

Provident Funds

Total individual wealth in provident funds grew by a whopping 24.57% y-o-y, to Rs 11.51 lakh crore in financial year 2016.

EMI VS SIP ( Be controlled or take control )

Public Provident Funds

The total individual wealth in PPFs with banks grew almost 19% y-o-y to Rs 3, 07,495 crore.

NRI Deposits

As at the end of financial year 2016, the total individual wealth in NRI deposits grew by almost 15% to Rs 8.26 lakh crore.

Small savings

Overall individual wealth parked in small savings schemes surged almost 14% in financial year 2016 to Rs 6.58 lakh crore.

Mutual funds

The wealth held by individual investors in mutual funds grew by almost 13% to Rs 6.23 lakh crore.

Pension Funds

Wealth in pension schemes grew by 24% to Rs 3.92 lakh crore in the financial year 2016.

  • National Pension Scheme – Individual wealth in the NPS grew almost 47% y-o-y to Rs 1.18 lakh crore in financial year 2016.

A WAY OF SUCCESS FULL FINANCIAL PLANNING

 Alternative Assets

Total investments in alternate assets rose by 84.70% to Rs 77,503 Crore in financial year 2016.

High-yield Debt

Individual wealth in this asset class has risen by 43.52% y-o-y in financial year 2016 to Rs 20,425 crore.

Infrastructure Funds

Total individual wealth is estimated to be approximately Rs 457.71 Crore at the end of financial year 2016 nearly up 113% y-o-y.

Gold

Total individual wealth in gold is estimated to be Rs 65.9 lakh crore ,up 15% from financial year 2015.

Diamond

Individual wealth held in diamonds grew by just 0.5% to Rs 8.02 lakh crore.

Download the complete report

Download (PDF, 1.41MB)

 

Federal Reserve’s Raises Interest Rates to strengthen the economy

Federal open market committee (FOMC) meet has ended up on December 14, 2016 and decides to raise rates by 25 bps and has signed more rate hikes in this year. Fed has convened people in an official manner and tightened labour market and higher inflation expectations for the hiked rates. The prospect of 3 or more hikes in US interest rates next year has sent the dollar to a 14-year high and caused a sell off on most Asian markets.

Since 26th June 2016, the yield on the benchmark 10 year U.S. Treasury note goes up by 10 bps to 2.57% levels, scoring the yields highest close.

Since Trump Victory in November 2016, The U.S. Treasury has increased rates by 70 bps. Fed says that the Standard and Poor’s (S&P) 500 index has inrush to record the highest rates.

The Fed’s stand on the economy on tightening labour market and higher inflation, which is really not excessive and assures the market step towards buying equities and selling bonds.

FEDERAL RESERVE BANK

This fad will be there till the last of this year as the bond market had given their safe side to the equities. The RBI has proved its declaration right, in keeping status of interest rates. While Indian economy will benefit from the Fed’s stand on economy strength. Bonds are going to be more expensive these coming days.

The Japanese 10 year bond closed at 0.057% yields, which go up by 2 bps on weekly basis. Japanese government bond stay in an upturn by following the directions of U.S. Treasury since US Presidential Elections.

In the policy meet held in September, Bank of Japan has decided to keep its 10-year Japanese government bond yield at 0%. At this particular stage, the Bank of Japan has not conducted any legal progression in the Japanese bond market. Their government is expecting to raise the bond yield from 0% to 1% or somewhat in the range of zero to one percent.

In the monetary policy meeting of the European Central Bank on December 8, 2016, they decide to extend their bond purchase program from March 2017 to December 2017. But, has lowered the quantity of purchasing from Euro 80 billion a month to Euro 60 billion a month and this will be starting from the month of April 2017.

As per the data received from UK as on November 2016, inflation rate came in at 1.2% YoY, which is recorded as the highest since October 2014. And UK bond yields goes up by 4 bps on the weekly basis.

Germany 10 year benchmark yield goes down by 3 bps on weekly basis. While the German 10 year bond yields reached its highest peak in January 2016 on Monday, as the investors walked away from their safe side by buying among the highest rising crude oil price that held aloft the expectation of inflation in the public.

Italy bond yields goes down by 8 bps on weekly basis to 1 month underslung after the uni-credit. To remove the banking sector from its position, the largest bank has appealed to sell their share. Portugal bond yield rise up to 25 bps as the market is tensed about the country’s finances.

Greece 10 year benchmark bond yield goes high to 8 bps after the debt relief given by the German finance minister.

Prominent economies 10 year benchmark bond yields had get heterogeneous the last week. South African bond yields goes up by 14bps. Russia 10 year bond yields fell by 17bps as price of oil goes on rising after Russia joined the Organization of the Petroleum Exporting Countries (OPEC) to cut down the production of oil.

India’s 10 years bond yields remained constant. Indonesia bond yields went down by 6bps.

US high yield bond yields decreased to 28 bps and Euro zone high yield bond yields went down to 26 bps in the previous week.

Weekly global bonds yields movement

Weeekly gobal bonds yields movement

Different concept of Wholesale Price Index (WPI) & Consumer Price Index (CPI)

Wholesale price index and consumer price index are the primary measures of calculating inflation rate. WPI and CPI are known as their official barometer to weigh their inflation. These two measures maintain the track of change in price.

Inflation Rate

Inflation is the increase in the price of goods and services. And the rate at which the price of goods and services increase at a particular time interval is called as ‘inflation rate’.

INDIA INFLATION RATE

Wholesale Price Index (WPI)

Wholesale Price Index is the indicator of change in price in wholesale market i.e. WPI shows the change in price of goods and services that are bought or sold in the wholesale market.

WPI make change in price of the goods and services at selected levels before going to the retail market. They change the price charged by the manufacturer. This is because, as the distribution channel goes on price of the products goes up.

WPI

The above data shows the WPI change in the year 2016 from January to October.

WPI is prepared on weekly basis. The WPI is based on 435 commodities in India, which show those prices in all trade and transactions.

Consumer Price Index (CPI)

CPI measures changes in the prices paid by the consumers for a basket of goods and services such as housing and medical care, foods and beverages, transportation, education, communication, apparel and recreation.

CPI

It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. It is also known as Standard Retail Price (SRP).

It is calculated on monthly basis.

 WPI versus CPI

·       Wholesale price index is the mid-point of the sum of all goods and services bought by the traders.

·       There are very few countries that use WPI for the calculation of inflation rates.

·       WPI results an inaccurate measure.

·       WPI measures inflation rate at every stage.

·       WPI is compiled and published by Office of Economic Advisor on a weekly basis.

·       A lot of insignificant goods are considered under WPI.

·       WPI is the basis for the economic deflation rate.

·       WPI is based on the price on which bulk transactions are made.

·       Consumer price index is the mid-point of the sum of all goods and services bought by the consumers.

·       Maximum countries use CPI for the calculation of inflation rates.

·       CPI results more accurate inflation rates.

·       CPI measures inflation rate at final stage only.

·       CPI is compiled and published by Labour Bureau on monthly basis in India.

·       Well selected variables are considered under CPI.

·       CPI is the basis for the inflation rate.

·        CPI is based on the final prices of goods at the retail level.

  • The Central Bank of India used to measure inflation based on WPI but under the Governorship of Dr Raghuram Rajan they switched to CPI.

RBI Statement: Incremental CRR goes up to Rs. 11.5 trillion in India

As per the data received from the RBI (Reserve Bank of India) on 7th December, 2016. Rs 11.5 trillion of total deposits had come across the system. Rs 8.4 trillion of gross deposits were received by the bank in between the time period of 8th November to 27th November in which 330 billion was of exchange of notes and the rest of Rs 8.1 trillion was the deposits. Banks also received transactions of cash withdrawals of Rs 2.1 trillion. Total deposits receive in the system from last 10 years till now goes up to Rs 3.1 trillion.

Commercial banks have paid Rs 1.5 trillion in reverse repos (i.e. RBI borrows money from commercial banks) and have bought Rs 2.4 billion of Cash Management Bills (which are meant to meet temporary cash flow mismatch of the central government).

Cash Reserve Ratio in banks has increased up to Rs 4 trillion because of heavy deposits and incremental CRR.

To pay the salaries in the starting week of December around Rs 3 to 3.5 trillion cash withdrawals were made. And the rest is the cash held by the bank.

Total Rs 14.5 trillion of Rs 500 and Rs 1000 notes were in circulation in which till now only 11.5 trillion has been deposited in the account and the rest could come in within the remaining 25 days.

RBI

RBI has announced that the incremental CRR is removed from 10th December 2016. Well, in this case CRR positions of banks would come down and liquidity would be increased around Rs 3.5 trillion. The excess of liquidity would be managed by RBI through the issue of MSS (Market Stabilization Scheme) bonds and reserve repos.

To slow down the liquidity, the RBI will start allowing higher withdrawals.

Why Rupee hits all time low as against US dollar

More about MSS bonds.

The government has made the new ceiling for the issue of MSS bonds at Rs 6 trillion from Rs 300 billion. As higher ceiling will help RBI in the management of deposits coming into bank. To manage the liquidity, the RBI will use these MSS bonds. The bonds are most likely to be the form of 28 to 91 days cash management bills or treasury bills.

As of 2nd December, banks have an outstanding amount of Rs 2.36 trillion in Reverse repo and Rs 1.3 trillion in Repo. And incremental CRR has been maintained by banks of Rs 3.5 trillion, which would be there only till 9th December, as RBI has planned to remove it from 10th December. Also, RBI has announced the auction of 28 days Government of India cash management bills for a specified amount of Rs 200 billion.

More about Incremental CRR.

Incremental CRR were started from 26th November and immediately crossed about Rs 3.5 trillion of liquidity. For immediate credit of CRR, banks exchanged old notes.

Money market rates and bond yields will rise in the starting on the back of RBI, but as this move by RBI is temporary. So, it will fall again and will be reviewed within the upcoming 14 days.

Bond market is expecting rate cut of 50 bps which would result in fall in GDP growth and inflation.

It has been decided by the RBI that on the increase in NDTL (Net Demand and Time Liabilities) between the time period of 16th December 2016 to 11th November 2016, banks need to maintain the incremental CRR of 100%, starting the fortnight (within 14 days) 26th November 2016 or even before. This would help to drain excess of liquidity in the system. 

Black Money Opened Up!!

On 28th November Government of India, the surplus Cash balance increased sharply by Rs 1.4 trillion to Rs 1.415 trillion. And this rise in cash balance made a question in everybody’s mind that how government did received such a high cash balance? This was due to third quarter advance tax payment is due only on the December 15 and government didn’t have any stake sales during this period. This made the sharp increment in inflows.

The government has disclosed that the black money is used to raise the government surplus rather to waste it.

The deposits made in the bank disclose the steady flow of black money.

 

3 guidelines when investing in sector funds

What is Sector Funds?

It is the open-end-fund which focuses solely in a sector of the economy. And because the holdings of this type of fund are in the same sector, there is an inherent lack of diversification associated with these funds.  It concentrates their investment in a single sector such as FMCG, financial services, health care, technologies etc..

There is nothing like permanent investment in sector funds. The investment made by the investors are temporary or for short period. The investors allow them to make an appearance in their portfolio as there would be possibility of huge returns, though for a short time.

These funds tend to increase substantially in price when there is an increased demand for the product or services offering provided by the businesses in which the funds invest.  On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will often face heavy losses as a result of the lack of diversification in its holdings.

The main problem with the sector funds is that the investors rarely act on a well thought out strategy. They do not stick to their roles, which results in decline of the business.

Just for an example, Energy funds put up an outstanding performance in the year 2007 which a massive return of 105% that particular year. But there was a huge decline next year with average -53%. And this goes on declining till 2013. Again come back was made in year 2014 with average return of 47%, but still a big cry from its 2007 feat.

sector fund

There are many more examples a while.

Could you do without them entirely?

According to John Bogle, the founder of Vangaurd fund “we can go our entire life without owning sector funds and probably never miss it”. As per him, the well – diversified portfolio doesn’t need a sector fund because that sector is already represented in a few diversified equity funds.

On the other hand, sector funds are useful for the investors having strong views who want to give a tactical slant to their portfolio. In the areas of the market in which you are confident enough to lead the market, you can employ a sector strategy to make an exposure. But if you invest in what you doesn’t know what exactly it is, then it will be a huge loss. The strategy made by the investors should be stable, and then only it will result in returns. Otherwise it can lag to dizzy falls.

3 guidelines are as follows:-

  • Sector funds should carry a small portion in your portfolio. It must never be a core holding, as the returns are not permanent. So, it must be taken care off. And you must invest in such market in which you have a great understanding of strategies.
  • If you have earned substantially well, then do not stick to sector funds. Because there is a high risk of downfall in the same for the coming years.
  • Volatility is given. So, do not let it disturb you any way. You have to stick on the strategies you made as to why you want to invest in a particular sector. And if you find your calls wrong then go off the table otherwise you will definitely face loss. But whatever you decide must be informative decisions. And that is how investments are made.