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Unlocking the Power of Compounding: Why Mutual Funds Outshine Direct Stock Investing?

The power of compounding can greatly benefit those looking to build wealth through investing. It is essential to understand the advantages of compounding and select the appropriate investment vehicle. While direct stock investing may be tempting, mutual funds offer specific benefits that can accelerate your investment growth. This blog will discuss why mutual funds excel over direct stock investing in harnessing the power of compounding.

When it comes to compounding, mutual funds, and direct stock investing have different levels. With direct stock investing, your investments grow over time as you earn returns from dividends and capital gains. This is called basic compounding or level 1 compounding, where you earn returns on both your initial investment and the accumulated returns. Let’s take an example to illustrate this: Suppose you invest Rs. 1,00,000 in a stock. After one year, it grows by 10% and becomes Rs. 1,10,000. In the second year, it grows by another 10%, resulting in Rs. 1,21,000.

Mutual funds harness the power of pooling money from numerous investors, allowing you to tap into the advantages of compounding on a grander scale. Rather than going it alone, you join forces with others, contributing your funds to a collective investment vehicle. This approach opens doors to larger and more diversified opportunities that an individual investor might find challenging to access independently. With professional expertise at the helm and the economies of scale that come with pooled resources, mutual funds provide a strategic avenue for growing your wealth through compounding over time.

Over time, the fund increases in value by reinvesting its earnings, such as dividends and capital gains, into more shares. This helps to boost the compounding effect.

Mutual funds provide the opportunity to access better investments and lower transaction costs, which can potentially lead to higher returns. It allows people to pool their money and benefit from combined resources for increased returns.

As a result, there are higher returns due to economies of scale, diversification, and professional management, which enhance growth potential for all involved as opposed to investing directly in individual stocks.

Happy Reading & Happy Investing!!!

Viralkumar Shah (Certified Financial Planner CM – USA, Financial Happiness & Wellness Coach)

Author – Financial Planning Sahi Hai! – Keep Your Life Organized

https://amzn.eu/d/8v4czuw

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The Market is at a Record High. What Should i Do?

With the market reaching new heights, many investors have questions. Have the Market reached the upper limit? Can we invest more even now?

The possibility that markets may now decline also crosses one’s mind. I do not see any evidence to support this. And yes, it is also true that it is unclear whether the market will increase or decrease soon. We only speculate based on our own biases; nobody knows. In the short term, markets reflect market sentiment, but in the long run, they reflect the state and health of the economy.

Imagine the Economy was a car 🚗 which had a speed of 100 km per hour with a 150 Horse Power Engine. The speed has now increased to 150 km/h, but this does not mean that the speed has reached its maximum – this is an important point to understand.

The reason for this is that the car’s power has increased from 150 to 200 horsepower. This means the car has the potential and energy to accelerate even further and reach much higher speeds.

The Market Index Level is the speed here, and the Horse Power is the Market P/E.

All I can say is that, despite the fact that the markets are reaching new heights and may be more expensive than the historical average valuation, the current market is still less expensive than the pre-covid markets.

Observe the graph or table below:

MonthSensexP/E Value
Jun-1939,39528.27
Jun-2364,71923.33
Rise / Fall64.3%-17.5%
Note: Trailing Valuation

The valuation is still relatively less expensive than pre-covid levels, despite new highs.

Invest wisely.

Courtacy of the Article: Krishan Sharma and Dharmendra Satapathy

Happy Reading & Happy Investing!!!

Viralkumar Shah (Certified Financial Planner CM – USA)

Author – Financial Planning Sahi Hai! – Keep Your Life Organized

https://amzn.eu/d/8v4czuw

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What has changed in the Taxation of Mutual Fund?

Pay higher taxes on your debt, Gold & International Mutual funds now.

What has changed?

Now you have to pay Tax as per your slab rate irrespective of your holding period on the gain from your Debt, Gold, International, FOFs Mutual Funds (any MF which will have 35% or less AUM in domestic equity).

What is the Current provision?

Currently, if you hold these funds for over 3 years, it is considered a Long-term capital gain and you have to pay 20% tax after indexation. Holding less than 3 years, it’s a short-term capital gain, and it’s taxed as per your slab rate.

When this is announced?

This was not there in the original budget document. This has been announced on 22.03.2023 as an amendment to Finance Bill 2023 (Budget 2023).

When this will apply from?

Applicable from 1st April 2023.

So, whatever amount invested till now and investments to be done before 31.03.2023 continue to get long-term capital gain tax rate of 20% and indexation benefits.

Categories after this amendment in Mutual funds for Tax Purposes:

So, now there will be 3 categories of funds for tax purposes:

1. Funds holding 65% or more of Indian equity:

LTCG – 10% LTCG above 1 lakh if hold for more than one year

STCG at 15% (No change)

2. Funds holding over 35% but less than 65% of Indian equity:

LTCG – Indexation benefit and 20% tax rate

STCG – Tax as per slab rate

3. Funds holding 35% or less Indian equity:

STCG will be applicable and taxed at a Slab rate for the individual.

Final Comments:

I believe this is a terrible move from the government. Debt and Gold MFs require encouragement considering the need for this asset class in one’s portfolio as part of asset allocation, debt has already have low penetration and this move of the government will affect it badly.

Happy Reading.

Viralkumar Shah (Certified Financial Planner CM – USA)

Author – Financial Planning Sahi Hai! – Keep Your Life Organized

https://amzn.eu/d/8v4czuw

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How Does Your Personality Type Affect Your Investment Journey?

Source: istock

When you think about your personality traits, what words come to mind? Impulsive? Confident? Organized? Consider how you make investment decisions. Would the same words be appropriate?

Certain psychological characteristics can have an impact on your investment decisions, often at the expense of logic. As a result, investment returns may fall short of your expectations.

Consider the following characteristics. Could any of these be hindering your success with investments?

Comparators, Complainers, and Controllers are the three personality types that might harm an investor’s investment journey and hinder them from having a successful investing experience.

Comparators always look dissatisfied with their investment returns and continually compare them to those of their peers, co-workers, and acquaintances. The “uski kameez, mere kameez, se safed kaise” syndrome is the cause of this. When they are ahead, they simply do not care, but when they are slipping behind, they always complain.

Complainers are investors who are perpetually complaining about the markets, the economy, their adviser, their luck, and, of course, their returns. Such people will never achieve their primary goal of attaining happiness.

Controllers are investors who believe they can exert influence over the ecosystem. They continue to seek formulas, theories, and hypotheses in the hope of outperforming everyone. They also have a bad habit of hiring an adviser but not giving him any authority, instead relying on him to advise him. They appear to know more about investing than even Warren Buffett.

If you have any of the three personality types listed above, you need a professional adviser more than anyone else, because your personality type will be the most difficult obstacle for your investment portfolio.

Happy Reading!!!

Viralkumar Shah (Certified Financial Planner CM – USA)

Financial Happiness and Wellness Coach