Why we sell-off during market corrections?

Have we ever thought why most of us sell off our investments during market corrections? Is it because we need the money or is there any other reason(s).

We all must have taken a ride in the roller coaster; when it goes up we feel excited but feel scared when it goes down.  It’s the emotion of fear that the human brain is not trained to handle very effectively.

Our mind has one basic instinct to perform; to enable our body to survive. When we come across fear, initially the mind tries to overcome it but if it continues or magnitude of the fear increases, our mind will try and remove the cause of fear.

That’s exactly what happens when we go through the market corrections. As anything going down creates a sense of scare and feeling of fear, initially we try to cope up with it saying it’s just a minor correction and things would return to normal. But as correction deepens and market voices spread further negativity, our fear factor(losing more money) increases exponentially and that is the time when our mind finds it extremely difficult to cope up and will drive us to remove the cause of fear by selling off our investments. 

Once we have sold our investments and booked, otherwise, notional losses, we feel a sigh of relief. We no longer get affected by listening to all the negative voices as we have removed the cause of fear of losing more money.

So had we not seen the television or listened to negative voices of so-called experts during such correction times and held on to our conviction, we would have avoided distress selling and booking losses.

It is very important to understand that market corrections are temporary but growth is permanent. Market corrections are always followed by astounding returns. The best phase of the Indian stock market (Apr 2003 till Dec2007) has given 596% of returns in four and a half years despite having gone through several corrections en route. The graph shows it all.

courtesy : anchoredge


  • All previous corrections look like lost opportunity; Present correction is no different, Although it feels this time it’s different.
  • Market corrections are temporary; growth is permanent; Hold on to your investments until financial goal(s) is achieved. Switch yourself off from all market voices.
  • No one knows when the market would correct, how much will it correct and how long will it take to recover; but what matters is time spent in the market rather than trying to time the market. 90% of the gains in Sensex in the last 39 years have come only during 90 best days.

Need to discuss more, please feel free to book a no-charge consultation with me on this link: (https://calendly.com/rakeshgoyal)

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Investments in Debt Mutual Funds

The recent decision of freezing six of their debt fund schemes by Franklin Templeton Debt mutual fund has sent a shock wave among the investors’ community who thought debt investments are safe and do not require any risk management. But if you see closely and analyse their investment pattern, it was an event waiting to happen. Most of their investments are done in lower-rated debt instruments to generate higher returns by compromising on safety.

Debt instruments have two risk elements associated with them,

  • Firstly, the credit risk meaning thereby payment of interest as and when due and refund of principal amount on the maturity
  • Secondly, changes in the interest rate  (due to change of repo rate as announced by RBI as part of their monetary policy)

Any investments in debt mutual funds should primarily evaluate these two factors by looking at their investment portfolio. AAA/A1+ rated debt instruments offer less credit risk as compared to other lower-rated debt instruments. So a debt mutual fund invested 100% of its corpus in AAA/A1+ rated debt instruments is a much better investment option as compared to others who compromise on the quality of their investment portfolio (by investing in lower-rated debt instruments). Most of the defaults, like the one which is under discussion are due to this reason only.
Changes in the interest rate due to the change in repo rate by the RBI will affect the yield delivered by the debt scheme.  Mutual fund schemes that invest in longer duration bonds are more susceptible to interest rate variations as compared to shorter-duration bonds (longer is the duration of investment more is the uncertainty of repo rate change and thus more volatility in the yield). So shorter duration debt mutual fund schemes are better as volatility is quite low and returns are steady. 

  • Before investing in debt mutual funds, thoroughly analyse the investment portfolio of the scheme. Invest only if 100% of investments are done in AAA/A1+ rated debt instruments.
  • Preference should be for shorter duration debt fund schemes.
  • Debt mutual funds are meant to provide stability to the portfolio and provide steady annualized returns of 7-8%. So please do not chase returns in debt funds. It would be at the cost of the safety of your principal.
  • Debt funds are good for investors with low-risk tolerance and provide better returns as compared to bank FD (https://letsinvestwisely.com/are-we-loosing-money-by-investing-in-bank-fd/)

Debt mutual funds carry a very low risk if chosen correctly. You can book a no-charge consultation with me on any issue of personal finance at this link (https://calendly.com/rakeshgoyal). Confidentiality is assured.

Disclaimer: Mutual funds are subject to market risk. Read all related documents carefully before investing.

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Are we loosing money by investing in Bank FD?

Rates of interest on various small saving schemes have been slashed substantially by the Government of India wef  01 April 2020.  The annual rate of interest on Bank Savings Account would be around 2.75% and Bank FDs will fetch you 5.5% to 5.8% for one to three years of term deposit. Further, interest accrued on these investments is fully taxable (except upto Rs 10000 on a savings account).

So for example, three years Bank FD having an annual rate of interest in the range of 5.8% will effectively generate a 4.06% return on investment (RoI) post taxation assuming a 30% tax bracket. With annual inflation hovering around 5% we are actually losing out on the purchasing value of our money by keeping it in Bank FD.

So, is there any option available better than keeping money in a bank fixed deposit or savings account?

Yes, investing money in debt mutual funds offer the following benefits:

* Better returns on investments (7 – 8%)
* Less tax liability, no tax deducted at source (TDS)
* Qualify for long term capital gains if remain invested for three years or more (20% tax rate with indexation benefits)
* Liquidity as good as bank account

Let’s understand this with the help of an example. For calculation purposes, let’s assume we invested Rs 5 lakh for 3 years in bank fixed deposit (RoI 5.8%) as well as in debt fund (RoI 7%).

So in the above example, we have seen that effective tax rate in debt mutual fund is half to that of bank fixed deposit and return on investment is 50% more than bank FD.

Happy Investing!!

Disclaimer: Mutual funds are subject to market risk. Read all related documents carefully before investing.

Understanding Investment Risks before Investing

Brutal fall in Indian stock markets over a period of last one month or so has left most of the equity portfolios bleeding. Fall has been so fast and vociferous that it wiped out almost all the gains of equity mutual fund schemes for last 3 to 5 years and in some cases up to 10 years. People who have started investing from 2018 onwards have their portfolios showing losses in the range of 20 to 50%.

This crash has left many investors wondering whether they were right investing in equity mutual funds?

During my interaction with investors, most of them ask “how much returns they are going to get on their investments?” Return on investments has no meaning by itself unless associated risk is taken into consideration. So the right question should be “how much risk is associated with my investments”. Understanding risk is important so that investors can take a informed decision before investing to get returns commensurate with risk.

Risk Capacity and Risk Tolerance 

More often than not, these words are used interchangeably but they have different meaning all together.

Risk Capacity. It’s the risk required to be taken by the investor to reach their financial goals. Your risk capacity is determined by comparing future cash flows to your investments( how much you expect to add or to withdraw from your investments) to your total value of investments . The more money you will be adding to your investments higher is your risk capacity.

Risk Tolerance. It’s defined as investor’s ability to absorb losses on investments. Low risk tolerance will make an equity investor sell equity investments at the very first instance of it going down whereas high risk tolerance means investor is willing to loose money and hold on to equity investments for potentially better returns. Following factors affect the risk tolerance
a. Time horizon for investments
b. Future earning capacity
c. Availability of other assets like house, pension, inheritance etc

So risk capacity and risk tolerance work together to determine the amount of risk required to be taken while planning investor’s portfolio. 

Investment decisions should ideally be guided by your risk capacity and not your risk tolerance, but often, it is the other way around. Risk return relationship is one of the fundamental laws of finance. You cannot get higher returns unless you take more risks.

The investor with low risk tolerance and high risk capacity needs to understand, that he or she may be compromising on their long term financial goals; on the other hand, an investor with high risk tolerance and low risk capacity needs to understand the potential implications on financial safety of their investments.

How much should be invested in Equity?

Rule of 100. 

Subtract the age of investor from 100, balance number suggests the maximum exposure of portfolio towards equity. e.g if the age of investor is 30 years, maximum 70% of his/her portfolio can be invested towards equities and for an investor of 60 years of age, 40% of his/her investments can go towards equities. These are average numbers and can be taken for planning purposes.

Rule of  Maximum Loss.
The Max Loss formula seeks to help investors determine the maximum percent of their portfolio that they should expose to equities. Max Loss depends on two factors:- What is the maximum percentage of your portfolio that you can tolerate losing in one year?What is the maximum percentage that you think the stock market can lose in one year?The formula of Max Loss % is as follows:

Max Loss %  =  (Max Portfolio Loss + Risk Free Returns) /
                            (Max Market Loss + Risk Free Returns)

Let us illustrate this with an example. Let us assume, you can afford to lose a maximum 5% of your portfolio value in a year and the maximum possible drop in the market in 1 year is 40%. The maximum percentage of portfolio loss should be worked out carefully based on your monthly cash-flows, your short term and long term liabilities and your average liquidity position in determining the maximum loss that you can tolerate.

In other words, if for some reason, you had to redeem your portfolio what is the maximum loss you can afford to bear. The maximum market loss should be based on how much the market fell on an average in bear markets. Let us further assume that you can get a risk free return of 6% (10 years GoI bond yield). The Max Loss % will be (5% + 6%) divided by (40% + 6%). When we do the math, we can have a Max Loss % of 24%. This should be equity allocation in your overall investment portfolio.

1. Always invest in accordance with your financial goals.
2. Investors with low risk tolerance and high risk capacity should allot a portion of their investments in equity to meet their long term financial goals
3. One should always focus on the risks rather than expected returns. Expected returns are difficult to forecast.

Need to talk more on this? Please feel free to book a no-charge consultation with me on this link.(https://calendly.com/rakeshgoyal). Confidentiality is assured.

Are you paying Income tax on Interest Income?

As part of direct taxes, all of us are paying Income tax to Government of India. Income tax is levied on following two parts of income:

1. Earned income which is earned by us in a financial year(Apr to Mar)
2. And the interest income which gets accrued on our savings / investments

There is hardly any scope to save income tax on earned income beyond what is available as part of deductions in different sections of Income tax Act e.g section 80 C, 80 D etc

But how much Income tax we pay on our interest income depends entirely on us. Most of our money either keeps lying in Saving Bank Account(SBA) or Bank FDs and we land up paying almost 31% of interest income as Income tax. 

So is there any way out?

Instead of keeping surplus money in Saving Bank Account or Bank FDs, we may like to invest this money in debt mutual funds. There is no tax liability as long as you remain invested in debt mutual funds(no TDS). If you remain invested for at least three years, you qualify for long term capital gains (LTCG). Should there be any requirement for redemption after three years, you get tax advantage on LTCG due to indexation and flat tax rate of 20%. Effective tax rate works out to be approx 8-9 % for people in 30% tax bracket.

let’s understand through an example. Let us assume we invested Rs 1 Lakh for 3 years and 1 day in a short duration debt fund in FY 2014 – 15 and redeemed in FY 2017 – 18. Assuming annualized pre-tax return was 7% compounded for these three years, tax calculations would be as shown below:  

In case of Bank FD, tax liability would have been Rs 6751/- assuming same rate of interest thus saving almost 73% on taxation.

And  on top of it, you get better returns on debt mutual funds as compared to SBA / Bank FDs.

Think over it…

Goal Based Investments

With Nifty benchmark indices NIFTY 50 in correction mode for almost a month now, we are witnessing gains in our equity based portfolios getting eroded substantially, more so in mid and small cap. Nifty benchmark index has fallen almost 9% from its recent high and Mid & Small cap index has lost 28% and 44% respectively from their all time high made in Jan 2018.

Although it does create apprehensions and some sort of panic in the mind towards future outlook of our investments, it should not worry us especially if we are into Goal Based Investments. So what is this concept of Goal Based Investments?

When we begin our journey towards savings and investments, there has to be some future purpose of these investments, some events like Children’s Education, their Marriages, Retirement Planning etc which we want to finance in future by sacrificing our today’s spending. Let’s call these as future goals which we want to achieve through our investments over the available time horizon. Investment without a goal is like boarding a train without knowing the destination.

Hence Goal Based Investments allow us to invest towards achieving the desired goals in the available time horizon by choosing the correct asset allocation(equity, debt, mix of both, gold) with optimum risk through a Systematic Investment Plan.

A few of the behavioral and financial reasons for choosing goal based investments are :

1. Optimum Savings. Once the goals are decided well in advance, we know how much money needs to be saved regularly, nothing more nothing less.

2. Start Saving Early to get More. Sooner we start saving towards a goal, lesser savings would be required due to power of compounding. e.g If a child’s education requires 50 lac after 20 years, we need to save only Rs 5,500 pm if we start today as against an amount of Rs 10,600 pm if we start after 5 years  and Rs 22,500 pm if we start after 10 years (Assuming 12% return P.A.).

3. Tangible Outcome. We are more likely to save and invest towards achieving a definite goal rather than saving without a purpose.

4. Avoids Debt and Better Management of Assets and liabilities. By mapping tomorrow’s liabilities with assets of today, we avoid getting into debt trap. It also helps us in better budgeting thereby meaning how much we can afford to spend today as against how much we want to spend.

5. Optimum Returns. Goal based investment gives us the opportunity to match our time horizon with asset allocation by taking optimum risk. If there is a mismatch in allocation, we may save too much or too little, missing out on returns with conservative allocation or missing out on goals with too much of risk.

Goal based investments provide us with an opportunity to work towards achieving our future goals rather than chasing returns and give us  peace of mind during such turbulent and volatile market conditions.
Happy Investing!!

Are your Investments in Debt Mutual Funds at Risk?

When we plan out the investments across different asset classes keeping in view the risk profile and financial goals of an investor, invariably part of the investments go in the debt mutual funds. How much of it will get invested in debt funds depends on risk appetite and  time available to achieve desired financial goals. It is supposed to be almost risk free investment giving better returns than bank FD with tax advantage. (https://letsinvestwisely.com/are-you-paying-income-tax-on-interest-income/)

However, in last almost 9 to 10 months, ever since ILF&S first defaulted on its credit payment( both on interest as well as principal), lot many companies like DHFL, ADAG group companies etc have defaulted on credit payment thus making rating agencies like CRISIL, CARE  down grade their ratings on Non convertible debuntures (NCD), Commercial Papers(CP) etc.

So what is the effect of this on the NAV of those mutual fund schemes who had investments in debt instruments of these companies?

As per the SEBI directions , any  BBB-  and downward ratings by rating agencies, mutual fund schemes having investments in thesecompany’s debt paper will have to compulsorily mark down the NAV by 75% to 100% of their total investments in that company as part of mark to market losses.

In last few months, you may have noticed that NAV of quite a number of debt mutual fund schemes had to be marked down, in some cases quite heavily.

So what does it mean to us? Should we stop investments in debt mutual fund schemes?  Definitely NO.

The answer lies in selecting good debt mutual fund schemes having investments in Govt / PSU / top quality companies with only highest ratings of AAA(for long duration debt paper) / A1+( for short duration debt instruments). One must ensure that choosen debt mutual fund scheme has 100% investments  in AAA / A1+ rated companies only. One should take out some time and review existing investments in debt mutual fund schemes and take a call accordingly.

It is important and beneficial to invest in debt mutual funds especially in today’s environment where interest rate cycle is going southward( beneficial for debt market) and equity market is poised for big correction, in fact the broader stock market(equity) is already down heavily in last almost eighteen months, Nifty Mid cap 400 and Nifty small cap 250 bench mark indices have already corrected by 20% and 30.33% from their 52 weeks high respectively.

Should you invest in insurance related products?

During my recent interaction with officers at different locations, I came to know that many of us have invested our hard earned money in insurance related products. The reasoning given was simple, you get dual benefits i.e your life gets insured and you also get maturity benefits if you survive the policy period. On the face of it, it looks like a good option. But in reality is it? Let’s see.

Let’s first understand the basic concept of life insurance. It is an instrument which provides protection against those risk events which can destroy or diminish the value of human life as an asset. These risk events may be dying too earlyliving too long and living with disability. The Human life Value(HLV) concept considers human life as a kind of property or asset that earns an income.

It thus measures the value of human life based on an individual’s expected net future earnings. Net earnings mean income a person expects to earn each year in future, less the amount he/she would spend on self. Thus, it indicates the economic loss a family would suffer if the wage earner were to die prematurely and accordingly quantum of insurance required would be calculated. In general, we can say that amount of insurance should be around 10 to 15 times one’s annual income. And to cover the risk of life, we need to pay the cost of risk (calculated based on mortality factor) termed as premium.

Now having understood the concept and need of life insurance, let’s see what are the options available to us:

  • Term Insurance. Under term insurance, only the risk of life gets covered without having any maturity benefits on survival. In case of death during the policy period, sum assured is given to the nominee. Premium paid towards the policy  covers only the cost of risk of life.
  • Variants of life insurance policies to cover risk of life as well as provides investment options( e.g endowment, money back policies with conventional investment options and Unit Linked Insurance Plan etc). All such policies provide sum assured in case of death during the policy period and maturity amount on survival. Premium paid towards such policies has two components, firstly, the cost to cover the risk of life and secondly, the invest able portion called as cash value component. Now what you get as maturity value on survival is only the cash value component of the premium with annualised returns of not more than 5-6%.
  • To understand how the finances work at the back end in both cases, let’s take an example of a 28 years old individual seeking life insurance policy primarily to cover the risk of his life for next 20 years with a sum assurance of Rs 2.1 crore(guaranteed returns on death during the policy period)
  • An investment cum life insurance policy( e.g endowment, money back etc) will have an annual premium of Rs 10 lakhs for all the twenty years. Maturity amount on survival, although not guaranteed, is indicated as Rs 4.02 crore assuming 8% annualised returns and Rs 2.56 crore assuming 4% annualised returns during the period of policy(These indicative figures are as per guidelines issued by IRDAI). Mind you, a premium of Rs 2 crore would have been paid by the individual in twenty years.
  • On the other hand, term insurance plan would cost an annual premium of only Rs 11454/- with no maturity benefits. Sum assured in both the cases remain same as Rs 2.1 crore. If the balance amount of Rs 9,88,456 ( difference of premium in both cases per annum) is invested in a index based mutual fund giving say 12% annualised returns for next twenty years, he will have a maturity corpus of Rs 7.12 crore.( Nifty benchmark index fund has given 12.54% annualised returns during last twenty years).
  • Wouldn’t it be better for him to go for term insurance and pay yearly premium of Rs 11454 and invest the saved amount of premium in better investment options? 


  • Life Insurance is only meant to cover the risk of life and not an option for investments. There are much better options available for investments.
  • As a matter of principle, any insurance policy offering maturity value on survival should never be taken.
  • Life insurance policy should always be taken from a known person who can do hand holding in case of requirement. Known registered consultant can understand your requirements and suggest a solution best suited to meet your requirements. Moreover he would be available to the nominee to guide him or her at the time of submitting the claim papers and assist the family to get the claim processed in case of unfortunate death of the policy holder, which will not be the case should you buy your policies from commercial websites like policy bazaar etc.
  • It is a misplaced belief for many of us that there is no commission involved while buying an insurance policy from such sites. Had this been the case, how do you think they run their business and pay hefty fees to film stars for promoting their cause? 

Am I financially ready to bear the cost of upbringing children….?

Well friends, most of the times it’s an emotional decision for a couple to start a family but rarely we take stock of our finances before we actually take a plunge. Now lets try and understand the quantum of money required to be saved and invested to meet financial goals associated with upbringing of children. Let’s do it with a case study.

Assuming a person gets an employment at the age of 23 years in Dec 2018 after finishing his graduation and plans to get married by the end of year 2021(26 years of age). Couple enjoys their married life and decides to have their first baby by year 2025( four years of marriage) and second baby by 2027(six years of marriage). Let’s see how much money they would require to save and invest on monthly basis to plan for the future requirements of their two children.

In the above example we have seen that a proper financial planning is required to be done and required amount of money needs to be invested in an appropriate financial instruments( I have assumed 7.5% annual returns in debt instruments to include bank FD, PPF etc and 12% annual returns in equity mutual funds over a longer period of time). Although the requirement of funds seems to be high but with proper planning and regular investments, these targets can easily be met.

Moreover financial planning will help us decide weather to have two children or settle for only one . At this stage, it may not be out of place to mention the importance of retirement planning. Just to give an example if this person is spending Rs 25000/- per month today, he would require approx Rs 3.06 lakhs per month at the age of 60 years with an average inflation of 7% per annum. Assuming his life span is 85 years, he has to have a corpus of approx Rs 8.17 crores by the time he retires at the age of 60 years to sustain upto 85 years of age( assuming 8% of annual returns and inflation of 7% post his retirement). And to accumulate the corpus of Rs 8.17 crores, he needs to invest Rs 11885/- per month over a period of next 37 years upto the age of 60.( assuming 12% annual returns on investments)

So financial plan will not only help us achieve our financial goals but may help us take important life decisions too.