5 Mistakes People Make While Investing In Mutual Funds

An investor should never be complacent and careless while making financial decisions. He must stay clear of myths [common myths about mutual funds busted] and make a well researched, understood and planned decision while investing in mutual funds [what are mutual funds] because an investment is not only going to deprive him of some portion of his income for present use but also if wrongly invested and handled, it might lead to a loss on the investments in the future.

Here are 5 mistakes that people make while investing in mutual funds
  1. Not monitoring the investment
    Any mutual fund investment process does not end with just putting in money in the preferred scheme. An investor needs to set time lines to reassess the scheme performance, see if there is any deviation in the scheme’s risk factor, scheme’s management and scheme’s goals and check if there is any change in the investor’s financial goals and in case the financial goal that was expected to be achieved through the investment has been achieved, he must decide whether to stay invested or not [know when to exit a mutual fund investment]. By keeping a track of the investment and changing economic scenarios, an investor will also be exposed to new and more rewarding mutual fund types or investment models or avenues.
  2. Ignoring the tax implications of the mutual fund investment
    While most investors are attracted towards making mutual funds investments after knowing the benefits and features , many of them overlook the tax rates and taxation benefits for different types of mutual fund investments. For example, while choosing an Equity mutual fund scheme, an investor must understand that selling an investment after holding it for more than 12 months doesn’t required him to pay any tax on the gains. [tax on mutual funds in india] Similarly, while investing in ELSS mutual funds, an investor should understand that ELSS  is a tax saving tool under section 80C of the Income Tax Act for those whose income is taxable. 
  3. Investing only in equity
    Equity mutual funds category gives the maximum returns. The point to be considered here is that while Equity MFs are attractive with high returns and no tax on Long Term Capital Gains, they carry high risk- a risk of low/ no/ negative returns depending on the performance of the companies in which the mutual fund is investing in and the overall economic and business conditions of the country. Moreover, equity should be opted by those in their early-to-mid phase of their life and investment cycles as they tend to have high risk taking capacity. Although equity is essential for good returns and investment growth, it should be supplemented by other types of less risky and fixed interest investments.
  4. mutual fund mistakes wikipedia
    Mistakes to avoid with respect to MF
  5. Investing just because one has to invest
    One of the things that people do is they start mutual fund investments not because they feel the need to but because everyone else is doing it and because they have heard that investments are a must.20 things to consider while investing in mutual funds. One must invest only after assessing the future needs of the individual and family and after gaining some level of understanding of how a particular investment type works and performs. However before investing one must ask oneself some basic questions like- If and when will I need money in the future? Can I afford to start investments now? How much can I invest in a month/ year? What options am I looking at? How much risk am I willing to take? How much return or interest am I expecting out of my investments? There are various types of mutual funds available that will cater of different types of customers.
  6. Stopping investments when markets are volatile and when there is recession
    Every one of us is a bit shaken and worried when we see that the market and economy are unstable because that simply means that our investments are in danger, hence the natural instinct to quit the investment. Yet, Long term and SIP mutual fund investors need not panic at such times as in the long run everything stabilises and grows and volatility in the short run is inevitable and SIP mutual funds have an in-built feature which averages out the lows and highs in the NAV over the entire period of holding the investment. The moral is to stay invested and keep investing in the face of volatility and recessionary business cycle phase.
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What Is Securities Transaction Tax? How Does It Affect Mutual Fund Investments?

Here is all that you need to know about Securities Transaction Tax:

Securities Transaction Tax or STT was introduced in India in the 2004 budget. This came into picture when LTCG on (for more on tax on mutual funds read all you need to know about mutual funds taxes in India) investments in equity markets was made tax free and to avoid tax evasion on capital gains. STT is a direct tax and is charged by the Union Government of India.
taxes in MF wikipedia
STT in Equity and MF
STT is a tax that is charged on the entire value of the investments to the individual investors, corporates and investment companies on every purchase and sale of Shares, ETFs (read ETFs vs mutual funds), Derivatives, Equity oriented units i.e., any such investment that needs to be transacted on the stock exchange and on sale of equity mutual fund (Read basics of mutual funds) units to the mutual fund. In 2013 the rates on taxes were revised and reduced owing to protests.

The current rates of tax for different Equity instruments are as follows:
Different taxes in Equity Investment

How does STT affect a mutual fund investor while selling his units?

As mentioned above STT is charged on the entire investment value on the sale of units of Equity based Mutual Funds to the mutual fund i.e., it is payable by the investor who is redeeming his units. Although it is borne by the investor, it is paid by the mutual fund AMC on behalf of the investor. So what the investor receives on the sale (redemption) of the equity based mutual fund units he holds, is the amount after paying for the STT.(Read when to exit an equity mutual fund investment)

While redeeming units of Equity based Mutual Fund an investor can either request for sale of units or can request for receiving a fixed amount of money by selling proportionate number of units.

So, if an investor asks for sale of 100 units @ Rs.200 each (NAV-understanding basics of mutual funds) from his Equity Mutual Fund investment , the AMC sells his units back to the mutual fund scheme and an STT is charged on Rs.20,000 and the amount after STT deduction is passed on to the investor.

On the other hand if an investor requests to receive say Rs. 10,000 of his Equity Mutual Fund investment (i.e., 50 units @ Rs. 200 each) the AMC would add up the STT amount to the Rs. 10,000 and then assess how many units in total need to be sold to arrive at a net value of Rs. 20,000. So, it is up to an investor to decide if he needs a specific amount in hand or just sell his units to receive whatever its value is. (Read 20 things to consider while investing in mutual fund)

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Tax On Mutual Funds In India | How Are Mutual Funds Taxed In India

The tax on Mutual Funds (read basics of mutual funds)is different for resident individuals, NRIs and corporate. Taxes are an inevitable part of our earning, spending and investing cycle. There is a whole gamut of taxes we pay for the different activities we perform, for the purchases we make, and for the benefits we receive. And as such Mutual Funds are not to be forgotten as these comprise the major part of an individual’s investment portfolio in the current times.

Taxation on Mutual Funds - How mutual funds are taxed?
Taxes on Mutual Funds in India
Let’s see how mutual funds are taxed for individuals in India:
  1. Mutual funds are taxed under the head ‘Income from Capital Gains’ as a part of Income Tax.
  2. Any capital appreciation gained on an investment in mutual fund held for less than 12 months for equity mutual funds and 36 months for debt mutual funds before selling off is termed as Short Term Capital Gain (STCG).
  3. Any capital appreciation gained on an investment in mutual fund held for more than 12 months for equity mutual funds and 36 months for debt mutual funds before selling off is termed as Long Term Capital Gain (LTCG).
  4. The tax rate is different for debt and equity mutual funds.
  5. A mutual fund scheme is said to be equity oriented only if at least 65% of the average weekly net assets is in Indian equities.
    Are mutual funds tax free in India? wikipedia
    Different taxes on MF
  6. STCG of a debt mutual fund and the STCG and LTCG profits on sale of other kinds of mutual funds are just added to the income of the individual and taxed as per the income tax slab rates.
  7. In case of hybrid mutual funds the tax rate is similar to equity mutual funds because in hybrid mutual fund schemes at least 65% of the money is invested in equity derivatives.
  8. STT/ Securities Transaction Tax of 0.001% is levied on every sale of units of an equity mutual fund schemes that are listed on the stock exchange over and above the above mentioned tax rates.(For more on STT/ Securities Transaction tax read what is securities transaction tax)
Let’s understand how indexation impacts a mutual fund investor through an example

A. 10% without indexation on profits on sale of Debt oriented mutual funds
Suppose Mr. Ram had purchased 10 units of a debt mutual fund with each unit @Rs. 10, thus investing Rs.100. After 3 years he decides to sell the mutual fund units and as on that date the value of each unit is Rs. 20 thus making his investment worth Rs. 200. Therefore his overall long term gain is Rs.200-Rs.100=Rs.100. He will have to pay 10% on the profit of Rs. 100 i.e., Rs.10.

B. 20% with indexation on profits on sale of Debt oriented mutual funds
Using the example as above, we also understand that the value of Rs. 100 3 years ago while investing was obviously more than it is on the date of sale of the units. This is because of the inflation in the economy. So, what an indexation provides investors selling their investments is to include the loss in the value of money due to inflation over the years of investment. So, suppose there has been an inflation of 15%, then the current value of the old Rs. 100 is Rs. 115 and the present sale value is Rs. 200. Therefore the profit is Rs. 200-Rs.115=Rs.85. Now, the investor will have to pay a 20% tax rate on the profit on sale which comes up to Rs. 17.

As it is up to the investor to choose the way he wants to pay tax on LTCG on his debt mutual funds, it is clearly evident that he saves more tax without opting indexation benefit.(Read 20 things to consider while investing in mutual fund).

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Motivation: What is the theory of Motivation in Management?

Today we will talk about how motivation drives people within. Motivation is defined as the inner drive to act in a certain manner. Behind every action there is a motive.

Importance of Motivation

  • Motivation fills the gap between ability and willingness. Motivation gives reason for people to get to work or action. Without motivation man wouldn’t feel the need to work. So in order to achieve goals he puts himself and his resources into use.
  • By judiciously putting resources to work and its repetition leads to efficiency in an employees work.
  • Motivation helps in achievement of organisational goals as efficiency and productivity in the work of an employee improves.
  • Motivation brings in a positive attitude in employees which helps them perform well and also brings in stability of human resource due to increased job satisfaction.

Theories of Motivation

Maslow’s Hierarchy of Needs Theory

  1. Physiological needs include basic needs like food, shelter, clothing etc. Without fulfilling these needs a person does not think about the next level.
  2. Security needs include physical safety and job security for basic sustenance.
  3. Social needs consist of affiliation needs like family, friendships and other informal groups.
  4. Self- esteem needs are the needs that bring confidence, self-respect and competence in a person.
  5. Self-Actualisation refers to the maximum potential a person can reach.

Herzberg’s Two –Factor Theory of Motivation

In 1959, Fredrick Herzberg propounded the two factor theory of motivation. In this theory if a factor does not satisfy, it may not even dissatisfy a person. The opposite of satisfaction is not dissatisfaction. His theory was based on identifying two different aspects of job satisfaction and dissatisfaction- motivators and hygiene factors.

Hygiene factors are the job factors that cause dissatisfaction or no dissatisfaction in a job. Absence of hygiene factors are the reason for job dissatisfaction. Hygiene factors are also called maintenance factors and for most employees these could be the basic minimum requirements. Factors like pay, benefits, company policies, job security, status, physical working conditions are included in hygiene factors.

Motivators are factors that affect motivation in a positive manner. These lead to satisfaction or no satisfaction at all. Motivators yield for higher performance. Growth and recognition are identified as one of the most influential motivators. These root from the basic tasks that an individual performs during the work.

• Equity Theory
Equity theory is based on the principle of balance or equity. This theory says that a person’s motivational level is based on his perception of equity and fairness. An employee judges fairness by evaluating the correlation between his inputs, like the hard work, time and effort he puts into his work, and his outputs like salary and other perks. He compares the ratio with that of his colleagues. Employees expect an equitable or positive ratio compared to their co-workers. If they perceive that it is not positive their motivational level reacts negatively.

• Expectancy Theory
Expectancy theory was propounded by Victor Vroom in 1964. Unlike Maslow's and Herzberg's theory this theory focuses on outcomes. As the name reveals this theory relates an employee’s work to his expectancy of outcomes. An employee’s motivational level depends on his expected rewards. After he asses this he performs his work with an amount of motivation and efficiency that is equivalent to the expected rewards.

In this theory work motivation relationship has three phases-
  1. Effort-performance relationship- An employee's performance depends upon the effort he makes.
  2. Performance-rewards relationship- The employee believes that putting in a certain amount of work will fetch him attractive rewards, then he becomes motivated.
  3. Rewards-Outcome- Finally if the employee believes that the rewards match with his personal goals he tries his best to attain organisational goals.
Elements like instrumentality and valence play vital role in this theory. Instrumentality refers to the thought that effort and performance will lead to desired rewards. Valence is importance of a reward to a person. If the reward is significant to an employee only then does the employee put in effort.

Finally from all the motivational theories discussed above we observe that all theories revolve around a person’s needs and internal motivation also plays a great role in increasing motivational level. Because only if a person feels that the incentive or outcome is appealing to him and matches with his personal goals, only then does he become motivated. All these theories help a manager understand the employee’s psychology and then he carefully designs incentives and lays it down before his employees. Motivation derives a positive feeling in an employee which increases job satisfaction and helps reduce employee turnover in the longer run.

Read More:
Group Dynamics: Types, Formation of Groups and Group Cohesiveness
Difference between Values and Attitudes (Explained)
Advantages and Disadvantages of Earned Value Management
Difference between Marketing and Selling | Marketing vs Selling

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Group Dynamics :Types, Development & Structure

In this article we will talk about how group dynamics work in an organisational setup so as to understand the effects and deal with them accordingly.A group consists of two or more members who come together and work together to achieve a common goal. Groups can be of many types. They can be classified into formal groups and informal groups.
  1. Formal groups are the groups that are deliberately decided by the management. Formal groups can be categorised into command group, task groups and functional groups.
    • Command groups are designed by the organisation according to the man-power requirement in each segment of the organisation. Each group member have assigned roles and established working relationships.
    • Task groups are formed to accomplish a particular task or project. Task groups have a limited range of goals to be achieved which doesn’t extend after the duration period of the task or the project.
    • Functional groups are created by the organisation to achieve goals. These type of groups exist throughout the life of the organisation. The finance department, marketing department, legal department, production and logistics department are a few examples of functional groups.
  2. Informal groups are groups that arise out of the social needs of people. Informal groups consist of interest groups, friendship groups, and reference groups.
    • Interest groups are groups that come together due to a common interest like working professionals from various fields coming together to adopt ecological friendly practices in their field or simply they are a group of tree-hugging enthusiasts. Interest groups usually last longer than any other informal groups because they are bound together by a common interest.
    • People with similar social activities, political or religious beliefs, people belonging to the same community in the society form friendship groups.
    • Reference groups are a type of group that people socially compare themselves with or try to associate with them. People often alter their attitudes and behaviour to that of the reference group. Common examples are family, friends and religious groups.

Group Development

Forming a group is the first stage of group development. This stage is characterised by a lot of confusion among group members about the objective of the group and their individual roles. Neither the leader nor any major objective of the group has been decided.

Storming: This stage is marked with conflict. Group members tend to disagree on matters relating to the group objective, leadership and power roles. Members often criticise and raise their concerns.

Norming: This stage is characterised by mutual understanding and co-operation after getting into discussions or even arguments and effectively making sense of what the common goal and task is.

Performing occurs after all group norms have been laid down and the goals to be achieved by the group is put down on the table. In this stage group members focus on work performance of members and make rational decisions.

Adjourning is the last stage of group development. The members of the group disband when the group has performed all its tasks and achieved all goals. This stage is mainly occurs in temporarily formed groups such as task groups. Most groups do not arrive at this stage.

Group Structure

Group structure is the relational structure of group members that binds them together and helps them achieve group goals as well as organisational goals.

Group Size is the number of members in a group. Some believe that the ideal size of the group is in between five to seven;although this varies according to necessities of the group. In a smaller group of five people, members interact more and there is a stronger sense of belonging amongst the members. Also, the smaller the group the more the individual participates. It is a fact that group participation increases job satisfaction.

Group Roles are associated with duties and responsibilities of every member of the group. Roles are predetermined in case of formal groups. But some roles arise as soon as one takes a particular position and responsibility in a group. Roles can be work roles that are roles to be performed related to work, maintenance roles like gatekeepers or blocking roles. Gatekeepers try to keep communication going and encourage participation.

Group Norms are standards of behaviour that are deemed acceptable by a group. Group norms are formed on mutual agreement with the group’s members. Norms are made to strengthen the group and avoid unpredictable behaviour. A lot of emphasis is given on conformity to norms as it shows the level of motivation and commitment of the group.

Group Cohesiveness refers to the bonding of group members and the level of co-operation among them. Cohesion is a positive attribute of a group as so are its effects.

Read More:
Comparison between Values and Attitudes (Explained)
What is emotions analytics (EA)?
Things you should say to your partner on a daily basis
6 secrets to a great long distance relationship

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