Intro 💫

In India, presently there are many Mutual Fund platforms available, for free. Being spoilt for choice, it can get overwhelming to decide which one's best for you.

To begin with, this choice is not as important as you'd like to think. For most apps, if you use one and don't like it, it's pretty straightforward to be able to move to another platform. It's a reversible decision.

But there are a few that you should avoid. For instance, the ones that sell regular plans.

Coming back to existing platforms that offer direct plans to Indian investors, we can broadly categorize these in two main types of mutual fund application/service categories.

• Third party applications

• Applications or platforms provided by the fund houses or RTAs

Third Party Applications 🥉

These are provided by third parties (the investor is the first party, fund house / RTA are the second party) which offer various transaction options to users for buying funds directly.

Most commonly, these 3rd parties are SEBI registered RIAs (Registered Investment Advisory); but can also be other AMFI distributors, or an umbrella organization backed by a group of fund houses.

They act like one-stop shop for various mutual funds, provided by almost all the fund houses.

Some of the popular ones are listed below in alphabetical order.

1. Coin by Zerodha

2. ETMoney

3. Groww

4. INDMoney / INDWealth

5. Kuvera

6. MFUtility

7. Mobikwik

8. Niyo Money / Goalwise

9. Paytm Money

Available functionalities or missing features of these platforms are captured below in a table:

Explanation of parameters used in the table

• Direct Mutual Fund Per SEBI regulation, all fund houses must offer a direct plan version of all their funds; where no middle-men can earn a commission for selling that. This reduces cost for the investor buying the fund. It improves returns by reducing cost over long run. Over any given period, direct plan of a fund would do better than regular plan of same fund.

• Fees There is no charge of any kinds of fees associated with buying units in a direct plan in the app, or setting up / cancelling SIPs. Note that some of these platforms have membership programs, or make some features available for a fee. We're not considering that here - only concerned with the ability to invest in direct plans, for any amount with any number of trades.

• Goal Setting A feature to set a goal for a specific amount of time so that you will be able to invest for it & track it.

• Family Account Ability to manage portfolios for multiple accounts (For e.g., spouse, Joint account) from a single user account login.

• Assets other than MF Ability of the platform to offer other assets like Gold, FD, Stocks, Bonds etc other than just Mutual Fund. Note that Coin by Zerodha offers only mutual fund; to be able to buy shares or bonds or ETFs, you'd need to download other products from Zerodha.

• TAX Statement Does the platform provide the statements for tax filing purpose (For e.g., Capital Gain Statement), or just to estimate tax liabilities for advance tax payments?

• History Tracking Ability of the platform to track the history of our portfolio ,irrespective of whether we purchased the fund from the same platform or not. In other words, can an investor just sign up and import their portfolio, built over the years, and track the performance all in one place?

• Automated Reinvestment Does the platform to automatically change the allocation percentage of your investment to debt & equity based on how near one’s goal is?

• Skip an SIP Option to skip the SIP for a month or a predetermined time. Note: Several platforms stops the investment and then start a new round again instead of pausing. This might create issues, especially if AMC has put restrictions on new SIPs. Do check with latest updates on your fund, from your fund house.

• NAV Cutoff Time This time determines the Net Asset Value (NAV), at which you can buy the fund units for that day. If an order is placed after this cut-off time, it'd be processed as an order of next business day. Ideally, you'd want a platform that enforces same cut-off time as the fund house / AMC; and not a restricted form of it. For instance, Coin by Zerodha has a cut-off time of 1:30 p.m. for all funds on their platform; while one can place an order in equity funds after 1:30 p.m. on most other platforms, and still get the NAV of same day.

Application by fund houses and RTAs 🥝

The fund houses also provide web portals / applications to manage the funds, offered by them.

So you might end up managing a bunch of applications to track your portfolio, having to deal with multiple logins on different websites.

Another option can be to use MyCAMS or KFinTrack. While these are provided by CAMS and KFinTech respectively; these don't offer all funds on their platforms, except for the ones from the AMCs whose RTA is also providing the platform.

For instance, if you invest in Axis Bluechip (using as an example, not a recommendation) Direct Growth, it won't show up in MyCAMS app. Because RTA of Axis MF fund house is KFinTech. Similarly, an investment in SBI Small Cap Direct Growth won't be visible in KFinTech app.

Other option is to have all the mutual fund investments from a single fund house.

But that's generally not a good idea, for many reasons (for instance, similarities in fund management styles or investment philosophies can make all the funds from a single fund house perform in a similar way). Practically, most investors would've investments with more than one single AMC.

Verdict 🎎

As long as you are buying direct mutual funds and not paying any maintenance charges, you should be fine with any of the application listed or not listed above.

And if you don't like one that you'd started with, you can easily move to another platform. We highly recommend testing out these platforms, preferably by placing a small order (say, 100 INR in ICICI Liquid Direct Growth or IDFC Insta Cash Direct Growth) and testing the order flow, end-to-end. Then continue with the one you liked!

Below are the options you can consider based on our analysis.

• Kuvera: If you are a beginner and is trying to get into the market for the first time.

• Niyo Money / Goalwise: Just wanted to get the money invested for a period of time without worrying about whether the fund should be equity based or debt based or a combination of these.

• Groww: If you need a platform where you can invest in stocks and mutual fund at the same time.

• INDMoney: If you want a platform which can track everything from daily expenses / investments, to credit scores.

When it comes to ELSS, present categorization gives the fund managers wide berth in picking stock from Nifty 500 universe of stocks. They can pick any stock from top 500 stocks listed in NSE / BSE - this is different from funds that are categorized as large-cap, mid-cap, small-cap, or multi-cap funds. Only flexi-cap category of equity funds is similar.

This makes it tricky to pick an ELSS fund, because all funds from these category might not be on the same footing.

You can look at past returns, or metrics derived from past returns (alpha, beta, sortino ratio, and other greeks); but all these won't indicate how a fund would perform in next time period of similar duration.

If a fund had 4% alpha on its benchmark over last 3 years; it's not an indication of what kind of alpha it would have going into next 3 / 5 / 7 years.

Active fund picking is hard, and ELSS having widest latitude can be really hard to pick the right fund that'd perform great after you invest in that.

For instance, until 2015-16, Nippon ELSS used to be one of the popular recommendation on many mutual fund portals. Since then, next 3-4 years haven't been kind to this fund, owing to this fund's huge bets on infrastructure / manufacturing sectors.

Conversely, Axis Long Term Equity (not a recommendation, using as illustration) has done better than expected over the same period.

In 2020, Canara Robeco ELSS fund looked like a great fund, doing much better than its peers over last 3-4 years. But 3-4 years ago, or even a year ago, it wasn't doing anything extraordinary, that it'd get into anyone's radar.

The harsh truth is, you can pick an ELSS fund, and at best hope for it to do well-enough. We've discussed in these FAQs how picking the right fund isn't exactly a big requirement - if you pick something that does ok enough, and give it time, that's fine.

ELSS investment which would be countable under 80C deductions is capped at 1.5L per year (though you can invest more than that amount in one/multiple ELSS schemes, the amount available for 80C will remain at 1.5L as per the current IT laws). On top of this, most salaried workers have PF, insurance etc., limiting ELSS investments to much lower value. If the investment principal is small, return difference isn't that important.

Just pick one, you're as likely to be wrong as you could be lucky.

There's no such thing.

It's rare for markets to move up / down so much in a single month, that a single SIP instalment being on a different date would make a sizeable difference in your long term corpus.

If you start investing today via SIP, and analyse 10 years later, you'd find that, say for example, 23rd of the month was the best day to invest for your funds. That's something you can know only if you know the NAV history of next 10 years, which no one does.

What about the apps that show you best date of SIP?

These platforms or services are showing you, the "best" date, to prevent an analysis-paralysis. It's "one less thing to worry about", therefore prompting it to the user would mean higher conversion rate (assuming this is a metric these platforms are measuring - how many people complete setting up their SIPs).

This is good for the platform, as it's helping the user feel psychologically safe that they're able to see some analysis, no matter how useless it is.

However, the only thing they've done is take past NAV data, and found out what has been best date of SIP for a particular fund over a period.

Since past performance is not indicative of future performance, anything derived from past performance is also not indicative of same metric for future.

If between 2001-2010, 5th of the month had been best for a particular fund, say SBI Bluechip (not a recommendation, just using as an example) - that does NOT mean for next 10 years (2011-2020) same exact date was best for the same fund.

For instance, some people believe that the last Thursday of the month coinciding with options expiry date, can be best for investment. This is obviously not backed by any sound analysis.

What does a sound analysis here look like?

You might find articles on the internet that draws some conclusions.

Take the 2010-2020 period. It's a 10 year period, with 120 months. That's 120 transactions. Assuming each month to be of 28 days (to account for February); this would require comparing across 28 time-series data sets, with each having 120 entries; for every fund.

But that's not all! Imagine someone investing on 28th of a month, instead of 1st of a month after salary credit (assume this person gets paid by employer on last day of previous month). Then these 28 days, this amount has been parked in savings account or overnight fund or even short term FD.

A proper analysis on best date for SIP would also have to involve the interest income from this and tax paid on these gains, which again, have varied greatly over any meaningful period.

As you can see, there are too many variables; and that's just with one single fund. India has more than a two thousand mutual funds, as of now.

Finally, consider that people don't invest the same amount via SIP over a ten year period. Some people increase the amount of SIP that they do every year as their salary increases. Some of them pause their SIPs from time to time, or skip a few installments here and there.

To sum it all up; there might be a best date for SIP in a month, and it depends on lot of factors that one cannot easily simulate with past data. But even if they did and found one, that date might not be best for your investment pattern for next 1-2 decades.

Invest on a date of month you're comfortable with.

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A mutual fund is not free from costs. An asset management company (AMC) is a for-profit entity who aim to make some profit from their venture. They also have to pay their security analysts, operations teams, pay brokerage fees for market participation, and record keeping fees to registrars like CAMS and KFintech, formerly known as Karvy.

A regular plan of a mutual fund has one more additional expense — distributor commission.

Why is distribution commission bad for an investor?

There are many reasons why regular plans shouldn’t exist.

• Erosion of Value

  Regular Plans add no value to the portfolio of an investor. All it does is eats away at your portfolio valuation and make the distributor richer.

  This cost scales with your portfolio valuation. The more your investments grow in value, the more money is taken out of your investment.

  It’s a classic case of tyranny of compounding costs, words made famous by Jack Bogle.

• Distributors are Inherently Biased Against the Investor

  The distributor which subscribes an investor to a regular plan is inherently biased against an investor because the distributor would recommend funds which have high distributor commissions regardless of whether the fund is actually good for an investor or not.

  To prove our point, here’s an example.

  This stark difference in the source of AUM should be enough to highlight where the priorities of regular plan distributors lie.
• It’s unfair

  You might’ve placed a purchase order five years ago in the regular plan of a fund, to purchase some units. This one transaction and subsequent payments, have been lining up pockets of the distributor, every day, for the last five years. And it would continue to do so as long as you have even a single unit in the regular plan of the fund.

  Meanwhile, the distributor is not at all involved in the process of managing your portfolio — that’s being handled by the respective AMC.

  This payment model of perpetual payment in eternity is rarely ever seen in nature, outside of this one use-case. Imagine visiting a doctor who demands 1% of your income every month in perpetuity till you’re alive.

• It’s sneaky

  For most mutual fund investors out there, the disadvantages of investing in regular plans are not well understood. Lack of financial knowledge, and fear of complexity have driven a generation of investors to blindly trust their distributors without looking too closely at account statements.

  But this charge is so sneaky, there’s no column in most account statements sent by AMCs, that include an entry for the amount that went to your distributor in the last 1M / 1Y / 5Y. Fortunately, your NSDL / CDSL consolidated account statement (CAS) would include this information.

  If distributors have faith in their financial advice and planning, they should have no shame in openly sharing with their clients, how much they’ve made blindsiding them. Or, the distributors should send an invoice to said clients. But they don’t, and to hide this daylight robbery, the payment is done by an AMC to the distributor directly, at periodic intervals.

What difference does an extra 1% make?

Let’s try to understand, with real world scenarios, exactly how much one can stand to lose investing in regular plans. However, before we get there, let’s discuss what direct plans are.

The only difference between a direct plan and a regular plan of a mutual fund is that direct plans do not have distributor commissions. The word direct must be present in your NSDL / CDSL / AMC account statements if you’re investing in a direct plan of a mutual fund.

Although it may not be straightforward to calculate the difference in returns between a regular plan and a direct plan of a mutual fund from AMC account statements, we can calculate it by simulating the same transactions on the same date in the direct plan of a fund.

Lumpsum Purchase in Axis Long Term Equity and Tata Large Cap

Next time, when a distributor tells you to keep your SIPs going, you have to wonder whether it’s because they don’t want to see their income disrupted, which is tied to total portfolio value.

Total Expense Ratio from an AMC’s Perspective

We can use this data to get some insights about the expenses generated by this fund.

SIP for 8+ Years

As on 9th April 2021, the direct plan of mutual funds have had more than 8 years of history since they were started back in January 2013.

We are considering some large-cap funds that have mostly stayed true to their large-cap stock selection mandate, i.e., mostly having bluechip stocks in portfolio of the fund. Mirae Asset Large Cap fund has been excluded, as it was operated as a multi-cap fund throughout most of this time period (2013-2018) that’s being considered.

UTI Nifty Index

HDFC Top 100

Franklin Bluechip

ABSL Frontline Equity

SBI Bluechip

DSP Top 100

ICICI Prudential Bluechip

Nippon Large Cap

As we can see, in the large cap space, equity mutual funds have mostly performed in-line with the index funds over the last 8 years. Most of them have underperfomed, but some of them have outperformed.

Let’s look at the data presented above from a different perspective. We’ll focus on distributor commissions and their impact on our portfolio.

As you can imagine, no popular distributor was publicly recommending UTI Nifty Index fund’s direct plan, back in 2013-14. This isn’t surprising considering the fact that for a regular plan distributor, recommending UTI Nifty Index fund’s regular plan would’ve been the least profitable.

How Bad Will It Be in the Long Run?

Unfortunately, investing in the regular plan of a mutual fund is only the beginning. As more and more time passes by, staying invested in the regular plan of a fund will erode your portfolio further.

As Jack Bogle said:

The miracle of compounding returns has been overwhelmed by the tyranny of compounding costs.

The recurring cost model of regular plans can unleash this mythical tyranny right on your portfolio, without you even realizing it.

Falsehoods and Myths about Regular Plans

As you’d imagine, regular plans are a juicy proposition for every participant involved, except for the investor whose capital is being eroded.

An investor might come across some of the following arguments in favor of regular plans. We’ll go ahead and debunk them.

But why would AMCs purposefully lower their returns in regular plans? It doesn’t make sense.

AMCs don’t have a reason to compete on performance, when they can just offer more commissions on their funds. The distributors would then sing praises of such funds over other available options.

AMCs like Mirae Asset, have been artificially reducing the TER of the direct plan of their funds well below that of their competitor fund houses, creating large TER differences between their funds’ direct plan TER and regular plan TER.

This incentivizes distributors to recommend Mirae Asset equity funds over other funds and lures in direct plan investors with unusually low expense ratios. Of course, the unusually low TER of direct plans can simply be increased later once Mirae Asset’s AUM targets are achieved. It’s unfortunate that there are no regulations on frequent TER changes made by AMCs.

As on 9th April 2021, this is how the TERs look like for flagship funds from Mirae Asset AMC:

Of course, Mirae Asset isn’t the only AMC which is doing this. You might come across unsustainably low TERs in direct plans of other AMCs, with reasonably high TER in the regular plan of the same fund.

But why would my distributor recommend such funds? He’s our family friend / relative and has our best interests at heart.

Regular Plan distributors don’t have to recommend good funds, because if it doesn’t perform well, they could just tell you that the markets were bad this year, keep your SIPs going, and buy at lower prices. Your uninterrupted inflows in regular plans makes the regular plan distributor richer.

To understand how deep this nexus is, take a look at AMFI disclosure reports on commission to distributors, from past years:

But the NAV of Regular Plans are lower than Direct Plans. Shouldn't I buy low and sell high?

The NAV of regular plans is lower because it includes distributor commission and it'll always be lower than the NAV of its direct plan counterpart. In this case, your purchase price doesn't matter. What matters, is the rate of growth after you purchase.

As we just saw, the NAV purchase price and the number of units that you get are irrelevant and do not affect the final portfolio value. The CAGR, however, does, and it should be evident that the CAGR of a direct plan will always be higher than its regular plan counterpart.

But it’s just a difference of 1%. It won’t have much impact.

I know regular plans are bad but if I switch, I'd have to pay taxes. I don't want to pay taxes unnecessarily.

Taxes are on realized gains. Commission is on entire corpus.

Just like the largest ant is no match for the smallest elephant, your taxes might be low enough, if any, compared to your potential commission losses over next few years. Even if it’s not, tax is a one-time headache. Commissions are forever, till the date you’ve zero units to your name in that regular plan of a fund.

You could also switch out partially, and not all at once. That’d save you some taxes by spreading your redemptions over more than one financial year.

In a scenario like this, it’s best to compute the potential values for tax liabilities, project losses in commissions, and make a choice on a case-by-case basis.

If not for my distributor, I wouldn't have started investing in mutual funds. I'm grateful to him. I can't just switch to direct plans now.

It's your decision to make but we'd advise you to think rationally about this, and keep your emotions aside when making decisions about your money.

Your distributor may have introduced you to mutual funds but if he signed you up on regular plans, he probably didn't sign you up because he was thinking of your welfare first.

At this point, you have the power to make decisions about your own money and switch to direct plans to save expense costs. You don't even have to find different funds.

If you're not comfortable choosing funds, you can start investing in the direct plans of the same funds offered by your distributor. Even in that case, you'd save on a lot of expenses.

But my distributor also gives advice. I don’t know anything about mutual funds. Investing in direct plans is only for advanced investors.

As we saw in the previous section, in the last 8 years, regular plans of large cap funds haven’t been able to achieve for the average SIP investor, what the direct plan of a low-cost Nifty index fund has generated.

Clearly, the so-called financial advice from regular plan distributors hasn’t been good enough to even make-up for the cost.

Investing in direct plans is a risk-free way of improving returns. A good advisor would recommend direct plans to their clients.

Also, when you invest in a mutual fund, the fund manager manages your portfolio. They are responsible for managing the investments in the you’ve invested in and adapt it according to market conditions. Your distributor has no role to play there.

SEBI has already issued notices saying that mutual fund distributors cannot be advisors. A person can either sell or advise but not do both.

Unlike a few years ago, we have many platforms today that offer investment in direct plans to every investor in the country. It has become much easier to invest in direct plans and manage your portfolio these days. One doesn’t need to visit an office, or use clunky AMC websites with bugs and errors.

If you’re wondering which website / app you should use to invest in direct plans, check out the following article.

If you’re wondering which mutual fund should you invest in, check out the following article.

We’d like to mention that choosing a “good” or a “best” fund isn’t important or required. Pick a decent actively managed fund and stick with it unless something fundamental changes about the fund. Or, if you’re still confused, pick an index fund and call it a day. The choice of the fund isn’t as important as sticking to that fund and investing in it in the face of market turbulence.

Wrapping Up

The real takeaway here is that recurring costs can affect your investment corpus in a really bad way over the long term. As an investor, avoiding regular plans is important. But in the same spirit, we should also avoid other recurring costs as well, which add up over the years, such as (but not limited to):

• brokerage commission, in percentage terms (and not fixed), for equity delivery

• rebalancing costs

• frequent selling leading to capital gains taxes

• high asset management fees of exotic products

Unlike regular plans, some of the above aren’t always avoidable. But do keep the adverse effects of costs from repeatedly doing these in mind, when engaging in, say, rebalancing.

Quantum AMC started offering direct plans of their flagship funds, Quantum Liquid and Quantum Long Term Equity, back in 2006. They were the first AMC to do so in India. They chose to not tie up with distributors, but rather offer a direct purchase option to the investors via offline mode (CAMS or KFinTech offices) and on their own website.

Since January 2013, SEBI regulations have forced all AMCs to launch direct plans for each and every mutual fund that they had and would come up with in the future.

If you haven’t done it yet, take a look at your NSDL / CDSL CAS, and see if the word “direct” appears in the name of the funds that you’re invested in. If not, you’re most likely invested in the regular plan variant instead. Ideally, all your funds should be in direct plan mode, and no fund should be in regular plan mode. You might be losing money to a rent-seekers without receiving anything of value in return. If that’s the case, start the process of switching to direct plan today.

The difference between regular plans and direct plans of mutual funds is explained in the article linked below. In short, regular plans have an additional cost of distributor commission. This doesn't go to the AMC.

UTI Nifty Index Fund

The list of expenses borne by UTI Nifty index fund in FY20 are as follows

People might argue that UTI could've reduced their expenses by not spending as much on Marketing & Distribution or Investor Education but considering they don't have enough AUM or TER to make any profits whatsoever, would cutting back on Marketing expenses help UTI at this point? The longer the fund has meager AUM, the longer UTI would suffer losses here. We should also consider that UTI Nifty index fund was launched back in March 2000, more than 20 years ago. I'm not sure if UTI has made any profits on this fund whatsoever and yet we hear people complaining about the TER of this fund being high.

Motilal Oswal S&P 500 Index Fund

Unfortunately, the scheme financial documents of MO's S&P 500 fund aren't available yet. It should hopefully be published in the next few months so we can know more about the expense details of MO's S&P 500 index fund.

Vanguard S&P 500 Fund

The Vanguard S&P 500 Fund is actually a class of several different funds all collectively known as Vanguard S&P 500 Fund. The different classes are

It should be kept in mind that Vanguard itself is structured differently than most AMCs and the company is owned by the investors in its funds. It was founded by the father of index investing, Jack Bogle, who was a proponent of low cost index investing. It would be fair to say that we haven't had any AMCs similar to Vanguard or influential index investing pioneers in India yet.

Summary

Intro💫

No! You don't need demat account / trading account, to invest in mutual funds.

Mutual funds are sold by AMC (Asset Management Companies) directly to you. RTA (Registrar and Transfer Agent) of the relevant AMC processes the transaction, and keeps records of your units purchase or selling.

It's already stored electronically, with legal ownership that it belongs to you.

For instance, if you buy units in SBI Bluechip fund, then SBI AMC would issue you units. And its RTA, CAMS, would be responsible for maintaining these transaction details as source of truth, when it comes to your holdings in the fund.

To Demat or not to? 🙇‍♀️

If you add demat on top of that, it'd create an extra layer. Now that extra layer is beneficial for you or not, would vary from person to person.

The following are the pros and cons of using Demat folios:

Upsides 👍

• Loan Against Securities(LAS): You can gain access to a variety of loans, predominantly from a bank, by offering the securities (like mutual funds) as collateral; that are maintained in your demat account. These securities can be pledged as a collateral for obtaining a loan from your bank.

• Easy Claim Process: Mutual Funds or stocks in demat are much easier to claim by dependents (nominee of demat) in the case of death. Direct plans with multiple AMC’s (fund houses) would otherwise mean multiple folios, which would be difficult to aggregate and claim.

Downsides 🥺

• Porting & Vendor lock-in: Demat folios (folios where your units are purchased through a broker in demat mode), don't let you easily port these into other platforms. In non-demat mode of holding (also known as Statement of Account mode, or SOA mode); your units are only with the RTA, and you can purchase through one platform (INDMoney, for example), and sell those units through another platform (say, MFUtility); while track your portfolio in a third platform (Kuvera or PayTM Money, for instance). You get best of all platforms, when you invest in SOA or non-demat mode. Compared to that, investing in demat mode means you must transact on those units, only via your broker.

• Extra Fees & Charges: Demat mode of holding also adds extra charges, in addition to usual charges of mutual funds like the expense ratio, for each transactions. Depository fee, annual maintenance fees for your demat account, withdrawal stamp duty etc. are examples of charges you'd typically incur, should you use demat account. For a full list of all fees, you should ideally check with respective broker.

If you are confused which one to choose, select the non-demat mode. You aren't limited by the platform in this scenario.

You can transact on your folio through any platform of your choice, track your holdings in any other platform of your choice.

If a platform doesn't offer a functionality (say, instant redemption from liquid funds, or creating new folio for tax optimizations on short-term withdrawals), you can directly use the web portal of the respective AMC to place that particular transaction in your folio.

It gives you a freedom so that you're not vendor-locked-in with your broker or platform.

What really is term cover?

A term cover is an income replacement plan. It should be covering you, till you've dependents who're reliant on your income, and miss it if something were to happen to you.

This money would never be yours. It's meant for your family, in the event of something highly unlikely.

How does it matter?

It matters because for most people with income from salary or contract work; it'd be hard to sustain their income after age of 55-60.

At that point, they'd ideally have enough savings or investment corpus, or annuity or pension to take care of their day to day expenses , for the rest of their remaining life.

It's hard to imagine one having to support their immediate family members financially, after an age of 60.

While most term insurers offer insurance coverage up to age of 70-75, or even 80 years of age; it only serves to increase the premium.

You shouldn't have to buy a cover for a scenario, and pay extra in premiums; when you don't even need it.

Optimally, a term cover up to age of 55-60 makes sense.

Ideally, if you reach a state where your savings + investments far exceed the cover amount (for example, by more than 2x-3x); then it makes sense to cancel the policy and stop paying further premiums. In the event of your demise, your nominee(s) would simply inherit your corpus.

If you plan well, you would actually make the term cover moot well before your retirement

In a well run plan, you would start creating assets soon enough. Even if you have a few years of earning/investing left, your corpus may be sufficient to take care of all the financial goals that outlive you. When you reach this state, you don't require term covers. Example: Say you have two financial dependents and are building a retirement corpus for the three of you. There may be a few more years required to build the corpus for all three, but you would have built the corpus for the two dependents earlier. You can then cancel the policy.

LIC doesn't create money out of thin air. Over-simplified & shortened description of how it works: It collects premium from policyholders, then it invests that in market-linked securities (bonds, stocks, CP, CD, commodities etc.). Eventually, it pays out policyholders after keeping some cut for itself.

Unlike bank or post-office deposits, LIC returns are not legally guaranteed. Govt. of India is a major stakeholder in LIC, but that does not mean it's a major stakeholder in your future. Govt. would do its best to prevent LIC from going under. But your returns come at the cost of LIC's income - when those two are at odds with each other, Govt. would pick LIC over your financial future.

In practice, LIC returns money you'd paid as premium + some bonus. There are different categories of these bonuses: loyalty bonus, guaranteed addition etc. LIC wants to make you feel they're doing you a favor by giving you some bonus. Historically, a bank FD / RD at SBI would have had higher returns than LIC policy over a given period.

You can know your bonus after the policy matures.

LIC is also not allowed to invest freely. They are the largest financial services company in the country, and have much more cash than any other financial institution, that they can invest. However, large corpus of few lakh crores are not easy to invest. So they have to look for distressed assets, or wait for really bad market condition before deploying sizeable chunk of that cash.

There's also political interference to consider - as evident from LIC's bailout of IDBI bank. LIC's hands are tied, in when it comes to where they can / cannot invest.

Over long enough period of time, LIC returns have also significantly underperformed equity market returns, namely Nifty & Sensex Total Return Index.

Now, consider various charges on insurance (mortality charges, admin fees, risk premium etc.). These are not shown to you (the end policyholders); but these eat away your corpus and line up LIC's pockets.

Your agent would tell you to invest in LIC policy, because that helps him earn commission. Your parents would pressure you into doing it, because most likely they'd not be aware of other investment options.

The fact that it has tax benefits is of little concern, because gains from LIC policies are so low, taxing it won't make much difference in final corpus size, post-tax.

At its core, an LIC policy is an insurance policy. The cover provided by this insurance is inadequate, to take care of your family's financial needs in your absence. A pure term cover is better, which works very different from how a typical LIC policy works.

But none of the above covers real problem with an LIC policy - it locks you into a lifelong decision much early on. For a lot of people, who had subscribed to LIC policies 20-25 years ago, and seeing their policies maturing now - the maturity amount is probably not even worth a month's income.

Due to inflation, the maturity estimate which might look huge today, would be much lower in value, upon actual maturity.

These premiums cannot be changed once you start paying for a policy. You have no option of stepping up your premiums as your salary increases year on year.

Overall, an LIC policy is rigid, wasteful, and doesn't provide adequate coverage. Tax benefits are not good enough to offset the opportunity cost (i.e. you're missing out on other efficient assets and time).

Avoid LIC policies, buy vanilla pure term cover, and invest in efficient market-linked transparent assets yourself. If your question is but what if markets don't do well in next 15-20 years?, then the LIC policy also has same fate.

Addendum

The general perception of the term "LIC policy" is any moneyback/endowment policy, in which there is some investment component also, i.e. after the end of the term of the policy, you will get money returned back to you. There are pure protection plans available by LIC and other insurance companies, which are what are recommended. In case of LIC, these are Jeevan Amar and Jeevan Tech Term. All others are some combination of moneyback plans.

Introduction ✨

Before we get to the answer for this, we need to define and establish common understanding around some domain specific terms.

A Base Policy, which could either be a group, an individual, or a family floater policy, covers you and/or your family members up to the Sum Insured.

This is for any hospitalizations; for a minimum period of 24 consecutive in-patient care hours, except for specified procedures/treatments where such admission could be for a period of less than 24 consecutive hours.

This base policy might have restrictions on Room Rent (all major hospital expenses are linked to this parameter, as discussed before) and ICU charges; require you to co-pay a specified percentage of the admissible claim amount and have other restrictions/exclusions under the policy.

Given all other conditions like your age, any pre-existing illnesses, number of family members being insured being the same, your base policy premium will increase with every increase in the sum insured. Hence a ₹2,500,000 (25L INR) sum insured policy will have a higher premium than a ₹1,500,000 (15L INR) sum insured policy.

Is my base policy enough? 🤔

Cost price inflation of medical services and medicines (closer to 10%-15% per annum) and lifestyle diseases can make a base policy of 25L inadequate in the next 5 years, since the time of subscribing in the policy.

Any new policy will also have a waiting period for pre-existing illnesses (PED’s) along with higher premiums due to the PED’s. If you want to future-proof your medical expenses, the base policy alone will not be enough.

The option you then have is to buy an additional top-up or super top-up policy. Both these policies are based on a clause called a deductible.

What is a deductible? 🌵

As per IRDAI’s guidelines on standardization in health insurance:

Deductible means a cost sharing requirement under a health insurance policy that provides that the insurer will not be liable for a specified rupee amount in case of indemnity policies and for a specified number of days/hours in case of hospital cash policies which will apply before any benefits are payable by the insurer.

When you buy a top-up or super top-up policy you must choose a deductible - the maximum cost you need to bear when making claim.

Assume you are buying this policy with a deductible of ₹500,000 (5L INR). What it means is that the first 5L INR of any eligible claim will first be paid by the insured either through a separate base policy or out-of-pocket.

Top-up vs Super Top-up? ☯️

In case of a top-up the deductible is applicable for each hospitalization, whereas in case of a super top-up the deductible is cumulative for the policy year.

Which one do I buy? 💰

Assuming you already own a base policy and are choosing between a top-up vs super top-up, it’s usually recommended you buy the super top-up.

The higher the deductible that you choose, lower will be the premium for the super top-up policy.

Ideally your super top-up policy should have the same renewal date as your base policy. This ensures that both policies overlap each other 100% and the benefits of having these two policies are maximized.

Super top-up policies are available for sum insured of up to 1 crore with some insurers.

Why is the premium low for Super top-ups? 🐤

Insurers can offer super top-ups at a cheaper rate compared to base policy. This is because of much lower probability of higher expenses, that’d require you to use your super top-up policy claim options.

Statistically, it's more likely that your hospitalization costs would be within the deductible limit of super top-up policy. Hence, insurers can afford to offer lower premium.

This is quite confusing to many people, since the finance world touts SIP (Dollar Cost Averaging in foreign terms) as the best way to invest.

Definitions

SIP (Systematic Investment Plan)

One invests a fixed amount of money at a regular interval (daily / weekly / monthly / quarterly). In short, it is transfer of money from cash to a particular asset (mutual fund / direct equity called the DIY-SIP or other such names).

STP (Systematic Transfer Plan)

One switches/transfers from one mutual fund to another at regular interval, if the money is already with the AMC (asset management company). In other words, you just setup a transfer from one MF to another, most commonly this is done from liquid/short term funds into equity funds.

Lumpsum

The investment of the whole lot of money into an asset.

Basic Guiding Principle: The overall average return of various asset classes vary. In the long term, the cash and cash-equivalents produce low but fixed returns, while the equity assets produce high returns with volatility (in most cases).

You have got 10 lakhs, and your investment horizon is >10 years. What should you do? So should you put your money in

1. 10L in an equity fund (or equity-oriented hybrid fund) on day 0. OR

2. Put your money in a short-term debt / liquid fund and start a STP into the equity fund at monthly (120 instalments) / yearly (10 instalments) intervals.

3. Keep your money in your bank account and start SIP into the equity fund at 120 monthly / 10 yearly intervals.

You do not have 10L, but can invest at a rate of 8k per month (Total principal amount 10L, over 10 years). What should you do?** So should you, since lumpsum is better than SIP,

1. Start putting your money into your account / liquid fund over all those 10 years, and then invest lumpsum at the end of 10 years, OR

2. You should start putting the money directly into Equity as a regular SIP.

The answer is obviously 2, since you will not be missing out on all those 10 years of equity returns.

Should you split your single SIP into multiple SIPs?

This is just another form of 1. As we understand, Lumpsums tend to win more often than not as compared to SIP, it is better to put a single SIP at a comfortable time. By comfortable time, I mean that if you receive your salary on 5th, then set up your SIP date to 15th or so; this gives you flexibility when your salary will get delayed (it is almost inevitable that this will happen). The added advantage of a single SIP is that the paperwork of future capital gains tax calculations will be easier. Having weekly/daily SIPs will have hundreds of entries and calculations after a few years.

TL;DR

if you have money to invest for a long term, put that money into a diversified equity asset ASAP. If you have got lumpsum (eg, bonus money or tax refund), then invest lumpsum. If you have regular stream, then invest at a regular interval.

If you google top mutual funds, you'd find plenty of communities or online publications tossing you some names of well performing funds.

No one can predict how markets would perform in near future (short term), or over long periods of time. And when we say no one, we really mean no one at all.

Amsterdam is the oldest stock exchange, founded in the 1460s. London stock exchange is one of the oldest, founded in 1801, with nearly ~220 years of history. US markets have been around for ~200+ years, since the early 1800s (NYSE was established in 1817). Indian markets are relatively young, been around for only a little over 40 years, in any meaningful way. BSE was founded in 1870s, but it's hard to find reliable data since before Sensex was created in 1979. Some even suggest to ignore data from before NSE was created in 1994, which gives us ~25 years worth of market data to analyse.

Despite all these data, there's no prediction algorithm or deep-learning solutions; that can predict future market behavior accurately or near-accurately. Markets would surprise you from time-to-time, and new events would keep on happening in all markets, all over the world.

Mutual funds give you exposure to markets, and their ups & downs are linked to market's movements. It's mostly not up to the fund.

Lion's share of performance of a fund, is due to luck - just having right exposure to right assets at the right time. Very little is due to fund manager's skill in asset picking.

There are different mutual funds, that invest in different types of assets. Some invest in stocks, some buy debt, while some others bet on commodities like gold etc.

The mutual fund that's best for you, is the one that help you with reaching your financial goals. If you need a certain amount of money after a given number of years; then for that financial goal, the mutual fund that helps you get there comfortably in time, is the best option.

For most retail investors, the problem is not the right fund picking. Any average fund would be good enough for most people.

Real problem is not investing enough, and relying too much on returns to make up for the low investment amount. Or not staying with a decent fund long enough.

Asking for best mutual fund is no different from asking which gym is best for you. Finding the perfect gym is not that important. Just like it's more important to be disciplined, in achieving your health & fitness goals, it's also important in achieving your financial nirvana.

This is not that different from the query on LIC. Bank / Insurance company would take your money, invest in some market-linked securities, deduct insurance related charges; and give you back peanuts. Upside is limited, but bank would sell you on the idea that downside is also limited.

As a rule of thumb, any policy or plan sold by bank, especially one that has a smart in its name, can be avoided without further consideration.

ULIP (Unit Linked Insurance Policy), Endowment plan, Annuity Plan - these are all great plans for the banks & insurance companies. But they are terrible for you.

Before buying into any bank products that are sold with such hopes and optimism, ask the bank RM to put you in touch with an existing subscriber, so you can review returns-in-the hands of an investor who actually invested in that.

Note that just because a bank RM is selling you, doesn't mean its returns are guaranteed by the bank. Other than bank deposits, nothing else is guaranteed, even if a bank sells you that.

You can look at the brochure / policy doc, and you'd see nice fat projections. But that's all those are - projections. Per IRDA regulation, banks & insurers can create projections with 8% and 4% return as illustrations.

That's not a guaranteed amount.

As said above, buy term cover if you need insurance. Invest in market-linked cost-efficient assets if you need returns. Most importantly, don't mix insurance with investment, where investment pays for the insurance.

Intro 💫

When buying a term cover, anyone would want to do their best to ensure their nominee(s) can claim the cover amount in their absence, if the worst were to happen. But it's easy to let our emotion guide us, what should be a rational process.

With various restrictions in place by IRDA (Insurance Regulatory and Development Authority), there aren't that many advantages of paying a premium to large reputed companies for their insurance cover.

Let's analyze various concerns you might be having, and how those stake up.

Concerns & Related Regulations 🤷

Insurance companies will find a way to enforce exclusions

Do investigate under which all circumstances they could reject a claim. It can be done by reading policy terms & conditions carefully, or getting details in writing from insurer.

But unlike health insurance, term insurance is much simpler. As morbid as this sounds, this question has a binary response.

Either insured person is dead or they're not dead. Even suicide is covered after 1-3 year of policy depending on the policy, which essentially means after a certain point of time insurer cannot reject a claim holding insured person responsible for their death.

Small companies will reject my claim no matter what

No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later

This means, after 3 years of continued payment of premiums, even if they find that some information about your medical history isn't correct in the insurance forms you had submitted, they can’t reject the claim on grounds of non-disclosure.

So, ensure that you provide correct information to the best of your knowledge when you take a life insurance.

But no need to worry about claims getting rejected because you missed to cross a ‘t’ in your form; if you've paid insurer premiums for at least 3 years.

They will make us wait a long time to settle

They cannot!

Maximum time period one's family needs to wait, is 90 + 30 = 120 days.

Insurance broking companies like Policybazar, Coverfox etc. have representatives in major cities who will be able to do the documentation on our behalf in case of any claim.

They will be able to guide us in getting the needed documentation thus decreasing the chances of delay.

What if the insurance company gets closed?

Sections 35, 36 and 37 of the Insurance Act provide guidelines of amalgamations and transfers of insurance business.

As per this, an insurance company just cannot exit the business.

It can only merge with other companies and that too with certain conditions, thus protecting our insurance cover.

They're also required to maintain the solvency ratio of 1.5 which means if the company gives 100 Rs cover, they need to keep aside 150 Rs (see note), thus ensuring that the company will be reasonably able to provide the insurance money.

Note:

• Solvency ratios in insurers is (Net Income + depreciation) / Liabilities. So example is not 100% accurate, but an approximate.

Higher Claim Settlement Ratio

CSR (Claim Settlement Ratio) is number of insurance claims settled, as a percentage of claims received by the insurer. It's a metric every insurer has to publish with the regulator.

While this is an important number to look at; some of us really overdo it, extrapolating to imaginations that aren't apparent from the raw data itself.

To begin with, if an insurer has a CSR of 96%, then it does NOT mean that your claim has a probability of 96%, of getting approved. Your case, if it ever comes to that, would be treated by claims department of insurer, as a standalone case of its own.

CSR is a lagging indicator, i.e., it only says what has happened; not what would happen in future.

What you should be more interested in, is the potential future value of your insurer's CSR, around the time of insurer's demise. Since there's no way to predict that (can you really predict what would be CSR of Max Bupa in another 10 years, looking at its CSR of past 5 years?), it's almost pointless to look at CSR as a guiding north star.

A relatively new entrant in insurance market, would've a younger insurance user base; and therefore lower CSR due to higher chances of rejection.

CSR can be sensibly used as a baseline selection criteria. For example, one might not consider insurers that have not scored more than 90% on their CSR in last 5 years.

But it's naive to think that if CSR of insurance company A is 98%, while it's 95% for B; therefore your family might've 3% extra probability of getting your claim approved if you were to get it from insurer A.

Chances are, if B has a good reason to reject a claim, most likely so would A.

Conclusions 🎏

These arguments are based on the rules as of today and is subject to change it future.

But historically, the rules have only gotten stricter, and not the other way around.

So, it is safe to assume that there is no real advantage of going with the company with good names. What you may consider is the solvency ratio and the customer service

Introduction

Though stock-screeners calculate a lot of things, you must do your own calculations too. You will miss a lot of good opportunities or make some expensive mistakes if you consider only the pre-calculated values.

The objective of this article is to explain the importance of your own calculations. The article provides examples where the screening portals might not give right results. The examples are not to demean any portal but to explain the reasons for the difference in numbers across websites.

Examples of dividend yield

Lets consider the dividend yield of Britannia Industries as on 29th April 2021 (#britannia-industries-dividend-yield):

Screener.in:    4.18%
MoneyControl:   0.95%
MorningStar.in: 1.78%

Correct value:  ~2-5%
Depends on your judgement on how repeatable these dividends are

The differences are because of different treatments of interim dividends. While screener.in considers all the interim dividends of FY21, MoneyControl considers only FY20's dividends. MorningStar considered only one of the two interim dividends (probably assuming the other one as a one time special dividend).

Another interesting case is that of Majesco. The dividend yield as on 29th April 2021 on various websites is (#majesco-dividend-yield):

Screener.in:              1,353 %
MorningStar.in:           1,351 %
ValueResearchOnline.com:  1,355 %
(Yeah, 1000+% in all the cases)

Correct value:            ~0-5%

The company sold off its US subsidiary and distributed most of the proceeds from the sale. The US subsidiary contributed over 90% of the company's revenues and assets. Thus it is safe to assume it was a one time dividend. The future dividend yield in such a case would be around 0 to 5%.

Relying on any screener and buying highest dividend yields shares blindly can make costly errors in such cases.

Examples of PE Ratio

Let's consider PE ratio of ONGC on different websites as on 29th April 2021 (#ongc-pe-ratio):

MorningStar.in:           shows blank
Screener.in:              13
ValueResearchOnline.com:  144
NseIndia:                 79
MoneyControl.com:         146

The company reported:

Standalone TTM EPS:       ₹ 1.32
Consolidated TTM EPS:     ₹ 0.73
The price was:            ₹ 104
Exceptional losses:     ~ ₹ 7.98 / share

Exception losses were of 4899 Cr pre-tax on an old GST liability.

The differences across websites is because:

• ValueResearchOnline and MoneyControl considered consolidated EPS as reported by the company.

• Screener.in considered consolidated EPS but added back the exceptional losses.

• BseIndia.com and NseIndia.com considered standalone EPS.

The correct PE depends on your individual judgement on how you interpret the impact of exceptional items on future earnings.

The PE based on last 5 years average earnings will be 8.29. This is what Benjamin Graham recommends to use in such cases.

Operating margins and gross margins

The text-book definition of gross profit margin (GPM) is sales - cogs.

COGS is cost of goods sold.

Most websites will show the gross margins on this standard definition. However, this can sometimes be misleading.

Example in case of TCS - screener.in shows the GPM as 100%. This is because TCS has no inventory. But the correct metric for COGS in this case should be their employee cost.

Similarly in case of banks, most websites (eg screener.in), don't consider their interest cost in OPM (operating profit margin) and GPM (gross profit margin). Thus these numbers are shown exceptionally high.

Screening companies on margins can often yield incorrect results for:

• Insurance companies

• Banks

• Finance companies

• Mining companies

Return ratios

In case of Abbott India, the ROIC reported as on 29th April 2021 is (#abbott-india-roic):

Screener.in:        22.90%
MorningStar.in:     21.53%
TijoriFinance.com:  131%
Correct value:     ~138%

The company held fixed-deposits (cash equivalents) of ₹ 2,197 Cr in FY20. While TijoriFinance excluded these cash-equivalents in the calculation of capital employed, other two websites didn't exclude it.

These differences in the methods of calculating ROCE, ROIC, ROA and other return ratios can yield wildly different results. You can sometimes miss some interesting companies because their calculated return might be much lower than their economic return ratios.

Summary and Wrap-up

The auto-calculated ratios on websites can often be different from manual calculations. Those calculations will often miss sector specific adjustments or "special cases" which are too frequent in the investing world.

Don’t rely blindly on any portal or report. Do your own due-diligence.Cross-check the numbers with your calculations.

Trust, but verify.

Though the websites and portals do their best, there are lots of nuances in the footnotes and schedules which are hard to capture. This mandates the due diligence from the investors and also provides opportunities to them.

To understand how to use a screener, you might want to check this out

Footnotes

Web-archives for case studies

Britannia Industries dividend yield

Majesco dividend yield

ONGC PE Ratio

Abbott India ROIC

Intro 💫

In India, there are plenty of small and big brokerage platforms available to you, that let you open trading and demat accounts for equity, bonds, ETFs (Exchange Traded Fund), commodities etc.

Read this to get an overview of features / functionality of popular brokerage services, and the costs you'd be incurring if you were to go with one of these.

Broadly speaking, there are two types of brokerage services in India at present:

• Discount Broker

• Full Service Broker

Full service broker 🏦

These are the traditional stock brokers, most commonly sharing a parent corporation with a big bank, which offer more than just buy / sell / hold functionalities. To name a few add-on services, for instance, most full service brokers provide:

• Brokerage reports and analysis

• Stock advisory

• Portfolio management / wealth management services etc.

Typically, these platforms have both online and offline presence to serve you.

Axis Direct, Citibank Securities, HDFC Securities, ICICI Direct, Kotak Securities, Motilal Oswal Financial services, SBI Securities etc. are examples of full service brokers.

A tell-tale sign of a full service broker, is that they charge a percentage of your investment as brokerage fee, which means costs scale with investment amount.

After the penetration of internet, it became less and less necessary to have a physical location to cater to the customers' needs.

So with reduced staff by not having physical customer service locations, discount brokers are offering the trade with discounted rate.

They also don't provide the research / advisory services, portfolio or wealth management services etc. to keep the operational costs low.

As a result, they can afford to charge lower trading fees. Most discount brokers have zero fee on equity delivery trades, and close-to fixed fee for intraday trading / BTST etc.

One also needs to keep in mind economics at scale. By offering lower costs, these services are reducing barrier to entry. That means larger number of users, and higher trade volumes. Even if per trade costs are lower, it has the potential to help these discount brokers pocket higher revenue than some of the full service brokers.

Such businesses want the volume, and while they operate on lower revenue margins per trade (not to confuse with margin provided by a broker) compared to a full service brokerage; they make bank on volume.

A few popular ones are listed below, in alphabetical order.

Comparison of Discount Service Brokers

The following table is a comparison-at-a-glance for these discount brokers. The information presented in this table maybe out of date at any moment in time. We'll do our best to update this table whenever we come across new information.

*Add-on pack: Some platforms offer subscriptions plans which will enable to advanced users to get more features, reports, reduced trade fee etc. for a monthly fee.

*Number of accounts: It's indicative of trust, as larger user-base might mean more audits & compliance requirements. These numbers change everyday, so exact value is not that important. By the time you're reading it, most likely exact number of accounts on each of these platforms could be higher than what you see in the table above.

The above table compares some popular discount service brokers, in terms of the following parameters:

• What are the aspects the platform make easy for you (USP)

• What are the factors the platform make harder / costlier for you

• Fees / charges on various types of trades

• Funds credit options to trading account, and time it takes to credit the amount

• Approximate number of accounts on the platform, as reported, at the time of writing this

Wrapping Up 🎁

Selecting a brokerage service might require some care. Unlike picking a mutual fund app, it's not that easy to migrate between brokers. This is not an easily reversible decision.

Some brokerages make it so easy to trade, that you might end up placing too many orders, and lose big on brokerage fees.

Most brokers ideally provide a cost calculator to get an estimate of various fees & charges that might show up against your account, for the volume of trades you'd want to execute.

We highly recommend being careful with F&O, intraday trading and BTST trades. Ideally, as a retail investor, if you're looking to buy for long term, most discount brokers are quite cost effective.

An important aspect to understand, is your broker has lot of control over your holdings; unlike your mutual fund app.

For instance, the Karvy brokerage scandal of 2019-20, exposed how even full service brokers can exploit dormant holdings, keeping those shares as collateral for their other business arms to get loans.

It's of paramount importance that you evaluate a brokerage service on these two parameters:

• Does the brokerage house have a history of lending out shares, to arrange for some liquidity?

• Does the brokerage platform have enough retail accounts, that they'd be subject to more audits and compliance?

This is why it's important to go with a broker that has been around for past few years, have healthy financials of their own, and have good volume. On that front, Zerodha comes out ahead of other brokers covered above.

It doesn't just end at choosing a broker with decent fees and nice UI / UX. You've to keep track of your holdings outside of the brokerage app. Check your monthly CDSL or NSDL CAS, to confirm your holdings are as shown in the portfolio section of your broker's app.

Market Corrections Aren't Unusual

Since 1920, the S&P 500 has, on average, experienced a 5% pullback 3 times a year, a 10% correction once a year, and a 20% decline every 7 years.

In fact, a 10-20% temporary decline is as common as your birthday and you should expect this almost every year.

Market Correction Should Never Be the Only Reason to Buy Stocks

A market correction should never be the only reason for buying stocks, unless you’ve already done your due diligence on the stocks you’re looking to buy.

It might sound surprising but the price of a stock is one of the least important things about a stock. At any point in time, the price of a stock may, or may not, reflect the underlying business fundamentals of the company in question.

Let’s assume that you didn’t do any due diligence on the stocks you bought during an ongoing market correction after asking for stock recommendations. What would you do if the price of a stock you bought falls by more than $50\%$? Would you sell it or hold it? What would be your reason for taking either of those actions?

Even if we assume that the stock recommendation comes from a person or an entity which apparently knows what they’re doing, you shouldn’t be willing to bet your hard earned money on borrowed conviction. They might find a better opportunity and sell the stock suggested earlier to buy another stock. Would they keep you updated every step of the way? They can also simply be wrong.

One has to realize that it’s much easier to buy a stock than it is to hold it or sell it. Although one doesn’t necessarily need to have conviction when buying a stock, holding a stock requires considerable research, devotion of time, and conviction, often in the face of extended downturns or a sideways market, even if one knows that the underlying business fundamentals are strong. The act of selling a stock is even harder and often the source of regrets among investors. People often have trouble letting go of a stock they’re mentally, and sometimes emotionally, invested in, even if the stock should be sold. Sometimes, people sell too soon and then regret it later.

while there is clear evidence of skill in buying, selling decisions underperform substantially — even relative to random selling strategies.

What Should You Do?

Assuming you’ve already done your due diligence on a stock and have enough conviction to hold it in the face of possible downturns, you may go ahead and buy the stock you want. However, if you haven’t done your own due diligence on a stock, it’s better to stay away from it. Asking for recommendations from others is a futile act because borrowed conviction will not help you in the time of crisis and the person who recommended the stock may not hold the stock in the near future or might be completely wrong about his choice.

However, if you still have the urge to buy something during a market correction, it might be relatively better to invest more in mutual funds you already hold.

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