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Equity investing: When should you rebalance your portfolio

Since March 2020, the stock market has been on a secular bull run. Some investors are concerned about a possible correction and are unsure whether to take a partial profit booking or a more precautionary approach. AMCs‘ balanced advantage funds are seeing strong inflows from investors who are hesitant to take on more equity investing risk at this time.

equity investing when should you rebalance your portfolio

Your portfolio includes a variety of asset classes, such as equities, debt, gold, and so on. The allocation ratio to various investment assets is determined by factors such as your risk profile, time horizon, investment objectives, asset category risk profile, and so on. Aside from these features, the allocation ratio is a useful tool from a different standpoint.

You make purchases in a bad market and profit booking in a bull market when you rebalance your portfolio and return back to your originally determined allocation ratio. This is a discipline that encourages partial profit booking at higher valuations while encouraging buying at lower prices.

For example, an investor follows a 60:40 allocation ratio means that 60% of an investor’s portfolio is invested in equity and 40% in fixed income. The allocation to equities would have been palpably lower than 60% (post-correction) and debt would have gone over 40% during the equity market correction phase of January to March 2020. (due to correction in equity and accruals in debt). He would have purchased that many shares to restore the balance if the rebalancing had been completed in March 2020. This would have resulted in lower-cost purchases.

equity investing.

Coming to the present situation. Following the one-and-a-half-year surge, the equity component of a 60:40 allocation would be higher than 60%. Whether a correction occurs or not, restoring the balance will result in partial profits. You can’t control the market, but you can manage the volatility in your portfolio by controlling the asset allocation in your portfolio.

However, rebalancing faces a psychological hurdle. But, the rationale for doing so is to avoid chasing the highest-return investment pat. Since the returns from multiple categories fluctuate year to year and market cycle to market cycle. The logic is that your portfolio should provide you with the best possible outcome, adjusted for volatility. To put it another way, your journey should be quite painless. Trying to foresee market levels is fruitless; all you can control is the portfolio you put together to meet your goals.

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Your Money: Know how an investor’s risk profile is constructed

When you hear the word ‘risk,’ you can think of an opportunity or a potential loss. It is subjective to the investor’s sense of risk; danger might mean various things to different people. Risk profiling is a method of determining a person’s willingness to take risks in the investment world. It takes the acceptance, as well as the comprehension of the risk factor, into account in various situations.

Risk profiling is the result of how you prepare for and react to adversity in life; often associated with investments. After considering the investment purpose, investment horizon, and psychological elements, the score is calculated. The determination of the risk profile of an investment is based on three factors: risk perception, emotional tolerance, and financial capacity.

When you’re thinking about investing, you should finish the risk profile questionnaire. It not only calculates the risk constructions but also asks a follow-up question to better understand the investor’s viewpoint on the three risk components in investment. To be aware of the implications of taking risks, it is critical to have a thorough grasp of these aspects. It aids in the discovery of a risk-taking sweet spot.

investor's risk of investing the hard earned money

Emotional tolerance

The financial capacity to take risks is a measure of anyone’s financial status and ability to add or reduce volatility. However, this does not imply that it also assesses a person’s willingness to take calculated risks in order to achieve specific financial goals. That procedure is distinct, and it incorporates mathematical formulae as well.

However, the outcomes frequently influence one’s willingness to take risks. For instance, if a person can keep up with her income inflow without touching her investments. they have a strong ability to take risks. Similarly, if the person’s investments are jeopardized and he or she has to start producing revenue immediately. In this case, the person’s risk tolerance is low.

investor's risk profile construction

Perception of risk

People’s financial personalities have a big influence on their assumptions about taking financial risks, which leads to contradictions with reality. They tend to view the market situation as dangerous, although their assumptions can differ significantly from reality. For example, if someone is able to take risks in life, they may consider the market collapsing, political upheaval, or even the Federal Reserve acting in a certain way, and they may make decisions they would not make if they were relying on their financial capacity or emotional tolerance.

For more such updates, keep watching this space!

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How to calculate tax on your property

Immovable property has traditionally been a secure mode of investment, especially for long-term investors. The acquisition of this type of property is for personal use or solely for rental and appreciation purposes. While taxation on property appreciation is on the basis of capital gains at the moment of sale. The taxation on rental benefits is on an annual basis in the hands of the owner.

Tax on Rentals

While taxation on rental income is normally under the heading of ‘housing property’. Income from property sub-letting is often taxed under the heading of ‘other sources’. In the case of jointly owned properties, the tax incidence is proportionately distributed on each owner’s share of the property. Up to a limit of two houses, a house property owned for the purpose of residing by self and family is exempt from taxation; nevertheless, rentals from a commercial property are always subject to taxation. Notional rent is taxable in the hands of an individual over and above two self-occupied residences; even if the property is not actively on rent.

property tax

The Income-tax Act of 1961 enables various deductions under this head of income for calculating the income payable from such rents. Aside from the municipal taxes paid by the property owner during the year; a standard deduction of 30% of the net yearly value of rent is available, regardless of the actual expenses incurred.

This basic deduction is available for all property owners to compensate for general maintenance and repair expenses; without the requirement to keep any accounting for such expenses. However, beyond this standard deduction, there is no allowance for additional deductions for expenses like maintenance fees in society flats, property insurance, etc.

tax on your property

Interest paid on home loan

The Act also exempts taxpayers from paying interest on house loans taken out for the acquisition, construction, repair, renewal, or reconstruction of real estate. In the event of a self-occupied property, the maximum limit for interest deduction is Rs 2 lakh; any interest exceeding this monetary limit will lapse; however, the Act does not specify a monetary limit for claiming interest deduction in the case of a rental property. For more such updates, keep watching this space!

Finance Financial Advice

Here are five smart ways to boost your home loan eligibility and approval chances.

Buying your own house is a very proud moment for everyone and it is something that almost everyone thrives for. To help this pursuit of ours, many finance organizations offers the home loan. However, a home loan is a very important financial decision and we must evaluate many home loans eligibility thoroughly while applying for a home loan.

To increase the odds of approval of your home loan application, you must look for several things. Eligibility for Loan applicants with insufficient income, low cibil scores, higher overall EMI obligations, etc has higher chances of home loan rejection.

While analyzing a loan application, lenders put several factors into consideration. The most important eligibility factors are; income, age, remaining working age, LTV ratio, property characteristics, and your existing loan repayment obligations. Failure in reaching the cut-off set by the lenders can lead to the rejection of your home loan application.

The lenders have the approval of RBI to finance up to 75 to 90 percent of a property’s market value through a home loan. The buyers have to cover the remaining proportion of the property’s cost from their own resources. The down payment or margin contribution is the proportion of the cost paid by the buyer’s own resources. There are certain home loan eligibility you need to have and we are going to discuss them all step by step.

Why a higher downpayment is better for your home loan?

Smart Ways to Increase Your Home Loan Eligibilty

Finance companies often ask for a minimum contribution from buyers as a down payment or margin amount of the property’s cost. However, paying a greater margin incurs many benefits and often makes more sense financially. Higher down payment means lower loan amount, which in turn results in smaller EMIs and lower interest costs.

Moreover, a higher down payment or margin contribution on a home loan by the buyer reduces the credit risks for the lender. Which in return, increases the likelihood of your home loan approval at a probably lower interest rate and thus improves eligibility. This will cut a large portion of your EMIs and thus more savings for you.

I know it makes a huge sense now to make a higher down payment on your home loan, but this can sabotage your financial goals as well. Always avoid compromising your emergency fund or investments earmarked for your crucial financial goals in making a higher down payment. Emergency funds help you in tackling your financial emergencies, compromising that may force you to take another loan. Diverting your investments can sabotage you from achieving your crucial financial goals.

Home loan

Why a higher downpayment is better for your home loan?

Loan applicants with insufficient income, low credit scores, higher overall EMI obligations, etc have very little chance of approval. Such borrowers can improve their home loan eligibility by adding a family member as their co-applicant(s). While choosing co-applicants one must give preference to those with stable income and good credit scores. Not only it boosts the chances of your loan approval, but it can also increase your eligibility for a bigger loan amount. In some cases, female co-applicants can additionally fetch you lower interest rates.

Why you should apply for longer repayment tenure?

reduce home loan emi

Choosing longer repayment tenure for your loan reduces your EMI amount and makes them more affordable. A lower EMI amount is more affordable, it lowers the risk of default and hence, increases the chance of approval. However, an unnecessary longer repayment tenure can increase the overall cost of your home loan. Thus you should always use the loan EMI calculator and determine an optimum loan tenure for your home loan. This optimum loan tenure gives adequate considerations to your repayment capacity and your contributions to your crucial financial goals. A borrower can reduce the interest cost of their loan by making prepayments whenever there are surplus funds available.

Home loan lenders prefer lending money to those having their total EMI obligations, including the EMI for the new home loan, within 50-60% of their monthly income. Home loan applicants exceeding this limit can boost their eligibility for home loan approval by applying for the longer repayment tenure.

Always compare home loan offers from multiple lenders

Different lenders offer different interest rates, processing fees, loan tenure, and other costs associated with a home loan. These differences are due to the differences in credit risk evaluation of a loan application by different lenders. Hence, it is wise to compare as many lenders as possible for your home loan before zeroing in on any specific lender.

Home loan lenders offer preferential rates or other terms & conditions to their existing customers. Thus, prospective home loan applicants should first approach those financial institutions with which they already have an existing consumer relationship.

Later, they should check online financial marketplaces for a better comparison of interest rates and other home loan features offered by other lenders. This allows buyers to determine the best home loan deal with the lowest interest rate, optimal loan tenure, and adequate loan amount.

Review your credit score before applying

Your credit score can fetch or drop the approval for your home loan or any loan. A credit score is one of the first filters used by lenders while evaluating a home loan application.

A good credit score is usually a score of 750 and above. This score can boost your loan eligibility and fetch lower interest rates from lenders. Hence, it is better if applicants review their credit scores before applying for home loans. This way, applicants with lower credit scores can apply adequate corrective measures to improve their credit scores.

Moreover, it is advisable to develop the habit of periodically reviewing one’s credit score, ideally at least once in three months. This will ensure sufficient time to use corrective measures for the improvement of the credit score and get any errors if present to be rectified at the earliest.

For more such updates, keep watching this space!

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Are you earning negative returns on your investments?

Every investor invests their money with an aim to earn profits on their investments. However, the rate of return for the investment may not always be positive. In fact, the risk of earning a negative return exists in every investment. Inflation can impact our investments, in such a way that even though you’re making money. But in a real sense, you will not be making a net positive return on your investments.

Money plant investment

What is Negative Return?

A negative return occurs when investors experience a loss in the value of their investments during a specific period of time. For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%.

While negative return is a possible risk in a market-linked investment such as a mutual fund or direct share. Fixed-income investments such as bank fixed deposits also carry a different kind of risk. In a market-linked investment, there is a risk of losing a fraction of your investment when the value of underlying securities falls. In a fixed-income investment, the risk of losing capital may not be there (or it may exist in some), earning a negative return on your investment is not very uncommon.

How Fixed-income investments can fetch negative returns?

investment returns

The negative return risk is primarily a consequence of rising inflation. It pulls the returns lower than expected and thus impacting the final return to an investor. For example, if a bank FD offers a return of 6 percent per annum and inflation is also 6 percent, the net return is almost zero. Thus at times, when FD rates are lower or the inflation is higher, the investment ends up earning a negative return. While the capital invested is safe and secure, the effective inflation-adjusted return could be low or negative.

Should someone avoid investing in bank FDs?

Fixed-income investments are actually more suitable for those investors who are looking for capital preservation rather than to grow money. It is suggested to take a balanced approach in your investment portfolio. If security is what you’re looking for, sure, you can invest in FDs. However, it is advisable to not invest more than 30 percent to 40 percent of your capital in the FDs as they’re not giving the best returns. Instead, you should place your remaining investment capital in other high-yield assets. For instance, gold can act as a valuable asset in times to come.

For more such updates, keep watching this space!