Equity,MF and profits

A couple of days back, the distributor was doing the rounds and met my collegue informally. He was all smiles like the SENSEX gaining weight. He said “Sir, time is right to redeem funds as SENSEX is going very high – you have some MF investments right?”

The human being is an animal with something called “Greed”. This forces like all emotions to make and commit errors. Immideatly my collegues calculator came out.  He beamed like a  40W bulb about to fuse due to high voltage.

Mohan – My investment 13 months back is grown by 51%. He got busy signing the redemption form, the friendly distributor produced and both my collegue and distributor was away happy.

Some thing is queer here isn’t it? My collegue had all reasons to enjoy 51% gains but why the distributor too? On a redumption for which he does not get commission?

The answer lies in greed factor once again. Here is how it works

First, the redemption is done minus Securities Transaction Tax (STT) and since its held for more than 13 months, its tax free at hand of investor ( Long term Capital Gains). My collegue proceeded to encash his 50,000 INR plus 51% gain which was a good sum at approimately 74,000 INR. Next he went on to invest the entire amount in another Mutual fund as he wanted to invest, grow and prosper – possibly to another 51%!

The biggest gainer for sure here is the distributor who gets more commissions for new investments – the catch due to which he forced the redemption with that wonderfull gains!. But hold on, whats wrong in that – allmost a couple of things.

Unless the redeemed money is going to help you in some way like solving a debt issue, purchase of some asset or services at least, you put back the money paying extra entry loads, not to talk of tax implications. The sensex is again a notion. When the equity markets fall, all your securities, MF fall. So 74 K invested once again is then only a notional gain!!! Think about it.

So, remember its important to have goals while investing – Like I will purchase that new bangles once my 3000 investment hits 51%, I will take that Hawaii trip the minute my 1000 Rs investment per month touches 12,000 etc…

Please dont ask me which fund it was 🙂 There are enough astrological pundits around the net with fact sheets to lead and mislead you all.

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6 Responses to Equity,MF and profits

  1. Ankur says:

    yes systematic disinvestment plan (not investment plan) is the best way to make fortunes in the market

  2. PM says:

    Wonder why he took out his money in the first if he wanted that money to be put in MFs!!

    And I agree with you about having goals while investing 🙂

  3. Srik says:

    People are actually ‘playing’ the stock market like this, ur post is a good lesson to them all.

  4. some body says:

    mohan:

    a question – i never invested while in india so all these terms need deep thining for me. why is there a difference in how these instruments are named in india vs. in the usa? is the indian way the same as the british way, or do they (the british) have a different set of terms?

    for example, the person you term a ‘distributor’ is a ‘broker’ here (usa). of course, the logic and the lesson applies equally here too.

    – s.b.

  5. Hmm.. I’ll keep this in mind when (and if) I invest.

  6. Ankur,
    SWP is a good idea. Normally advised to do a SWP out of equity to a debt instrument.

    PM,
    Greed is the golden word due to which such things happen!!!

    Srik,
    There are 2 types of share market players (retail), eiher they learn a very bad lesson and never venture towards equities while the other set learns their lessons.

    somebody,
    Sadly in india “insurance is sold while its brought in USA”, the ignorance levels of people give rise to all these problems. Nomenclature may immideatly be of some concern but shoudnt affect the masses i suppose.

    Black king,
    🙂 Good decision.

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