It is quite natural to get Anxious and Panic

We have seen unprecedented pandemic outbreak in last couple of weeks . The Novel Virus – Corona has already taken thousands of innocent lives and still shows no signs of weakness.

As for the markets, the pandemic of coronavirus has shaved off nearly a third of the global market cap. India is no exception . Our Markets have corrected by nearly 30% . And it was in short period of time .

It is quite natural for an investor to get panicked and get anxious .

When market drops , that financial loss fires up your ‘amygdala’ – part  of your brain that processes fear and anxiety and generate famous “flight or fight” situation . So it is normal , just accept it .

In fact , the brilliant psychologists Daniel Kahneman – Nobel prize winner  and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the measure of an equivalent gain . Which means that the magnitude of loss of Rs 1000/- is more than double that the magnitude of gain of Rs 1000/- .

Losing money is so painful that many people ,terrified at the prospect of any further loss , sell out near the bottom or refused to buy more.

The ideal way of sailing through such situation is : not to act in panic . Observe the situation & let it evolve on its own . It is perfectly ok to have no opinion or views on the same. Because no one knows. It is unknown territory .

Lot of damage is already done across markets in anticipation . No one has any clue on how things will unfold in coming day.

However , past experience of market gives the evidence that things come back to normal sooner or later ….be it Tulip Mania 1673, South Sea Bubble 1711, Spanish flu in 1917 , great depression in 1929 , Black Monday 1987 , Asian crisis 1998, Financial meltdown 2008 and many more . The reason , the magnitude and the recovery may differ from event to event . But it comes back to normal .

Indian market have also experienced such shocks earlier .  Some of them have shown below in tabulated form .

The data suggest that a long term horizon is essential to profit from equity as your losses can be undone if you simply stay put .
One can argue that this time it’s different …but it is quoted as most dangerous words in investing by Sir John Templeton, legendary investor. 

There is no argument that COVID-19 has no national boundaries , no social bounds.It’s already disrupted the economic lives of billions of people. It doesn’t care what you believe or who you pray to or how much money you make. It is hitting hard to everyone .But, as saying goes , it is not what happened matters , what matters is how we respond …whether it’s life or investing .

Equity valuation has come to good and attractive level . We suggest to add more in equity , rebalance your portfolio . However, we need to make sure that one has to have enough surplus to take care of next at least 10-12 months liabilities and household expenses . This is anyways the first part of financial planning i.e. Contingency planning . However, you revisit it your numbers before you commit any money to equity .

And Don’t worry about further downside of 10-15% but think of missing out future potential upside of 40-50% .

Sharing the extract of Warren Buffett 1987 letters to shareholders describing Benjamin Graham’s the famous parable of Mr. Market 

He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, M􏰄r Market’s 􏰑􏰋quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.

At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another enduring characteristics : He doesn’t mind being ignored . If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

 Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.

Benjamin Graham writes in his book  “The Intelligent Investor” –

􏱆Basically , price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.

In equities , darkest times offer the brightest opportunities.  Albert Einstein said it rightly “In the midst of every crisis , lies great opportunity.”

And finally everything is not about money, markets and investing. Stay safe. We wish you and your families the best of health and happiness at all times.

Happy Investing!!! 

HRITHIK Super Hit But in Stock Market and not in Bollywood

–  By Meghashyam  Sinkar

Bollywood actor Hrithik didn’t appear in movie screen last year . But it looks like he was busy at the Share Market . Here HRITHIK stands for HDFC Bank , Reliance , Infosys, TCS , HUL , ICICI Bank and Kotak bank . These stocks have contributed more than 70% return of entire Nifty Index . The last one year rally was concentrated to few stocks only . Rest of the stocks have lost significant amount of market cap . Due to such polarisation of Nifty stocks returns  , most of the large cap oriented diversified mutual funds have underperformed against the Nifty . Correction in Mid-caps and small-caps have made the performance of other categories of the funds also dismissal. This is the main reason of sub optimal returns across portfolios inspite Nifty surging at new heights. .

Fund Category 1-Y
Equity: Large Cap 9.36
Equity: Large & MidCap 0.42
Equity: Multi Cap 3.10
Equity: Mid Cap -5.68
Equity: Small Cap -12.00

Source – Value Research

The basic advantage of mutual fund is the diversification which reduce the risk and generate better risk adjusted return .They do invest across 30 to 50 stocks in their portfolio which resulted the non performance over last one year .  But , if you compare the fund category returns over 5 years and above , then active funds have delivered much better returns against the benchmark generating alpha in the range of  2 – 7 %.

We , at Pentagraph, always communicate that equity returns are never linear in nature & it is the long term patience game .

Happy Investing !!!





Old Way or New Way….

–  By Nikhil Shah


Each change in our surrounding is a turning page. It is about closing one chapter and opening another one. Changes brings new beginning and excitement to life.
Similarly there has been one change in tax structure after Budget 2018 for investors. Which is 10% tax on all Equity Funds.

All Equity Funds has 2 options Growth and Dividend. Below is new tax implications on both options.

Dividend – Option.
Dividend Distribution Tax – 10 %  deducted at AMC level (Mutual Fund Level ) however it is tax-free in the hands of investors .

Growth – Option.
Short term Capital Gain – Applicable in case of below 1 year which is 15%.
Long term Capital Gain – Above 1 year upto 1 lakh nil, above 1 lakh 10%

** On above surcharge and STT as applicable

There are many Investors who like to reap out regular benefits through Dividend income OLD WAY in mutual funds.
Which is now taxed @ 10% at source. Solution to this is SWP – Systematic Withdrawal Plan NEW WAY. But below are few common misconceptions between Dividend and SWP.

However if similar investors takes route of SWP (Systematic Withdrawal Plan) in Growth option of Equity Funds.

He can jot down broadly below pro’s and con’s in Growth – SWP and Dividend – Payout.

SWP – Growth Option

  • Investor own can fix date and frequency on which he requires money.
  • Investor own can fix amt or yield which he want.
  • It can be paused and restarted in between if required.
  • There is capital gain tax if in any case, which will be very minuscule over DDT.

Dividend Option – Payout.

  • Dividend date and frequency is on the discretion of fund house. Can’t be decided by investor.
  • Dividend amount or yield is also on the discretion of fund house. Investor can’t decide amt.
  • Tax on dividend paid is deducted by Fund house before it’s been paid.
  • Dividend can be paid only after profit booking by fund house.

However essence of all this is, how it could be wise for investors to shift from Dividend – Payout to Growth – SWP.
Let’s understand this practically with example .

Assume an Individual invested in any Equity Balanced Fund 10 lakhs each in both options Dividend and Growth. He got fixed Monthly payout through Dividend payout in Dividend option, similarly he fixed same Monthly payout through SWP Payout in Growth option. Same monthly payout from both investments, yet there is difference in returns as below calculation.

Investment Amt: 10,00,000/= in each option.
Assume Fund delivered return : 12% compounded annual.
Monthly SWP or Dividend Amt :  7,500/= 
Period of Investment: 5 Years

SWP : Dividend


  • Above calculation is assumption based for understanding only. Calculation vary’s case to case basis.
  • In all Mutual Funds Dividend distribution tax is reduced from NAV, i.e., you are indirectly paying the tax.  
  • When withdrawal extends more than 1 year in Equity MF SWP, gain converts to long-term capital gain which is tax-free upto 1 lakh, however above 1 lakh gain due to long term capital gain taxation above calculation will get change.
  • In SWP, every time you redeem, only a part of the redemption is your gain. And only the gain component is taxed as opposed to the entire dividend amount being taxed under the dividend option. Hence the tax is lower in systematic withdrawals than in dividends in short and long term both case.

Now you decide OLD WAY or  NEW WAY…..


Important Notification on Mutual Funds

Dear Pentagraph Family Members,

You would be receiving the communications from different mutual funds or rather would have received by now .

The Securities and Exchange Board of India (SEBI) announced a bold move in October 2017. In a circular ( click here to read the circular ) , it did Mutual Fund Categorization and Rationalization into five broad categories (equity, debt, hybrid, solution-oriented and others) and a few sub-categories under them (such as large-cap, mid-cap, small-cap,multicap under equity). Mutual fund houses would then only be able to have one scheme in each sub-category, with some exceptions.

Definition of Large cap, Mid-cap & Small-cap Funds

  1. Large Cap: 1st – 100th company in terms of full market capitalization.
  2. Mid Cap: 101st – 250th company in terms of full market capitalization.
  3. Small Cap: 251st company onwards in terms of full market capitalization.
Pentagraph View 

We , at Pentagraph , believe that this rule will be certainly beneficial in long run for the entire industry.

It will become easier to choose the fund as there are over 1200 open-ended mutual fund schemes. Around a third of these are equity and a fourth are debt schemes .This leads to lot of confusion.

Within equity, 10 sub-categories have been allowed and within debt, 16 sub-categories have been allowed. Fund houses will be allowed only one per sub-category and  you would be able to conduct an apples-to-apples comparison for each category that suits your risk appetite.

As the Funds are likely to make lot of changes in coming days like merger of schemes , changes of its attributes, Pentagraph will study and review its current recommendations & portfolios and will communicate with you all in case of any changes to be made on individual portfolios .  

Pushing for uniformity and transparency in disclosures, Sebi has asked mutual fund houses to prominently disclose the total expenses charged to customers on a daily basis for all schemes under a separate head on their websites. (Click here to read the circular)

The markets regulator also asked them to communicate to investors any change in the base Total Expense Ratio *** (TER) of the scheme through email or SMS at least three working days prior to effecting such change.

So , you would be receiving the communication on the above changes on quite regular basis .

****The TER is a percentage of a scheme’s corpus that a mutual fund house charges towards expenses including administrative and management.

Happy Investing !!

Team Pentagraph 

Learn from it or Run from it….

By Nikhil Shah

People often think they can’t change their past, but I disagree. Perhaps we can’t change every mistake in our past, but we have to remember that the past is a moving target. Every day that goes by us becomes a part of our past history. Whatever we do today will become a part of our past tomorrow, which means we do have the power to change our past by doing the right things today.
This lesson is taught best in the Disney movie “The Lion King.” There is a point in the movie when the young lion Simba is feeling sorry for himself for his past mistakes. The wise baboon Rafiki takes a stick  and hits Simba on the back of the head. Simba yells, “Geez, what was that for” and Rafiki replies, “It doesn’t matter, it’s in the past.” Simba says, “Yeah, but it still hurts.” Rafiki then says “Oh yes, the past can hurt. But the way I see it, you can either learn from it, or run from it.Rafiki then swings the stick again to hit Simba on the head and Simba ducks down in time to avoid the stick. Rafiki says, “You see.”  I love that example! It’s the perfect reminder that this principle should not be a difficult one for us to grasp. Yes, it hurts to mess up, but it’s in the past, so learn from it and move on.

Loss-Aversion Bias in Investment Behaviour.

It explains why despite deciding you’ll hate a movie ten minutes in, you’ll stick it out for the whole two hours in misery. You’ve already paid for the ticket, so you don’t want to waste money by not seeing the movie. But you won’t get that money back if you stay, so why do you feel like you have to? The reason we’re inclined to throw good money after bad (which economists call the sunk cost fallacy) is a perfect example of loss aversion in action. If we’ve spent resources on something—whether it’s as small as a ticket to a bad movie or as large as the billions of dollars spent in a war or social program that’s not working out—we’re inclined to stay the course so as not to waste what we’ve already spent. In other words, we want to avoid feeling the loss of what’s been spent, so we stick with our plan, hoping for a gain, even when sometimes that just leads to a bigger loss in the long run.

Similarly, in investment products many times how it is beneficial by correcting mistakes.

Let’s understand by example case of Mr. Swami. who bought Traditional Endowment Insurance Plan.

Mr. Swami is dynamic Software engineer, at the age of 30, he decided to save for his Retirement Goal AND TAKEN Traditional Endowment Insurance Plan for 20 years premium paying term with 1 Lakh Annual Premium.

Mr. Swami was upset after seen 5 year returns of only 6.5% p.a.(CAGR) , Now, today at the age of 35 when he got his Financial Health Checkup done from an Advisor.

Advisor recommended him below “CHANGE”:

  • He asked him to stop paying further premium and get the policy paid-up first.
  • Get term plan for self which will cost very less in annual premium and high in life cover.
  • Start investing in Hybrid Equity MF or Diversified Equity MF for next 15 years period.

** Note: Above calculation is considered without taxation.

What have you done if you are at the place of Mr. Swami ?

There is no question that making mistakes is a necessary part of our growing process, but I do believe there is a way we can still learn and grow without making quite so many mistakes and in a way that can be far less painful. And when you do make your next mistake, which all of us most certainly will – own it, fix it, and for heaven’s sake when that stick comes swinging toward the back of your head, hopefully you have learned enough to duck like Simba !!

Happy Investing !!

Indexation and its benefits to Debt funds

By Nikhil Shah
With every financial year ending, your big task would be to calculate tax on income from sell of any asset you own (Real Estate, Shares, Mutual Fund, Gold, Debentures, Bonds). Tax applicable on any income from asset comes under head of capital gain. How Indexation works plays important role hear and its beneficial through Debt Mutual Fund let’s understand.
Concept of Indexation and role of CII Cost Inflation Index on capital gains tax calculation:

The value of rupee today will not stay the same for tomorrow. The prices keep increasing due to inflation. It is fair to pay more for toothbrush, restaurant bill, clothes etc. over the years because of the price rise due to Inflation. Likewise, it is not fair to pay Capital Gain Tax without incorporating the factor of inflation.
The government charges tax on our sale of the asset and they do not wish to let go of the capital gain. Hence, the government charges capital gains tax, which is calculated on the basis of CII.
Cost inflation index (CII) is an index issued by the Central Board of Direct Taxes and the figures keep changing every financial year.
In order to avoid paying a large sum towards tax, the sale price of the asset can be indexed to demonstrate the asset’s value as per its current value, taking into account inflation reducing its value. In this manner, the profit derived from the sale would be lower, thus reducing the capital gains payable.
Thus, indexation helps reflect the actual value of the asset at present market rates, taking into account the erosion of value due to inflation.
The CII for a particular year is fixed by the government and released every Fincancial Year(FY), for the purpose of tax computation.

Below is latest applicable CII (Cost of Inflation Index) chart:

The formula to calculate the cost inflation index is as follows:
Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

Lets understand with practical case of with Fixed deposit Vs Debt Mutual Fund.

Mr. Parikh pro saving person comes under 30% tax slab.
He has done 2 Investments on same date and exited from them on same date.

Investment 1.

He invested in Bank Fixed Deposit Rs.1 Cr. at annual rate 8%, in Jan 2014. He exited from it for Rs. 1.24 Cr. in Jan 2017.

Computing tax for this investment is as below:
The Interest income = Exit value of Fixed Deposit – invested value of Fixed Deposit.
i.e., 1,00,00,000 – 1,24,00,000 = Rs. 24,00,000

His Net Interest income is Rs.24 lakhs in absolute term.

Tax liability is charged at 30% tax slab. The tax liability will be 24,00,000 X 30% = Rs. 7,20,000
Net Income in hand = Rs. 16,80,000  i.e., 24,00,000 – 7,20,000.

Investment 2.

He invested in Debt Mutual Fund Rs.1 Cr. at annual rate 8%, in Jan 2014. He exited from it for Rs. 1.24 Cr. in Jan 2017.

Computing tax for this investment is as below:
First we have to calculate CII by this formula.

Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

The CII for the Jan 2014 FY in which Debt Mutual Fund was 220. The CII for the Jan 2017 FY mutual fund redeemed was 264.

The Cost Inflation Index (CII) is 264/220 = 1.20

While computing tax, CII is multiplied with the purchase price to arrive at the indexed cost of acquisition. This is the actual cost of the asset.
Therefore, the indexed cost of acquisition = 1,00,00,000 X 1.20 = Rs. 1,20,00,000

The long term capital gain= sale value of the asset – indexed cost of acquisition
i.e., 1,24,00,000 – 1,20,00,000 = Rs. 4,00,000

Tax liability by indexation method charged at 20%. The tax liability will be 4,00,000 X 20% = Rs 80,000

Below table will help you to understand it more clearly.

* In both Investments tax calculation surcharge and Education Cess is not considered. 
When you index, it helps you save taxes. It helps you adjust the purchasing price of the Debt Mutual Fund with the current market prices.

What is capital gain?
When you sell any asset you own (Real Estate, Shares, Mutual Fund, Gold, Debentures, Bonds are treated as assets) and you make a profit on the sale, it is known as capital gain. The tax you pay on profit earned is called as capital gains tax.
No tax if you make a loss (you sell at a lower price than you bought it), you incur a capital loss.

What are the types of capital gains on Debt Mutual Funds ?
Depending on how long you held the Debt Fund, the capital gain is classified either as short-term or long-term.

Note: In above case provided investment is in Debt Mutual Fund – Growth Option. In case of dividend option of Debt Mutual fund, Dividend Distribution Tax will be applicable as per given rate by govt. We will cover Dividend Distribution Tax in separate blog.

Short-term capital gain: Applicable if you sell the Debt Mutual Fund within 36 months from the date of purchase.
In traditional products such as fixed deposits or debentures, the interest on your investment is taxed as per your slab rate; that is –whichever tax slab you fall under. With debt mutual funds too, your gains (short-term gains) are taxed as per your slab rate if you held them for less than 3 years or 36 months.

Long-term capital gain: If you sell the Debt Mutual Fund after 36 months from the date of purchase.
After crossing 3 Years or 36 months in Debt Funds, method of tax calculation as per Indexation is game changer. And in traditional products it remains same as per tax slab of individual.

Income earned on traditional products is treated as Interest income under Head of Income from other sources.
However Income earned on Debt mutual fund is treated as capital gain under Head of Income from capital gain (Mutual funds are treated as Assets).

In above comparison table you can see how Mr. Parikh got benefited higher net income by paying low tax through the route of Debt Mutual Funds compared with low return by paying higher tax on Fixed Deposit.


Over 21 Asset Management Companies and more than 3000 mutual fund schemes raise the worry on choosing the mutual fund schemes for a new investor. Generally , Investors pursue the ranking of mutual fund schemes on different websites available in this space and try to figure out the number 1,2 ,3…… mutual fund schemes .He then invest into these schemes. Till this time, it looks simple .But the problem arises when he again browses the same website and finds some other schemes in the place of one in which he had invested .To add to his surprise, the schemes keep on changing on monthly basis.

There are number of agencies which do the ranking of MF and publish the same in different media .One needs to understand the ranking method whether it is on mark to mark return basis ,CAGR basis and so on. E.g.Valueresearch evaluates the fund on the basis on 3 yrs returns with risk adjusted ratio and then rates the fund .ICRA takes two yrs performance on CAGR basis. Due to this, different schemes appear at the different agencies. Secondly ranking sometimes does not specify the category of the fund i.e.Midcap, large cap etc. The silver line makes the ranking indisputable “Past performance is no guarantee of future of returns”.

During the recent conference held in Mumbai, I happened to meet Mr. Dhirendra Kumar, founder of “Valueresearch”. He mentioned that one should look at ranking as elimination process rather than just
selection process. Today’s 5 star rated fund may become 4 star next month. One should think twice in selecting 3 star and the below rated funds.Most of the investors choose the fund that has given the best returns in the last year .In fact, Mutual fund companies also advertise these returns as it is easier to get money in best performing fund than
average performing fund .You can see numbers of IPO’s coming now at this market level .Where were they all last year when market was below 10,000? It is easier to raise the money in such market conditions and same things apply to the mutual fund.

In chasing the performer, investors make their own index of stocks. It looks like AMFI website while looking at their MF portfolio. The question of “which fund to invest in” remains the question for lot of
investors forever.