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Common Investment Dilemmas

Getting into a dilemma while investing is a common phenomenon. It usually happens when investors are indecisive about two seemingly similar situations or investment avenues. If the dilemmas are not tackled early on, it could lead to a flawed investment decision, which can be disastrous for your finances. These dilemmas are usually a result of the lack of knowledge among investors about various investment options. This leads to confusion about which investment option is most suitable in a given situation. In a bid to simplify things, investors look for answers that may have worked for their friend or colleague in the past. However, since the situation varies across investors, there is no clear-cut answer or standard solution that will hold good for all investors. In this article we bring out 5 common investment dilemmas that investors grapple with regularly while investing.

1. Stocks vs Equity funds This is undoubtedly the most common investment dilemma faced by several investors, regardless of their investment expertise. This dilemma is rooted in the investor’s belief that investing in stocks and equity funds is one and the same thing. In reality they are quite different and suit investors with distinct profiles, although for a category of investors both options may prove viable. While investing in stocks, investors are required to do their homework (read research) pre-investment and post-investment. This involves understanding not just the company, but also the underlying sector. This is in addition to grasping the macroeconomic implications and its impact on the company under review. Having conducted the research pre-investment, the investor must continue doing so post-investment to ensure he is invested with the right company. With mutual funds it’s a little less complicated. You still have to do the basic research to select the right equity fund. But having done that, the rest of the research (that the investor in stocks has to do on an ongoing basis) is done by a team of experts (read fund managers).

2. Hold vs Redeem This is the dilemma that a lot of investors grapple with. In fact, it won’t be wrong to term it as one of the most difficult investment decisions. Of course, in many cases, the investors are cornered in this situation because they are uncertain of their investment objectives. If there is clarity on that front, then the decision to redeem/stay invested is a relatively easy one. Investments are usually made to achieve a specific investment objective. Hence, ideally investments should be held until the set objective is reached. However, there could be situations where investors are left with no choice but to redeem their investments mid way. Usually, such situations arise if a particular investment fails to perform according to expectations making the redemption an obvious option.

3. ELSS vs ULIPs Although this dilemma sounds surprising, yet it’s true. Many investors find it difficult to choose between ELSS (equity linked savings scheme) and ULIPs (unit linked insurance plans). It is obvious that they fail to appreciate that while both are tax-saving avenues, they are two very different investment options and cater to different investor needs and objectives. The best way to resolve this dilemma is by understanding their respective features and the objectives that they fulfill.

4. FDs vs Liquid Funds Investors who wish to invest their monies for a short-term (say 40-45 days) have (broadly) two options at their disposal – Fixed Deposits (FDs) and Liquid Funds. Most investors are unable to discern which is the superior option. In terms of returns, both options are comparable. However, in terms of tax benefits, liquid funds are preferable for investors in the higher tax brackets, while FDs are favourable for investors in the lower tax bracket (as also for those who don’t have taxable income).

5. Self-investing vs Financial Planner Whether to opt for the services of a financial advisor or not is another dilemma faced by investors. This dilemma has been heightened after SEBI (Securities and Exchange Board of India) has allowed investors to invest directly in mutual funds without paying entry load. Per se, investing on your own or through a financial planner is not a dilemma. It’s a decision that can be made easily based on whether you have the ability and time to define your investment objectives clearly with a financial plan on how to achieve them. Then you need access to research, which is necessary to help you select the right investment option in the right allocation. If you feel upto the task of making these decisions on your own and tracking them post-investment, then you can invest on your own. Else it is advisable to employ the services of a professional.

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27. Feb, 2011
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Wash Sale Rule – What You Should Know Before Taxes Come

One of the topics that arise at tax time is about the wash sale rule. If you take it into consideration before taxes and sell your losing positions that have no chance turning green, you can offset your taxes on capital gains. This can be an effective way of paying less capital gain taxes when you file with your tax accountant, but you must avoid the wash rule to claim losses.

What is it?

A wash sale is selling a security that is a loss and purchasing the same security back within 30 days. When you purchase the same security back within 30 days of the sale, you can not report it on your taxes as a loss. Investors will repurchase the security back in hopes of it recovering; but if it does not recover like they thought, you will not only lose more money but you will not be able to claim the loss on your taxes. One thing to note is that the wash sale rule only applies to losses, not gains. You will not be able to offset your capital gain tax by buying the same stock back within 30 days to eliminate reporting a gain.

What is the purpose of it?

The purpose of it, is to prevent investors from selling a stock or security at a loss to offset their capital gain tax and then repurchase the same stock or security back for a gain. The IRS does not want an investor to claim a loss on their taxes, when in reality, the investor sold their position for a day to claim the loss and then bought back the same stock that made them profit in return.

If you are thinking about repurchasing a security that you have sold within 30 days, you should take the following into consideration:

  • What has changed that makes you want to repurchase this stock, since you just sold it?
  • What is the probability that the security will rise in price?
  • Are you conformable with not being able to claim your loss on your taxes if the security drops in price, again?

It is very wise to think carefully about repurchasing a security that you just sold. The determining factor will be if you think the rewards outweigh the risks of repurchasing the security back. The wash sale rule can work against you if you do not plan ahead on selling your securities that are at a loss, so be smart and plan out your sales.

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17. Jul, 2010