What will you learn about?

 The financial markets and mutual fund industry

 Your role as a mutual fund sales representative
 The importance of the “Know Your Client” rule and how to apply it
 Client focused reforms
 Analyzing the risk-return relationship of investments
 Explaining the process of creating and managing investment
portfolios that meets client’s needs
 The different types of mutual funds
 The function of exchanges and clearinghouses
 Assessing mutual funds performance and fee structure

What is the course syllabus?

Expand All| Collapse All
Chapter 1 - The Role of the Mutual Fund Sales Representative
Chapter 2 - Overview of the Canadian Financial Marketplace
Chapter 3 - Overview of Economics
Chapter 4 - Getting to Know the Client
Chapter 5 - Behavioural Finance
Chapter 6 - Tax and Retirement Planning
Chapter 7 - Types of Investment Products and How They Are Traded
Chapter 8 - Constructing Investment Portfolios
Chapter 9 - Understanding Financial Statements
Chapter 10 - The Modern Mutual Fund
Chapter 11 - Conservative Mutual Fund Products
Chapter 12 - Riskier Mutual Fund Products
Chapter 13 - Alternative Managed Products
Chapter 14 - Understanding Mutual Fund Performance
Chapter 15 - Selecting a Mutual Fund
Chapter 16 - Mutual Fund Fees and Services
Chapter 17 - Mutual Fund Dealer Regulation
Chapter 18 - Applying Ethical Standards to What You Have Learned
 Course Completion, Wall Certificate and Digital Badge
Upon successfully completing this course, you will be able to
download a Notice of Course Completion available through your
student profile. This will remain on your profile as formal
confirmation of course completion.

You can also accept a digital badge through your student profile
after successful course completion. Digital badges are portable
image files that allow you to share your credentials across the web.
You can post them to your email signature, personal website, social
media channels—even to electronic copies of your resume.

CSI will mail you a wall certificate within 4 – 6 weeks of course

completion. Frames to display your certificate are available. Please
ensure that your First and Last Name on your profile matches your
First and Last Name on your Government Issued Photo identification
– this will ensure you receive an accurate certificate.

CSI will be pleased to issue an Honours Certificate to all students

who obtain a final course mark of 85% or higher.

About
The Investment Funds in Canada (IFC) course provides foundational
knowledge that prepares advisors to give clients effective advice on
mutual fund investments based on their objectives, timeline and risk
tolerance. It also provides greater insight into a mutual fund
representative’s legal, ethical and professional responsibilities.
Successful course completion will help you meet regulatory
requirements to register for the Mutual Fund Dealer – Dealing
Representative License.

What skills will you develop?

 Understand the Canadian financial markets and the mutual funds

industry better
 Analyze the risk-return relationship of investments
 Gain deeper insight into assessing mutual fund performance and
fee structure
 Build knowledge and skills to create and effectively manage client
portfolios

Who should enrol?

Enrol if you’re:Seeking your license to sell mutual funds

 A financial services professional seeking to grow your knowledge-

base
 Looking to gain a broader understanding of capital markets

What credentials does this course lead to?

 Personal Financial Planner (PFP®)

 Estate & Trust Professional (MTI®)
 Certificate in Financial Services Advice
 Certificate in Advanced Mutual Fund Advice
What careers does this course lead to?

 Mutual Funds Licensed Dealer

 Financial Planner
 Discount Broker
 Investment Representative
Explore Career Map
Depending on the level of financial experience you have, our
comprehensive Career Map can help guide you through the financial
areas that will suit you best.

You can search by courses, credentials or careers to better

understand the financial marketplace and navigate it successfully.
Hours of study: 90 – 140 Hours

Enrolment Period: 1 Year

What is the IFC exam weighting?

Exam Topics

Introduction to the Mutual Funds Marketplace

The Know Your Client Communication Process

Understanding Investment Products and Portfolios

The Modern Mutual Fund

Analysis of Mutual Funds

Understanding Alternative Managed Products

Evaluating and Selecting Mutual Funds

Ethics, Compliance, and Mutual Fund Regulation

What is the IFC exam structure?

Structure

Exams

Exam Format

Exam Duration
 Structure

Question Format

Questions Per Exam

Attempts Allowed Per Exam

Passing Grade

Assignments

What Continuing Education (CE) credits will you earn?

Accreditation

CSF Mutual Funds

CSF Compliance

ICS Life Insurance

FSRA Life Insurance

ICM Life Insurance

ICBC Life Insurance

AIC Life Insurance

QAFP General CE

CFP General CE

View CE credits for all CSI courses and all associations.

While CSI makes every effort to ensure that the information is up-to-
date, we are unfortunately unable to fully guarantee its accuracy.
The information listed in the chart may be subject to change.
 Chapter – 1 ( The Role of the Mututal Fund Sales Representative)
A Mutual Fund Sales job involves promoting and selling mutual fund
products to individual and institutional clients. This role requires a strong
understanding of financial markets, investment products, and sales
strategies. Responsibilities include building relationships with financial
advisors and distributors, driving sales growth, and ensuring client
satisfaction.

Key Responsibilities:
 Sales & Business Development:
 Identify and target potential clients, including financial advisors, brokers, and
institutional investors.
 Develop and implement sales strategies to achieve sales targets and expand the
client base.
 Build and maintain strong relationships with existing clients to ensure customer
satisfaction and retention.
 Generate new leads through networking, referrals, and marketing initiatives.
 Product Knowledge & Market Expertise:
 Maintain a deep understanding of the company's mutual fund products and their
investment strategies.
 Stay updated on market trends, competitor activities, and regulatory changes.
 Conduct market research to identify new business opportunities and adapt sales
strategies accordingly.
 Relationship Management:
 Collaborate with internal teams, such as marketing and product development, to
align sales efforts and ensure a consistent brand message.
 Provide regular updates to clients on market developments, investment
performance, and fund information.
 Handle client inquiries, resolve issues, and provide exceptional customer service.
 Sales Reporting & Analysis:
 Track sales performance against targets and generate regular sales reports for
management.
 Analyze sales data to identify areas for improvement and optimize sales
strategies.
 Participate in sales meetings and training sessions to enhance sales skills and
product knowledge.
 Distributor Management:
 Provide support and guidance to distributors on product knowledge and sales
strategies.
 Organize and lead distributor events, training sessions, and investor education
initiatives.
 Maintain regular communication with distributors to ensure they are well-informed
and equipped to sell the mutual funds.
Skills and Qualifications:
 Sales Skills:
Proven track record of successful sales performance, including lead generation,
relationship management, and closing deals.
 Financial Acumen:
Strong understanding of financial markets, investment products (especially mutual
funds), and financial regulations.
 Communication Skills:
Excellent verbal and written communication skills for interacting with clients,
distributors, and internal teams.
 Analytical Skills:
Ability to analyze sales data, market trends, and competitor activities to inform
sales strategies.
 Interpersonal Skills:
Ability to build and maintain strong relationships with clients and distributors,
fostering trust and loyalty.
Education and Experience:
 Typically requires a bachelor's degree in finance, business administration, or a
related field.
 May require relevant certifications or licenses, such as the Series 7 or Series 63 (in
the US).
 Experience in sales, particularly within the financial services industry, is often
preferred.

Chapter 2: Overview of the Canadian Financial Marketplace

The Canadian financial marketplace is a sophisticated system facilitating

the flow of capital and investment. It encompasses major stock exchanges
like the TSX and TSX Venture, alongside the Montreal Exchange focused
on derivatives. The market includes various instruments like equities, fixed
income securities (bonds), and derivatives, enabling diverse investment
and risk management strategies.

Key Components:
 Exchanges:
The Toronto Stock Exchange (TSX) is the largest, primarily listing large-cap
companies, while the TSX Venture Exchange focuses on smaller, emerging
companies. The Montreal Exchange specializes in derivatives like futures and
options.
 Instruments:
The market deals with a wide range of financial instruments including:
 Equities: Common and preferred shares of publicly listed companies.
 Fixed Income: Government and corporate bonds, and debentures.
 Derivatives: Futures and options contracts on various underlying assets.
 Financial Institutions:
Canada's financial system includes banks, investment dealers, insurance
companies, trust companies, and credit unions, each playing a role in the
marketplace.
 Regulation:
The financial marketplace is subject to regulation by various bodies, including the
Autorité des marchés financiers (AMF) in Quebec.
 Key Functions:
 Capital Allocation:
Financial markets facilitate the transfer of capital from savers to users (borrowers).
 Price Discovery:
Markets help determine the prices of securities through the interaction of buyers
and sellers.
 Risk Management:
Derivatives markets allow for hedging and managing various risks.
 Liquidity:
Markets provide liquidity, making it easier for investors to buy and sell securities.
Recent Trends:
 Economic Slowdown and Inflation:
In 2023, the Canadian economy experienced a slowdown, and bond yields reached
high levels not seen since the 2007-2008 financial crisis.
 Regulatory Developments:
There are ongoing regulatory developments in Canadian capital markets, with
potential impacts on market participants.
 Technological Advancements:
New stock exchanges like NEO are emerging, focusing on innovation and providing
platforms for companies to raise capital and gain exposure.

Chapter – 3 ( Overview Of Economics)

Economics is the social science that studies how societies allocate scarce
resources to produce, distribute, and consume goods and services. It
examines individual and collective decision-making, analyzing how people,
businesses, and governments make choices under conditions of
scarcity. The field is broadly divided into microeconomics, which focuses on
individual agents and markets, and macroeconomics, which studies the
overall economy.

Key Concepts in Economics:

 Scarcity: Resources are limited, while human wants are unlimited, forcing choices
about how to use available resources.
 Opportunity Cost: The value of the next best alternative foregone when a choice is
made.
 Supply and Demand: Fundamental forces that determine prices and quantities in
markets.
 Market Structures: Different ways markets can be organized, such as perfect
competition, monopoly, or oligopoly.
 Economic Systems: Different ways societies organize their economies, including
traditional, command, market, and mixed systems.
 Macroeconomic Variables: Key indicators like GDP, inflation, unemployment, and
interest rates that economists study.
Microeconomics focuses on individual decision-makers, such as
consumers, firms, and workers. It explores topics like:
 Consumer behavior: How individuals make choices about what to buy and
consume.
 Firm behavior: How businesses decide what to produce, how much to produce, and
how to price their products.
 Market efficiency: How well markets allocate resources and how they can fail to do
so.
Macroeconomics examines the overall economy, focusing on issues like:
 Economic growth: How economies expand over time.
 Inflation: The rate at which prices increase.
 Unemployment: The percentage of the workforce that is unemployed.
 Fiscal policy: Government spending and taxation.
 Monetary policy: Actions taken by central banks to influence the money supply and
interest rates.
In essence, economics provides a framework for understanding how
societies make decisions about scarce resources and how these decisions
affect individuals, businesses, and the overall economy.

Chapter – 4 ( Getting of Know the Client)

Getting to know your client is crucial for building strong relationships and
ensuring successful collaborations. This involves actively listening to their
needs, understanding their goals, and tailoring your approach to their
specific situation. Key strategies include asking open-ended questions,
conducting surveys, analyzing data, and paying attention to their feedback.
Here's a more detailed look at how to get to know your clients:
 1. Engage in Open Communication:
 Ask Questions: Initiate conversations and ask open-ended questions to understand
their needs, challenges, and what they hope to achieve.
 Listen Actively: Pay close attention to their responses, both verbal and nonverbal,
and demonstrate that you are engaged in the conversation.
 Be Responsive: Address their questions and concerns promptly and thoroughly.
2. Gather Information Through Various Channels:
 Surveys:
Create and distribute surveys to gather structured feedback on their preferences,
pain points, and overall satisfaction.
 Customer Profiles:
Develop customer profiles to categorize and understand different segments of your
client base.
 Review Data:
Analyze data from your interactions with clients, such as purchase history, website
activity, and social media engagement.
 Social Media:
Utilize social media platforms to engage with clients, gather feedback, and gain
insights into their interests and opinions.
3. Understand Their Business and Industry:
 Research Competitors:
Investigate their competitors to understand their market position, strategies, and
competitive advantages.
 Follow Industry Trends:
Stay informed about the latest trends and developments in their industry to
anticipate their needs and offer relevant solutions.
 Identify Pain Points:
Understand their key challenges and frustrations to identify opportunities to provide
valuable solutions.
4. Build Rapport and Trust:
 Be Human:
Show empathy, build rapport, and demonstrate that you understand them as
individuals.
 Be Accessible:
 Make yourself available for communication and build a strong relationship based on
trust and mutual respect.
 Seek Advice:
Ask for their input on your work or ideas to make them feel valued and involved.
 Celebrate Successes:
Acknowledge and celebrate their achievements to strengthen the relationship and
foster a positive working environment.

Chapter – 5 ( Behavioural Finance )

Behavioural finance attempts to explain how decision makers take

financial decisions in real life, and why their decisions might not
appear to be rational every time and, therefore, have unpredictable
consequences. This is in contrast to many traditional theories which
assume investors make rational decisions.

What Is Behavioral Finance?

Behavioral finance, a subfield of behavioral economics, proposes that psychological
influences and biases affect the financial behaviors of investors and financial practitioners.
Moreover, influences and biases can explain all types of market anomalies, including those in
the stock market, such as severe rises or falls in stock price.

Given that behavioral finance is such an integral part of investing, the U.S. Securities and
Exchange Commission has staff specifically focused on behavioral finance.

KEY TAKEAWAYS

 Behavioral finance is an area of study focused on how psychological influences can affect
market outcomes.
 Behavioral finance can be analyzed to understand different outcomes across a variety of
sectors and industries.
 One of the key aspects of behavioral finance studies is the influence of psychological biases.
 Some common behavioral financial aspects include loss aversion, consensus bias, and
familiarity tendencies.
 The efficient market theory which states all equities are priced fairly based on all available
public information is often debunked for not incorporating irrational emotional behavior.

Understanding Behavioral Finance

Behavioral finance can be analyzed from a variety of perspectives. Stock market returns are
one area of finance where psychological behaviors are often assumed to influence market
outcomes and returns but there are also many different angles for observation. The purpose of
the classification of behavioral finance is to help understand why people make certain
financial choices and how those choices can affect markets.

Within behavioral finance, it is assumed that financial participants are not perfectly
rational and self-controlled but rather psychologically influential with somewhat normal and
self-controlling tendencies. Financial decision-making often relies on the investor's mental
and physical health. As an investor's overall health improves or worsens, their mental state
often changes. This impacts their decision-making and rationality towards all real-world
problems, including those specific to finance.

One of the key aspects of behavioral finance studies is the influence of biases. Biases can
occur for a variety of reasons. Biases can usually be classified into one of five key concepts.
Understanding and classifying different types of behavioral finance biases can be very
important when narrowing in on the study or analysis of industry or sector outcomes and
results.

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Behavioral Finance Concepts

Behavioral finance typically encompasses five main concepts:

 Mental accounting: Mental accounting refers to the propensity for people to allocate
money for specific purposes.
 Herd behavior: Herd behavior states that people tend to mimic the financial behaviors of
the majority of the herd. Herding is notorious in the stock market as the cause behind
dramatic rallies and sell-offs.
 Emotional gap: The emotional gap refers to decision-making based on extreme emotions
or emotional strains such as anxiety, anger, fear, or excitement. Oftentimes, emotions are a
key reason why people do not make rational choices.
 Anchoring: Anchoring refers to attaching a spending level to a certain reference. Examples
may include spending consistently based on a budget level or rationalizing spending based
on different satisfaction utilities.
 Self-attribution: Self-attribution refers to a tendency to make choices based on
overconfidence in one's own knowledge or skill. Self-attribution usually stems from an
intrinsic knack in a particular area. Within this category, individuals tend to rank their
knowledge higher than others, even when it objectively falls short.

FAST FACT

Behavioral finance is exploited through credit card rewards, as consumers are more
likely to be willing to spend points, rewards, or miles as opposed to paying for
transactions with direct cash.
Some Biases Revealed by Behavioral Finance
Breaking down biases further, many individual biases and tendencies have been identified for
behavioral finance analysis. Some of these include:

Confirmation Bias
Confirmation bias is when investors have a bias toward accepting information that confirms
their already-held belief in an investment. If information surfaces, investors accept it readily
to confirm that they're correct about their investment decision—even if the information is
flawed.

Experiential Bias
An experiential bias occurs when investors' memory of recent events makes them biased or
leads them to believe that the event is far more likely to occur again. For this reason, it is also
known as recency bias or availability bias.

For example, the financial crisis in 2008 and 2009 led many investors to exit the stock
market. Many had a dismal view of the markets and likely expected more economic hardship
in the coming years. The experience of having gone through such a negative event increased
their bias or likelihood that the event could reoccur. In reality, the economy recovered, and
the market bounced back in the years to follow.

Loss Aversion
Loss aversion occurs when investors place greater weight on the concern for losses than the
pleasure from market gains. In other words, they're far more likely to try to assign a higher
priority to avoiding losses than to making investment gains.

As a result, some investors might want a higher payout to compensate for losses. If the high
payout isn't likely, they might try to avoid losses altogether, even if the investment's risk is
acceptable from a rational standpoint.

Applying loss aversion to investing, the so-called disposition effect occurs when investors
sell their winners and hang onto their losers. Investors' thinking is that they want to realize
gains quickly. However, when an investment is losing money, they'll hold onto it because
they want to get back to even or their initial price. Investors tend to admit they are correct
about an investment quickly (when there's a gain).

However, investors are reluctant to admit when they made an investment mistake (when
there's a loss). The flaw in disposition bias is that the performance of the investment is often
tied to the entry price for the investor. In other words, investors gauge the performance of
their investment based on their individual entry price, disregarding the fundamentals or
attributes of the investment that may have changed.

Familiarity Bias
The familiarity bias is when investors tend to invest in what they know, such as domestic
companies or locally owned investments. As a result, investors are not diversified across
multiple sectors and types of investments, which can reduce risk. Investors tend to go with
investments that they have a history or have familiarity with.

FAST FACT

Familiarity bias can occur in so many ways. You may resist investing in a specific
company because of what industry it is in, where it operates, what products it sells,
who oversees the management of the company, who its clientele is, how it
performs its marketing, and how complex its accounting is.

Behavioral Finance in the Stock Market

The efficient market hypothesis (EMH) says that at any given time in a highly liquid market,
stock prices are efficiently valued to reflect all the available information. However, many
studies have documented long-term historical phenomena in securities markets that contradict
the efficient market hypothesis and can't be plausibly captured in models based on perfect
investor rationality.

The EMH is generally based on the belief that market participants view stock prices
rationally based on all current and future intrinsic and external factors. When studying the
stock market, behavioral finance takes the view that markets are not fully efficient. This
allows for the observation of how psychological and social factors can influence the buying
and selling of stocks.

The understanding and usage of behavioral finance biases can be applied to stock and other
trading market movements on a daily basis. Broadly, behavioral finance theories have also
been used to provide clearer explanations of substantial market anomalies like bubbles and
deep recessions. While not a part of EMH, investors and portfolio managers have a vested
interest in understanding behavioral finance trends. These trends can be used to help analyze
market price levels and fluctuations for speculation as well as decision-making purposes.

What Does Behavioral Finance Tell Us?

Behavioral finance helps us understand how financial decisions around things like
investments, payments, risk, and personal debt, are greatly influenced by human emotion,
biases, and cognitive limitations of the mind in processing and responding to information.

How Does Behavioral Finance Differ From

Mainstream Financial Theory?
Mainstream theory, on the other hand, makes the assumptions in its models that people are
rational actors, that they are free from emotion or the effects of culture and social relations,
and that people are self-interested utility maximizers. It also assumes, by extension,
that markets are efficient and firms are rational profit-maximizing organizations. Behavioral
finance counters each of these assumptions.
How Does Knowing About Behavioral Finance
Help?
By understanding how and when people deviate from rational expectations, behavioral
finance provides a blueprint to help us make better decisions in financial matters.

What Is an Example of a Finding in Behavioral

Finance?
Investors are found to systematically hold on to losing investments longer than rational
expectations would predict, and they also sell winners too early. This is known as the
disposition effect, and is an extension of the concept of loss aversion to the domain of
investing. Rather than locking in a paper loss, investors holding losing positions may even
double down and take on greater risk in hopes of breaking even.

The Bottom Line

Behavioral finance is an area of economics that fuses with psychology. It ascribes the often
irrational behavior of individuals when faced with financial choices to a variety of biases and
heuristics. Often, individuals are unaware of the underlying biases at work that can underlie
bad decision-making. A study of this area of finance is essential to anyone who wants to
master the art of trading and investing.

Chapter – 6 ( Tax Planning for Retirement Planning )

Retirement planning can be quite complex, and neglecting the tax implications of
your retirement savings can significantly impact your pensions. Here are a few
strategies you can follow to manage tax liability post-retirement:

1. Be Aware of Applicable Taxes

Whether you want to invest in mutual funds or pension plans to fund your retirement,
you must understand how the income will be taxed. If you have retirement income
from under different heads like long-term capital gains, short-term capital gains,
income from other sources, etc., you must anticipate that you have to pay taxes on
these income sources.
Although long-term capital gains are taxed at 12.5%, you can save tax on this. To do
this, you can realise gains of up to Rs. 1.25 lakh annually (which is tax-exempt) by
selling profitable investments and subsequently repurchasing the same stocks or
mutual funds. Furthermore, you can opt for more tax-efficient investments like NPS,
PPF, EPF, etc.

2. Optimise Your Investment Portfolio for Tax Efficiency

Upon retirement, your tax liability can include taxes on dividends, capital gains,
interest income, and income from property and so on. If you don’t plan for tax
savings, your income will be pushed into higher tax slabs, which will lower your
overall income for the rest of your life.

Hence, tax-efficient investment strategies can help minimise your tax liability by
changing your investment portfolio to include various tax-saving instruments. Take
steps like holding long-term investments to avail lower capital gains tax and
changing your retirement account into a tax-advantaged account, etc. Therefore, it
will reduce the post-retirement tax liability each year and help you reduce your
taxable income.

3. Invest in a Deferred Annuity

A deferred annuity is an insurance product created for retirement planning, providing

you with a fixed income starting at a future date of your choice. While working, you
can invest in a deferred annuity plan as it acts as a source of steady income through
savings for your retirement.

With this income, you can fulfil various dreams after retirement, like buying a house,
travelling, indulging in hobbies, or embarking on newer adventures. You can
consider making partial withdrawals over time from the annuity rather than taking
large lump-sum withdrawals. It can help you manage your taxable income more
effectively and potentially stay within lower tax brackets.

4. Use Tax-Advantaged Accounts Before You Retire

 To prepare yourself for tax planning for retirement, you can utilise the advantage of
investing in tax-saving investment options before retirement. Here are several
options you can consider using as tax-advantages accounts before you retire:

 Investing in savings bank accounts, bank deposits, or post office deposits can benefit from
deductions of up to Rs. 50,000 on the interests earned under Section 80 TTB in case of
senior citizen.

 You can claim tax deductions under Section 80C and Section 80CCD by increasing your
contributions to the Public Provident Fund (PPF) and National Pension System (NPS).

 Consider reducing your tax burden by investing in retirement-focused ULIPs, which offer tax
benefits on the maturity amount under Section 10(10D).

How Retirement Taxes Are Calculated?

Even during the absence of your salary, you can get regular income through property
rental, capital gains, and the interest accrued from investments. Each of these
income sources is subject to taxation. The tax amount varies according to your age
and annual income.

Pension income taxation depends on whether you receive a lump sum amount
(commuted pension) or instalments spread throughout time (non-commuted).

Uncommuted Pension i.e regular monthly pension/annuity is always taxable for all
types of taxpayers and is subject to taxation based on the applicable income tax
slabs. The amount received periodically is added to your total income for the year,
and taxes are levied accordingly.

Income tax Implications on Commuted pension or lump sum pension is as below -

For Government Employees : Fully Exempt

For Non Government Employees:

1. Employee receives both Gratuity & Pension : Assuming 100% pension is

commuted, 1/3rd of the pension amount is exempted & remaining is taxed as salary.
 2. Employee does not receive Gratuity i.e. only pension is received : Assuming
100% pension is commuted, ½ of the pension amount is exempted & remaining is
taxed as salary

3. Any payment received in commutation of pension as a lump sum on vesting

(maturity) from a Pension Plan of a life insurance company is completely exempt,
subject to fulfillment of various conditions under the current income-tax law.

Other than pension, Indian employees may receive benefits at the time of retirement
in the form of gratuity, provident fund payments or VRS (Voluntary Retirement
Scheme). Each of these carry different tax benefits, which are explained below:

 Gratuity : Gratuity taxation depends on the employee type.

 For government employees, it’s fully tax-exempt.

 For non-government employees under the Payment of Gratuity Act, the least of actual
gratuity or ₹20 lakhs or 15 days’ salary for each completed year of service (calculated as the
last drawn salary divided by 26, multiplied by 15, and then multiplied by the number of
completed years of service) is exempt; excess is taxable.

 For non-government employees not under the Act, least of actual gratuity or ₹20 lakhs or
half month’s salary for each completed year of service (calculated as the average salary of
the last 10 months). is exempt; the remainder is taxed.

 Provident Funds: Provident Fund taxation depends on the type of fund:

 Statutory Provident Fund (SPF): Interest earned and withdrawals are fully exempt from
tax.

 Recognized Provident Fund (RPF): Employer contributions up to 12% of salary are tax-
exempt; interest up to 9.5% per annum is tax-free. Withdrawals are tax-exempt if conditions
(like 5 years of continuous service) are met.

 Unrecognized Provident Fund (URPF): Employer contributions and interest are taxable
upon withdrawal.

 Public Provident Fund: Contributions made towards the Public Provident Fund (PPF) are
eligible for tax deduction under Section 80C. The maximum deposit limit for PPF is Rs.
 1,50,000 a year, which means you can claim the entire deposited amount as an exemption
under the Income Tax Act.

 Voluntary Retirement Scheme (VRS): Compensation received under VRS is exempt from
tax under Section 10(10C) of the Income Tax Act, subject to the conditions least of Rs 5
Lakhs or actual amount received or salary p.m. multiply by number of remaining month of
service or salary p.m. X 3 months X Number of years of completion of service.

 Leave Encashment: Leave encashment taxation depends on the type of employee:

 Government Employees: Leave encashment at the time of retirement or resignation is fully

exempt from tax.

 Non-Government Employees: Leave encashment is taxable, but at retirement or

resignation, the least of the following is exempt under Section 10(10AA):

₹25 lakhs (for retirement after February 2023).

Actual leave encashment received.

Salary for 10 months (based on the average salary of the last 10 months).

Cash equivalent of the leave due (up to a maximum of 30 days for every year of
service).

Leave encashment during service is always fully taxable.

Indian citizens between the ages of 60 and 80 can avail tax deductions up to Rs. 3
lakh on yearly income. The following table represents the income tax slabs with the
annual income of senior citizens above Rs. 3 lakh (under the old regime), which will
help you in tax planning for retirement.

Income Tax Slab Income Tax Rate

Between Rs. 3 lakh to Rs. 5 lakh 5% plus cess

Rs. 5,00,001/- to Rs. 10,00,000/- Rs. 10,000/- + 20% of (Total income - Rs. 5,00,000/-) + cess
Above Rs. 10,00,000/- Rs. 1,10,000/- + 30% of (Total income - Rs. 10,00,000/-) + ces

Super senior citizens aged 80 and above are exempt from tax on income up to Rs. 5
lakh under the old regime. Under the new regime, taxpayers of all ages are exempt
from taxes if they have an income of up to Rs. 7 lakh.

Summary

To sum up, tax planning for retirement is extremely important to guard the savings
you have accumulated from being eroded by taxes during your post-retirement
years. By implementing strategies and optimising your investment portfolio for tax
efficiency, you can substantially reduce your overall tax burden.

You will thus be able to maximise your retirement income benefits with a high level of
efficiency and enjoy well-deserved financial security in your golden years. Consider
various tax-saving investment options that might be available to achieve your goals.

Frequently Asked Questions

1. How is retirement planning taxed?

The tax amount will differ depending on your age and nature of income. Tax benefits
are available to retired individuals on commuted pension, leave encashment,
gratuity, PPF, VRS, Savings & Term Deposits, etc.

2. How can a retired person save tax?

A retired person above age 60 can save tax by investing in savings bank accounts,
bank deposits, or post office deposits and can benefit from deductions of up to Rs.
50,000 on the interests earned under Section 80TTB. They can also claim income
tax deductions under Section 80C and Section 80CCD by increasing their
contributions to the Public Provident Fund (PPF) and National Pension System
(NPS).
 3. Is gratuity taxable on retirement?

Gratuity taxation depends on the employee type.

 For government employees, it’s fully tax-exempt.

 For non-government employees under the Payment of Gratuity Act, the least of actual
gratuity or ₹20 lakhs or 15 days’ salary for each completed year of service (calculated as the
last drawn salary divided by 26, multiplied by 15, and then multiplied by the number of
completed years of service) is exempt; excess is taxable.

For non-government employees not under the Act, least of actual gratuity or ₹20
lakhs or half month’s salary for each completed year of service (calculated as the
average salary of the last 10 months). is exempt; the remainder is taxed.

4. What is the 4% rule in retirement?

The 4% rule in retirement is quite straightforward, as you must calculate all your
investments and withdraw 4% of the total sum in your first year of retirement. After
that, you can adjust the amount by following the inflation rate. Hence, by following
this rule, you can ensure you will not deplete your funds over 30 years of retirement
period.

5. Is the PF amount taxable after retirement?

According to the Income Tax Act provisions, if an amount is withdrawn from the EPF
after retirement, it is exempted from any tax. Further, the exemption is provided for
the total accrued balance in an employee's EPF account at the time of his retirement
or cessation from employment.

Related Articles

 Superannuation – How It Works, Tax Benefits and types

 Annuity Tables: Definitions, Components, and Applications

 Annuity Plans for National Pension System – NPS

 NPS for NRI: Benefits, Eligibility and How to Invest?

Chapter – 7 ( Types of Investment Products and How They Are Traded )

Investment products can be of many different types,

including bonds, stocks, ETFs, mutual funds, and real estate. Such
a wide variety of investment products has paved the way for a rich
landscape for people to start investing by choosing an instrument
that aligns with their financial goals and risk appetite.

What Is Investing?
Investors allocate money or capital to work on a project or undertaking to
generate positive returns, or profits. The type of gains depends on the
project or asset. Real estate investing can produce both rents and capital
gains. Many stocks pay quarterly dividends. Bonds commonly pay regular
interest.

KEY TAKEAWAYS

 Investors usually use a long-term approach to generate acceptable

returns.
 Investing differs from speculation, where gains are earned from
short-term price fluctuations.
 Investors can self-manage their portfolios or employ the services of
a professional money manager.
 Investment success depends on the amount of risk, the holding
period, the frequency of the investment activity, and the source of
the returns.

Stock and bonds are among the most common types of investments.
Investopedia / Sydney Saporito

Understanding Investing
Investing is to grow one's money over time. The core premise of investing
is the expectation of a positive return in the form of income or price
appreciation with statistical significance. The spectrum of assets in which
one can invest and earn a return is vast.

Risk and return go hand-in-hand in investing; low risk generally means low
expected returns, while higher returns are usually accompanied by higher
risk.1 At the low-risk end of the spectrum are basic investments such
as certificates of deposit (CDs) . Bonds or fixed-income instruments are
higher up on the risk scale, while stocks or equities are regarded as riskier.

Commodities and derivatives are generally considered to be among the

riskiest investments. One can also invest in something practical, such as
land, real estate, or items such as fine art and antiques.

Risk and return expectations can vary widely within the same asset class.
For example, a blue chip that trades on the New York Stock Exchange will
have a very different risk-return profile from a micro-cap that trades on a
small exchange.

The returns generated by an asset depend on its type. For instance, many
stocks pay quarterly dividends, whereas bonds generally pay interest
every quarter. In many jurisdictions, different types of income are taxed at
different rates.

In addition to regular income, such as a dividend or interest, price

appreciation is an important component of return. Total return from an
investment can thus be regarded as the sum of income and capital
appreciation.

Standard & Poor's estimates that from 1926 to 2023, dividends have
contributed approximately 32% of total return for the S&P 500 while capital
gains have contributed 68%. Capital gains are, therefore, an important part
of investing.2

FAST FACT

Economists view investing and saving to be two sides of the same coin.
This is because when you save money by depositing in a bank, the bank
then lends that money to individuals or companies that want to borrow that
money to put it to good use. Therefore, your savings are often someone
else's investment.

Types of Investments
Today, investment is mostly associated with financial instruments that
allow individuals or businesses to raise and deploy capital to firms. These
firms then rake that capital and use it for growth or profit-generating
activities.

While the universe of investments is vast, here are the most common
types of investments.
Stocks
A buyer of a company's stock becomes a fractional owner of that
company. Owners of a company's stock are known as its shareholders.
They can participate in its growth and success through appreciation in the
stock price and regular dividends paid out of the company's profits.

Bonds
Bonds are debt obligations of entities, such as governments,
municipalities, and corporations. 3 Buying a bond implies that you hold a
share of an entity's debt and are entitled to receive periodic interest
payments and the return of the bond's face value when it matures.

Funds
Funds are pooled instruments managed by investment managers that
enable investors to invest in stocks, bonds, preferred shares, commodities,
etc. Two of the most common types of funds are mutual
funds and exchange-traded funds (ETFs).

Mutual funds do not trade on an exchange and are valued at the end of the
trading day; ETFs trade on stock exchanges and, like stocks, are valued
constantly throughout the trading day. Mutual funds and ETFs can either
passively track indices, such as the S&P 500 or the Dow Jones Industrial
Average, or can be actively managed by fund managers.

Investment Trusts
Trusts are another type of pooled investment. Real Estate Investment
Trusts (REITs) are one of the most popular in this category. REITs invest
in commercial or residential properties and pay regular distributions to their
investors from the rental income received from these properties. REITs
trade on stock exchanges and thus offer their investors the advantage of
instant liquidity.

Alternative Investments
"Alternative investments" is a catch-all category that includes hedge funds
and private equity. Hedge funds are so-called because they can limit
(hedge) their investment risks by going long and short on stocks and other
investments.
Private equity enables companies to raise capital without going public.
Hedge funds and private equity were typically only available to affluent
investors deemed "accredited investors" who met certain income and net
worth requirements. However, in recent years, alternative investments
have been introduced in fund formats accessible to retail investors. 4

Options and Other Derivatives

Derivatives are financial instruments that derive value from another
instrument, such as a stock or index. Options contracts are a popular
derivative that gives the buyer the right but not the obligation to buy or sell
a security at a fixed price within a specific period. Derivatives usually
employ leverage, making them a high-risk, high-reward proposition.

Commodities
Commodities include metals, oil, grain, animal products, financial
instruments, and currencies. They can either be traded
through commodity futures—agreements to buy or sell a specific quantity
of a commodity at a specified price on a particular future date—or ETFs.
Commodities can be used for hedging risk or speculative purposes.

Comparing Investing Styles

Let's compare a couple of the most common investing styles:

Active vs. passive investing: The goal of active investing is to "beat the
index" by actively managing the investment portfolio. Passive investing, on
the other hand, advocates a passive approach, such as buying an index
fund, in tacit recognition of the fact that it is difficult to beat the market
consistently. While there are pros and cons to both approaches, in reality,
few fund managers beat their benchmarks consistently enough to justify
the higher costs of active management.

Growth vs. value: Growth investors prefer to invest in companies in their

growth stages, which typically have higher valuation ratios than value
companies. Value investors look for companies that are undervalued by
the market and that meet their more strict investing criteria.

How to Invest
Do-It-Yourself Investing
The question of "how to invest" boils down to whether you are a do-it-
yourself (DIY) kind of investor or would prefer to have your money
managed by a professional. Many investors who prefer to manage their
money themselves have accounts at discount or online brokerages
because of their low commissions and the ease of executing trades on
their platforms.

DIY investing is sometimes called self-directed investing and requires a

fair amount of education, skill, time commitment, and the ability to control
one's emotions. If these attributes do not describe you well, it may be
smarter to let a professional help manage your investments.

Professionally Managed Investing

Investors who prefer professional money management generally have
wealth managers looking after their investments. Wealth managers usually
charge their clients a percentage of assets under management (AUM) as
their fees.

While professional money management is more expensive than managing

money by yourself, some investors don't mind paying for the convenience
of delegating research, investment decision-making, and trading to an
expert.

FAST FACT

The SEC's Office of Investor Education and Advocacy urges investors to

confirm that their investment professional is licensed and registered. 5

Robo-Advisor Investing
Some investors opt to invest based on suggestions from automated
financial advisors. Powered by algorithms and artificial intelligence, robo-
advisors gather critical information about the investor and their risk profile
to make suitable recommendations.

With little to no human interference, robo-advisors offer a cost-effective

way of investing with services similar to what a human investment advisor
provides. With advancements in technology, robo-advisors are capable of
more than selecting investments. They can also help people develop
retirement plans and manage trusts and other retirement accounts, such
as 401(k)s.

A Brief History of Investing

While the concept of investing has been around for millennia, investing in
its present form can find its roots in the period between the 17th and 18th
centuries when the development of the first public markets connected
investors with investment opportunities. The Amsterdam Stock Exchange
was established in 1602, and the New York Stock Exchange (NYSE) in
1792.67

Industrial Revolution Investing

The First Industrial Revolution (1760-1840) and the Second Industrial
Revolution (late 19th century and early 20th century) resulted in greater
prosperity, as a result of which people amassed savings that could be
invested, fostering the development of an advanced banking system. Most
of the established banks that dominate the investing world began in the
1800s, including Goldman Sachs and Citigroup. 89

20th Century Investing

The 20th century saw new ground being broken in investment theory, with
the development of new concepts in asset pricing, portfolio theory, and risk
management. In the second half of the 20th century, many new investment
vehicles were introduced, including hedge funds, private equity, venture
capital, REITs, and ETFs.10

In the 1990s, the rapid spread of the internet made online trading and
research capabilities accessible to the general public, completing the
democratization of investing that had commenced more than a century
ago.11

21st Century Investing

The bursting of the dotcom bubble—a bubble that created a new
generation of millionaires from investments in technology-driven and online
business stocks—ushered in the 21st century and perhaps set the scene
for what was to come.

In 2001, the collapse of Enron took center stage, with its full display of
fraud that bankrupted the company and its accounting firm, Arthur
Andersen, as well as many of its investors. 12

One of the most notable events in the 21st century, or history for that
matter, is the Great Recession (2007-2009) when an overwhelming
number of failed investments in mortgage-backed securities crippled
economies around the world. Well-known banks and investment firms went
under, foreclosures surmounted, and the wealth gap widened.
The 21st century also opened the investing world to newcomers and
unconventional investors by saturating the market with discount online
investment companies and free-trading apps, such as Robinhood.

Investing vs. Speculation

There is no clear definition separating investing from speculation used for
legal or regulatory purposes. All forms of investment incur risk and include
a speculative hope that the investment will pay off. Because the outcome
is uncertain, there is little to distinguish between the two activities.
However, some generalities do apply when attempting to categorize these
activities:

 The amount of returns sought: Speculators often seek an extreme

degree of return, whereas investors may be content with a less
flashy payout.
 The holding period of the investment: Investing typically involves
a longer holding period, measured quite frequently in months or
years; speculation usually involves less than a few months, although
some speculators are content to wait years for their bets to pay off.
 The frequency of investments: Investments can be initiated more
frequently if the holding period is shorter. Speculators tend to have a
higher frequency of investment decisions than investors when
comparing within a common timeframe.
 Source of returns: Price fluctuation is the exclusive source of return
for speculators. Investors may be able to gain income through
dividends, coupons, or other interest payments, though they
certainly hope to gain from price appreciation as well.

Price volatility is often considered a common measure of risk, but a

comparatively lower investment size can offset price volatility. So, although
blue-chip, dividend-paying stocks may seem much less risky than small-
cap growth stocks or cryptocurrency investments, the actual risk may have
more to do with the comparative risk taken on by the individual investor.

Proper risk management has more to do with the position size of one's
investment than the total investment capital. The amount of risk in an
investing strategy is also influenced by the frequency with which an
investor takes on risk in an individual investment. Speculators tend to have
a higher frequency of initiating risk. Thus, speculation is considered riskier.

Example of Return From Investing

Assume you purchased 100 shares of XYZ stock for $310 per share
($31,000) and sold it exactly a year later for $46,020. What was your
approximate total return, ignoring commissions? Keep in mind, XYZ does
not issue stock dividends. The resulting capital gain would be [ ( $46,020 -
$31,000 ) / $31,000 ] x 100 = 48.5%.

Now, imagine that XYZ had issued dividends during your holding period,
and you received $5 in dividends per share. Your approximate total return
would then be 50.06%:

 $46,020 + $500 = $46,520

 [ ( $46,520 - $31,000 ) / $31,000 ] x 100 = 50.06%

How Can Investing Grow My Money?

Investing is not reserved for the wealthy. You can invest nominal amounts.
For example, you can purchase low-priced stocks, deposit small amounts
into an interest-bearing savings account, or save until you accumulate a
target investment amount.

If your employer offers a retirement plan, such as a 401(k), allocate small

amounts from your pay until you can increase your investment. If your
employer participates in matching, you may realize that your investment
has doubled.

You can begin investing in stocks, bonds, and mutual funds or even open
an IRA. Starting with $1,000 is nothing to sneeze at. A $1,000 investment
in Amazon's IPO in 1997 would yield millions today. 13

This was mainly due to several stock splits, but it does not change the
result: monumental returns. Savings accounts are available at most
financial institutions and don't usually require a large amount to invest.
Savings accounts don't typically boast high interest rates, so shop around
to find one with the best features and most competitive rates.

Believe it or not, you can invest in real estate with $1,000. You may not be
able to buy an income-producing property, but you can invest in a
company that does. A real estate investment trust (REIT) is a company
that invests in and manages real estate to drive profits and produce
income. With $1,000, you can invest in REIT stocks, mutual funds, or
exchange-traded funds.

How Can I Start Investing?

You can choose the do-it-yourself route, selecting investments based on
your investing style, or enlist the help of an investment professional, such
as an advisor or broker. Before investing, it's important to determine your
preferences and risk tolerance. If you're risk-averse, choosing stocks and
options may not be the best choice.

Develop a strategy outlining how much to invest, how often to invest, and
what to invest in based on goals and preferences. Before allocating your
resources, research the target investment to make sure it aligns with your
strategy and has the potential to deliver the desired results. Remember,
you don't need a lot of money to begin, and you can modify your plans as
your needs change.

What Are Some Types of Investments?

There are many types of investments to choose from. Perhaps the most
common are stocks, bonds, and ETFs/mutual funds. Other types of
investments to consider are real estate, CDs, annuities, cryptocurrencies,
commodities, collectibles, and precious metals.

Is Investing the Same as Gambling?

Investing and gambling are similar in one aspect: the variability of chance.
However, these activities differ in how they are designed, approached, and
regulated. Gambling is confined to what can happen within a given event.
In some cases, the game's rules are dictated by a person or entity that
offers the game, and the rules can be constructed to benefit them over
time.

Investing differs from gambling because the regulators—government and

industry entities—only regulate the markets. As such, their incentive is to
create a fair and orderly playing field rather than to try and profit.

The Bottom Line

Investing is the act of allocating resources into a venture that's expected to
generate income or profits. The type of investment you choose will likely
depend on what you seek to gain and how sensitive you are to risk.

In general, lower risk yields lower returns, while higher risk yields higher
returns. You can make investments in stocks, bonds, real estate, precious
metals, and more.
 You can invest with money, assets, cryptocurrency, or other mediums of
exchange and choose different types of investment vehicles, such as
stocks, bonds, mutual funds, and real estate. Each investment type carries
different levels of risks and potential rewards.

Investors can choose the DIY route or enlist the services of a licensed and
registered investment advisor. Technology has also afforded investors the
option of receiving automated investment solutions by way of robo-
advisors.

Chapter – 8 ( Constructing Investment Planning )

What is the construction of an investment portfolio?

Adopt the portfolio construction process

The process includes four steps: 1) Benchmark 2) Budget 3) Invest and 4) Monitor.
Learn about financial portfolio management
 Establish the different types of portfolio investments. ...
 Put your money into different funds. ...
 Diversify across the same asset classes. ...
 Diversify across different asset classes. ...
 Determine your asset split based on your age. ...
 Continue to tweak your portfolio.

4 Steps to Building a Profitable Portfolio

Rattankun Thongbun/Getty Images

7 Reasons You Haven’t Received Your Tax Refund

Close
A well-diversified portfolio is vital to any investor's success. As an
individual investor, you need to know how to determine an asset
allocation that best conforms to your personal investment goals and risk
tolerance. In other words, your portfolio should meet your future capital
requirements and give you peace of mind while doing so. Investors can
construct portfolios aligned to investment strategies by following a systematic
approach. Here are some essential steps for taking such an approach.

KEY TAKEAWAYS
  Overall, a well-diversified portfolio is your best bet for the consistent
long-term growth of your investments.
 First, determine the appropriate asset allocation for your investment
goals and risk tolerance.
 Second, pick the individual assets for your portfolio.
 Third, monitor the diversification of your portfolio, checking to see how
weightings have changed.
 Make adjustments when necessary, deciding which underweighted
securities to buy with the proceeds from selling the overweighted
securities.

Step 1: Determining Your Appropriate Asset

Allocation
Ascertaining your individual financial situation and goals is the first task in
constructing a portfolio. Important items to consider are age and how much
time you have to grow your investments, as well as the amount of capital
to invest and future income needs. An unmarried, 22-year-old college
graduate just beginning their career needs a different investment strategy
than a 55-year-old married person expecting to help pay for a child's
college education and retire in the next decade.

A second factor to consider is your personality and risk tolerance. Are you
willing to hazard the potential loss of some money for the possibility of
greater returns? Everyone would like to reap high returns year after year,
but if you can't sleep at night when your investments take a short-term
drop, chances are the high returns from those kinds of assets are not worth
the stress.

Clarifying your current situation, your future needs for capital, and your risk
tolerance will determine how your investments should be allocated among
different asset classes. The possibility of greater returns comes at the
expense of greater risk of losses (a principle known as the risk/return
tradeoff). You don't want to eliminate risk so much as optimize it for your
individual situation and lifestyle. For example, the young person who won't
have to depend on his or her investments for income can afford to take
greater risks in the quest for high returns. On the other hand, the person
nearing retirement needs to focus on protecting their assets and drawing
income from these assets in a tax-efficient manner.

Conservative vs. Aggressive Investors

Generally, the more risk you can bear, the more aggressive your portfolio
should be, devoting a larger portion to equities and less to bonds and other
fixed-income securities. Conversely, the less risk you can assume, the
more conservative your portfolio will be. Here are two examples: one for a

onservative investor and one for a moderately aggressive investor.

Image by Julie Bang © Investopedia 2020

The main goal of a conservative portfolio is to protect its value. The
allocation shown above would yield current income from the bonds, and
would also provide some long-term capital growth potential from the
investment in high-quality equities.
Image by Julie Bang © Investopedia 2020

Step 2: Achieving the Portfolio

Once you've determined the right asset allocation, you need to divide your
capital between the appropriate asset classes. On a basic level, this is not
difficult: equities are equities and bonds are bonds.

But you can further break down the different asset classes into subclasses,
which also have different risks and potential returns. For example, an
investor might divide the portfolio's equity portion between different
industrial sectors and companies of different market capitalizations, and
between domestic and foreign stocks. The bond portion might be allocated
between those that are short-term and long-term, government debt versus
corporate debt and so forth.

There are several ways you can go about choosing the assets and
securities to fulfill your asset allocation strategy (remember to analyze the
quality and potential of each asset you invest in).

Stock Picking
Choose stocks that satisfy the level of risk you want to carry in the equity
portion of your portfolio; sector, market cap, and stock type are factors to
consider. Analyze the companies using stock screeners to shortlist potential
picks, then conduct a more in-depth analysis of each potential purchase to
determine its opportunities and risks going forward. This is the most work-
intensive means of adding securities to your portfolio and requires you to
regularly monitor price changes in your holdings and stay current on
company and industry news.

Bond Picking
When choosing bonds, there are several factors to consider including the
coupon, maturity, the bond type, and the credit rating, as well as the
general interest-rate environment.

Mutual Funds
Mutual funds are available for a wide range of asset classes and allow you
to hold stocks and bonds that are professionally researched and picked
by fund managers. Of course, fund managers charge a fee for their services,
which will detract from your returns. Index funds present another choice;
they tend to have lower fees because they mirror an established index and
are thus passively managed.

Exchange-Traded Funds (ETFs)

If you prefer not to invest in mutual funds, ETFs can be a viable
alternative. ETFs are essentially mutual funds that trade like stocks.
They're similar to mutual funds in that they represent a large basket of
stocks, usually grouped by sector, capitalization, country, and the like.
However, they differ in that they're not actively managed but instead track a
chosen index or another basket of stocks. Because they're passively
managed, ETFs offer cost savings over mutual funds while providing
diversification. ETFs also cover many asset classes and can be useful for
rounding out your portfolio.

Step 3: Reassessing Portfolio Weightings

Once you have an established portfolio, you need to analyze
and rebalance it periodically, because changes in price movements may
cause your initial weightings to change. To assess your portfolio's actual
asset allocation, quantitatively categorize the investments and determine
their values' proportion to the whole.

The other factors that are likely to alter over time are your current financial
situation, future needs, and risk tolerance. If these things change, you may
need to adjust your portfolio accordingly. If your risk tolerance has
dropped, you may need to reduce the number of equities held. Or perhaps
you're now ready to take on greater risk and your asset allocation requires
that a small proportion of your assets be held in more volatile small-cap
stocks.

To rebalance, determine which of your positions are overweighted and

underweighted. For example, say you are holding 30% of your current
assets in small-cap equities, while your asset allocation suggests you
should only have 15% of your assets in that class. Rebalancing involves
determining how much of this position you need to reduce and allocate to
other classes.

Step 4: Rebalancing Strategically

Once you have determined which securities you need to reduce and by
how much, decide which underweighted securities you will buy with the
proceeds from selling the overweighted securities. To choose your
securities, use the approaches discussed in Step 2.
IMPORTANT

When rebalancing and readjusting your portfolio, take a moment to

consider the tax implications of selling assets at this particular time.
Perhaps your investment in growth stocks has appreciated strongly over
the past year, but if you were to sell all of your equity positions to
rebalance your portfolio, you may incur significant capital gains taxes. In this
case, it might be more beneficial to simply not contribute any new funds to
that asset class in the future while continuing to contribute to other asset
classes. This will reduce your growth stocks' weighting in your portfolio
over time without incurring capital gains taxes.

At the same time, always consider the outlook of your securities. If you
suspect that those same overweighted growth stocks are ominously ready
to fall, you may want to sell in spite of the tax implications. Analyst
opinions and research reports can be useful tools to help gauge the outlook
for your holdings. And tax-loss selling is a strategy you can apply to reduce
tax implications.

What is a Four Fund Portfolio?

A four-fund portfolio is an investment portfolio used by some passive index
investors. It typically consists of mutual funds focused on domestic stocks,
domestic bonds, international stocks, and international bonds. This
strategy offers strong diversification and the ability to balance the portfolio
to your liking.

How Should I Rebalance My Portfolio?

Rebalancing means buying and selling investments to ensure your
investment portfolio maintains your desired asset allocation. For example,
if you have become overweight on stocks and underweight on bonds, you
can sell some of your stocks and use the money to buy bonds. Be sure to
consider capital gains taxes and consider strategies like tax-loss
harvesting to help reduce your tax liability.

Why is Diversification Important?

Diversifying your portfolio across different asset types can help reduce the
volatility of your portfolio. For example, since 1926 a portfolio composed
solely of stocks has seen single-year drops as large as 43.1%. Meanwhile,
portfolios with a 50/50 split of stocks and bonds have only seen a 22.5%
one-year drop at worst.1
Is Stock Picking Hard?
Many investors try to pick individual stocks in the hope of building a
profitable portfolio and beating the market's overall returns. While beating
the market is possible, it's exceedingly hard to do, even with experience
and a lot of time to research. Between 2013 and 2023, only 10% of
actively managed mutual funds saw more than half of their stock picks
beat the market's average, meaning even professional investment
managers struggle with stock picking. 2

The Bottom Line

Throughout the entire portfolio construction process , you must remember to
maintain your diversification above all else. It is not enough to own
securities from each asset class; you must also diversify within each class.
Ensure that your holdings within a given asset class are spread across
various subclasses and industry sectors.

As we mentioned, investors can achieve excellent diversification by using

mutual funds and ETFs. These investment vehicles allow individual
investors with relatively small amounts of money to invest in a portfolio of
stocks or other assets.