Mutual funds
Someone else does the buying. You still make the decisions that matter.
Invest in professionally managed portfolios designed to suit different financial goals, investment horizons and risk profiles.
- What you own
- Units in a schemeA proportional share of everything the scheme holds.
- What a unit is worth
- The net asset valueStruck once each business day, after the market closes.
- Where your money sits
- With a trustee and custodianSeparate from the fund house, which only manages it.
- Recurring cost
- The expense ratioDeducted inside the scheme, so it never appears as a debit.
- Direct or regular
- Two plans, one portfolioIdentical holdings; the direct plan simply costs less.
- Categories
- Defined by SEBIWhat a scheme may hold is set by its category, not by its name.
- Smallest investment
- As low as the scheme allowsMany accept a very small monthly amount.
Scheme categories and their definitions, expense ratio limits, exit loads, cut-off times, minimum amounts, riskometer readings and tax treatment are set by SEBI, the fund houses and the government, and all of them are revised from time to time. This page describes how mutual funds work rather than what any scheme holds or charges today. The scheme information document, the current factsheet and your account statement are the authoritative record, and nothing here recommends any scheme, category or fund house.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully. The value of your units can fall as well as rise and is not guaranteed by anyone, including the fund house, the trustee or us. Past performance, whether of a scheme, a category or a fund manager, does not indicate what will happen next, and a scheme that led its category for three years has no obligation to do so for a fourth. A debt fund is not a deposit: it can fall in value when interest rates move and it carries the credit risk of whatever it has lent to. Nothing on this page is a recommendation to invest in any scheme, category or fund house, and it takes no account of your circumstances, your goals or your tax position.
Four things worth knowing before the first investment
None of these are about which scheme to pick. All four decide more of the outcome than the pick does.
You own a slice of a pool, not a promise
Money from many investors is pooled and invested according to a stated mandate, and you hold units representing your proportional share of everything in it. Your money is held by a custodian and overseen by a trustee, separate from the fund house, which is paid to manage it and nothing more.
Consequence: the fund house cannot use your money for its own purposes, and it also cannot promise you a return.
The category decides far more than the name
Scheme names are marketing; categories are rules. SEBI defines what each category may hold, how much of it, and in what, so two schemes in the same category are doing broadly comparable things whatever they are called. The category is the first thing to establish and the name is close to the last.
Consequence: read the category and the mandate before the fund name, the star rating or the recent return.
Direct and regular are the same portfolio
Every scheme has two plans holding exactly the same securities, managed by the same person, on the same day. The regular plan carries a commission paid to a distributor out of the scheme; the direct plan does not, so it costs less and its net asset value is therefore higher. The difference compounds for as long as you stay invested.
Consequence: if you are not receiving advice you value, you are paying for advice you are not getting.
The return a fund reports is not the one investors get
Funds report the return of the scheme over a period. Investors earn the return on the money they actually had invested at each point, and because money tends to arrive after a good run and leave after a bad one, the second figure is usually smaller. The gap is made entirely of decisions, not of performance.
Consequence: staying invested through a bad year is worth more than picking a slightly better scheme.
Six families of scheme, and they answer to different things
Every open-ended scheme sits in a defined category, and the category tells you what it may hold, what will move it, and what kind of bad year to expect.
That is a far more useful starting point than a name or a rating.
Equity schemes
Mainly shares of listed companiesSchemes that invest predominantly in equity, divided by SEBI into sub-categories according to the size of company they hold, the style they follow or the theme they pursue. This is where long-term growth is sought and where the worst years live.
- The sub-category tells you far more than the name: what size of company, what concentration, what freedom the manager has.
- Index schemes sit here too, and they charge the least because they follow a published rule rather than an opinion.
- Sector and thematic schemes are the narrowest and are usually launched after the theme has already done well.
What to check first
- The sub-category, and how concentrated the portfolio actually is
- The expense ratio, compared like for like within the sub-category
- How far the category fell in past bad years, and whether you would have stayed
- Whether a broad index scheme would do the same job for less
Buying the scheme at the top of last year's table. It is usually the one that took the risk that happened to be rewarded, and the sector schemes that lead those tables are at their most expensive precisely when they are most admired.
Category definitions, the sub-categories within each family and what each may hold are prescribed by SEBI and are amended from time to time; the scheme information document states which category a scheme belongs to and what it is permitted to invest in. This section describes the character of each family rather than an inventory of what is available today, and nothing here is a recommendation to invest in any category or scheme.
Debt-oriented, hybrid or equity
The single most useful question in this whole subject is when you will need the money. The second is how large a fall you could sit through without selling. Between them they narrow six families to one, before any scheme name is involved.
Which family of scheme fits the money you are investing
Two questions about this particular pot of money, not about you in general. The matching column below is highlighted. This describes how the three families behave; it is not advice about any scheme, and it takes no account of your circumstances.
You have five years or more and you believe you would leave a falling holding alone. That combination is what equity is built for: a long period for the return to arrive and the temperament to stay invested while it does not. Start with a broad scheme rather than a narrow one, check the expense ratio against comparable schemes in the same sub-category, and look at how far the category has fallen in past bad years so the first one is not a surprise.
This matches a stated horizon and tolerance to the characteristics of a family of schemes. It is not investment advice, it takes no view on any scheme, fund house or moment, and it does not consider your income, liabilities, tax position or other holdings. Mutual fund investments are subject to market risks; read all scheme related documents carefully.
Attribute Debt-oriented Hybrid Equity
| What it mainly holds | Bonds, government securities and short-dated paper | A stated mix of both, within category limits | Shares of listed companies |
| What moves it | Interest rates and credit quality | Both, in the proportion it holds | Company earnings and market sentiment |
| Horizon it is built for | Months to a few years | Three years and upwards | Five years and upwards |
| How a bad year feels | Flat to mildly negative, usually | Uncomfortable but cushioned | Genuinely painful, and normal |
| How steady it is | The steadiest of the three, and not fixed | In between, by construction | The least steady, by a wide margin |
| Main risk | Rates rising, and the credit it has lent to | Whichever side is larger at the time | The market falling and staying down |
| Typical expense ratio | Lower | In between | Higher, and lowest of all on index schemes |
| Exit load | Often none, or only for a very short period | Usually a short period | Usually a short period |
| Tax treatment | Per the rules for non-equity schemes | Depends on the equity proportion held | Per the rules for equity-oriented schemes |
| Good for | Money with a date on it, and an emergency reserve | A single holding doing two jobs | Money with no date on it for years |
| Bad for | Beating inflation over a long period | Anyone who wants to control the mix themselves | Anything you will need within a few years |
Answer it per pot, not per person
The same investor can hold a debt-oriented scheme for the deposit on a flat two years away and an equity scheme for retirement in twenty, and be right about both at once. The question belongs to the money and its date, not to a permanent description of your appetite for risk.
Worth doing: list what each pot is for and when it is needed, then answer the two questions separately for each.
A debt fund is not a deposit
It is steadier than equity and it is not fixed. The value falls when interest rates rise, a longer-dated scheme moves more than a short-dated one for the same change, and a scheme holding weaker credits can lose money in a way a government securities scheme cannot. Steady is a description, not a guarantee.
Worth doing: read what the scheme actually lends to, and how long its average holding runs, before treating it as the safe part.
The second question is the honest one
Almost everybody says they can sit through a fall, and a great many people discover otherwise the first time they see one. If you suspect you would sell, that is useful information rather than a failing, and the right response is a gentler holding you will actually keep rather than an aggressive one you will abandon at the worst moment.
Worth doing: look at how far your chosen category has fallen in past bad years, and ask whether you would have stayed.
What a goal needs, and what the plan choice costs
Both calculators work on figures you type in. Neither knows a scheme, a net asset value or a past return, and neither of them is a projection. What they do is show you the shape of compounding, which is the part most people underestimate in both directions.
Work backwards, not forwards. Most people start with an amount they can spare and hope it is enough. Starting from the goal tells you immediately whether the plan is realistic, and if the monthly figure that comes out is impossible, the honest responses are a longer period, a smaller goal or a larger contribution. Assuming a higher return is not one of them.
Contributions are treated as made at the end of each month and the assumed return is applied monthly. Tax, exit loads and inflation are excluded, so a goal fifteen years away will cost more in rupees by then than it does today.
Three things decide the outcome, and you control two of them. The return is not yours to choose, however confidently anyone quotes one. The amount you invest and the period you stay invested are entirely yours, and so is the cost you agree to pay. Between a scheme that might do slightly better and a plan that certainly costs less, only one of those two is a fact you can check before you commit.
Six instructions worth knowing by name
All of them are standing instructions rather than products. Each removes one decision from your month, which is the entire reason they work.
SIP, the systematic investment plan
A fixed amount invested on a fixed date, automatically. It buys more units when the net asset value is low and fewer when it is high, which averages your cost without requiring you to have a view. Its real value is behavioural: it removes the monthly decision, and the monthly decision is what people get wrong.
Worth knowing: the date barely matters. Continuing through a bad year matters enormously.
Step-up, the one people forget
An instruction that raises the SIP amount by a set percentage once a year. Incomes rise and monthly investments usually do not, and closing that gap changes the eventual result far more than chasing a slightly better scheme ever will. It costs nothing to set up and it is entirely within your control.
Worth knowing: set it on the same date every year so it happens without another decision.
STP, the systematic transfer plan
Moves a fixed amount from one scheme to another at set intervals, usually from a short-duration scheme into an equity one. It is how a large lump sum is put to work gradually without leaving it in a bank account, and each transfer is a redemption from one scheme and a purchase in the other.
Worth knowing: each transfer is a redemption, so exit load and tax apply to the scheme you are moving out of.
SWP, the systematic withdrawal plan
Redeems a fixed amount on a fixed date and credits it to your bank account. It is the usual way of drawing a regular income from a holding, and because you are redeeming units rather than receiving a distribution, you keep control of how much comes out and when.
Worth knowing: withdrawing more than the holding grows by will exhaust it. The plan does not warn you.
Growth or income distribution
Two options within the same scheme. Growth retains everything and reflects it in the net asset value. The income distribution option pays some of it out, which reduces the net asset value by the amount paid and is taxed in your hands. It is a partial withdrawal with a friendlier name, not an extra return.
Worth knowing: if you want a regular income, an SWP usually gives you more control than the distribution option.
Switch, and why it is not free
Moving from one scheme to another, or between plans of the same scheme, is a redemption followed by a purchase. That means exit load where applicable and a capital gain or loss on the units sold, even though no money reached your bank account. It is the most commonly underestimated cost in this whole subject.
Worth knowing: a switch from regular to direct is still a redemption, so check the tax before doing it in one go.
Six things to look at, in this order
Every scheme publishes a factsheet each month and a scheme information document once. Between them they answer every question worth asking, and the answers are free, standardised and comparable across fund houses.
The category and the mandate
What the scheme is permitted to hold, in what proportion, and what it is trying to do. This is the first line to read and it disposes of most schemes immediately, because a great many of them are simply not doing the job you had in mind.
Where: the top of the factsheet, and the investment objective in the scheme information document.
The riskometer, and what it is not
A standardised reading of the scheme's risk on a defined scale, recalculated monthly from what the scheme actually holds. It is genuinely useful for ruling things out and it is not a prediction. A scheme can be correctly marked at a given level and still have a very bad year.
Where: on the factsheet and in every advertisement the scheme runs, by requirement.
The expense ratio, both plans
Stated separately for the direct and regular plans. It is charged on your whole holding every year, deducted inside the scheme so you never see it as a debit, and it is the only number on the page that is a fact about the future rather than about the past.
Where: the factsheet, and updated on the fund house's website whenever it changes.
The portfolio, and how concentrated it is
The full list of holdings is published monthly. What is worth looking at is not the individual names but the shape: how much sits in the top ten, how much in one sector, and for a debt scheme, what it has lent to and for how long. That shape is what produces the bad years.
Where: the monthly portfolio disclosure, on the fund house's website.
The exit load and the lock-in
What it costs to leave, and whether you may leave at all. Most schemes charge a load only for a short initial period; some categories carry a genuine lock-in during which redemption is simply not available. Both are stated plainly and both are easy to discover only after it is inconvenient.
Where: the scheme information document, under load structure.
Performance, last and least
Against the scheme's own benchmark, over several periods rather than one, and next to the category. Read it last, because it describes a past that nobody is obliged to repeat, and because a scheme that led for three years has often done so by taking a risk that has not yet been paid for.
Where: the factsheet, always alongside the benchmark it is required to show.
Six ways this goes wrong, and only one is the market's fault
Markets falling is on nobody's list of surprises. These are the ones that turn an ordinary fall into a poor long-term result.
Stopping the SIP when it is working hardest
An instalment made during a fall buys the most units, which is exactly when people cancel. Stopping in a bad year and restarting after a recovery converts the single genuine advantage of a systematic plan into its opposite, and it is the most common and most expensive mistake in this entire subject.
Guard: decide now, in writing, that instalments continue through falls. Then do not revisit it during one.
Owning fourteen schemes that hold the same shares
Adding schemes feels like diversification and usually is not. Several large-cap schemes from different fund houses hold substantially the same companies, so the result is the market's return, achieved with more paperwork and a higher average cost than one broad holding would have charged.
Guard: look at the overlap in the top holdings before adding another scheme to the same category.
Buying the top of the performance table
Last year's best scheme is usually the one that took the risk that happened to be rewarded last year. Choosing by recent return means systematically buying whatever has just become expensive, and the sector and thematic schemes that top those tables are launched precisely when the theme is most crowded.
Guard: if the reason to buy is a number from the last twelve months, it is not a reason.
Treating a debt scheme as a deposit
It is the steadier part of a portfolio and it is not fixed, not guaranteed and not immune. Rates rising pushes prices down, a longer-dated scheme moves more than a short one, and a scheme holding weaker borrowers can lose money outright. The word safe does not appear in any scheme document for a reason.
Guard: match the scheme's duration to when you need the money, and read what it lends to.
Switching, repeatedly, for small reasons
Every switch is a redemption and a fresh purchase: exit load where it applies, a capital gain crystallised, and the compounding clock reset on the holding period. A portfolio rearranged twice a year quietly pays for the privilege, and the rearranging almost never earns back what it costs.
Guard: write down what would make you exit a scheme, and exit only for those reasons.
Leaving the housekeeping undone
No nominee registered, an old bank account on the folio, a KYC record that has gone stale, an address nobody updated. None of it affects the return and all of it affects whether the money reaches the right person without a legal process. It takes an afternoon and it is the highest-value afternoon on this page.
Guard: register a nominee, verify the bank details and check the consolidated account statement once a year.
Every line, what it is charged on, and who charges it
Rates and limits move with circulars and with the Finance Act, so the table gives you the structure and tells you where the current figure is published. On this product almost everything is deducted inside the scheme, which is why it is so easy to overlook.
| Line item | Calculated on | Levied by | Where the current rate is published |
|---|---|---|---|
| Expense ratio | The value of your holding, every year. It is deducted inside the scheme, so it never appears as a debit anywhere. | Fund house | The factsheet, for both plans |
| Commission, in the regular plan | Your holding. It is paid to the distributor out of the scheme and is the reason the regular plan's expense ratio is higher. | Fund house | The difference between the two plans |
| Exit load | The redemption value, if you leave within the period the scheme states. Many schemes charge none at all. | Fund house | The scheme information document |
| Stamp duty | Every purchase, switch-in and dividend reinvestment, on the amount invested. | Government | Notified rate, under the Stamp Act |
| Brokerage on an ETF | Only if you buy a listed scheme on the exchange rather than from the fund house. | Yukti | ₹20 per executed order |
| Securities transaction tax | The redemption value of units in an equity-oriented scheme. | Government | Notified rate, in the Finance Act |
| Account opening | Nothing. There is no fee to open a folio and no fee to hold one. | Yukti | Free |
| Entry load | Nothing. Entry loads are not permitted on mutual fund schemes. | Nobody | Prohibited by regulation |
| Depository charge | Only if the units are held in demat form and are sold from it. | Depository | The published tariff sheet |
The expense ratio is the cost that matters and the one you will never see billed, because it is taken from the scheme's assets before the net asset value is struck. Your account statement records every transaction and the units held; the factsheet records what you are paying for them.
See what the plan choice is worth before you choose it
The second calculator takes the two expense ratios from the factsheet and shows what the difference between them becomes over the period you intend to invest. It is thirty seconds of arithmetic and it is the clearest comparison available between two things holding exactly the same portfolio.
How the tax on a mutual fund is put together
Rates, thresholds and holding-period boundaries are set in the Income-tax Act and amended by each Finance Act, so they are not quoted here. The structure is what lets you ask the right question of the right person.
Nothing is taxed until you redeem
A growth-option holding produces no taxable event while you simply hold it, however much the net asset value has risen. Tax arises when units are redeemed, switched or transferred, which is one reason a switch made casually can be an expensive decision.
Consequence: the tax is a function of when you sell, and that timing is yours.
Equity-oriented and everything else are different
Whether a scheme is treated as equity-oriented for tax depends on how much it actually holds in domestic equity, not on what it is called. Equity-oriented schemes have their own holding period and rates, with a threshold of long-term gain exempt each year; everything else follows a different set of rules.
Before you buy: the scheme information document states how the scheme is classified for tax.
Every SIP instalment has its own clock
Each instalment is a separate purchase with its own date, so on redemption the units are taken out in the order they were bought and each tranche is classified short or long term on its own. A three-year-old SIP redeemed in full contains both kinds of gain at once.
Consequence: a capital gains statement for the year is not optional reading. The fund house provides one.
A switch is a sale
Moving between schemes, between plans of the same scheme, or from regular to direct, is a redemption followed by a purchase. Tax applies on the units redeemed exactly as it would on a sale, even though no money reached your bank account and nothing felt like a withdrawal.
Practical effect: a large regular-to-direct switch may be worth staging rather than doing in one go. Ask first.
Distributions are income
Amounts paid out under the income distribution option are added to your total income and taxed at the rate applicable to you, with tax deducted at source above a threshold. They are not an extra return: the net asset value falls by what is paid out, so it is a partial withdrawal that happens to be taxed differently from one.
Practical effect: for a regular income, compare this against an SWP before choosing. The answer depends on your slab.
Losses are not wasted
A capital loss can be set off against capital gains under rules that distinguish short-term from long-term, and what cannot be used in the year can generally be carried forward for a number of years, provided the return is filed within the due date.
We are not tax advisers.: For anything beyond the structure described here, ask a chartered accountant.
This is a description of how the tax treatment is structured and is not tax advice. Rates, thresholds, holding periods and the classification of a scheme depend on the law in force for the relevant year and on your own circumstances. Please consult a qualified tax professional.
The mutual fund glossary
Every term you will meet on a factsheet, in a scheme document or on an account statement, defined in one or two sentences. Type to search, or jump by letter.
All 48 terms.
The record of every transaction in a folio and the units held. The registrar sends it to you directly, independently of any distributor or broker.
The asset management company: the fund house that manages the schemes. It is paid a fee and does not hold your money, which sits with a custodian.
The index a scheme measures itself against. It must be shown alongside the scheme's own return in every performance disclosure.
The difference between what you redeemed units for and what they cost you. Short-term and long-term gains are taxed differently and the boundary is set in the Income-tax Act.
The classification prescribed by SEBI that determines what a scheme may hold and in what proportion. It tells you far more than the scheme's name does.
A scheme with a fixed maturity, subscribed during its offer period and not open for ongoing purchase or redemption. Most schemes people hold are open-ended instead.
A periodic statement listing your holdings across fund houses, sent to you directly. Reading it once a year catches most housekeeping problems.
The total value of everything a scheme holds. Also called assets under management.
The risk that a borrower a debt scheme has lent to does not pay. It is the risk a government securities scheme largely avoids and a corporate bond scheme does not.
The institution that actually holds the scheme's securities, separate from the fund house that manages them.
The notified time by which a request and the money must both be with the fund for that business day's net asset value to apply. It differs between scheme types.
The version of a scheme bought without a distributor. Identical portfolio, no commission paid out of the scheme, and therefore a lower expense ratio and a higher net asset value.
A measure of how much a debt scheme's value moves for a given change in interest rates. Longer duration means a larger move in both directions.
A scheme holding enough in domestic equity to be treated as equity for tax. The threshold is defined in law, not by the scheme's name.
A charge deducted from the redemption value if you leave within a period the scheme states. Many schemes charge none at all.
The annual cost of running a scheme, expressed as a percentage of assets and deducted inside the scheme. You never see it billed, which is why it is the cost most often ignored.
The monthly document carrying the scheme's category, portfolio, expense ratio, riskometer and performance against its benchmark. Free, standardised and comparable across fund houses.
The account number under which your holding with a fund house is recorded by the registrar.
The person responsible for the scheme's investment decisions within the mandate its category allows. The mandate constrains them far more than most investors realise.
A scheme that invests in other schemes. Its own expense ratio sits on top of the costs of the schemes it holds.
The option in which income is retained inside the scheme and reflected in the net asset value rather than paid out.
A scheme holding both equity and debt in proportions defined by its sub-category, with rebalancing handled inside the scheme.
The option in which part of the scheme's income is paid out. The net asset value falls by the amount paid and the receipt is taxed as your income.
An unlisted scheme that copies an index, bought from the fund house at the day's net asset value. The same idea as an index ETF, in a different wrapper.
The one-time identity verification required before investing. It is shared across fund houses, so it is completed once rather than for each scheme.
A period during which units cannot be redeemed at all. It applies to certain categories and to solution-oriented schemes, and it is real rather than a discouragement.
What a scheme says it will do with your money, stated in the scheme information document and constrained by its category.
The net asset value: what one unit is worth, struck once each business day after the market closes. A high or low figure says nothing about whether a scheme is expensive.
A new fund offer: the period during which a newly launched scheme is first open for subscription. A new scheme has no record to examine, which is worth remembering.
A scheme open for purchase and redemption on any business day, at the applicable net asset value. Most schemes people hold are of this kind.
A scheme that follows a published index rather than making its own selection. It cannot beat the index and is not attempting to.
The monthly publication of everything a scheme holds. The shape of it, rather than the individual names, is what produces the good and bad years.
The agency that maintains folios, processes transactions and sends you your account statements.
The version of a scheme bought through a distributor, whose commission is paid out of the scheme. Same portfolio as the direct plan, higher expense ratio.
A standardised reading of a scheme's risk level, recalculated monthly from what it actually holds. Useful for ruling things out, and not a prediction.
The effect of investing a fixed amount at regular intervals, which buys more units when the net asset value is low. A consequence of a steady habit rather than a strategy.
The legal document setting out what a scheme may invest in, what it charges, what its load structure is and what the risks are. The authoritative source for all of those.
A systematic investment plan: a fixed amount invested automatically at a fixed interval. Its real value is that it removes the monthly decision.
An instruction that raises the SIP amount by a set percentage each year. It changes the eventual result more than scheme selection usually does.
A systematic transfer plan: moving a fixed amount from one scheme to another at set intervals. Each transfer is a redemption and a purchase.
Moving between schemes or between plans of the same scheme. It is a redemption followed by a purchase, so load and tax apply even though no money reaches your bank.
A systematic withdrawal plan: redeeming a fixed amount at a fixed interval and crediting it to your bank account.
A scheme confined to one theme or sector. Far more concentrated than a broad scheme, and usually launched when the theme is already popular.
The full annual cost of a scheme including management fees and operating expenses, subject to limits prescribed by SEBI.
How far a passive scheme's actual result drifts from the index it follows. The most honest measure of whether it is doing its job.
The body that holds the scheme's assets in trust for unit holders and oversees the fund house. It is the reason your money is not on the fund house's books.
One share of the pool. What you own is a number of units; what they are worth is the net asset value on the day.
You. Units are held in your own name in a folio, or in demat form, and the registrar reports them to you directly.
Commonly asked about mutual funds
How much do I need to start?
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Direct or regular, and does it really matter?
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A scheme at ₹12 must be cheaper than one at ₹450, surely?
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Should I stop my SIP when the market falls?
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How many schemes should I hold?
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Why did I get a different NAV from the one I saw?
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Is a debt fund safe?
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What happens if the fund house runs into trouble?
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When should I sell a scheme?
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What is the one thing I should do today?
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