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Category: Financial Planning

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The Power of SIP

SIP or Systematic Investment Plan is a plan through which a person can invest a small amount in a mutual fund at regular intervals (monthly/quarterly).

 

Hardly pinches your pocket

Most of us spend some money every day buying and eating a snack worth around Rs 15 or 20. Just saving that amount enables one to start investing in mutual funds through SIP. 

 

That’s how small an amount is required to get started investing through SIP

While we all love and deserve to spend our hard-earned money, keeping a small amount aside each month can go a long way.

 

How often do we spend Rs 500 just over a whim? We may decide to order through one of the many food delivery applications or may meet up with a couple of friends at a coffee shop. Before we realize it, we end up spending around Rs 500.

 

Thanks to rising income and a higher standard of living, it doesn’t pinch as much as it used to.

 

After all, Rs 500 is what a couple of movie tickets or a couple of pizzas cost.

 

Most mutual funds allow investors to start investing with Rs 500 per month.

For an individual who has never invested earlier, starting with Rs 500 per month is also a promising beginning. 

 

Therefore, this becomes a great way for new investors to begin as regularly investing Rs 500 per month over a longer period wouldn’t impact the investor’s wallet even if there is irregular income due to job loss or sabbaticals.

 

Magic of compounding

Investors would agree that Compound interest is one of the most powerful forces in the world! This is because of the impact it has on one’s investments. Investing over a longer period will create substantial wealth.

 

Investing just Rs 500 per month can result in the following scenarios

 

  • Over 10 years, a CAGR of 12% will offer Rs 1.2 lakhs
  • Over 10 years, a CAGR of 15% will offer Rs 1.4 lakhs
  • Over 10 years, a CAGR of 18% will offer Rs 1.7 lakhs
  • Over 20 years, a CAGR of 12% will offer Rs 5 lakhs
  • Over 20 years, a CAGR of 15% will offer Rs 7.6 lakhs
  • Over 20 years, a CAGR of 18% will offer Rs 11.7 lakhs
  • Over 30 years, a CAGR of 12% will offer Rs 17.6 lakhs
  • Over 30 years, a CAGR of 15% will offer Rs 35 lakhs
  • Over 30 years, a CAGR of 18% will offer Rs 71.6 lakhs
  •  

Let us look at the illustrations which offer a CAGR of 12% across 10, 20, and 30 years.

 

Over 10 years, the investment of Rs 500 per month turns out to be worth Rs 1.2 lakh.

 

Over 20 years, it balloons up to Rs 5 lakhs, and over 30 years it swells up to Rs 17.6 lakhs!

 

We don’t lose our sleep

Over a shorter period markets tend to be volatile. Even after investing consecutively for 36 months, one may see that one’s portfolio is in red. If the invested amount is small, then a new investor can deal with this situation and not feel stressed about it. 

 

If a new investor starts a SIP with a larger amount in a small-cap fund during a choppy market, the variance in a portfolio can cause the investor to chicken out and withdraw his holdings much before the magic of rupee cost averaging plays out

 

As the performance of a mutual fund in which an investor has started a small SIP improves, she acquires confidence to invest higher amounts.

 

Suitable for risk-averse investors

Some individuals only prefer saving in fixed income or debt instruments. Due to certain reasons, such investors prefer the security of lower returns rather than the opportunity presented by equity funds to beat inflation. 

 

If they haven’t tasted the growth that an equity-based instrument brings in, introducing them to the same through small SIPs is a great idea.

 

Some investors may not stay through the course even though the monthly invested amount is tiny. Whereas some may realize the benefits of investing in equity-based instruments as well and may seek to increase the SIP amount.

 

Continue to invest in case of unforeseen circumstances

As the size of an investor’s portfolio increases, her confidence in the wealth-creating ability of mutual funds increases. 

 

After experiencing market volatility and continuing investments regularly, the investor begins to appreciate the process of creating wealth by investing through small SIP when the mutual fund portfolio starts growing. 

 

This offers a huge boost of confidence to the investor which may result in the investor bumping up her SIPs.

 

Acquire confidence to invest more over some time as our portfolio grows

 

We live in an uncertain world. Incomes have improved but job security, especially in private firms, is a big question mark. There may also be health-related situations that may cause an individual to stop working for a while. 

 

We are also living in a time when individuals wish to make the most out of their lives. This includes taking a sabbatical to travel or quitting a well-paying job to start up.

 

During such scenarios, one may not receive a regular flow of income. Or the size of income could reduce. Small SIPs can still be kept going as they may not cause a huge dent in an investor’s pocket during such uncertain times.

 

Easier to develop the habit of financial discipline

Financial discipline is rarely something we are born with. We have to work on it. Let us take the example of goal-based investing. A newbie investor may start a small SIP to invest a certain amount over 5 years to achieve a goal. 

 

However, after 18 months, this individual may be tempted to buy a new laptop and would be falling short of some amount. 

 

If this individual decides to redeem the corpus which has been created so far, he may not only lose the opportunity of creating more wealth but would also fall back on his efforts to achieve his goal. 

 

Therefore it is critical to adhere to financial discipline when it comes to investing. Starting small makes it easier to get used to this. It is worth creating a habit of putting aside a small amount. 

 

Over some time, this would make it easier to deal with following a discipline of investing larger amounts.

 

Claim tax benefits

Investors who are starting their journey in the world of investment can look at ELSS to not only help achieve financial goals but also save tax. ELSS stands for Equity Linked Savings Schemes. 

 

ELSS is riskier than the fixed income alternatives available for tax-saving under section 80C but has the shortest lock-in period among all these options. It also offers the potential for growth via equity.

 

Conclusion

Rome wasn’t built in a day. And neither is a huge corpus that can offer financial freedom. One can begin investing modestly and then slowly keep increasing SIPs without being influenced by noise.

 

Once an investor signs up to ride several market cycles then there is no looking back. 

 

This is because the investor begins to understand the importance of continuously investing during good times as well as bad. Small SIPs are bound to do wonders for our financial health.

 

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Secure your Child’s Future – Invest in Mutual Fund

Raising one’s child to become the best version of himself/herself is the biggest responsibility of the parents. From nutrition, healthcare to education – you want to provide the best in everything to your child. 

 

Apart from that you also have to make sure that their future is secured. 

 

And the only way to achieve this mammoth task without hurting your own financial future is by investing through mutual funds. 

 

1. Goals for your Child’s Future

The first step towards investing is to know what you are investing for, i.e. what is your investment goal. Now, as parents, you need to have financial goals set for your child.

 

For example, you have to save for your child’s school admissions, his or her college/higher education, maybe for a degree from a foreign university, his/her marriage, etc. Try to figure out what kind of money you would need to achieve each of the goals. 

 

Say, for your child’s school admission you need to save Rs 2 lakh; or Rs 80 lakh for your child’s higher education, etc. This way you can turn your dreams for your child into financial goals. 

 

2. Choose the right fund and start saving towards the goal

Since you know your goals, you should start saving towards them. Now, it is extremely important to choose the right mutual fund as per your goals. 

 

For example, let’s suppose you would need Rs 2 lakh for your child’s school admission in two years. This is a short term goal, for which the main focus is capital preservation. Ideally, you should invest in Short Duration Debt Funds or FDs to achieve the goal on time. 

 

Meanwhile, you might also want to save for his/her higher education. This is a goal that is at least 17 or 18 years away. And also, due to inflation, the amount that you would need would be much higher than it is today.

 

For example, an MBA course at a top-rated university costs around Rs 20 lakh today. And at the 10% annual inflation rate the same course would cost Rs 80 lakh in 15 years.

 

So to achieve this goal, you need to invest in equity mutual funds as they are your best bet to get inflation-beating returns consistently over the long run.

 

3. Start investing through SIPs to save towards your goal

The easiest way to get into the habit of disciplined investing in mutual funds is by starting a SIP.

 

Through a SIP, you put a fixed amount of money every month towards your mutual fund investment, which over the years helps you achieve the target amount in time. 

 

For example, say you want your child to attend a top-rated B-school and for that, you need to save Rs 80 lakh in 15 years. If you choose to invest in a mutual fund through a SIP, then your monthly SIP amount would be Rs 16,000 every month to reach the goal on time (assuming 12% average annual returns)

 

4. Increase your SIP investments periodically

As every year your income and salary increases, you should also increase your SIP investments every year. This can be a fixed 10% every year or as per the percentage of increment in your salary each year. 

 

Now, this timely boost every month can make a huge difference in the final amount that you will receive. Let’s explain this with a two case scenario. 

 

Say you want to save Rs 80 lakh in 15 years to be prepared to send your kid to B-school. In the first case, you keep investing Rs 16,000 per month all through to reach the goal in time.

 

Meanwhile, if you keep increasing the investment amount by 10% every year, you can save Rs 80 lakh in 12 years. (In both the cases the return amount assumed is 12% p.a., though there are no guaranteed returns.) 

 

And if you reach the goal early, you will be much well prepared when it’s finally time for your kid to go to B-school.

 

5. Do not stop/skip your SIP investments

To achieve a financial goal on time, this is the most important thing to follow. That is, never stop or skip your SIP investment. Remember, one wrong step can completely jeopardize your child’s future. 

 

The most important future goals of your children are time-bound, like your child’s school, college education, or higher education.

 

So if you skip, miss, or stop your investments midway meant for such goals, it would mean you might not have enough funds when it’s time to go for college/university. So be regular with your investments. 

 

However, if you had to stop investing for some reason, make sure to fill that gap later by adding money later. 

 

Conclusion: 

Ensuring that your child’s future is well secured is one of your biggest responsibilities. There are several milestones that they need to achieve at different ages. And you need to be financially prepared to help them achieve each of the goals. 

 

So set the goals, determine the timeframe, and start investing in the right mutual funds.

 

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Markets at all-time highs: Should you exit & re-enter at lower levels?

Markets at all-time highs: Should you exit & re-enter at lower levels?

The markets are high and they look overvalued. Many are worried about the expensive markets. But the bigger questions that investors must ask, are the following.

 

1. If it falls, then by how much?

 

2. What if it does not fall much; i.e., what if it is a time-bound correction and not a price-bound one?

 

3. ‘When’ will it fall?

 

Now, let’s apply this logic to the stock market. A lot of investors are in a dilemma: ‘should we book profits for now and enter again when the market falls?’

 

Let’s say you execute this thought and sell all your investments today with the plan of entering the market again when it falls.

 

And let’s assume your decision is proved right and the market falls drastically in the next few days or weeks.

 

If that happens, it is not good news. This is because if you are proven right in this decision, you will do it again in the future.

 

That is, you will ‘time the market’ again and again. And this is a bad habit. If you time the market 10 times in the next few years and you are wrong just 3-4 times out of 10, you may still lose money overall, forget about making great returns.

 

Check the records of successful investors. Do they follow this practice? If not, why? If they cannot or do not predict the market, what are the chances of you being right?

 

We have to be careful about the kind of actions we take, as they will become a habit. If this habit is a bad one, it will be very tough to leave it.

 

Now, let’s see if we can answer the three questions asked earlier.

 

1. What if there is only a time-bound correction?

Correction can be price-bound, the way we had in 2008 and March 2020. And it can be time-bound as well. That is, the markets remain in a certain range for a very long time.

 

Examples:

1) From July 2009 till December 2011, again, the Sensex was range-bound.
After moving in a range, the market started moving up again in both cases. If that happens again in the next few months or years, your plan to enter at low values may never fructify.

 

2) From December 1993 till February 1999 (for more than five years), the Sensex was range-bound between 3000 and 4000 levels.

 

2. If it falls, then by how much?

Did you invest a huge amount in March 2020? No? Maybe because you were waiting for the markets to fall more. We, as humans, have this deep desire to buy at the lowest level.

And who tells you where the bottom is? TV experts, your advisor, neighbors, colleagues, or friends?

 

Investing at the lowest point and exiting at the top is a matter of luck, not research. Therefore, the best strategy is to invest at every level. Even at today’s level in January 2021.

 

In a nutshell, make sure you are conscious of the habits you develop while investing in the stock market. This is what differentiates a successful and not-so-successful investor.

 

3. ‘When’ will markets fall?

I know investors who sold their portfolios in July 2020. The market had recovered significantly from its March lows and economic activity had hardly started.

Logically speaking, it was the right call. Many investors and experts were expecting the market to fall again.

 

We are in December 2020 now and we all know what has happened from July onwards. It is not about being ‘logically right,’ but about developing the right habit.

 

I also know a few of these investors who entered the market again in September-October 2020.

 

It was not easy for them to watch the markets grow continuously when they had sold their investments in anticipation of a fall.

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ELSS Mutual Fund – 3 Mistakes to Avoid

3 ELSS Mutual Fund Related Mistakes to Avoid

Of late, ELSS (Equity Linked Savings Schemes) or “Tax Saving Mutual Funds” have gained tremendous popularity. More and more investors are starting to believe that for saving taxes, ELSS Mutual Funds Sahi Hai!


And why not? As a category, Tax Saving Mutual Funds have grown investor wealth at nearly 18% per annum between 2013 and 2020 – nearly twice as fast as traditional choices such as NSC and PPF, and almost three times faster than traditional Life Insurance. 


Their shorter lock-in period of three years has added to their allure.


All the obvious advantages of ELSS Funds as an 80(C) instrument notwithstanding, they possess a few all too common pitfalls too. Here are three of them that you must avoid at all costs.


1.Not understanding the risks

Unfortunately, there are no free lunches in the investment world. Increased return potential will invariably be accompanied by an increased risk of capital erosion. Being equity-linked, ELSS funds are high risk in nature – during the crash of 2008 & Covid’19 crisis many ELSS funds fell to nearly half their value!


As an investor, you would do well to understand the risks associated with ELSS funds before taking a final decision.


If you’re very risk-averse, you may want to consider splitting your tax-saving amount between ELSS funds and other lower-risk instruments such as PPF or Tax Saving FD’s – lower returns notwithstanding.


Respecting your unique investment preferences and risk tolerance levels and critical for long-term investing success.


2.The Investing in one shot

A common ELSS Mutual Fund related mistake – is to hold back until the last moment and make a lump sum investment into a tax saving mutual fund and the very end of the fiscal year.


While this approach would benefit you if you luckily end up catching a market bottom; it could work against you if you end up investing at a market peak (neither of which can be predicted).


A much smarter approach would be to start a Mutual Fund SIP (Systematic Investment Plan) in an ELSS Mutual Fund at the start of the financial year, after computing your projected deficit for the year.


For instance – start a monthly SIP of Rs. 12,500 in 12 months will make 1,50,000. In doing so, you’ll be benefiting from a mechanism called “Rupee Cost Averaging” which greatly mitigates the risks associated with the stock markets.


In the long run, your returns will be a whole lot smoother and less volatile, and you’ll worry about your investments much less.


3.The Fixating on the 3-year lock-in

By fixating on the three-year lock-in, many investors harbor the mistaken belief that three years is a sufficient time horizon to invest in ELSS Mutual Funds. In reality, a time horizon of five to seven years is a lot more appropriate, since a Tax Saving Mutual Funds is essentially a 100% equity-oriented investment.


In situations where lump sum investments are made when market valuations are already stretched (such as today’s scenario), it is quite likely that ELSS returns could be flat to negative over a three-year period, with a couple of rough-rides thrown in during the course too.


In such situations, investors need to be willing to extend their time horizons by a further three to four years (beyond the mandated three-year lock-in) to really reap rewards. While you can derive a degree of comfort that the mandated lock-in will finish within 36 months, you need to mentally commit yourself to a longer investment horizon if you’re opting for a Tax Saving Mutual Fund.


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What to start early: Investment or Insurance?

INVESTMENT vs INSURANCE

Several reasons why you should start investing and also get insurance at a young age. But, at the time when we start our career, with a little income and too many expenses, the dilemma that we often face is should we invest or insure first?


Through this blog, I will try to help you get over this dilemma, i.e. whether to invest or insure first.


Before I get it into explaining whether to invest or insure first, it is important to understand why it is important to start investing and also buy insurance (health and life) early in life.


2 reasons why you should start investing early

Starting your investments early improves your spending habits

At the time when we start earning, our income is quite low. And if we want to save from that little amount of salary that we get, then we have to put restrictions on our spending by creating a budget. Over the years this simple practice becomes a habit, eventually improving our spending habits.


To adopt the simple habit of saving/investing, put away the part of the salary at the start of the month. And, then make a monthly budget with the rest of the money you have in hand. 


Say you earn Rs 30,000 monthly and out of that you want to save Rs 10,000 every month. So as soon as you get your salary, put Rs 10,000 away, and then create a monthly budget with the rest Rs 20,000.


You enjoy the benefit of compounding
For starting your investments early, you stay invested for longer, which automatically increases the benefit of compounding. Let’s understand this with 2 simple examples.


Say you want to save Rs 5 crore for your retirement. Now, with that goal in mind, you start investing in an equity mutual fund from the age of 22. For this, you will have to keep investing Rs 5,500 for the next 38 years, and your total investments would be Rs 25 lakh.


In the second case, the goal remains the same but you start investing in the goal much later, let’s say at 45. For this, you would need to invest Rs 1 lakh every month for the next 15 years and your total investment amount would be Rs 1.8 crore.

This is how compounding works in favor of money over the years.


After looking at the reasons why one should start investing early, let’s understand why it is equally important to get insurance at a young age.


Here as we speak about insurance, we mean both health and life insurance.
Speaking about health insurance, no matter what your age is you should always have health insurance. 


Sickness or some health emergencies can come at any time and if you do not have health insurance, medical expenses can burn a huge hole in your pocket. So you should never delay the process of getting health insurance.


However, we often delay the process of buying a term life reason for very simple but foolish reasons. The common notions are since we are young and healthy or at this stage, as the responsibilities are less, we do not need term life insurance. However, contrary to the popular belief, buying term insurance early on is always favorable.


2 reasons why you should buy term life insurance early


The premium amount is low
The biggest advantage of buying term life insurance early on is the premium amount that you pay is much less as compared to what you would pay if you buy it at a later stage in life.


For example, say you want to buy a policy of Rs 1 crore that would give you coverage till 75 years. If you buy it at 25, the premium amount would be Rs 8,000 annually. At 30, it would be Rs 10,000. And at 45, the premium for the same policy would be Rs 30,000.


Your family gets covered early on
The sooner you buy the term insurance, the sooner your family gets covered. Even if you are not married, your parents might be dependent on you or you might have a loan (vehicle loan, student loan), 


In case you die early then your family will have to bear that burden. Having term insurance ensures your family will not have to go through financial hardship in case something happens to you


So finally, whether to invest or insure first?
So, this is typically a chicken and egg situation – who came first.
To put more aptly, here it would be which one to do first, buy insurance, or start investing? Now, the best thing to do is to do both things simultaneously.


For example, let’s suppose Rajeev is a 25-years-old, and given his monthly income of Rs 40,000, he can take out Rs 10,000 each month, i.e. Rs 1.2 lakh annually, for savings/investments/insurance. So what should he do?


Here is how you can allot the money towards insurance and investments


Health insurance: It is a good practice to have at least 6 times your monthly salary as your health insurance coverage. By that logic, since Rajeev’s monthly income is Rs 40,000, his health coverage should be between Rs 2.4 to Rs 2.5 lakh. At the age of 25, the yearly premium amount for Rs 2.5 lakh health insurance would be about Rs 5,000.


Term life insurance: Since Rajeev doesn’t have a lot of liabilities, a term cover of Rs. 1 crore would be enough. Say the term life insurance cover that you need at this stage is Rs 50 lakh. The premium for a Rs 1 crore term policy would be around Rs 8,000 annually.


Investments: The rest of the Rs 1.1 lakh you can invest in Mutual Funds. Since Rajeev is young, he can take risks, and therefore you should invest in equity mutual funds. He can consider large-cap mutual funds or multi-cap funds and start a monthly SIP in these funds.


Now, as and when the income increases, he should also increase your investment amount. Rajeev should also review his health and term cover at regular intervals to ensure the cover is sufficient.


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CFD Better Then Bank FD (Fixed Deposit)

Corporate Fixed Deposit

FDs are normally a fixed deposit and a saving instrument, which gives a higher rate of interest than a regular savings account. 


It is a term deposit in which we invest in a lump sum amount and we get interest on it till maturity. 


FD’s are normally offered by the bank. But NBFC’s (Non-Banking Financial Companies) also offer the FD’s and it is known as Corporate Fixed Deposits. They are the same as bank FDs.


Corporate Fixed Deposit (CFD) is a term deposit that is held over a fixed period at fixed rates of interest. The maturities of various corporate fixed deposits can range from a few months to a few years.

Their functioning is somewhat similar to Bank FDs but they are offered a higher rate of interest. The risk involved with corporate FDs is significantly higher. If the company hits a recession or goes bankrupt then the returns cannot be provided at the maturity of corporate FDs.

The medium of the deposit is a certificate of deposit. The corporate FDs are not insured, that means, in case of default you will not get Rs 5 lakh as in the case of bank fixed deposits. It gives high returns as compared to Bank FD’s as they involve high risks.


Key benefits of Corporate FD’s :


Higher returns – Enjoy greater returns from Corporate FDs as compared to the bank FDs.


Flexibility – Choose Corporate FDs as per your preference from a variety of tenures such as monthly, quarterly, half-yearly, or yearly.


Liquidity – Enjoy better liquidity with Corporate FDs with a lower lock-in period than Bank FDs


Premature Withdrawals – Opting for premature withdrawal in FD means depositors can withdraw their amount and close the account before the term ends.


Safety – Company deposits are carefully inspected by credit rating agencies. These agencies check whether such FDs are safe and stable.


Tips for choosing a Corporate FD:


Credit Rating: Opt for higher-rated corporate FDs based on its credit rating which indicates the underlying risk of the company.


Company Background: Assess a company’s business viability by referring to its Financial Statements, Management Discussion, and Analysis (MD & A).


Repayment History: Companies’ repayment history helps to determine the company’s credit score, credibility, and stability.


Risk profile: Make sure that the company you pick is financially healthy and helps you rule out any default risk during the fixed deposit period.


Terms of FD: A cumulative scheme could be better than a regular income option as the interest earned gets invested in other avenues. At the end of the day, you’ll have a lump-sum amount in your hands. But not if you’re looking for a regular income from the FD.


Here are the top NBFC’s recommended by our expert.
1. HDFC Ltd (Housing Development Finance Corporation Ltd)
2. PNB Housing (Punjab National Bank Housing Finance)
3. Mahindra Finance (Mahindra & Mahindra Financial Services Ltd)


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9 things to know about Sovereign Gold Bond

Gold Bond

The seventh(7) series of Sovereign Gold Bond Scheme 2020-21 will open for subscription today (12th Oct 2020). The price of the latest SGB issue has been fixed at Rs 5,051 per gram of gold. 


Investors applying for the issue online will get a discount of Rs 50 per gram. So the price for them will be Rs 5,001 per gram. The issue will remain open for one week through October 16.


The latest SGB issue comes at a time when gold prices have corrected over 12% from its August high of Rs 56,200 per 10 grams.


9 things to know about Sovereign Gold Bond


1) Gold bonds have a maturity period of eight (8) years with an exit option after the fifth year. However, if an investor is eyeing an exit before the lock-in period of 5 years, they can always get out of the bonds by selling it on stock exchanges. The redemption price is based on the then prevailing price of gold.


2) Price of the issue has been fixed taking the simple average closing price for gold of 999 purity of the last three business days of the week preceding the subscription period. The price published by the India Bullion and Jewellers Association Ltd is used for this purpose.


3) One can apply for a minimum of 1 gram gold in the issue. An Individual and a HUF can invest up to four kg in SGBs in each financial year. Other eligible entities can invest up to 20 kg in a year. These bonds can be bought from banks, Stock Holding Corporation, post offices, and recognized stock exchanges.


4) Any resident under Foreign Exchange Management Act (FEMA) can invest in SGBs. An individual, HUF, trusts whether a public or private and university can invest in SGBs. Even investment on behalf of a minor can be made by his guardian. An NRI cannot invest in these bonds but is allowed to hold these bonds received as a nominee of a resident investor.


5) If you hold SGBs till maturity, there will be no capital gain tax on the investment. Further, you will get an interest of 2.5% annually, which will be paid on a semi-annual basis.


6) SGBs are a superior alternative to holding physical gold. Also, there is no risk of theft, and the costs of storage are eliminated in the case of SGB.


7) SGBs are issued by the Reserve Bank of India on behalf of the government.


8) Documents that are required for applying these bonds are Voter ID, Aadhaar card/PAN, or TAN /Passport.


9) Unlike in physical gold, GST is not levied on SGBs.


SGBs should be a part of your investment portfolio as it helps in diversification. According to us, 5-10% of an individual’s portfolio should be invested in gold.

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7 Things to do when your Mutual Funds are in Red

Mutual Fund is down

When investors seek higher returns, they invest in equity mutual funds. A higher return comes with a cost, in equity it is Volatility. Mutual funds are affected when the markets are volatile and this is why your mutual funds are going up & down.

Now many times when the market is volatile, such as now, investors panic and take decisions that may not be in their best interests. If you are an investor and wondering what to do with your investments in this situation, here are 7 things you can do instead.


Keep Calm
This is the absolute first step to successful investing.
The stock markets usually perform well over a long period. In the short term, volatility causes the price to go up and down. 


While you can lose money in mutual funds due to short term market disturbances, if you look at the long term, instances of negative returns drastically reduce after 3-5 years of holding. 


If you have a longer time horizon of say 7-10 years, you need not get disturbed by the news around and lose your calm. Don’t let the noise get to you.


Avoid Redeeming In Haste
Can you lose money in mutual funds in falling markets? Yes. But does this mean you should redeem your investments? No. Think twice before redeeming your money the moment you see the markets perform poorly.


Certain investors believe they can take their money out of a mutual fund when its value goes up and then invest again when the value starts going down. This sounds good in theory but usually does not turn out well. 


What happens most of the time is that people take out their money from a mutual fund and wait for the right time. But more often than not, the timing isn’t perfect. What ends up happening is that people sell when the price falls. 


And then, when they plan to invest again, they invest at a price higher than what they sold their mutual funds for. This hurts the long term wealth creation process.


So decisions like redemption should not be a factor of current market conditions. Investing in equity mutual funds via the SIP route is what comes to rescue in such cases since SIP frees you from market timing. 


It also leverages rupee cost averaging to buy you more units when the markets are down.


Compare Performance With Other Funds in the Same Category
You may feel the mutual fund you have invested in is not performing very well. This may or may not be a time when the markets are doing well.

A good strategy at this point is to check your mutual fund’s performance with mutual funds in a similar category.

Also, mutual funds are long-term investment options. If you observe your mutual fund’s performance is only slightly poor when compared to the best-rated funds, switching might not be necessary.

Over a short period, various mutual funds perform in different ways. In the long run, the best mutual funds belonging to the same category usually give similar returns.


Compare Performance With Other Funds From Different Categories
Certain mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk.

If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories.

For example, small-cap mutual funds give very high returns. But they also have a higher risk. Relative to small-cap equity mutual funds, large-cap equity mutual funds have been less risky.

Also, you might want greater returns and be willing to take the risk. In that case, too, you should explore the best funds in the other category for investment.


Research the Sector
Another reason why your mutual funds are falling could be because your investments are sector focused. This point is relevant to you only if you have invested in a sector fund. 


Sector funds invest only in a specific sector or industry.
Sector funds are considered the riskiest for a reason – they are even harder to predict when compared to other equity mutual funds.

So if you have invested in a sector fund and are losing money, pay attention to the health of that industry and its prospects.

If you think the industry has a good future, continue to remain invested. If on the other hand, you think the industry isn’t doing well, you should plan to redeem your money.


Diversify
This is perhaps the only way to counter your mutual fund loss at the moment. If your portfolio is exposed only to equity, then add some liquid/debt funds to the mix. 


They will not only balance out your losses due to equity but will also allow you to raise money for short term goals. Also, diversify across asset classes. 


Gold is considered as an excellent hedge against market volatility as gold prices usually go up when the markets are done. You can look at exposing about 5% of your portfolio to gold.


Can you lose money in mutual funds? The answer is YES. Should you have a knee-jerk reaction at seeing a red portfolio and make big decisions? Probably not. While the situation is uncomfortable, this too shall pass. Markets have bounced back before and this time also.


From temporary events like elections and geo-political tensions to recessions to pandemics, the economy has seen it all and thrived nevertheless. Investing is a long-term game and should be treated like one. 


Stay calm, invest with a vision, keep yourself updated and you are good to go!

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Sensex jumps 13000 – here are 5 mistakes to avoid

Sit & Relax

Cheering the Government’s move to unlock the economy, the stock markets rallying strongly, taking the Sensex up-to 39000. As an investor, here are five mistakes you should guard your portfolio against.


Don’t succumb to FOMO (Fear Of Missing Out)

You may have exited your equity investments and sat on the sidelines when things started heading down in March. 


Now, with the stock markets have rallied 50% from the bottom, you could feel a strong urge to throw caution to the wind and push all your money back into equities all at once. However, this would be a mistake. 


It’s highly unlikely that markets will continue its one-directional surge for very long. Once the euphoria settles, real data such as earnings growth and GDP numbers will come into focus and drive stock prices. 


Going all in right now could mean that you’ll be staring at a heavy loss when the current rally retraces. Instead, it would be a lot wiser to stagger your way back in using weekly STP’s (Systematic Transfer Plans) over the next 3-4 months.


Beat the Action Bias!

If you were among those who saw their investments sink deep into the red when markets capitulated in March, you may be itching to take some sort of action with your portfolio, now that the notional loss is lower. 


There’s absolutely no need to jump the gun and make rash decisions to exit your investments at this time. Remember, you got into equities for the long run – so remain invested through the ups and downs, and let the economic recovery play out properly over the next year or two. 


Moving in and out of your investments will surely work to your detriment in the long run.


Don’t stop and start your SIP’s

Remember, we’re not out of the woods as yet. What we are seeing right now is nothing more than a euphoric, liquidity fuelled spurt in stock prices because the lockdown was lifted. 


Though the worst may very well be behind us for now, stock-markets wise, a long and winding road towards economic rehabilitation lies ahead. As the world adjusts to the new normal, we’ll see plenty of volatility in the markets. 


It’ll certainly be a few quarters before consumption returns to pre-COVID levels. In the interim, we may witness more measures to curtail the spread of the virus, which may hurt market sentiments. 


Some businesses will flounder, while others will adapt and grow. In such a volatile scenario, the best thing you can do is to allow your SIP’s to continue dispassionately – a month in, month out.


 Stopping and starting your SIP’s would be a big mistake. Just sit tight and let Rupee Cost Averaging work its magic.


Don’t time the market

With the number of variables and incoming data prints involved, it would be impossible to predict the short and medium-term direction of the markets during this time. 


You may have one bullish month followed by a severely bearish month, followed by another surge. Towards the end of May, banking stocks rallied 10% in two days for no apparent reason! In times of such extreme volatility, any attempt at trading would most likely land you in a big soup. 


Whatever you do, do not try to time the market; instead, follow a disciplined approach to investing, staggering investments into the markets using a well-planned approach wherever necessary.


Don’t invest unadvised

In choppy waters, the support of an astute Advisor can prove invaluable. In such times, even the most seasoned investors can fall prey to a host of behavioral biases that will work to their long-term detriment. 


Your Financial Advisor can be the much-needed voice of reason that will help you make better investment decisions. Choosing to invest unadvised to pinch a few pennies would be a highly regrettable decision right now.


Don’t fly solo – instead, hand over the controls to a conflict-free, competent Financial Advisor who is acting in your long-term interest!

 

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5 Financial Lessons from COVID 19

Learning in Lockdown

As the nation grapples with the devastating impact of COVID 19 and financial markets gyrate to the tune of incoming news flows, a number of valuable financial lessons come to the fore. Here are five important ones.


Adequate Health Insurance is a must

Many of us rely on our company-provided Mediclaim policies to fund our healthcare emergencies. What we fail to account for, though, is the fact that an unexpected job loss could leave our families without health insurance protection almost overnight. 


Also, worth considering is the fact that COVID 19 treatment costs have run into several lakhs for many affected patients. 


The crisis has certainly taught us the importance of having an optimal quantum of high-quality health insurance coverage in place, notwithstanding your company provided Mediclaim.


Timing the market is futile

When the NIFTY sank to sub-8000 levels in March and sentiment was at its lowest point, doomsday predictions were a dime a dozen. Investors made a collective beeline for the redemption button and exited equities. 


However, markets have since staged a smart recovery, and are showing definitive signs of strength. The takeaway here is the well-worn fact that market timing is impossible, and so should therefore not be attempted. 


The only way to create long term wealth from financial markets is to follow a contrarian approach by accumulating equities when fear is at its highest point and to sit through the rough rides thereafter.


An Emergency Fund is vital

If there’s one Financial lesson that the COVID-19 crisis has taught us, it’s the critical importance of building a savings pool that can be used to ride out a prolonged contingency. 


An emergency fund is the most basic pillar of sound financial health. Make sure you’re putting away money consistently into a financial instrument that is low risk in nature and gives you the comfort of easy and immediate access to capital. 


Follow the thumb rule of having 6 to 12 months of fixed monthly expenses stashed away at all times – you never know when you might need it, as emergencies don’t come announced.


Discipline makes a world of difference

The most effective antidote to the host of behavioral fallacies that plague our day to day investment decisions is to follow a disciplined approach. 


In fact, this argument carries even more weight during volatile times such as these. Investing via SIP’s (Systematic Investment Plans) without giving a second thought to market levels or the unending stream of good and bad news flows that inundate our minds on a daily basis, can prove extremely effective. 


In the long run, such automatic averaging would go a long way in ensuring fantastic portfolio returns. Stay disciplined.


Unadvised Investing can be injurious to your portfolio!

Needless to say, unadvised investors who went down the direct plan route in a hapless bid to save on investment costs have had a harrowing time of late. 


Without the valuable support of a “coach” in the form of a qualified Financial Advisor, many of them have taken regrettable investment decisions in the past couple of months that will have long-term ramifications on their future wealth creation. 


For best results, seek the support of an experienced and proven Financial Advisor who will be acting in your interest at all times. COVID or no COVID, flying solo can prove dangerous to your Financial Health!

 

 

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