The investing puzzle
Behavioural issues
Managing risks
Investments and goals: Why you need the guidance of a financial adviser
Wealth creation is not a magic, make sure it happens by method
As we celebrate the World Financial Planning Day on 4th October this year, let’s chat about something we all know but often overlook—financial planning. Financial planning isn’t just for the elite or the well-versed as often misunderstood, it’s for every Indian who aspires to secure their future.
Why Financial Planning Is a Big Deal
Picture this: You decide to go on a road trip without any idea of your destination, no map, no GPS. Fun at first, but you’ll soon find yourself lost, frustrated, and maybe even running low on fuel or battery as applies to you. That’s what life can feel like without financial planning. Here’s why financial planning is a must-do.
1. Your Goals Are Your Roadmap: Just like you’d set a destination for your trip, financial planning helps you set and prioritise life goals. Whether it’s buying that dream home, sending your kids to college, or retiring comfortably, a plan gets you there better and generally with less stress.
2. Unexpected Potholes: Life’s full of surprises—some good, some not so much. A well-thought-out financial plan is like having a spare tyre for those unexpected flat tyres in life.
3. Money Multiplier: You know how your smartphone battery drains when you use too many apps? Well, your money does the same if you don’t manage it wisely. Financial planning helps you keep your money working for you, not against you.
4. Zen Mode: Imagine having adequate money set aside for emergencies and life’s little luxuries. Financial security brings peace of mind, and that’s worth its weight in gold.
Financial Planning in India – The Reality Check
So where does the Indian scenario stack up on all this? We’ve got a lot going for us, but we’ve still got some ground to cover when it comes to financial planning.
1. Financial Literacy Gaps: Many of us never learned the ABCs of finance. It’s like trying to play cricket without knowing the rules. We need better financial education, starting from schools to workplaces.
2. Insurance Missteps: A lot of us are underinsured or don’t have insurance at all. It’s like riding a racing bike without a helmet. Comprehensive insurance should be a no-brainer.
3. Stashing Cash: We’re known for saving, but sometimes we just hoard cash or park it in low-yield investments. Imagine having a supercar and only driving it at 20 km/hr. It’s time to rev things up and explore better investment options.
4. Retirement Myopia: Retirement planning is still a new concept for many. It’s like ignoring the scoreboard in a cricket match and hoping to win. Start planning for retirement early; your future self will thank you.
Benefits of Getting Your Financial Act Together
Now let’s talk about the good stuff—how getting your financial ducks in a row can make your life better.
1. Freedom to Dream: Ever dreamed of quitting your job to travel the world or start your own business? Well, financial planning can make those dreams a reality.
2. Stress Buster: Financial worries can give you sleepless nights. But with a solid financial plan, you can relax, knowing you’re prepared for life’s curveballs.
3. Money Magic: Smart planning can make your money grow faster than a magic beanstalk. It’s not about making more money; it’s about making the most of what you have.
4. Legacy Building: Wouldn’t it be amazing to leave a legacy for your kids and maybe grandkids? Financial planning helps ensure your wealth sticks around for generations to come.
World Financial Planning Day: What’s the Big Deal?
Now, why should you care about World Financial Planning Day? Here’s the lowdown:
1. Wake-Up Call: It’s a reminder that financial planning isn’t just for the rich and famous; it’s for all of us. Time to roll up our sleeves and take control of our financial future.
2. Community Vibes: This day brings together financial experts, everyday folks like you and me, and everyone in between. It’s like a big financial planning picnic, where we share tips and stories.
3. Think Global: Money matters are universal. On this day, we realise that the same rules apply whether you’re in India, the US, Europe or anywhere else. Financial planning is a worldwide team effort.
4. Be Empowered: World Financial Planning Day is your chance to get the scoop on how to make smart financial moves. It’s like having a personal financial coach on speed dial.
So, as we celebrate World Financial Planning Day, remember this: Financial planning isn’t rocket science; it’s life science. It’s about making your life easier, more enjoyable, and full of possibilities.
Take a step today, set some goals, protect your dreams, invest smartly, and plan for your golden years. It’s your journey, and with a little financial planning, it’s bound to be a lot smoother and more rewarding. Here’s to your brighter financial future!
Cheers to World Financial Planning Day!
Source- Economictimes
Real volatility, false risk
Nowadays, tomato prices are volatile, but the stock market is not. At least, that’s what the headlines say. Are they correct? What is the meaning of the word volatility? The word appears to have three related but distinct meanings. Unfortunately, the one that is most commonly used is the wrong one.
Outside the financial markets, volatility means, as a dictionary puts it, undergoing frequent, rapid, and significant change. For example, the weather can be volatile. In the financial markets, technically, it means the amount of variation in a series of traded prices of anything over time. You can get even more technical and talk about the dispersion of returns for a security or an index. High volatility means that the price may change dramatically over a short time period in either direction. Low volatility means that it will not fluctuate dramatically but change at a steadier pace. Note that there is no direction of movement implied in either of these definitions, either the financial or the non-financial ones.
The third definition of volatility is the common and wrong one: Volatility means that the price of something is moving in a bad direction. In the media and social media, volatility means that bad things are happening to the price of something. It’s a ridiculous definition, but it’s the most common one. Technically, when the price of a stock increases sharply, it increases the volatility. However, I doubt whether anyone has ever used the word volatility to describe a sharp increase in a stock price. The word is only used for bad things. Funnily enough, in some contexts, that can mean a price rise. In the current tomato headlines, volatility means a rise in prices!
But let’s talk about genuine volatility. A lot of savers will always choose the lowest possible volatility in the asset class they choose for their savings. The massive preference for fixed-income assets like bank FDs, PPF, and other sovereign deposits that we see are all strong evidence of this. Even within market-linked volatile asset classes, lower volatility is a characteristic many investors chase. Within equity mutual funds, people will choose hybrid funds or only conservative large-cap funds and so on. All this is fine–I’m not criticising this. In fact, I keep a tight check on the volatility of most of my investments.
However, and this is something that few investors appreciate, lower volatility is not free. It has a cost. Perhaps that sounds self-contradictory to you. After all, we have been conditioned to believe that volatility means losses and lower volatility is good. That’s not true. Choosing the right kind of volatility can always boost your returns. To see the truth of that statement, compare equity mutual funds with bank fixed deposits. When you choose lower volatility, you reduce your returns. You are paying the price for stability — volatility in good quality investments means that your investment fluctuates but, on the whole, rises faster.
However, do you actually need the lower volatility? That question is important because volatility is transient. For a quality investment, prices fall but then rise again. The fall in value means that it will soon rise even faster. For investments that have to be held for a long time, paying the price for lower volatility makes little sense. If you can withstand temporary volatility, you should happily and enthusiastically embrace volatility — that’s the road to high returns.
Many years ago, Warren Buffett said, “Charlie and I would much rather earn a lumpy 15 per cent over time than a smooth 12 per cent.” So should you and I. One doesn’t have to be as rich as Buffett and Munger to prefer a lumpy but higher return. One just has to be as sensible and have a long-term view.
Source- Valueresearchonline
How to retire at 45
Gokul, a dynamic 32-year-old project manager at a prestigious IT firm, has charted a clear course for his future: early retirement at 45. His vision extends beyond the confines of his corporate career, and wants to start his own blog.
At the heart of his plans is his family – his wife, who manages the household and their five-year-old son. As the sole breadwinner, Gokul brings home a monthly salary of Rs 1.2 lakh, which comfortably covers their monthly expenses of around Rs 80,000 and leaves enough room for life’s little luxuries. But given his circumstances, can he afford to retire early? Let’s find out.
His son’s higher education
Parents want to provide their children with the best education they can. And Gokul is no different. He wants to allocate Rs 15 lakh for his son’s higher education. However, given the average inflation rate of 6 per cent in India, the same Rs 15 lakh course will likely balloon to around Rs 32 lakh in 13 years.
Fortunately, Gokul has the means to cover this cost, as he has accumulated Rs 7.5 lakh in a few tax-saving mutual fund schemes . This amount will grow to the desired amount by the time his son gets out of school, assuming his investment increases 12 per cent each year.
Calculating retirement corpus
Since Gokul has a monthly expense of Rs 80,000 and wants to retire by 45, he’ll need to save a little more than Rs 5 crore. We arrived at this figure based on three assumptions:
- That he and his wife live until 85.
- The average inflation rate in their post-retirement years is 6 per cent.
- That they ensure their nest egg (roughly Rs 5 crore) grows at 9 per cent during their retirement years.
A Rs 5 crore retirement kitty is a formidable sum to accumulate in the next 13 years, but we dived head-long to see if this can be achieved. When we pored over Gokul’s current investments, we found he has a provident fund of Rs 7 lakh, and a monthly EPF contribution of Rs 7,200 – an amount matched by his employer.
Assuming EPF grows 8 per cent each year and Gokul’s monthly contribution rises 10 per cent, he would amass Rs 60 lakh by age 45. In addition, he should put his savings to work for him. Since he’s saving Rs 40,000 each month, it would be ideal if the money is invested in one or two flexi-cap funds, which are diversified equity mutual funds .
That’s not it. (The ambition of retiring early comes with a price attached, after all). Gokul will have to step up his investment by 10 per cent each year. If he can successfully do this and the flexi-caps annually grow at 12 per cent, he’d build a Rs 2.19 crore corpus. But even then, Rs 5 crore seems like a long shot.
Our suggestion
If Gokul and his wife can put the squeeze on their monthly expenses by just Rs 10,000 each month, it will work wonders on two fronts:
- His retirement corpus will reduce to Rs 4.38 crore.
- He can start investing the additional money he saves in flexi-cap funds . Meaning, he can start investing a total of Rs 50,000 every month.
Do this, and he retires by the age of 45! Combining the EPF and flexi-cap money will help Gokul achieve his retirement target.
The magic of equity
Gokul should invest in flexi-cap funds stems from the time-tested theory of equity being a true wealth generator in the long run. Contrary to popular belief, the risk quotient of equity flattens over the long term. ‘Long term’ is the key here.
On the other hand, if Gokul invests in debt-oriented funds, it would be an uphill task – a polite term for impossible – to scale his retirement peak.
Parting shot
Once Gokul retires, it is important to transfer a certain portion of his money from flexi-cap funds to the more conservative debt-oriented fund. Because, during retirement, capital preservation is of utmost importance.
Having said that, he shouldn’t go overboard with debt-oriented funds. He still needs to keep 35-50 per cent of his money in an equity fund. Flexi-cap remains a good option even at this point in time. This will ensure his retirement nest egg doesn’t exhaust during his lifetime.
Last but not least, Gokul should watch his withdrawal rate. Limiting annual withdrawals to 4-6 per cent of the retirement corpus will eliminate risks in future.
Keep in mind
- Gokul should have life insurance and medical insurance. Consider critical illness riders.
- He should have an emergency fund that covers six months of expenses. For this, use a combination of a liquid fund and a sweep-in deposit.
Source- Valueresearchonline
The markets they are a-reverting
Have you heard the Bob Dylan song where he explains the basic principle of investing? No? You don’t think that Bob Dylan is the kind of guy who would bother about the financial markets? You’re wrong. There’s a song where he sings at one point, “For the loser now, will be later to win.” Later in the same song, he sings, “And the first one now, will later be last”. That’s the principle of reversion to mean, explained very nicely.
So what exactly is a reversion to mean? I would have given you the dictionary definition, but since I’m trying to keep up with the times, here’s what GPT4 says it is: In finance, “reversion to the mean” refers to the assumption that the price of an asset will move towards its average price over time. If the price of the asset has been above the mean, it is expected to decrease in the future, and if it has been below the mean, it is expected to increase.
While that definition refers to stocks, it’s just as applicable to almost all financial assets, including entire markets. That’s the reason it makes little sense to get too excited about the markets zooming to all-time highs or specific parts of the markets doing fabulously well. Similarly, it’s pointless to get panicky when the markets fall too sharply. However, the problem arises because investors do not understand the underlying idea and assume that the current trend will continue. Of course, in this belief, they are aided and abetted by those who stand to make money from them.
The lure of investing in whatever segment of the market is doing well at the moment is easy to pass off as research. Professionals (brokers, advisors, fund companies) as well as individual investors, can always justify investing in an industry by pointing out that it is doing better than others, the assumption being that it will continue to do better. If this excitement sustains long enough or strongly enough, then it becomes conventional wisdom – something ‘everyone’ knows. For sectors, this happened to tech stocks back in the heady days of 1999, and we all know how that ended. Around 2005-07, it happened to a set of industries that were loosely (forcibly?) defined as infrastructure. That ended up in just as big a blowup as tech in 2001.
Meanwhile, it also happens for segments of the market, like small-caps. Small-caps are especially prone to this phenomenon because the deviations from the mean are most severe. When they do better, they do much better. It’s easy to convince investors (or it’s easy for investors to convince themselves) that this means something when it doesn’t. When a sector or a segment sustains better-than-average performance for a noticeable amount of time, a bandwagon gets created around it. Fund companies launch funds or start pushing the ones that already exist. Investment advisors start talking about it, seeing a clear short-term win if the trend holds. For a while, the trend does hold. At this point, it looks sub-optimal to invest in a diversified way. The thing to understand is that this almost always happens. Since some sector or the other is always certain to be doing better than the average, having a diversified portfolio always looks like a foolish choice.
And then, as the investment analyst Bob Dylan explains, the averages assert themselves, and the segment starts performing below average, and the returns revert to the mean. Those who join the party late are left with a negative outcome. The reversion to mean often results in the formerly best segment falling to the absolute bottom and creating losses even when the rest of the market is booming. And so it goes on, year after year, decade after decade.
The right option is to keep investing steadily, in a diversified manner, preferably through SIPs. It’s not complicated, but avoiding the hype takes effort.
Source- Valueresearchonline
Retirement: a fast disaster or a slow one?
A few weeks back, while googling retirement systems in other countries, I saw this headline: 100-year-old Brazilian breaks record after 84 years at same company. Brazilian Walter Orthmann joined a company named Industrias Renaux on January 17, 1938, and 84 years later is still working there. I guess the greatest achievement here is that at the age of 100, he is still active and alert and still enjoys working. In the article I read, here’s the advice he gives, “I don’t do much planning, nor care much about tomorrow. All I care about is that tomorrow will be another day in which I will wake up, get up, exercise and go to work; you need to get busy with the present, not the past or the future. Here and now is what counts.”
There are a lot of news stories about this man that you can Google and find out more about this man but it goes without saying that this kind of a ‘retirement solution’ is not on the cards for the salaried amongst us. Retirement is a scary thing. By the time salaried people reach that age, they’ve typically been working for close to 40 years. For most of them, their existence is pretty much defined by the routine of their jobs. More importantly, their finances are defined by getting that salary every month.
Some small fraction of people are lucky enough to have an inherently inflation-protected income – for example, rent or a government pension, or those who have generated enormous wealth during their working years – the spectre of post-retirement financial problems and impoverishment haunts most retirees. Nowadays, lifespans are long and most people have two or three decades of lives left at retirement.
During these long years, a lot can happen. For example, even though lifespans have become long, the rise of chronic diseases has meant that ‘healthspans’ have become short and many of us will face ruinous medical bills at some point in the latter part of our lives.
This fear of the unknown – the spectre of risk that comes with retirement makes it a natural instinct to be conservative with post-retirement investments. This is perfectly understandable. Once you stop earning, there is no plan B. If you make big losses in your investments, then that money is gone forever – you will not be able to earn more and make up for the losses. This makes people extremely conservative in their outlook. A considerable number will trust only bank deposits, sovereign schemes and perhaps LIC.
This feels safe but actually, it is not. The problem is that your savings can face a sudden, hard disaster, or they can face a long, gradual disaster. Like the proverbial frog in boiling water, the latter cannot be felt. Those who face this long, slow disaster do not even know that there was an alternative.
In fact, I’ve come to realise that some people choose this disaster knowingly. Why so? I’ve spent years explaining that after retirement, equity is a must in order to avoid this slow disaster. There are those who understand this very well and yet are so scared of the quick disaster that they willingly choose it. This is the worst of all worlds, and it comes entirely from a lack of confidence.
This confidence is hard to gain, and the only route to it is through knowledge and experience, coupled with real-life examples. That’s the part I try to play in this publication, along with resources you can find online, including a very comprehensive set on Value Research Online. However, I must point out that like all savings, fixing your post-retirement investment plan is something that needs to be done sooner rather than later. It may be a slow disaster, but the years roll by quickly and it does not take time for the slow one to arrive.
Source- Valueresearchonline
Balanced-advantage funds: Are they the right choice for regular income?
Mr Naresh Gupta, a non-pensioner super senior citizen living in Delhi, recently took out fixed deposits (FDs) to manage his household expenses. However, he needed a regular income and sought our advice on whether to invest in a balanced-advantage fund (as suggested by his friend) for this purpose.
What are balanced-advantage funds?
- Balanced-advantage funds, also dynamic asset allocation funds, are a type of hybrid funds that invest in both equity and debt instruments.
- Unlike equity and debt funds that have fixed investment mandates, balanced-advantage funds have a dynamic equity-debt allocation. Broadly speaking, these funds put more money in equities and less in debt when markets are depressed, and vice versa.
- Fund houses claim this dynamic allocation helps them capture potential upsides and limit downsides in volatile equity markets, making them popular among investors.
- However, balanced-advantage funds widely vary in their risk-reward profile. Some funds are vastly conservative, while others can be high on the risk metre.
What does this mean for Mr Gupta?
- Given these funds’ wildly differing risk profiles, Mr Gupta must exercise caution while choosing the right balanced-advantage fund.
- For a regular-income portfolio, Mr Gupta can go for a balanced-advantage fund where the equity allocation stays in the range of 40-50 per cent, and doesn’t move to extremes.
- For instance, if a balanced-advantage fund goes aggressive on equity and the market tanks, it can pose a hurdle in deriving regular income. At the same time, a balanced-advantage fund which takes a very conservative call on equities (around 15-20 per cent) may not earn enough returns to support regular income
That being said, Value Research is sceptical of mutual funds that rely on timing the market. We believe that static equity-debt allocations (such as 75:25, 50:50 and 25:75) based on your ability to take risks work better in the long run. It eliminates the chances of pre-empting market moves based on models or human judgement. Even in the case of funds with dynamic asset allocation, we would prefer the ones that do not take extreme calls. It brings higher predictability.
An alternate route
Mr Gupta can also follow the below alternate strategy:
- Invest at least one-third of the money in equities at all times, preferably in good flexi-cap funds or large-cap funds (for very conservative investors) to achieve returns that beat inflation.
- Invest the other two-thirds of the money in fixed-income investment avenues, such as government-backed guaranteed return schemes like the Senior Citizen Savings Scheme (SCSS). Also, allocate some of the funds to high-quality short-duration funds for emergencies.
- Rebalance the portfolio every year and limit annual withdrawal to no more than 5-6 per cent of the corpus.
Source- Valueresearchonline
Should I allocate over half of my portfolio to small and mid-cap funds?
Is it advisable to build a core equity portfolio (50-60 per cent) in mid and small caps, considering an SIP tenure for 10 plus years? – Anonymous
When it comes to long-term investing, a time horizon of 10 years or more is well-suited for equity investments. However, it’s important to avoid over-concentrating in one type of fund or solely investing in mid and small-cap funds. For example, building a core equity portfolio where 50-60 per cent is allocated to mid and small-cap funds is not recommended.
Instead, a diversified approach to equity via flexi-cap funds is recommended, as they invest across large, mid, and small-cap stocks. By investing in a flexi-cap fund, around 25-30 per cent of your portfolio is exposed to mid and small-cap stocks, while large-caps make up about 70 per cent. When building a portfolio, it’s best to focus on stocks that provide growth with stability, which large-caps tend to offer. Riskier assets should only be allocated a small portion of the portfolio.
While mid and small-cap funds may provide higher returns than flexi-cap funds in the long run, they may fluctuate more in the short run and are generally considered riskier. Having a higher exposure of 50-60 per cent to mid and small-cap funds can make your portfolio much more volatile, which is not advisable.
In conclusion, if you’re willing to accept higher risk and volatility for higher returns, you can add a mid or small-cap fund along with a flexi-cap fund. This way your portfolio allocation to mid- and small-caps would be slightly higher. However, it’s not advisable to make them the core of your portfolio.
Source- Valueresearchonline
How to move your corpus to an equity fund?
Hi, I am 40 years old and my PPF maturity of around Rs 15 lakh is due next year. I want to move to a better growth investment instrument like NPS wherein I am ready to stay invested for another 15-20 years. I am aware that my withdrawals from PPF will be tax free. Can you please suggest the strategy to systematically move my investment into these equity funds? – Suchit Poothia
You need to keep a few things in mind when you want to move your corpus to equity funds.
- Duration: The thumb rule to decide the duration of your equity investment when you have a lump sum is to spread the investment across half the period it took you to earn that money, but it shouldn’t be more than three years. For instance, if it took you five years to build a corpus of Rs 30 lakh, then you can divide the corpus and spread the new investment across 12 to 24 months. This staggering approach to investing will help reduce the cost of investment as well as the risk.
- Allocating to equity: Since the time horizon for your new investment is about 15 to 20 years, you should look at allocating more in equity. This is because they tend to beat inflation in the long-run.
Now if you wish to use the current corpus to invest in your NPS account, select the active choice option and allocate 75 per cent to equities. But do keep in mind the withdrawal restriction.
You can withdraw only up to 60 per cent of the NPS corpus as a lump sum when you reach the age of 60 and the remaining 40 per cent has to be used to purchase annuities. Partial NPS withdrawal is allowed only under certain special circumstances such as to meet medical expenses, education and marriage expenses of children, etc.
Other investment options
Alternatively, if you are a disciplined investor and won’t touch the corpus until retirement, then you can invest in flexi-cap funds. These are pure equity funds and have no restrictions on withdrawals. Unlike the NPS which mostly invests in large-cap stocks, flexi-cap funds diversify their investments in mid and small caps too. This can provide you slightly better returns.
However, if you have never invested in equities before and are wary of allocating 100 per cent to equity, you can choose an aggressive hybrid fund. These funds invest about 65 per cent in equities and 35 per cent in debt. This mixture helps to contain the equity volatility and is better placed to provide more consistent returns as compared to pure equity funds.
Softening the risk is what is necessary for new investors so that you are psychologically strong to stay the course and do not end up exiting the fund in panic.
Source- Valueresearchonline
Mutual fund investment in children’s name: New SEBI rule comes into effect today
Parents or legal guardians will be able to invest from their own bank accounts in mutual fund schemes for their children, starting today i.e. June 15. The Securities and Exchange Board of India (SEBI) has revised its 2019 circular which prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian.
Earlier, Sebi only allowed payment for investment from the bank account of the minor or from a joint account of the minor with the guardian. The new rule will streamline this investment process for mutual fund investors who invest on behalf of minors.
Decoding the rule
Under the new rule, payment for investment in mutual funds by any mode will be accepted from the bank account of the minor, parent or legal guardian of the minor, or a joint account of the minor with parent or legal guardian.
They will no longer need to open joint accounts or open the account of minor children for this purpose.
What happens to existing folios?
For existing mutual fund folios, the AMCs will have to insist upon a change of pay-out bank mandate before redemption is processed.
Irrespective of the source of payment for the subscription, all redemption proceeds will be credited only to the verified bank account of the minor, which he or she can hold with the parent/ legal guardian, Sebi said.
Source- cnbctv18
