Mar 25, 2009 12:54 PM
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I feel a compelling sense of deja-vu to publish my opinion on this topic in the current roller coaster economic ride that we are faced with.
The investing bug has been irresistible to individuals once addicted to its sting. I have rolled among a wave of joy and desperation which had engulfed me in the past four years of my investing life, though I confess I am not much saner in-spite of the experiences.
I am still pretty young to confess that I have experienced everything that the gamut of investment has to offer; and hence must acknowledge that the wisdom mentioned below are partly from personal experience or my professional wisdom… I hope this helps individuals and investors with little knowledge of financial markets to take basic decisions while deciding to invest their hard earned funds
Until mid-2008, one common intellectual element weaving a common chain of communications among individuals as diverse as doctors, housewives, peons, clerks, professionals, chai walas, watchman, media professionals was their self imposed belief of possessing intricate knowledge of the stock market. The self belief has now been shattered irreparably, though I will not be surprised if the ghosts of the past relieve in the next Bull Run(whenever that happens)
Basic rules of investing
· Invest surplus funds that you have at your disposal. Do not borrow for investing
· Invest for the long term
· Do not leverage your hard earned money in Futures which though tempting may leave you high and dry and in some cases maybe without a home. Remember and etch it in your mind that you are not playing a Casino but investing your hard earned money.
· Do not blindly trust your Broker or Investment Advisor while investing in either equities or mutual funds. Enquire the positives and the negatives of their recommendations and do an independent analysis to be comfortable with your decisions
· Do not mix investment with insurance i.e. Unit Linked Insurance Plans. This is something your insurance agent will never tell you since he earns the fattest commission by selling you that product.
Returns and Risk
The basic principle of risk and return in financial markets is more or less common sense: the higher the rewards offered the greater the risks incurred. The riskier an investment proposition, the higher the potential rewards is imperative to encourage people to take on those risks. Investments in equity(shares) are one of the prime examples of high risk high reward theory.
Returns on investments in shares are directly dependent on how well or how poorly these company fares. However, a fund manager managing a mutual fund would invest your money is across different companies/ sectors and would also allocate a part of it to debt instrument yielding a fixed rate of return thereby balancing the return on the total investment. The advantage is that in case even two investments do not generate returns, other investments may average your returns.
Asset Mix
I do not recommend betting your savings on one asset class i.e. investing all your funds in either equity/ mutual funds/ gold/ real estate/ fixed deposits etc.etc. It is imperative that a balance is maintained in your investments by investing it among different asset classes to generate consistent returns and diffuse risks. The investor should clearly assess his priorities, cash flow and his risk appetite prior to selecting investment options.
Investors can broadly be classified as Ultra Conservative, Conservative, Balanced, Aggressive/Professional Investor. Investors looking to protect their savings and planning for retirement/ children’s marriage expenses are typically Conservative investors and should ideally allocate 60% of the funds in investments yielding fixed returns viz. Bank deposits and 15% in Gold(you may also look at purchasing paper gold through exchange traded funds), 15% in Balanced schemes floated by Mutual Funds. The remaining funds may be invested in equity shares viz Blue Chip companies.
Investors with a balanced risk appetite intending to invest with a view towards long term investments horizon with stable returns should ideally allocate 50% of funds in Balance schemes floated by Mutual Funds, 25% in blue chip equity shares and the rest in fixed deposits or Gold.
Aggressive investors who intend to ride the bull and the bear market and aim to substantially appreciate their capital tend to invests heavily in shares, options and futures with look with disdain towards fixed deposits. These investors would typically allocate 75% of their funds in equity/ options or future products and the balance in Mutual Funds or Gold.
The asset allocation mentioned above is not comprehensive and fixed since the mix would be altered based on an individuals risk appetite and his investment goals. It is hence important to assess your investment needs and goals prior to slotting yourself into one of the brackets mentioned above.
(The concept of self categorisation into risk profiles is much more complex and can be elaborated as a topic in a separate discussion. You may email me on my personal email for more information on the same)
Expert vs. novice fund management
Mutual fund companies hire the best talent available in the industry to manage funds invested with them. These are traditionally individuals with in-depth knowledge of various industries and the sectors and hence you can be rest assured that your investment is being managed by professional which would not be the case if you managed it with advice from well wishers, brokers and friends.
Systematic investing
Systematic investing in mutual funds is institutionalized through the Systematic Investment Plans(SIP) floated by various mutual fund companies. This does not mean that one cannot discipline one-self for investing in shares since this can also be achieved by allocating a fixed monthly sum for investing in shares thereby averaging the cost of purchase over a period of time
Investment horizon
Equity has consistently outperformed returns generated by mutual funds over a period of 5 years+. Mutual Funds tend to generate lower returns compared to equities since they tend to invest in differing asset types for e.g. debt instruments(yielding low returns), bank deposits
Tax considerations
Income earned from investing in shares is exempt from Income Tax provided, it has been held for more than one year. In case shares are sold within one year of purchase, the income derived from the same is subject to tax. Income earned by individuals from distribution of dividend by equity mutual funds is exempt from tax.
The importance of a financial planner who understands your investment needs and able to provide unbiased advice is never more important than in than in this troubled times. Do select the right firm or individual who will guide you in taking the right decisions
