Under this heading, I am going to discuss two topics regarding Considerable Factors & Common Mistakes before/ during Investment.
Most Important Considerable Factors
We, maximum people are believed to be great savers traditionally, with an average savings rate close to 30% per annum. However, our investments have been pretty static in nature. We prefer bank deposits (which yield 4-5% to 8-9.5%) to equities (which can yield up to 12% in the long run). The blame cannot just be thrown on the global economy or the policy paralysis of Indian govt. It has to be lack of financial awareness.
Stats don’t lie. The insurance companies/ agents know this pretty well. According to the latest news, investors have lost Rs 1.3 trillion (one lakh crore) due to mis-selling of insurance policies. This is a huge number. Gone are the days when you could double your money in 5-6 years just by doing a post office deposit. Time has changed and so should we. There has to be a strategy in place to deal with your finances.
Below are 5 important factors based on which an investment strategy can be finalised:
Age: Our mindset changes as we grow old. We tend to up skill ourselves on various things in life. Financial planning also needs a similar treatment. When in mid 20’s, we do not have any dependants and this is the time when we start off our career. Usually, in this stage it’s about spending, spending and more spending. Impulse buying is very high and we cannot resist the temptation to buy the latest jeans or the ultra modern tablet. We could do a little bit better by saving in small amounts every month, listing all expenses or making a simple monthly budget.
In our 30’s, we would have dependants. We would love to buy that dream house or that latest sleeky car (thanks to those tons of loan options). But, when responsibility arises, we should be ready to compromise. We should be looking at building assets and look for loan only when it cannot be avoided. Personal loans should be a strict ‘No’. We should be able to slowly increment our savings as and when our salary rises. This is the perfect time to plan for retirement. Retirement planning at the age of 30? You must be thinking am kidding. No, am not. Power of compounding works for you when you start early. There would be fewer chances of you missing on your goals if you start early. Also, make sure you are covered with sufficient insurance since your family should not be missing your presence financially.
40’s is a stage when our children would be young and expenses would naturally increase. So, have an eye on all such expenses and plan accordingly. If you have missed out on taking a health insurance, take it now. You might not get one if you delay it or even if you get it, it could be beyond your affordability. When in 50’s, you might feel you have worked enough and may want to retire early. Make sure you don’t take too much of risk in this stage. After retirement, continue to be conservative but make sure you don’t lose out to inflation because you would not have hikes in income to cover it up.
Risk Appetite: Risks are inevitable. There is no investment without any risk. Always know your risk appetite before investing in any instrument. Think how you would react if the stock you have invested dips 20% in a session. Based on such questions, decide whether you want to be an active investor or a passive investor. Active investor is one who actively buys and sells. He / She believes he / she can time the market. Passive investor is the one who buys those funds which do not need active intervention, such as index funds.
Goals: Every investment should be linked to a goal. Your investments should not be a wild goose chase. Clearly list all your goals and then prioritize. Do a backward calculation with regards to your goals and then work towards your goals in a systematic manner. Your goals should be SMART (Specific, Measurable, Attainable, Realistic and Time bound).
Time in hand: To get the right strategy going, you need to put in time regularly to update yourself with knowledge on financial markets and instruments. If you are very busy with your work and cannot put aside at least 4-5 hours every week for your finances, you need a financial planner. He would be able to guide you through all aspects of your finance and also suggest you a proper investment strategy based on your situation.
Asset allocation: This is the mother of all strategies. According to a survey, 90% of returns in a portfolio are due to asset allocation. Asset allocation combines factors such as diversification, liquidity, risk, etc. It tells you how much you need to invest in a particular asset class. For instance, if you have Rs.10,000 to invest, it would tell you how much you need to invest in liquid funds, balanced funds, large cap funds and so on.
If you ask me if there is any thumb rule for this, I would say no. All the above factors combine to make that ideal asset allocation.
Conclusion
There is nothing like a one size fits all strategy. It would depend on multiple factors. Once invested should not mean invested forever. Investments need to be monitored and rebalanced regularly. Again, if you do not have the time and knowledge to do all this, better consult a good financial planner.
Most Common Mistakes while Investing
Everyone knows that money needs to be invested somewhere and not just saved. Like everything else, we make mistakes even while investing. Let’s discuss the 8 most common mistakes made by us while investing in various products.
Buying on obligation: Quite often one of our friends/relatives comes to us with an offer to buy insurance/mutual funds. They tell us that this is the best product designed and created just for you. And you buy it either because you believe him or out of an obligation that you cannot reject him. This is a common scenario in life insurance. Your friend/relative would be an agent of a life insurance company and would approach you whenever he is short of his target. You decide to help him by paying premium for an insurance policy. You ignore the fact that you had missed out on an opportunity to buy a good financial product which suits you because you have invested somewhere else.
Taking Free advice: I have learnt that a lot of investment decisions are made during a coffee break with your friend. He tells you about a product in which he has invested a few days back. He also says that you should be investing in it for your good. Without even knowing about it properly, you make your mind upon buying it. You are happy that you have received an advice free of cost. However, this free advice could cost you in the long run. Before accepting his advice, did you think of his skill set/knowledge in suggesting you this product?? Is he qualified enough to advice you? It’s better to take some time to research a good financial planner and pay him fees for his advice.
Investing Randomly: A lot of times you may just pick a product because you heard that it is good. It is a random investment. Have you considered your goals, objectives and time frame of investment? If you did not, don’t worry. Many of us do not do it either. You might have picked a mid/small cap fund with high risk without knowing that it is for a goal which is 6 months away. Had you thought of that goal before investing, you would have picked a short/ultra short debt fund.
Investing without Research: One thing which always lures us into purchasing a financial product is returns. Our eyes lit up whenever we see returns of 10, 12 or 15%. There are products which have given these returns and you might have chosen one of them based on past performance. But, is returns the only criteria for selecting a product? Shouldn’t we also know about aspects such as fund manager, taxation, liquidity, risk, etc. Doing proper research is necessary before investing as you would know the pros and cons of a product beforehand. It will also help you make informed decisions.
Not Diversifying: I know that you might have read this phrase umpteen times – ‘Don’t put all your eggs in one basket’. The phrase is perfect from an investment perspective. You need to diversify if you are serious about your goals. A long term goal such as retirement cannot be achieved through a debt product like FD/RD. In the same way, an equity fund does not suit a short term goal such as vacation after 5-6 months. A tasty recipe is a mix of different spices. In a similar way, you need different kinds of products in your portfolio to derive the best from it.
Not having patience: Patience is definitely a virtue. Great inventions were not made overnight. Some investments are the best only when held for longer periods. A common mistake by most of us is that we sell a product if it has gone down after a few months of buying it. You knew that the product was volatile and hence might fall in the short run. Instead, emotions take over and you forget that you had done enough research on it and picked a good financial product. Many investors shy away from mutual funds for the same reason. Next time someone talks about mutual funds, they tell him/her to stay away from such products as it failed in their case.
Trying to time the market: Timing the markets is something which even experts have failed to achieve. According to me, trying to time the markets is like going on a wild goose chase. Moreover, traders should be doing it, not investors. If you want to be an investor, invest in a product according to its merits and demerits. There might be occasions such as recession when even fundamentally good stocks also go down. But, it’s just a matter of time. If it’s good, it will bounce back. Even the best of equity mutual funds have gone down when markets were down. But, they managed to weather the downside and delivered pretty good returns later.
Staying conservative when young: The final mistake which I wanted to state is that a lot of us try to be conservative when we are young. It could be because our elders have advised to be so or because of our past couple of experiences. This is a time when we need to be aggressive. Important goals such as children’s education, children’s marriage, house, retirement, etc would be far away. Conservative products cannot take you to these goals. You might have heard about the power of compounding. This is what will take you to such goals. Take risks by investing in equities. In the long term, equities deliver returns of 12-15%, which no other product can. However, take note of the term ‘long’. You may have to wait for 10 years or more to achieve such high returns. Of course, there are other factors such as portfolio review, re balancing, etc which you need to take care of in this period.
Conclusion
These are some of the common mistakes made by us. If you had been into investing for a few years, you would have already learnt most of these. If not, it is better to learn soon. If you have noticed any other mistakes made while investing, do share with us.
Most Important Considerable Factors
We, maximum people are believed to be great savers traditionally, with an average savings rate close to 30% per annum. However, our investments have been pretty static in nature. We prefer bank deposits (which yield 4-5% to 8-9.5%) to equities (which can yield up to 12% in the long run). The blame cannot just be thrown on the global economy or the policy paralysis of Indian govt. It has to be lack of financial awareness.
Stats don’t lie. The insurance companies/ agents know this pretty well. According to the latest news, investors have lost Rs 1.3 trillion (one lakh crore) due to mis-selling of insurance policies. This is a huge number. Gone are the days when you could double your money in 5-6 years just by doing a post office deposit. Time has changed and so should we. There has to be a strategy in place to deal with your finances.
Below are 5 important factors based on which an investment strategy can be finalised:
Age: Our mindset changes as we grow old. We tend to up skill ourselves on various things in life. Financial planning also needs a similar treatment. When in mid 20’s, we do not have any dependants and this is the time when we start off our career. Usually, in this stage it’s about spending, spending and more spending. Impulse buying is very high and we cannot resist the temptation to buy the latest jeans or the ultra modern tablet. We could do a little bit better by saving in small amounts every month, listing all expenses or making a simple monthly budget.
In our 30’s, we would have dependants. We would love to buy that dream house or that latest sleeky car (thanks to those tons of loan options). But, when responsibility arises, we should be ready to compromise. We should be looking at building assets and look for loan only when it cannot be avoided. Personal loans should be a strict ‘No’. We should be able to slowly increment our savings as and when our salary rises. This is the perfect time to plan for retirement. Retirement planning at the age of 30? You must be thinking am kidding. No, am not. Power of compounding works for you when you start early. There would be fewer chances of you missing on your goals if you start early. Also, make sure you are covered with sufficient insurance since your family should not be missing your presence financially.
40’s is a stage when our children would be young and expenses would naturally increase. So, have an eye on all such expenses and plan accordingly. If you have missed out on taking a health insurance, take it now. You might not get one if you delay it or even if you get it, it could be beyond your affordability. When in 50’s, you might feel you have worked enough and may want to retire early. Make sure you don’t take too much of risk in this stage. After retirement, continue to be conservative but make sure you don’t lose out to inflation because you would not have hikes in income to cover it up.
Risk Appetite: Risks are inevitable. There is no investment without any risk. Always know your risk appetite before investing in any instrument. Think how you would react if the stock you have invested dips 20% in a session. Based on such questions, decide whether you want to be an active investor or a passive investor. Active investor is one who actively buys and sells. He / She believes he / she can time the market. Passive investor is the one who buys those funds which do not need active intervention, such as index funds.
Goals: Every investment should be linked to a goal. Your investments should not be a wild goose chase. Clearly list all your goals and then prioritize. Do a backward calculation with regards to your goals and then work towards your goals in a systematic manner. Your goals should be SMART (Specific, Measurable, Attainable, Realistic and Time bound).
Time in hand: To get the right strategy going, you need to put in time regularly to update yourself with knowledge on financial markets and instruments. If you are very busy with your work and cannot put aside at least 4-5 hours every week for your finances, you need a financial planner. He would be able to guide you through all aspects of your finance and also suggest you a proper investment strategy based on your situation.
Asset allocation: This is the mother of all strategies. According to a survey, 90% of returns in a portfolio are due to asset allocation. Asset allocation combines factors such as diversification, liquidity, risk, etc. It tells you how much you need to invest in a particular asset class. For instance, if you have Rs.10,000 to invest, it would tell you how much you need to invest in liquid funds, balanced funds, large cap funds and so on.
If you ask me if there is any thumb rule for this, I would say no. All the above factors combine to make that ideal asset allocation.
Conclusion
There is nothing like a one size fits all strategy. It would depend on multiple factors. Once invested should not mean invested forever. Investments need to be monitored and rebalanced regularly. Again, if you do not have the time and knowledge to do all this, better consult a good financial planner.
Most Common Mistakes while Investing
Everyone knows that money needs to be invested somewhere and not just saved. Like everything else, we make mistakes even while investing. Let’s discuss the 8 most common mistakes made by us while investing in various products.
Buying on obligation: Quite often one of our friends/relatives comes to us with an offer to buy insurance/mutual funds. They tell us that this is the best product designed and created just for you. And you buy it either because you believe him or out of an obligation that you cannot reject him. This is a common scenario in life insurance. Your friend/relative would be an agent of a life insurance company and would approach you whenever he is short of his target. You decide to help him by paying premium for an insurance policy. You ignore the fact that you had missed out on an opportunity to buy a good financial product which suits you because you have invested somewhere else.
Taking Free advice: I have learnt that a lot of investment decisions are made during a coffee break with your friend. He tells you about a product in which he has invested a few days back. He also says that you should be investing in it for your good. Without even knowing about it properly, you make your mind upon buying it. You are happy that you have received an advice free of cost. However, this free advice could cost you in the long run. Before accepting his advice, did you think of his skill set/knowledge in suggesting you this product?? Is he qualified enough to advice you? It’s better to take some time to research a good financial planner and pay him fees for his advice.
Investing Randomly: A lot of times you may just pick a product because you heard that it is good. It is a random investment. Have you considered your goals, objectives and time frame of investment? If you did not, don’t worry. Many of us do not do it either. You might have picked a mid/small cap fund with high risk without knowing that it is for a goal which is 6 months away. Had you thought of that goal before investing, you would have picked a short/ultra short debt fund.
Investing without Research: One thing which always lures us into purchasing a financial product is returns. Our eyes lit up whenever we see returns of 10, 12 or 15%. There are products which have given these returns and you might have chosen one of them based on past performance. But, is returns the only criteria for selecting a product? Shouldn’t we also know about aspects such as fund manager, taxation, liquidity, risk, etc. Doing proper research is necessary before investing as you would know the pros and cons of a product beforehand. It will also help you make informed decisions.
Not Diversifying: I know that you might have read this phrase umpteen times – ‘Don’t put all your eggs in one basket’. The phrase is perfect from an investment perspective. You need to diversify if you are serious about your goals. A long term goal such as retirement cannot be achieved through a debt product like FD/RD. In the same way, an equity fund does not suit a short term goal such as vacation after 5-6 months. A tasty recipe is a mix of different spices. In a similar way, you need different kinds of products in your portfolio to derive the best from it.
Not having patience: Patience is definitely a virtue. Great inventions were not made overnight. Some investments are the best only when held for longer periods. A common mistake by most of us is that we sell a product if it has gone down after a few months of buying it. You knew that the product was volatile and hence might fall in the short run. Instead, emotions take over and you forget that you had done enough research on it and picked a good financial product. Many investors shy away from mutual funds for the same reason. Next time someone talks about mutual funds, they tell him/her to stay away from such products as it failed in their case.
Trying to time the market: Timing the markets is something which even experts have failed to achieve. According to me, trying to time the markets is like going on a wild goose chase. Moreover, traders should be doing it, not investors. If you want to be an investor, invest in a product according to its merits and demerits. There might be occasions such as recession when even fundamentally good stocks also go down. But, it’s just a matter of time. If it’s good, it will bounce back. Even the best of equity mutual funds have gone down when markets were down. But, they managed to weather the downside and delivered pretty good returns later.
Staying conservative when young: The final mistake which I wanted to state is that a lot of us try to be conservative when we are young. It could be because our elders have advised to be so or because of our past couple of experiences. This is a time when we need to be aggressive. Important goals such as children’s education, children’s marriage, house, retirement, etc would be far away. Conservative products cannot take you to these goals. You might have heard about the power of compounding. This is what will take you to such goals. Take risks by investing in equities. In the long term, equities deliver returns of 12-15%, which no other product can. However, take note of the term ‘long’. You may have to wait for 10 years or more to achieve such high returns. Of course, there are other factors such as portfolio review, re balancing, etc which you need to take care of in this period.
Conclusion
These are some of the common mistakes made by us. If you had been into investing for a few years, you would have already learnt most of these. If not, it is better to learn soon. If you have noticed any other mistakes made while investing, do share with us.