How Should You Invest Right Now

How Should You Invest Right Now

Tough times call for tough decisions! Well for us, it is about utilizing our time at home as much as possible and evaluating the action plan what to do now! With COVID 19, the world financial markets are also giving investors quite a scare. While we are all sitting at home and doing our bit to avoid the spread of COVID 19, we at Wealth Cafe decided to share more information on what you as an investor could do to manage your money better.

'Investing is not about avoiding the risk but managing the risk to make maximum returns possible'

Investing Rule 101 - High Risk = High Returns & Low Risk = Low Returns

Never forget the Rule of Investing.

Only after you have understood and digested this fundamental Rule of Investing that you should read further.

How should you Invest?

- Know your Risk Profile (How much risk can you bear)

- Invest in financial products that match your risk appetite by doing Asset Allocation

How to do Asset Allocation?

- We have attached the asset allocation table based on your Risk profile to help you understand how much you should be investing in debt & equity. Further, we believe that you all remember the Risk profile Questionnaire you took in the Workshop.

- A simpler method is to use your age to determine your asset allocation. If you are in the age bracket of 25- 35 years, invest 30% in Debt and 70% (100 - 30) in Equity. The rationale here is that the younger you are the more risk you can take as you would have a longer investment horizon and have a higher risk-taking appetite. While this appears to be a simple method, this is a crude method and risk profiling is the best way to arrive at your personal risk profile.

What Next?

Once you have determined your investments into Debt: Equity-based your Risk profile. Ensure that you maintain your Asset Allocation Ratio.

For Example:

This is how you begin your investing journey.

Now, given the current volatile markets, if after a month, Equity falls further down (which we are not sure of!), you must do Asset Allocation again.

This action of checking your investments and selling/buying as per your asset allocation is known as re-balancing your portfolio.

How often should you re-allocate/re-balance your portfolio?

You must re-balance your portfolio where your asset allocation varies by more than 5% from the desired Asset Allocation ratio.

How does this help?

By sticking to this rule-based allocation, all sentiment-based investments can be kept aside and you end up buying equities when they are cheap and selling them when they are expensive.

Equity - 03/31/2020

Impact of Compounding - Why should you start your SIP now.

Compounding is also one of the reasons why you must invest as early in your life as possible, even if the amount that you are planning to invest is small.

SIP (Systematic Investment Plan) is the best way to achieve the same too.

Many people keep waiting to have enough before they could start investing. In fact, the key to wealth creation lies in starting to invest immediately and staying at it for a long period of time. Let's understand this with the help of this example.

Bunny - A planned guy, started investing at the age of 25

Avi - A bit laid back, started to invest only at the age of 35.

Bunny Invested 10,000 per month for 30 years, investing a total of 36 lakhs, whereas Avi started late so he invested 15,000 per month for 20 years, totalling his investment of 36 lakhs and matching Bunny's Investment.

At the age of retirement at 55, Bunny makes 6.92 crores, 3 times more than Avi, who makes only 2.24 crores.

Bunny has the edge over Avi for starting 10 years early and continuously investing even if it is with smaller amounts.

Now what if Avi wants to achieve the corpus of 6.92 crores that Bunny did. How much will Avi have to invest to achieve that?

Well given that Bunny is making 3.5 times more than Avi at the age of 55, Avi will have to invest 3.5 times more than what she was investing originally. Avi will have to put aside INR 46, 240 per month from the age of 35 to 55 i.e. a total investment of 1.1 crores. Versus Priya invests only 36 lakhs to achieve the corpus of 6.92 crores.

Now one thing that is very clearly evident from the case is that the investing style is the difference in their portfolio and how Starting early can make all the difference in your returns. Bunny started 10 years earlier than Avi in his 20’s and he achieved a higher corpus by over 4.5 crores. Another best thing done by Bunny is he stayed invested for a long period of time. i.e. 30 years.

Tabular representation

Particulars	Bunny	Avi
SIP amount	10,000	15,000
Start Age	25	35
Invested Till	55	55
Maturity Date	At age 65	At age 65

Maturity Amount	6.92 crores	2.24 crores

Total Amount Invested	36,00,000	1.1 crores

So the 2 things that create magic for your investments are

1.Starting early

2. Investing for long……….. Long term.

When it comes to investing, the earlier you start the better, the compounding effect grows your money exponentially.

These can give you astonishing results, so what are you waiting for! Start today.

That is the power of compounding taking effect for the investor who started early.

Equity / Investments - 03/02/2019

Most Essential Factor for a Successful Investor

Scores of articles have been written on this topic, what does it take to be a Successful Investor. A quick search on Google will give you results which include Fundamental Analysis, Technical Analysis, Economic data Analysis, Understanding the business of company, Timing the markets, monitoring Currency movements, and the list goes on and on. Then, what is the Most Essential Factor for a Successful Investor?

DISCIPLINE.

This one word overrides all other factors.

Discipline to stick to one's investment plan.

Discipline to continue to contribute for one's goals.

Discipline to book profits and re-allocate based on one's Asset Allocation.

DISCIPLINE PAYS OFF

Studies have shown that more than 90% of the returns earned by an investor can be explained by Asset Allocation. That means, right Asset Allocation (for example, Debt or Equity) is more important than the selection of the actual instrument (say an HDFC Fund scheme or a Reliance Fund scheme). And it requires DISCIPLINE to maintain the Asset Allocation as time passes and as markets fluctuate.

Investors reaped enormous profits when the markets reached new peaks in January, 2008. This was followed by the famed crash in September, 2008 all across the globe. This led to panic redemptions on part of many many investors. Unexpectedly, the markets recovered quickly to reach the 2008 highs in November, 2010.

Investors who stayed invested were the ones' who reaped maximum returns on the systematic investments made in the dips. Investors who exited in 2008 out of panic have only themselves to blame for missing out on the rally.

Again, the longer you stay invested in the equity markets, lesser is the probability of getting negative returns. A study of the Sensex returns for the past 30 years have shown that, if you were invested in the index for any period of 14 years or more, there is zero probability of earning negative returns. As one of the Investment gurus rightly said, "Time in the market is more important than timing the market".

Successful investors from around the world swear by only one thing...DISCIPLINE. A Financial Plan helps you initiate and maintain that Discipline.

Equity / Investments / Mutual Funds - 09/28/2018

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Risk Involved in Investing in Equities

As mentioned, Risk is the uncertainty involved in the expected returns. Risk associated with Equities are much higher compared to Debt instruments. So are the returns. This follows the universal principle, "Higher the Risk, Higher the Return".

Market Risk

The biggest risk associated with Equities is Market Risk. Equity instruments are volatile and prone to price fluctuations on a daily basis due to changes in market conditions.

Financial Risk

This is the second biggest risk associated with investment in Equities. Disruption in the internal financial affairs of a company will have a direct impact on the share prices of the company and may cause a loss to the investor. A prime example of such an instance is the Satyam fiasco in the January 2009 or a recent example of management fights in SKS Microfinance.

Investing Risks...there are a multitude of them.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value.

Securities, which are not quoted on the stock exchanges, are inherently illiquid in nature and carry a larger amount of liquidity risk in comparison to securities that are listed on the exchanges. While securities listed on the stock exchange carry lower liquidity risk, the ability to sell these investments at the market price is limited by the overall trading volume on the stock exchanges.

Settlement Risk

It is a risk that the counter party does not deliver the security purchased against cash paid for it or value in cash for the security sold is not received after the securities are delivered by us.

Such risk can be avoided by entering into transactions in the nature of delivery versus payment (DVP) or settlements via clearing houses where the Stock Exchange acts as the counter party to every transaction.

Risks associated with investing in foreign securities

The biggest risk associated with investments in foreign securities is fluctuation in foreign exchange rates. If you invest in a US Stock which gives you 20% return over a period of time and the US Dollar depreciates by 10% during this period, your net return in domestic currency will be much lower than 10%.

Other risk involved include restriction on repatriation of capital and earnings under the exchange control regulations and transaction procedures in overseas market.

You will see that a some of the risks listed above also affect Debt Securities. It is very difficult to segregate risks which affect only one type of investment.

Equity / Investments / Mutual Funds - 09/18/2018

What are the different funds in a ULIP and why to switch between them?

Most Insurers offer a wide range of funds to suite’s one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles and thus, varied returns.

We have listed below some common types of funds that are available:

Sr. No	General Description	Nature of Investments	Level of Risk
1.	Equity Funds	Invests in equity shares of the companies listed on the stock market. This may be further split into small-cap Equity, Mid-cap equity and Large-cap Equity	High
2.	Debt Funds/ Interest Income Funds	Invested in corporate bonds, government securities and other fixed income generating instruments	Medium
3.	Cash Funds/ Money Market Funds	Invested in cash, fixed deposits or other money market instruments which are liquid.	Low
4.	Balanced Funds	They are a combination of Equity and Debt i.e. a balance between Equity and debt.	Medium to high

The funds of a ULIP are similar to the various fund classification of a mutual fund. It is due to the basic nature of both the investment products. However, it is not that easy to switch between mutual funds. Refer our Article on how to switch between mutual funds.

ULIPs are favorable due to the option to switch between different funds as per our needs and requirements. The primary objective of switching funds is to leverage from the funds performing well. If your funds in your portfolio are not performing well then the peers, you may choose this option.

There is a basic cost involved in switching of funds which depends on the ULIP that you own. Some ULIPS, allow one transfer free and anything beyond that has a fixed cost. Refer our Article - Various Charges associated with a ULIP.

Also, many people make use of switching to meet their goals and make the most of the tax benefit. You may refer to our Article ----

To ensure that you make the most of this option, you must keep a track of the funds’ performance to make an informed decision.

Asset Allocation: You must switch to re-balance your portfolio, to maintain your asset allocation or to make the most of a sudden change in the market condition. This change in market condition may also require you to review your asset allocation. As discussed for this purpose switching is cheaper than selling and re-investing mutual funds.
Life stage Needs / goal-based approach: when a switch is required to achieve your goals set in mind, you must do the same using this option in ULIPS. For example, if you have invested for a 10-year long-term goal in an equity-based fund. Based on the rules of goal setting, from the 7th year, you should start switching your fund to a debt fund to not lose the gains made in an equity fund. Such a switch is cheaper and more convenient with a ULIP than with a Mutual Fund.

Since ULIPs are long-term market-linked plans, you should review and manage them appropriately to optimize your asset allocation, minimize the risk and maximize your returns. If you are not confident about managing it yourself, it does mean that you should lose the opportunity of growing your own wealth. You can always take advantage of the auto-manage options offered by the insurer or appoint a financial advisor who shall do the same for you.

To learn more - you can check our course - NM 102: Build a Safety Net. Use code SAVE20 for 20% off.

Equity / Insurance / Investments - 08/03/2018

Choice of Investment Products

Have you been confused when deciding where to invest your hard earned savings?

You are not alone because there are a sea of products available for you to put your savings in. We make an attempt to give you a snapshot of products below:

I. EQUITIES:

(1) Direct Equities: Investment in shares of companies through the stock exchange. This includes both the cash and the Futures & Options segments.

(2) Mutual Funds: Investment in over 1,500 Mutual funds which include the following categories; Large cap funds, Mid-cap funds, Sector Funds, Index Funds, Hybrid Funds(Debt plus Equity) and ETFs.

NEVER PUT ALL YOUR EGGS IN A SINGLE BASKET!

II A. DEBT INSTRUMENTS

(1) PO Monthly Income Scheme(MIS): A deposit offered by the Post Offices(PO) which pays a monthly interest. Suited for retired individuals.

(2) PO Recurring Deposit(RD): Another scheme from the Post Office which enables small periodic savings with as low as Rs. 10 a month.

(3) Kisan Vikas Patra(KVP): Popular fixed income bonds which repay the principal and interest on maturity.

(4) National Savings Certificate(NSC): Popular fixed income bonds which repay the principal and interest on maturity.

(5) Bank Fixed Deposits: The most popular investment avenue in India. The deposits could bear a Fixed Rate or a Floating Rate of interest. Banks also offer Recurring Deposits.

(6) Mutual Funds: Debt Mutual Funds score over deposits because of they are more tax efficient and more liquid. These include Income Funds, Monthly Income Plans and Liquid Funds.

(7) Corporate Deposits: Apart from banks an investor can invest in deposits of Corporates, NBFCs and other Financial institutions. These generally offer a higher rate of interest compared to bank deposits and have a higher risk.

II B. Retirement Saving Avenues:

(1) Senior Citizen Savings Scheme(SCSS): A government of India Scheme specially for retired individuals.

(2) Public Provident Fund(PPF): The most popular tax saving scheme falling under the 'EEE' category of investments.

(3) Employees Provident Fund(EPF): Mandatory contributions to the EPF required by law for all salaried employees result in this fund forming a part of every individuals' portfolio.

(4) New Pension Fund(NPS): Another 'EEE' category product, which helps one accumulate a corpus for his retirement days.

(5) Annuities: The corpus accumulated for one's retirement can be invested to earn monthly annuities to meet post retirement expenses.

(6) Reverse Mortgage: A product recently introduced in India, it offers retired individuals monthly income against the security/mortgage of their house.

II C. Government Bonds:

There are a number of securities issued by the Government of India available for investment based on their requirement:

(1) RBI Bonds

(2) State Government Bonds

(3) NHAI/REC Bonds u/s 54EC for Capital Gains

(4) NABARD Bonds u/s 80C

(5) IIFCL Tax Free Bonds

(6) 8% taxable Savings Bonds

III. STRUCTURED PRODUCTS:

(1) Capital Protection with market participation Products: Generally restricted to the High Networth Individuals(HNIs), structured products come in different shapes and sizes.

(2) Private Equity(PE) Funds: For the niche section of investors, these investments fall in the high risk high return category.

IV. REAL ESTATE:

(1) Direct Investment: This involves buying physical residential and commercial properties including land.

(2) Real Estate Funds: Just like Mutual Funds, real estate funds pool in the investors money and invest in real estate properties. This scores over direct investment because of lower transaction costs and professional management of the fund.

(3) Real Estate Investment Trusts(REITs): A security that sells like a stock on the stock exchange and invests in real estate directly, either through properties or mortgages. Such securities are not yet available in India.

V. COMMODITIES:

(1) Gold ETFs: The most popular and easiest route to gain exposure to investments in gold.

(2) Direct Investments: Just like the direct equity route, one can get exposure to commodities both in the cash or Futures & Options market.

VI. FOREX:

The largest market in the world in terms of volume, this is an investment product which is not yet popular among the retail investors in India.

Alternative Assets / Debt / Equity - 08/02/2018

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