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 Debt

Risk refers to uncertainty in returns. Debt instruments are considered less riskier than Equities because there is a lesser uncertainty in the returns one can expect from Debt Instruments. Never the less, following are the major risks are involved in investing in Debt Securities.

Interest-Rate Risk

Fixed income securities such as bonds, debentures and money market instruments face interest-rate risk. Generally, when interest rates rise, prices of existing fixed income securities fall and when interest rates drop, prices of fixed income securities increase.

For example: If a Rs. 100 par value security offers 9% rate of return, and the prevailing rate of interest increases from 9% to 10%, the values of the security will fall below Rs. 100 because it offers a lower rate of return(9%) compared to the market return(10%). The extent of fall or rise in the prices depends on the existing coupon rate, time to maturity of the security and the quantum of increase or decrease in the interest rates.

Credit Risk

In simple terms this means that the issuer of a debenture/bond or a money market instrument may default on interest payment or in paying back the principal amount on maturity. Even if no default occurs, the price of the security may go down if the credit rating of the issuer of the debt instrument goes down.

Investment in Government securities has zero Credit Risk as the Government is not expected to default on its obligations.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value. Liquidity risk can be measured by the difference between the buy price (bid price) and the sell price (offer price) quoted by a dealer. Larger the difference, greater is the Liquidity Risk. Indian Debt market has a higher Liquidity risk compared to Global Debt market, because of low trading volumes in the Indian Debt market.

Reinvestment Risk

If interest rates fall, the coupon payments being received on fixed income securities will have to be re-invested at the lower prevailing interest rate. This is known as Reinvestment Risk.

For example: If you are receiving 9% coupon on a fixed income security, and the prevailing interest rates are 7.5%, the coupon payment received will have to be invested at the lower rate of 7.5%.

As zero coupon securities do not provide any periodic interest payments they do not have Reinvestment risk. However, they have a higher interest rate risk.

Debt / Investments - 09/24/2018
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Should you invest in Sectoral Funds?

First of all, what is a Sectoral Fund?

A Sectoral Fund is a Mutual Fund that restricts its investments in stocks of a particular sector. For example: Reliance Pharma Fund invests only in stocks of Pharma companies. UTI Banking Sector Fund invests only in Banks.

An extension of a Sectoral Fund is a Thematic Fund that invests in stocks based on a  particular theme. For example: Birla Sun life GenNext Fund invests in companies that are expected to benefit from the rising consumption patterns in India, which in turn is getting fueled by high disposable incomes of the young generation (Generation Next).

Sectoral and Thematic Funds are generally referred to as a single category. Some of the Sectoral funds available in India include Banking, Pharma, IT, Technology, Infrastructure, FMCG etc.

The reason Mutual Funds launch such schemes is that they believe a particular sector will outperform the broader index and generate higher returns.

 

Risk/Return Profile of Sectoral Funds

Sectoral Funds fall in the 'High risk' 'High return' category of funds. If the particular sector does well, then one can expect higher than market returns. The same is true vice versa.

For example: Franklin Infotech Fund invests in stocks of only IT companies. On April 30, 2011 the fund had an exposure of over 50% of the fund portfolio to Infosys Technologies and over 25% to TCS. When the March '11 Quarter results of Infosys did not meet market expectations, its stock price fell and the value of this fund also fell be over 8% in just two days!

Sectoral Fund: The Pawn or the Queen?

Should you invest in Sectoral Funds?

Sector Funds add a flavour to your portfolio and hold the possibility of increasing the returns of your overall portfolio if they do well. Some of the best performing funds in the last five years have been Sectoral Funds in the Banking and Pharma space.

You should take exposure to Sectoral Funds only if you have the higher risk appetite. Again, you must ensure that investments in Sectoral Funds do not exceed 10% of your total portfolio.

Points to be kept in mind before investing in such funds

Firstly, you need to understand the objective of the Mutual Fund scheme properly. For example: Some Sectoral Funds invests only up to 65% of the portfolio in the stated sector. This can dilute your exposure to a sector.

What is included in the definition of a sector/theme also varies from fund to fund. For example: As on date, DSP T.I.G.E.R Fund and ICICI Infrastructure Fund have significant exposure ICICI bank. The logic being, as infrastructure grows, banks are going to be directly benefited by increased lending. This also needs to be studied.

Secondly, you need to check the exposure of your investment portfolio to a particular sector. For example: Most diversified equity funds already have a good exposure to the banking sector. One must take this into account before taking additional exposure to the banking sector through sectoral funds to avoid over exposure.

Thirdly, you must understand that the fund manager of a sectoral fund is restricted in his investment options and will have to continue to invest in a particular sector even if that sector is not doing well. A diversified fund manager has no such restriction and can easily make a switch.

Lastly, compared to a diversified Equity Fund, a Sectoral Fund is not held in the portfolio for a very long time, say 10-15 years. When a Sector is expected to do well, one buys such a fund and exits the fund once it starts going out of favour. The tenure for such funds generally is 3-5 years. Some amount of timing is required to enter and exit such funds.

For example: The Infrastructure sector in India did very well till the markets crashed in 2008. Even though the markets recovered from the crash, the sector has grossly underperformed the broad index till date.

In conclusion, take an informed decision before investing in a Sectoral/Thematic fund.

Investments / Mutual Funds - 09/22/2018
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Why Start Saving Early?

A very simple solution to the question.

Below we show a very simple comparison between an individual who invests Rs. 25,000 per year in PPF @ 8% when he is 25 years for 10 years versus and another individual who invests DOUBLE the amount when he is 35 years, again for 10 years. 

Assuming they both hold the amounts invested till they retire at the age of 60 years, we let the number do the talking:

START INVESTING EARLY

 Not only has the early starter multiplied his investment by 11.57 times compared to just 5.36 times, even his total corpus on retirement is higher by Rs. 2,12,962.
Investments - 09/20/2018
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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
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Mutual Funds Investment Options - Dividend or Growth

Investments Options basically address the question of what should be done with the returns you receive on the investments made. In a normal Fixed Deposit, you receive interest periodically. The interest is either paid to you (known as Simple Interest) or it is reinvested and so that the interest earned in the first year is invested and earns interest in the second year (compound interest). In case of direct investment in equities, if the value of the share increases and a dividend is declared, it is received by you in your bank account and the value of the equity share falls to the extent of dividend received by you. When you invest in any Mutual Fund Scheme you have the following Investments Options: Dividend Option: Under this option, the Mutual Fund Scheme periodically declares a dividend which is paid out to the investor just like how an equity share paid the dividend or how a fixed deposit pays interest. However, the dividend is not guaranteed and is subject to profits made by the Mutual Fund Scheme and availability of distributable surplus. If the units of a Mutual Fund Scheme 'A' are valued at INR 45 per unit and the Scheme 'A' declares a dividend of 20%, an amount of INR 2 (20% of INR 10) will be paid to the investor and the value of the Scheme 'A' units will fall to INR 43. This option suits someone who is dependent on his investments for regular income. Dividend Reinvestment OptionUnder this option, the amount of dividend declared by the Mutual Fund Scheme is used to buy more units in the scheme. The dividend of INR 2 declared above by Scheme 'A' is not returned to the investor, it is used to buy more units in the Scheme 'A'. The net effect of the Dividend Reinvestment Option on the value of the investments is the same as the growth option. Dividend Reinvestment Option has a small tax advantage for Liquid Schemes. Short-Term Capital gains on Liquid Schemes are charges as per the investors' slab rates (maximum slab rate: 30% plus surcharge plus education cess). However, the dividend declared by a Liquid Scheme pays a dividend distribution tax of 20.3576%, resulting in the tax advantage.
Investments / Mutual Funds - 09/16/2018
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Modes of investing in MF - SIP, STP, VIP etc

Having decided the mutual fund and the scheme one wants to invest in, the investor has to finally decide through what mode he is going to invest the money. He has the following modes available to him: Systematic Investment Plan(SIP): This is the most popular choice for a salaried individual or any person who saves money regularly. Every month on a specified date an amount you choose is invested in a mutual fund scheme of your choice. The forms/instructions need to be submitted only once and every month the amount is deducted from your bank account and invested in the Mutual Fund Scheme. Hassle Free Investments. Systematic Transfer Plan(STP): In this mode of investing, where you initially park your entire INR 1 lakh (a big lumpsum amount) in a less risky category of mutual fund such as a liquid scheme, and then systematically transfer money on a regular basis from the liquid scheme to an equity fund or any other mutual fund scheme of the same fund house. For a business person who earns in lumpsums, STP is the best option. Since markets are volatile in the short run, and its impossible to time the markets to perfection, an investor must opt for STP.  This helps even out the volatilities just like the SIP option. Lumpsum (one time) - When you have a big sum of money lying in your bank account and you wish to invest the entire money in one go, then you can consider investing via lumpsum investments. This is more risky, as the entire amount is exposed to risk immediately. A target investment amount that has to be achieved monthly, needs to be set. Based on the target, the value of subsequent investments will be derived from the difference between the target and the actual value of the investment. Systematic Withdrawal Plan(SWP) is the complete opposite of SIP. It helps you withdraw equal sums of money on a periodic basis. Once you have accumulated a corpus through investments over a period of time, the SWP route can be used to withdraw the money on a monthly/weekly basis to cater to your needs. Value Averaging Transfer (VTP) - works on a similar while flexibly transferring money from one scheme to another based on the set target. VTP is similar to VIP in terms of the concept of investment. The difference here is that instead of a bank account, the money is transferred from a liquid fund to the selected equity fund VTP is not suitable for novice investors. They should consider investing through STP in the early stage of investing. Dividend Transfer Plan(DTP): An innovative option for risk-averse investors. One has two choices under this. If you have invested in an Equity scheme, you can decide to transfer Dividend declared by the Equity Schemes to a Debt Fund. This ensures that your profits are protected and transferred to a safer avenue. Conversely, if you have invested your money in a debt scheme, you can transfer Dividends declared by the Debt Fund to an Equity Scheme. This way your capital is protected and your returns are invested in equities in a bid to earn higher returns. As you can see, the underlying for all the above option is to help an investor become a disciplined investor and to overcome the problem of timing the market.
Investments / Mutual Funds - 09/12/2018
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Open-Ended and Close-Ended Funds

The Indian market has begun to realise the potential of mutual funds as the most advantageous avenue for exposure to equities. Mutual funds are going to be your money partner for the rest of your life. It is worthwhile to spend a little time for understanding some basics related to mutual funds. We have already touched upon the types of Mutual Funds on the basis of the investment objectives (Equity, Debt, Gold, etc.). Another distinction in Mutual funds is based on the length of time for which the fund is collecting money. The two categories are Open-ended and Closed-ended funds. An Open-ended fund has a perpetual lifespan-Ended and you can invest in the fund or redeem your investments at any time. As inflows are unlimited and, typically, unrestricted, there is no limit to what the corpus can grow to. At present most AMCs prefer to launch has funded as it helps the AMC garner money A close-ended fund restricts the inflows to a specified period. They are open for subscription for a few days from the date of their launch. The Fund stops accepting funds from the public, once the subscription period ends. However, to ensure liquidity, the fund houses list their closed-ended schemes on a stock exchange. The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. Apart from listing on an exchange, these funds sometimes offer to buy back the units, thus offering another avenue for liquidity. SEBI regulations ensure that closed-ended funds provide at least one of the two avenues to investors for entering or exiting.
                                                                                                                Choose the Fund to suit your purpose
Close-ended funds, by their feature, come with a fixed tenor ranging from 3 months to over 3 years. Most Close-ended funds are Debt Funds. Fixed Maturity plans launched with a fixed tenor, is the best example of a Close-ended Fund. It is not uncommon for Fund Houses to launch Close-ended Equity Funds. Such funds help the Fund Manager invest as per the market cycle and prevent the investors from cashing out in case of adverse market conditions. Once the fixed period for the close-ended fund gets over, the maturity proceeds are either repaid to the investors (typically, in the case of debt funds) or the close-ended fund is converted into an open-ended fund (typically, in the case of an equity fund). Once converted to an open-ended fund, the fund is open to subscriptions and redemptions like any open-ended fund. Close-ended schemes are traded on the stock exchange in comparison to the open-ended schemes. Also, close-ended schemes have different pricing as compared to the price you buy because they are traded on the exchanges. Different periods of time in the last 20 years have seen open ended and close ended funds change in popularity with the AMCs. In the early years of the mutual fund industry, fund managers were not sure if investors would stay invested in the fund. Due to this uncertainty on account of investor behaviour, most schemes launched in 1990s were closed ended schemes. With the growth and maturity in the market, fund managers gradually moved towards the open ended schemes. Funds switched to launching closed ended funds in 2006 and 2007 due to a cost advantage as the closed ended funds allowed to charge initial marketing fees from the investors. With changes in SEBI regulations, that advantage no more exists and currently AMCs launch open ended or closed ended funds keeping in mind the purpose of the fund and investor requirements. What, then, should be kept in mind by the investor while choosing between the two kinds of funds? Close-Ended Debt funds begin with a fixed tenure. This enables the Fund Manager to invest in securities in line with the term of the Fund. This reduces the Interest rate risk faced by the investor as the investments in the Fund are held till maturity. In case of Close-ended Equity fund, the manager knows the size of the corpus he has to manage. Another advantage is that there are no redemptions from the fund during its tenure. The Fund Manager need not hold excess cash in anticipation of redemptions. However, there is no proof to show that Close-ended funds have performed better than open-ended funds.
Investments / Mutual Funds - 09/10/2018

Financial Discipline

The problem in today’s world is that everyone puts their entire efforts in earning money. Both the partners work hard to satisfy family needs from the financial perspective. In doing so we are compromising on various aspects like health, parenting, reading books, spend time on self etc. We are so stressed out that we do not think of anything else. We have huge monthly saving to invest but we don’t plan and we are not sure where to invest. Most of the time the money lies ideal in saving accounts or they are made to invest in real estate by by non professionals. Or some bank agent sees their bank balance and manages to sell them a ULIP or some other high commission product in the name of their child's future. By the time we realise that we made a bad investment, we would have already lost a lot of money in these products.
                                                                      To be a winner, you have to put efforts into something!!
We all are so busy doing so many things that regular financial planning takes a back seat. Further, lack of knowledge and enough information delays it even more. People don’t realise the importance of financial discipline. You make money, but do not put efforts to make the money you have made to make more money for you. If you channelize your savings properly you can easily achieve your dreams. With financial planning, you can do goal-based planning and ensure that you live the quality of life you always desired, ensure your children's future, plan and retire early comfortably, spend time with your kids etc. Financial discipline also includes proper tax planning and timely tax filling. There are various benefits available for an individual under the income tax Act which are considered while preparing a financial plan. However, many people just invest for the purpose of tax savings and nothing more or less than that. This is not enough, you must get more discplined, define your goals, understand your savings, reduce your expenses and invest accordingly. The main purpose of this article is to encourage individuals to inculcate financial discipline. In our other articles, we have discussed about how to convert a financial discipline into gains by investing properly.
Investments - 09/04/2018

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