Mistakes Investors Make That You Should Avoid

Hello fellow investors!

This Thursday, we are sharing a few mistakes that a beginner does when he/she starts investing and it is important that you understand them and act on it accordingly.

1. Not investing

The first and the biggest mistake investors and savers make is not doing it.
Don’t wait for that raise, inheritance, or lottery win. Start today, right now, with whatever you can.

Consider this: If you can save just 100 INR a day every day for 20 years, and earn 12 percent on it, you’ll end up with INR 30,48,395. That’s enough to change your life and the lives of those you love. So let's just start with keeping INR 100 aside.

2. Investing before doing your homework

When it comes to investing in risk assets like stocks, one mistake I’ve made is going on “gut instinct” and 20 minutes of Internet research.

When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of online research and information available free, not to mention TV shows and library books.

3. Being impatient

In a post called The 10 Commandments of Wealth and Happiness, the author, Stacy Johnson, offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever.

Stare at a newly planted tree for 24 hours and you’ll be convinced it’s not growing. Fixate on your investments the same way, and you could miss out on a game-changer.

As discussed above, your 100 INR daily grows into 30 lakhs over 20 years, you gotta be consistent and patient.

4. Not diversifying

There are two types of risk in stocks. The first is called market risk: If the entire market tanks, your stocks probably will as well. The other is called company risk: the risk a specific company will do poorly.

It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies.

Can’t afford to own a meaningful number of companies? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens – even hundreds – of companies with an investment of as little as INR 500.

5. Taking too much risk

Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.

Some investments are little more than gambling. Investments like options and commodities, for example, promise huge rewards, but the risk is also huge. Don't forget high risk = high returns.

6. Not taking enough risk

On the other side of the same coin, some investors stand like a deer in the headlights, unwilling to take even a measured amount of risk.

Instead, they keep their savings only in fixed deposits and bank, earning less than 6% (which is only reducing) and comforting themselves with Mark Twain’s expression: “I’m more concerned with the return of my money than the return on my money.”

Insured savings will ensure you never lose anything. But they’ll also ensure the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.

7. Paying too much attention

There is such a thing as information overload. Between the Internet, newspapers, magazines, and cable TV, it’s easy to get more than your fill of conflicting information.

Step back, look at the big picture, find a few financial journalists or others you trust, then tune out the rest.

8. Following the herd

One of the world’s wealthiest men, Warren Buffet, said, “Be fearful when others are greedy; be greedy when others are fearful.”

If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest – even if that day is a long way away, and even if it’s possible things could get worse before they get better.

We have seen the recovery that has happened from the below of March 23, 2020, of the stock market to current where we are almost back to what we were at the beginning of 2020.

9. Holding on when you should be letting go

Equity is best played as a long game. You should hold on long enough to see it through, but not knowing when to get out could cost you big.

Don’t obsess over your investments, but don’t ignore them either.

10. Being overconfident

The economy runs in cycles of boom and bust – when times are good, people often confuse luck with skill.

This is what happened during the housing bubble and the dot.com stock bubble and the past 4 months (March 2020 to July 2020). Being in the right place at the right time isn’t the same as being smart.

11. Failing to adjust

How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes.

As you approach retirement age, you should reduce your risk.

12. Not seeking qualified help

While investing isn’t rocket science, if you don’t have the time or temperament, consider getting help.
The wrong help?
A commissioned salesperson more interested in their financial success than yours.
The right help?
A fee-based planner with the right blend of education, knowledge, credentials, and experience - you can contact us at ria.wealthcafe.in

Happy Investing!

Disclaimer: - The emailers are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Investments - 06/19/2020

Understanding 'Mutual Fund Units & NAV

Hello fellow investors

More than 6 months into lockdown, 1 market crash and 1 great recovery, the only constant thing is our learning and our Thursday emails. We started writing our emails soon after lockdown and now we enjoy it so much that we cannot wait for the next Thursday to come and share some insights from the finance world with you.

In today's email, I am going back to the basics of Mutual Funds and explain what exactly are Mutual Fund Units and NAV and how they help or not help you make investment decisions.

What is a Mutual Fund Unit?

Just as share represent the ownership of Equity, units represent the ownership of Mutual funds. When you invest 5000 INR in a mutual fund and the NAV of the fund is 50 INR - you would get 100 units.

It is like buying petrol when you go to the petrol pump, you ask them to fille petrol in your car for 1000 INR. If the price per litre is INR 100, you would get 10 litres of petrol in your car.

Let's understand a few facts about Units of Mutual Funds

1. You don't need to buy 1 entire unit of Mutual Fund
You can buy a mutual fund in fractions or parts, it is the amount of money you invest that determines how many units you get. Like when you fill petrol in your car, you tell them fille petrol of INR 1000, if per litre petrol price is 72, you get 13.88 litres of petrol. The same thing happens with Mutual Funds.

2. You do not sell all your units to withdraw from Mutual Funds.
As you can partially invest in mutual funds, you can also partially withdraw from mutual funds. You can do that anytime you want (unless they are close-ended schemes)

3. Units are not the same as the share price
Equity Mutual Funds invests in Equity stocks/shares but it does not mean that units are the same thing. The share price is of an individual company and the demand and supply of that particular stock are one of the factors of their share price movements. Such does not happen to mutual fund units.

An average of all the underlying stocks of the mutual funds helps determine the value of each unit which is called as Net Asset Value - NAV.

4. NAV is the price of each unit
The price of each unit of a mutual fund is the NAV. If you want to buy 1 unit of a mutual fund, the price you have to pay is the NAV of that mutual fund’s unit on that day.NAV changes every day. So when the NAV goes up, you gain.

A high NAV does not mean that a particular Mutual Fund is better than the one with a low NAV. NAV price does not determine the value of the Mutual Fund.

NAV= (Total market value of assets invested by the fund-Expenses)/No of Units

5. Mutual fund unit price (NAV) goes up and down

As NAV is determined based on the total market value of the assets invested in by mutual fund which includes shares, bonds, cash, any interest or dividend earned by them and would also capture the movement in the price of shares & bonds, the NAV would also move.

NAV of a fund changes every day where there is a change in the underlying asset, this change helps you know if you are in profit or loss.

Mutual Funds are considered one of the most common forms of investing today, in fact it has generated a lot of wealth for investors who have understood the risk of investing in them and managed it appropriately. We will soon be launching a course on Mutual Funds and more, so stay tuned and keep reading our emailers for a detailed update on the same super soon.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

How to Invest in Mutual Fund guide / Investments / Mutual Funds - 06/09/2020

Overnight Funds - What, When and Why to Invest in them

Overnight Funds are the least risky mutual funds. They are less risky than the Liquid Mutual Funds as well.

This is a type of debt fund with practically no interest rate fluctuation risk and credit rating risk and low credit default risk. Overnight Funds are like investing in your savings bank account with slightly higher returns. This money can be part of your emergency fund or just money that you want to keep aside for a while for whatever reason without worrying about gains.

What is an overnight Mutual Fund work?

It is a debt mutual fund that invests in bonds that mature in one day! So at the start of each business day, the entire AUM would be in cash, overnight bonds would be purchased, they will mature the next business day, the fund manager would take the cash and buy more overnight bonds and so on. So each the NAV increase just a little bit due to the interest income.

Interest Rate Risk - If a bond matures the next business day, its price will not be affected if RBI changes the (overnight) interest rate. Next day, your bonds mature and you will buy new overnight bonds at the new rate.

Credit Rating Risk - If the credit rating of the bond issuer changes, the bond price will not be affected as your bond will mature the next day.

Default Risk - There is a risk only if the issuer of the bond absconds with your money or refuses to pay up: credit default risk. To manage this risk, there is collateral from the bond issuer. However, not fully covered, it still offers some protection for this risk.

In what product do these funds invest in?

Overnight funds invest in debt instruments with one day to maturity. When the bonds mature, the fund reinvests the proceeds in the next set of one-day instruments. The risk from default or fall in value within a day is negligible. Typically, the funds invest in collateralized borrowing and lending agreements (CBLO), a short term borrowing facility backed by securities of the central government through which mutual funds lend to banks and others, and reverse repos. Both of these are protected from credit risk since they are backed by collateral securities. The schemes may also invest in money market instruments such as treasury bills, certificates of deposit and commercial papers with residual maturity of not more than a day. If the interest rate for the day is high, the returns from overnight funds are up and vice-versa, with no impact on the value of the securities.

Who should choose overnight funds?

Anyone who wants to park money with the least amount of risk without worrying about returns.

A business owner who has a current account and thus, does not earn any interest on the cash lying in his/her account can invest in overnight funds to make some gains on their working capital.

Liquid Funds or Overnight Funds

Liquid funds holding securities with the highest credit quality will still earn better returns than overnight funds given that they hold securities with 25-30 days to maturity, while overnight funds cater to the need for a liquid investment with negligible risk for investors looking to park their funds for very short periods of time (a day maybe).

Many liquid funds allow investors to withdraw up to ₹50,000 instantly, and offers useful online features, looking for a steady short-term ride or parking funds for your emergency needs - liquid funds are still preferable.

However, recently SEBI has announced certain changes where they have said there will be an exit load associated with liquid funds. However, the exact % and the impact of it is not yet announced. Once that is there, the investor will have to take an overall call based on the returns and the cost of investment.

Wealth Cafe Actionable - If you can manage a little risk, invest in overnight funds every Friday and withdraw the same on Monday earning gains over the weekend.

Mutual Funds - 07/11/2019

Why you should avoid investing all your money in a FIXED DEPOSIT?

First job – first income – first savings – first investment is always a fixed deposit. The moment there is any lump sum savings in our bank account, we make a fixed deposit.

Recurring deposits are also a type of fixed deposits where a fixed amount is invested monthly in the deposit account.

Most either invested in a fixed deposit or a recurring deposit once in our lifetime. Fixed Deposit is the stepping stone to our investment journey.

Fixed Deposit is a low risk – low return investment product.

Return: A fixed deposit currently gives a return of 7%-7.5% before tax and after taking into an account the tax rate of 30% on the income from fixed deposit. It would be anything between 5.75% - 6%. Hence, the return from a fixed deposit is not a lot.

Risk: Investors assume that Fixed Deposit is the safest investment option and nothing can go wrong with them. It is important to note that a small amount of risk is always associated with every investment. The RBI ensures a balance of Rs. 1 lakh per account holder in case of default by any scheduled bank. Anything more than that in any bank is not insured and hence, is at risk, if the bank was to shut down. So, if you have a deposit of 5 lakh rupees with a scheduled bank and it was to go bust, RBI will only pay you back 1 lakh rupees. Also, it is important to know that the banks are governed by RBI and the big banks will not just shut down tomorrow, there is a relative risk which we all bear when we take a fixed deposit.

Co-operative Banks: Co-operative banks are not scheduled banks. They generally give a return of 1% or 2% more than the other private/public banks making a fixed deposit with these banks a very lucrative investment option. However, a higher return means higher risk. Co-operative banks are notoriously known for shutting down without any prior notice and the government may not come to rescue these banks. So, the amount of risk that you take for 1% extra return is not justifiable and it is not a MEASURE RISK and hence, you should try and avoid the same.

Why do you invest?

You can own what you cannot own today
You can own more than what you want to own today but cannot.

Basically, your investments should beat inflation. Because with time, things keep getting more expensive at the rate of inflation, so your money today has to grow at a rate higher than the inflation rate for you to be able to afford what you cannot afford today.

The current rate of inflation is 5% - 5.5% and hence, your investments must fetch you more than this to help you get whatever that you want to own.

Are your fixed deposits giving you a return higher than the inflation rate?

We have tabulated below to explain how your money grows in a fixed deposit versus in a mutual fund. This growth in money is compared to the price of movie tickets and how the same has grown expensive over a period of time.

In this table, you can see the difference in the price of a movie ticket, 10 years ago and today. The same is compared to the growth in your fixed deposit investment @current rate of 6%.

Whereas, if you invest in mutual funds, your money would grow @15% and after 10 years, you will have 4 times the value and in 20 years, 10 times the value you get from a fixed deposit.

You should just not invest your money, but you should invest it right to get more than what you can today.

If you can 10 years from today exactly what you can today, what is the point of investing. This is what fixed deposit does to your money. It does not make it work hard enough for you to be able to enjoy life. By investing in a fixed deposit, you will only be able to own what you have today, tomorrow, not really a lot more.

Wealth Cafe Actionable - Invest in fixed deposit when you are closer to your goal and cannot afford to take a risk. You can also invest for your emergency fund in a fixed deposit as the returns are similar to a liquid fund but fixed deposits are safer. The only problem with fixed deposits is that they are illiquid and you have to bear a penalty for premature withdrawal of a fixed deposit.

Image Credit: Wooden Earth

Alternative Assets / Investments - 05/09/2019