Different Asset Classes and their advantages and disadvantages (Part-III)

Part-III: Cash and cash equivalent.

Most people think that only investments generating cash are assets, however, even cash itself is an asset class as it gives you purchasing power when any opportunity arrives and cash in saving bank account can also generate return. Cash saves you from liquidity crunch. In business world, excellent opportunities does not last longer. In such scenario, those who are having cash in hand have more chance to gain from such short-term opportunity. There is only one disadvantage of cash that it’s return cannot beat inflation. If you keep cash in your bank account for long time, due to inflation, its value will decrease.

To overcome this problem, you can invest in liquid funds where you can withdraw your money within a day. Liquid funds normally gives better return than saving bank. Alternatively, you can park your money in “sweep in FD”. Kotak is one such bank providing this facility. All you have to do is link your existing Fixed Deposit to your Savings or Current Account in Kotak bank.  In case you are falling short of funds in your account the deficit will be withdrawn from your Fixed Deposit. The Sweep-In facility helps you enjoy liquidity in your Savings account while earning high returns with the applicable interest rates of a Fixed Deposit.

With the Sweep-In facility you can link your existing Fixed Deposit to the Savings/Current Account. Whenever there is a shortfall of funds in the Account to clear a cheque, we will utilize units of the Fixed Deposit to clear the cheque. On this utilized amount, you will earn a rate of interest for the period that the Fixed Deposit remained with the Bank at the applicable rate of interest at the time of booking the original Fixed Deposit. Your balance amount in Fixed Deposits will continue to earn the original rate of interest.

For more details, please contact bank representative. A small disclaimer: this article is not sponsor by any bank; some information about sweep in facility is from Kotak bank website for education purpose.  

It is very important to keep some cash with you and treat it as a liquid asset. Never invest 100% of you portfolio in illiquid asset. Always keep some cash with you based on market situation and your risk appetite. Consult an experienced and qualified investment advisor for making a well-balanced and diversified investment portfolio.

I am an investor and two year back I developed interest in finance and investment. I manage my own portfolio and still learning about new investment options. However, I am not a certified investment advisor and this blog is not an investment advice, it is only for education in good faith.

Different Asset Classes and their advantages and disadvantages (Part-1)

Part-I :Real Estate  (Flats/home/Plot/Shops)

Saving is a good habit, investing it is even better. In India, most of people invest based on friend and family advice. Consulting investment advisor or investing based on your own research is very rare. In such scenario, most of people invest in real estate because it is one of the oldest investment class and chances of loss is negligible. Due to ever increasing population, real estate gives good return in long term. However, there are some disadvantages too. Firstly, there is a default risk. Many times it happens that same property is sold to two parties. Secondly, there is a risk of capturing of your land by some goon. In both cases you have to fight long legal battle which will waste lot of money and time. Thirdly, you have to buy property at market rate or below market rate to generate profit in short run. Also, you must have idea of location. If you buy property at wrong location, you have to wait for long time before you see any appreciation. Finally, all type of properties are not good investment. It depends on your goal and your requirements.

Suppose, you already have a home to live, and you buy a flat for rental income. This will be a bad investment because rental income of commercial property is more than rental income of residential property. Also, flat needs constant maintenance and you also have to pay society charges! Which will even further reduce your rental income.

Now, let’s take an example of a Plot or a land. If you buy a plot away from the city area, you have to wait for long time before any significant increment. Plots within the city are very expensive. If property market crashed or there is a slowdown, again you have to wait for long time before making money by selling it.  

One bigger problem with property is that it is not liquid asset. i.e. It cannot be converted into money immediately. It takes more than one month to find a prospective costumer and transfer property on his/her name.

Thus, Even though investment in real estate is good and can be made risk free with proper research and investigation, it is not the best investment for every individual. There are several other asset classes which one should consider before investing in real estate. Different asset classes outperform in different time. For example, during COVID-19 Pandemic, Gold outperform most of asset classes. While rental income hit hard.

Hence, during investing make a diversified portfolio to mitigate risk. Learn about different asset class and take help of financial advisor before investing large sums of money. Your parents and friends definitely gives you right advise from their prospective but they may not be able to give best investment advice until and unless they themselves belongs to financial field. Which is not the case in most of the cases. Doing your own research is very important. Lot of information is available on internet. If you do not like reading, you can watch Youtube videos. Even all financial advisors are not updating their skills and in some cases there can be clash of interest. Suppose your financial advisor is selling insurance too. He might try to sell you life insurance for your whole family when you only need life insurance for earning members! So, the only option left is self-research. It is your hard earned money, so you are the one to take final decision after checking all the options available and your requirements.

In next part I will discuss another asset class – Stocks and Mutual funds. Please press the like button if you like this article.

Is Gold a Good Investment?

Gold is women’s first love in India. Most of Indian families have some amount of gold in the form of gold jewellery. But very few people actually buy gold as an investment. Indians prefer real estate property over other asset class because of ever increasing population. But from last couple of years land, flats and other real estate properties are not giving any return. Also, this asset class has extremely low liquidity. Because of these problems small investors are looking for other assets.

Government is pushing public towards share market as it has huge disinvestment objective. Since last few months stock market is at its highest level even though economy is going down. Stock market can give high return but it is very risky and need lot of research to make money. That’s why it is better to enter in stock market through mutual funds and always buy on the advice of your financial advisor. To learn about mutual funds please read my blog by clicking here

Keeping money in banks is no longer beneficial due to high inflation. Your savings in banks will reduce with time due to inflation. Thus, to beat inflation, investment in gold is good idea. Gold has higher liquidity than real estate and less risk than equity. Gold can be a good investment if we invest smartly. Besides physical gold, there is several other option of buying gold. You can buy Sovereign gold bonds or you can invest in gold ETF (exchange traded fund) or you can even buy gold mutual funds.

While physical gold can have safety problem, purity problem and buying and selling problem, digital gold can be a better alternative.  Sovereign gold bonds are the best option if you want to invest in gold for longer term. Not only your investment will increase with increasing gold price, but also you will get 2.5% annual return on your gold bonds. You can buy these bonds from any public national bank and even from some private banks that too provides you with the facility to buy them such as ICICI bank.

Other method to investing in gold is ETF gold fund and gold mutual funds. For ETF gold fund you need a Demat and trading account. So if you do not have trading account and don’t want to open one, you can opt for Gold mutual funds which invest in Gold ETF funds. You should also invest in gold to diversify your portfolio. Invest 10-15% of your total investment money in gold. It will diversify your portfolio and save your money from inflation.

Be a Defensive Investor

 

Broadly speaking, there are two kinds of Investors –Aggressive and Defensive. Aggressive investors are those who are willing to take more risk for more profit, thereby putting their investment at higher risk. Whereas defensive investors are those who are more interested in avoiding any losses on their initial investment. They want to play safe. They are happy with minimum returns.

Investment and gambling are two different things. In investment, you take a calculated risk and do the proper research before investing. In gambling, you leave everything on your luck and wild guess.

So, even if you are an aggressive investor, do proper research before trying to make more profit. Do not just invest blindly on someone advice. Instead of making higher profit you may end up losing all your money. Do not invest on someone’s recommendations or past performance of any share or mutual fund. Past performance does not guaranty future returns.

We all know one universal principle of investing: More risk, more profit. Conversely, it also means that chances of making profit decreases as profit increases. If chances of making profit decrease too much, it becomes gambling rather than investing. In gambling most of people lose money. Similarly, investing with high risk can make you lose your whole money.

Seldom people told stories of peoples making lot of money in very short span of time from stock market. However, there are many more cases where people lost all of their hard earned money. Thus, do not let other’s success stories blind your eyes.

What is the purpose of investing? To make money, right? If instead of making money, you start losing money, there is no benefit of investing. Better, keep your money safe in bank account or in liquid funds. So, by default everyone must be a defensive investor.

If you have some extra money which you do not need for several years, you can invest it in stock market as an aggressive invertor. For high risk and high return, invest in small cap funds or small cap stocks.  

For retail investors and first time investors, defensive investing is the best. Diversify your portfolio and invest in different sectors and different schemes. Be happy with 10 to 15% annual profit on your investment in stock market and mutual funds because no other scheme will give you better returns. It has been observed that in long term (five to seven years), stock market gives good return.  As per your risk appetite, mix your investment in debt and equity.

Below are some other articles on investment:

1)

2)

Disclaimer: Mutual Fund/ stock market investments are subject to market risk. Please read the offer document carefully before investing’

How to Invest intelligently?

Below are some important points about investment which you must keep in your mind while investing.

  1. Diversification: Never put all eggs in same basket. Always invest money in two to three different places like real estate, gold, equity and debt instruments like FD and Debt funds etc.. By doing so, you can minimise your risk of losing your entire investment.
  2. Start Saving and investment early in your life: Time is money. It is not just a saying but a proven fact. Always put your money to earn for you. As you give your investment more time, your return will grow faster due to compounding effect. To reap benefits of compounding, you need to give 5 to 10 years time to your investment. Encourage your youngsters to start investing in safe avenues like PPF and debt funds. Even Rs500 investment over a period of 20-25 years can fetch you big corpus. You can even start with Rs100 in some mutual funds through SIP. To know more about Mutual Funds you can read my article by clicking here.
  3. Discipline and regular investment: Small amount invested regularly can give you bigger amount than big amount invested irregularly. Most often, we wish to accumulate big amount for investment. However, when we have some need, we take out some money from this amount and this way our investment plan remain a plan! Invest monthly whatever surplus you have and discipline yourself to save every month that small amount whatever be the condition. Make regular investment a rule of your life not a habit.Because habits you can change, rules you can’t.
  4. Egg, Chicken and Hen method: Whenever you invest, always invest with short term, medium term and long term perspective.Because you will need money in every part of your life. Thus, investment must be goal orianted like retairement, education, foreign tour and marriage etc. For short term, always keep some money (equivalent to minimum 6 month of your earnings) in saving account or in liquid funds, which can be redeem immediately. For medium term (2-5 years), invest in large cap. Mutual funds, Gold and other such instruments. For long-term investment, invest in PPF, Index funds, FD, NPS, debt funds, gold and govt. securities. You may not get high return but your money will be safe and with time it will grow rapidly.

Happy investing!!!

Best Investment

Some of us do regular investment in mutual funds, PPF accounts, FD and in some other such instruments to earn passive income. However, there is another type of investment which can give us better returns than any other investment.

This best investment is one where you invest in your own skill development. Here, you can generate several times more return than ordinary investment. Unfortunately, most of us never think about this investment and they have to settle for 10-15% profits.

World is changing very fast. Everyday new technologies are replacing old one. Investing in you is not only rewarding but also necessary. Learn new methods used in your industry, attend seminars, read good books daily, watch YouTube video’s and utilise your free time in creative habits like exercise, playing outdoor games, networking, meeting people etc.

Your health and your knowledge are your best investment. Keep investing to gain best results.

How to Earn Passive Income through Mutual Funds Investment

Indian stock market is as sentimental as Indians themselves. Even a small negative news can cause huge panic in market. Big players and well-informed investors exit at high price immediately and buy shares at low price later. Whereas, small investors who want to make one time investment and become rich in short span of time mostly suffer losses. One very important fact about share market is that, it is a zero sum game. Your loss is someone else’s profit. Those who buy shares based on reccomondations and speculations mostly lose money. If you do not know much about share market, it is better to invest through mutual funds which are managed by fund managers.

In long term, any passive investment does not yield more than 9% profit in India. Property rates are going down, maximum rental income is between 5 to 8%  and interest rate on FD are between to 5 to 8%. However, share market is booming from last 10 years. Share market can give you better profit if you invest smartly.

To minimize risk and to gain more than 10% return (subject to market risk), Mutual funds are good investment for the long term. They restrict your losses within a narrow band. For low risk and low return of 8% to 12%, you can invest in mix funds known as balanced funds (debt +equity). If you are willing to take moderate risk, and want better returns (if market does not crash abruptly), opt for large and midcap or Multi-cap equity funds. In multicap funds, fund manager has more freedom to choose shares from different catagory. However, recently SEBI has restricted this freedon by making it compulsory for each multicap fund to have 33% exposure in small cap and 33% in mid caps. Small cap equity funds are associated with high risk and high return. It is better to avoid pure small cap fund in short term investment.

If you want to avoid high expense ratio, always buy direct mutual funds. Regular funds always have around 1% higher expense ratio, which can cost you huge amount of money in long term. In addition, direct Index funds are even better having expense ratio around 0.5% or even lesser.

Important terms used in Mutual fund market.

  • NAV: NAV stands for net asset value. It is the value of one unit of Mutual fund. Higher NAV does not mean over price of units like in stock market. It means Mutual fund performance is good and it is more famous with investors so they are investing more money.
  • AUM: asset under management. It is the total amount of money managed under particular scheme.
  • Expense Ratio: It is nothing but fund management charges. Lesser is better.
  • S.I.P.: Systematic investment plan. It refers to monthly investment of money in any Mutual fund. You can invest even Rs500 per month in some funds. In this case, your SIP will be Rs500.
  • Lump sum: One time investment.

If you do not have big amount of money to invest, then SIP is the best way to start investing in mutual fund as it average out your risk and profit. Do not wait till you save money to invest one time.  Start SIP as early in your life as possible. Read my previous blog to understand benefit of starting early by clicking here.

Start investing early to attain financial freedom:

 

As we start earning, most of us do not have long term financial goals due to which we spent almost whole monthly income on trivial things such as shopping, outing, movies, expensive accessories and parting with friends and family. Since we have no financial liabilities at that age, we are not interested in saving and investing. Even our elders do not motivate us for investing; only few fortunate people may differ! Some of us start saving though for short term goals like marriage, honeymoon, car or bike etc. But no one think about investing at the age of 21 to 25 when we start earning.

Unfortunately, most of us do not understand power of compounding. If you will understand power of compounding you will definitely start investing early. Amount of investment is secondary; time is primary for magic of compounding to take place. If you invest today instead of starting investing  after 15 years, your return will be much higher after 25 years . Below table shows an example to prove above statement. There are two persons- Tom and Jack. Tom starts investing at the age of 22 and invested Rs1000 for 25 years till he reached age of 47 years. Jack started investing Rs2500 monthly at the age of 37 and he also invested till the age of 47. Both invested Rs.300,000 but for different duration. Now let us see returns of both persons at the age of 47.

Interest=8 % pa
Years Tom age 22 Jack age 37
1 12000 30000
2 24960.0 62400
3 38956.8 97392
4 54073.3 135183
5 70399.2 175998
6 88031.1 220078
7 107073.6 267684
8 127639.5 319099
9 149850.7 374627
10 173838.7 434597
11 199745.8  
12 227725.5  
13 257943.6  
14 290579.0  
15 325825.4  
16 363891.4  
17 405002.7  
18 449402.9  
19 497355.2  
20 549143.6  
21 605075.1  
22 665481.1  
23 730719.5  
24 801177.1  
25 877271.3  

 

Even though both invested same total amount, Tom return is almost double of Jack return, even though Jack monthly investment was 2.5 times lesser thne that of Tom monthly investment.

This means, by increasing duration of investment, even with smaller monthly investment you can earn better returns. This is the power of compounding.

Start systematic monthly investment plan (SIP) as early as you earn. How much amount you invest is not important. There are mutual funds and PPF account where you can invest even Rs500 per month, which means Rs.17 per day. Every person who is earning can save and invest this small amount of money and increase it with time. This will help him/her to achieve financial stability and freedom before reaching age of 50 years. After that you will no longer need to work for you necessities. You will have a secondary income to take care of your necessities; you will work for your own joy and passion.  By investing Rs5000 per month, you can save Rs68,00,000 in 30 years if we consider mere 8% profit compounded annually.

There are many equity mutual funds which can give you around 15% profit too. This will increase your wealth faster. However, Equity mutual funds are subject to share market risk. For safer option, you can opt for debt mutual funds, FD’s, PPF account, liquid funds etc.