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

Part-II: Stocks and Mutual funds

In first part I discussed about real estate, which is very popular asset class and investment in real estate is consider quite safe and profitable. However, there is a drawback of liquidity.

To overcome this drawback of liquidity and to increase profitability by taking higher risk you can invest in stocks and mutual funds. You can easily buy and sell stocks and mutual funds using different digital platforms or through recognized brokers and distributers. It has T+2 days settlement cycle. i.e. on third working day, your money will be deposited in your account.

So, the first advantage of this asset class is that it can be converted to cash with in three working days. Secondly, in long term, it can generate better return than FD and rental income. If we consider past few decades, NIFTY-50 and Sensex (benchmark index for share market) has given around 12% annual return. So, if you invest in Index fund you can expect to earn 10-12% annual return subject to market risk. If you do not know anything about share market, do not invest in shares. Better invest in equity mutual funds based on financial advisor and your research.

Debt funds are another type of mutual funds. While equity mutual funds invest in shares, debt funds invest in debt instruments like commercial papers, debentures and government securities.

Debt funds are more secure than equity funds when national economy is in good condition. However, they too involve credit risk and interest risk. Credit risk can be more prevalent when economy is going down. In such times, one has to be very careful and invest only in AAA rated papers or in sovereign bonds to save investment from credit risk.

When interest rate is going down, debt fund yield goes up and when interest rate is going up, debt fund bond yield is going down. This is called interest risk. In such cases, when interest rate are already down, you can opt for floating interest debt funds. When interest rate will increase their yield will not decrease as interest rate is floating i.e variable.

It is important to create balanced and well diversified portfolio to mitigate risk and increase return in both bull and bear market. To achieve this, add both debt and equity in your portfolio based on your risk appetite and time horizon.

In next article I will discuss third asset class which is CASH.

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.

Why Mutual Funds Investers suffer losses on Budget day?

This year Budget-2020 is presented on Saturday.  Normally Saturday and Sunday are off days for Indian stock market. However, due to Budget presentation, share market was open and there was a steep fall in BSE Sensex of around 1000 points.

Unfortunately, all mutual funds decided to remain closed on Saturday as usual because as per their offer documents Saturday and Sunday are “Non business days” and NAV is not calculated on these days.

Mutual fund investors face huge loss due to this. All Mutual funds investors were unable to invest or redeem their money on Saturday. Suppose some person wanted to invest money on Saturday in mutual fund then he has to invest it only on monday when again market will be open. On Monday market was recovered and thus he missed the opportunity to buy low.

Logically, when share market is open, Mutual funds should be open too. This is not the first time when budget was presented on an off day. In 2005 also Budget was presented on Saturday. Mutual funds must think about it and in the interest of investors, all mutual funds houses and online discount brokers like Zerodha and Groww must remain open on such holidays. Even if they have to make some changes in offer documents, they must do it.

Millions of Indian Mutual Funds investors are feeling cheated and lose money on third of February 2020. When stock market is open, every investor must have access to invest not just those who directly invest in stocks. I request all Mutual Fund investors to raise their concerns to fund houses to avoid it in future.

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!!!

Caution: Small retail investors must stay away from stock market for some time

Sensex is trading in the region of 43,000 points. A big correction was expected since the start of this year. That correction came in march-April 2020 and within few month, share market again reached its peak. Sensex is climbing higher and higher even after slowdown in GDP and many other negative news such as lockdown due to Covid-19 cases. It seems some players do not wants Sensex to go down and they are pumping money even on small positive news and ignoring negative news unemployment rate, falling sales and Indo-China border conflict.

There is a large disconnect between Indian economy and share market at this moment. Even a slightest negative news can make the market crash. Most of large cap stocks are already overvalued and market PE ratio is at its high, which is the very important indicator of valuation. In such scenario, small retail investors and new investors must not buy new stocks to avoid huge losses. Because stock market can crash anytime and wipe away all your hard earned money in a day or a week.

Wait for correction in stock market for few months before investing. Invest your money in less risky alternatives or keep it in your saving bank account for few months and just wait. If you are very keen to invest, invest through mutual funds which are less risky. To read my post about mutual funds, click here.

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.