Are you a smart, educated and informed Investor?

As per AMFI (Association of Mutual Funds in India),

 “Assets managed by the Indian mutual fund industry has grown from Rs. 11.19 trillion in November 2014 to Rs. 13.43 trillion in November 2015. That represents a 20% growth in assets over November 2014. The value of assets held by individual investors in mutual funds increased from Rs. 5.07 lakh cr in November 2014 to Rs. 6.14 lakh cr in November 2015, an absolute increase of 21.24% Individual investors held Rs 6.14 lakh crore in mutual funds as of November 2015, an increase of 21.24% over November 2014. Investments of individual investors in equity schemes increased by 28.25% over November 2014.”

 Now that is huge money and if so much of money is going into this all important wealth creating instrument (Mutual Funds), then why is retail participation still so low? There are less than 4.5 crore retail investor accounts for a population of 1.25 billion.

It is that time of the year when we receive e-mails from the finance department for submitting investment proofs for tax savings.

There are many sites which are encouraging investments in ELSSs (Equity Linked Savings Schemes) and while there are positives and negatives, many of us stay away from this product. The problem lies with our natural inclination towards avoiding ‘Risk’-we are so besotted with fixed returns that any investment which has the word ‘risk’ mentioned in it, becomes a taboo.

This obsession of having the ‘Principal’ intact and earning over and above it is the greatest fear that keeps us away from earning higher than inflation returns. We also have to live with a loss by missing out on the all important ‘Opportunity Cost”

Opportunity Cost is the price we pay by staying invested in a lower yielding asset class when the same investment in another asset class would have earned us better returns.

For ease of understanding, if MFs for a particular year returned 15 % and you stayed invested in Bank FDs @ 8%, then the difference of 7% (15%-8%) is your opportunity cost.

We have a tendency to ignore anything related to investing where we need to read, learn, understand and then take a decision. Our preferred investment vehicles have traditionally been instruments which are easy to understand and require little or no follow up or review thereafter.

Most of us bought our first Insurance policy just because a relative or a neighborhood uncle or aunt coaxed us into buying it – we never made an effort to inquire about the product features. We keep on paying premiums only to realize later that it is a dud instrument and not an investment.

There is another reason for our lackadaisical behavior with money- staying un-aware, both at school and home. There are many things which remain only ‘Formula’ for us, with little or no practical application.

Remember the school days when calculating Simple Interest was so simple, however when it came to Compound Interest, the problem always seemed to be compounding as the formula was a little complicated! Money affairs, we believe, are to be kept simple!

Compounding is of great significance and the sooner we understand it, the greater are the chances of benefiting from it. (We can discuss this in detail, later)

What would you do if tomorrow banks start paying you 2% on FD, or if the banks stop paying any interest on your money? Now that is a distant possibility in India in the current environment. However, think about it seriously- what would be your backup plan in that scenario-it would definitely call for studying other options available.

You would go in for real estate, equities, gold, bonds or government securities.

However remember, that from a liquidity & ROI perspective, there would be a lot of variation. Thus start reading and making informed choices. Most studies prove that a person, who keeps himself updated, stays engaged and well aware would be able to multiply wealth manifold.

Understanding a product BEFORE you put your money is of utmost importance. Non Tangible products require greater research, assessment and review.

There are a few people who still choose to neglect equities saying it is risky and akin to gambling – this is as far from reality as it can get.

If you consider Gold and Real estate as investment products, how many times have you sold gold for a profit to invest or for returns? How many of you have really thought about selling your home from purely enjoying the ROI?

Do we look at daily, weekly or monthly price of these two instruments to assess the returns? We DO NOT, then why do we start tracking our equity investments from day 1?

Some important factors before investing in Mutual Funds:

Why to invest                        there are many reasons, but here I would say that invest purely from a diversification point of view. Once you start understanding the magical world of MFs, make a plan and stick with it.

When to invest          for a retail investor, this is a dilemma- whether SIP or when the market goes down. If you are an informed investor, try a rule based approach- say when Nifty is 25-50 points down. If that does not happen, let it be 30th of the month. Have your own logical approach and go with it.

How to invest            this is not that difficult-either get a Demat account or speak with your bank representative. Direct investing with the MF is another option and has its own advantages. There are sites with automated and algorithm based tools, identifying best MFs for you, basis your needs and profile.

How much to invest  the beauty of equities lies in the fact that when you look back, you always tend to think that why did I not invest more! So, for arriving at this amount, you need to take care of your monthly expenses, have an emergency fund ready and then take the plunge. Try to start with at least 5 % of your monthly salary.

Review            this is an important aspect of investing. You might not look at your FDs or RDs during the tenure as you are assured of the returns. However with MFs, there are chances that due to certain market factors, there might be an impact on your portfolio returns. Thus re balancing or re aligning with your long term goals is a necessary step.

While I do not believe in New Year resolutions, I thought of today as a good day to share this as I know there are many who believe in and stick with their resolutions.

Let 2016 be that year-become an informed, educated and smart investor – start investing in Mutual Funds.

Best wishes.


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