Whether in equity fund or debt fund - all can benefit from the disciplined investing through SIP

A lot has been written about the benefits of SIP in equity funds. However, little has been discussed about the same in the context of debt funds. Click on the link to understand how SIP in debt funds can be useful to you:

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The English translation of the article is as under:

“My daughter is studying in the 10^th standard now. She would be ready for the college in a few years. I want to be financially ready to fund her education.” A proud father of a daughter was talking to his friends. Let us analyse the situation.

The daughter is going to college for higher education in just three years. There is a possibility that they have figured out what kind of course and college that she may attend. It does not matter whether the girl and the parents have decided on the course. Whether they have decided or not - whatever the case, there is a need to be financially ready. If one has not done anything so far, one needs to start investing as soon as possible.

However, in this situation, the goal is very close – just three years away and a serious one at that. Due to such a short time period, it would be unwise to take an exposure to equity. That means, one should avoid investing into equity mutual fund in such a case. At the same time, one has 36 months to accumulate the money. Such an investor should consider investing through SIP.

The option now for the investor is to consider doing a regular monthly investment in a fund that is not risky, i.e. one may consider a debt fund (especially short term debt fund or an ultra short term debt fund). Such funds invest in debt securities issued by various companies, banks and even government. since the investments are in debt securities, the funds are a lot safer than equity mutual funds.

Since most of the discussions on SIP end up talking about long term goals and SIP in equity funds, many are not aware that it is possible to fund near-term goals through SIP in fixed income funds, too. While discussing the benefits of SIP, majority of the experts highlight two benefits (1) Rupee cost averaging, and (2) Power of compounding. The former is derived due to the volatility inherent in equity, whereas the latter too is a function of the nature of equity to potentially provide high returns in the long run. As can be seen, both the major benefits talked about are related to equity. However, some of the underplayed benefits of SIP are as under:

·      SIP brings discipline to one’s savings approach

·      SIPs allow large sums to be accumulated even by saving small

·      It helps automate the savings approach

In the situation described earlier in this article, or any such similar situation, it is possible to accumulate the required amounts through SIP in debt funds.

14th January 2007 - a decade back ...

It was exactly 10 years ago on 14th January 2007 that an article I had written appeared in main stream media for the first time. The financial daily was Business Standard and the article was entitled "Simple Things About Compound Interest". I thought of writing this article when I saw how some companies using misleading communication regarding interest rates offered on fixed deposits or on return on investment. Interestingly, after this article appeared in Business Standard, one such advertisement was removed by the advertiser from the billboards across Mumbai.

A decade later, the article is still relevant.

In these 10 years, 351 articles have appeared in various publications with the mainstream media taking the lion's share of 233 articles (roughly 2/3rd of the total published articles).
Thank you everyone - the publications, the editors, the editorial and support staff, the readers, the patrons, and friends & family. your support was phenomenal. Thank you God for giving me this opportunity.

Wish you all a very happy Makar Sankranti, happy Bihu, happy Pongal, happy Baisakhi, happy Uttarayan.

How to maximize your wealth?

Most individuals prefer to keep looking for the highest returns offering investment. However, the return is not in our control. It makes sense to work on things that are in our control.

Click here to read further ...

Double your money - LOL

Recently, I came across an advertisement by a real estate company highlighting 33.33% annualized return on investment in their property. The tagline read: “Why ______________ double your investment offer is the best investment option”. It showed a table comparing various avenues:

Comparison against investment options
Investment option	Average annual rate of return	No. of years required to double investment	Risk of investment
Double your investment offer	33.3%	3	Low
Equity / stocks	17% *	4.5	High
Mutual funds	8-10%	7.2	Medium
Fixed deposits	9%	8	Low

* Average returns for investing in stocks over the last 3 year period. Risk involves price fluctuations and volatility

(The above table is reproduced from the advertisement that appeared in leading dailies)

What an offer! Looks mouthwatering!

A word of caution may be required here. (In fact, many words may be required).

Let us start with the fine print here. The advertisement has an asterisk (*) mark against the 17% shown in front of equity/stocks. The note below the table says “… Risk involves price fluctuations and volatility.”

“Volatility” of what? One may be referring to volatile prices or volatile returns. Incidentally, volatile returns are a result of volatile prices. And volatile prices and price fluctuations indicate the same thing.

Let us now come to the table. In the second column, average annual return numbers are mentioned for four different investment options. Whereas the returns in case of equity/stocks are the average for the last three years, there is no mention of where the same for mutual funds is taken from. The range of returns indicated here (8 – 10%) simply suggests that almost all mutual funds offer very similar returns, which further means there is only one category called mutual fund and there is no difference among various schemes of mutual funds.

Further in the second column, the “Double your investment offer” is expected to give 33.3% annualized return. 33.3% multiplied by 3 would give you 100% in 3 years – exactly what the advertisement claims. So far so good, but the moment you analyse the numbers in the third column, another error props out.

“Double your investment offer” doubles your money in 3 years and hence the returns are mentioned as 33.3%. In that case, if a fixed deposit doubles your money in 8 years, its returns should be mentioned as 12.5% and not 9% (12.5 X 8 = 100, whereas 9 X 8 = 72). This is where one can make out that the copywriter does not understand the difference between simple interest and compound interest. Or is it convenient to make the mistake here? If you use simple interest in one case, why should you use compound interest calculation in another, within the same table?

The final column is the most interesting – risk. What is the basis of concluding whether an investment carries high risk or low risk? Incidentally, if we look at the mutual fund row, once again the myth (that all mutual funds are the same) shouts loudly. How can the risk of all mutual funds be mentioned as “medium”? If that is the case, why did SEBI introduce the “Riskometer” recently?

What is the basis of mentioning that “Double your investment offer” is “low risk”? Is it because someone guarantees buy-back at double the price? Does it mean there is no price fluctuation since someone guarantees? If that is so, ever heard of “credit risk”? What if the guarantor cannot honour the guarantee? What if the guarantor does not?

Ok, ok, I know you would still be holding the property. Really? Or would you only be holding a property “under construction”?

Be careful. The money invested would be yours. It is always better to be prudent and not get swayed by advertisements that promise the moon. Someone has rightly said, “If it sounds too good to be true, it probably is.”

Exercise due diligence. Check all the claims made. Only after satisfying your doubts, go ahead an invest your money.

One more point: there are investment avenues and issuers that fall within the ambit of various regulations and there are some that do not. Real estate is one such area that does not have a regulator. In all such cases where a regulator does not exist, you got to be more careful.