Equity investments simplified

Click on the link here to read the transcript of my chat on www.moneycontrol.com today

Equity investments simplified - your queries regarding mutual funds

Here is the transcript of my chat on www.moneycontrol.com today.

http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=2935

Master Your Money - chat transcript - August 1, 2017

Questions on personal finance and mutual funds answered ...

Build wealth with mutual funds

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.

Transcript of my chat today on www.moneycontrol.clom

Here is the transcript of my chat on www.moneycontrol.com:

Equity investments simplified

Transcript of chat 21-May-2017

Click on the link below to read the transcript of my chat on www.moneycontrol.com on 21st May 2017



Equity investments simplified

Why do people remember investing in ELSS only in the last quarter of the year?

Historically, we have observed a very peculiar behaviour from investors. In fact, tax-savers could be a better term than investors, going by the behaviour.Click on the link below to read my article on the subject:

Why do people remember investing in ELSS only in the last quarter of the year?

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The English translation is as under:

Recently, someone asked me whether one should consider investing in an ELSS – Equity Linked Savings Scheme – a mutual fund scheme that allows one to save tax under Section 80C of the Income Tax Act. I felt like checking the calendar to see which month it is. Historically, investors have inquired about these funds only in the last quarter of the year, or at best between December and March.

Let us look at some data:

Year	Gross inflow in ELSS in last quarter (Rs cr)	Annual gross inflow (Rs cr)	Last quarter's contribution in the year
2004-05	90	154	58.44%
2005-06	2257	3934	57.37%
2006-07	2855	4402	64.86%
2007-08	3873	6448	60.07%
2008-09	1248	3324	37.55%
2009-10	2001	3601	55.57%
2010-11	1696	3450	49.16%
2011-12	1132	2698	41.96%
2012-13	1311	2626	49.92%
2013-14	1382	2661	51.94%
2014-15	3932	8343	47.13%
2015-16	4407	9980	44.16%
2016-17	6677	14624	45.66%

The table above contains data regarding how much money was invested across the ELSS schemes by investors from across the country.

It is interesting to note here that the amount of money that was invested in the last quarter of the year, i.e. January-February-March was between 37% in 2008-09 to almost 65% in 2006-07. The last 25% of the year accounts for roughly 50% of annual business.

Look at the contribution of the month of March in the whole year.

Year	Contribution of March in annual business
2004-05	25.32%
2005-06	29.66%
2006-07	37.39%
2007-08	32.35%
2008-09	18.38%
2009-10	28.10%
2010-11	23.33%
2011-12	22.76%
2012-13	22.70%
2013-14	29.05%
2014-15	23.56%
2015-16	22.58%
2016-17	25.49%

Only one month, March accounts for more than 20% of annual sales.

What is happening here? Investors are delaying their tax planning decision to the end of the year.

This happens when we treat the money used for tax saving as an expense – it makes sense to defer expenses to the last moment. However, investing in ELSS is not an expense. It is primarily an investment, and then a tax saving avenue.

Also, since ELSS is a mutual fund scheme, we can use the facility of systematic investing (popularly known as SIP). This allows us to spread our investments over the year, which helps in two ways:

1.     There is no sudden large outflow in the last few months of the year, and

2.     We get the benefit of Rupee Cost Averaging, about which we have talked in our earlier articles on explaining SIP.

So, although we have lost the first month of the year, i.e. April, it is still time. Start your SIP in an ELSS scheme, if you are looking for an equity investment for long term growth coupled with tax saving.

- Amit Trivedi

Reviewing portfolio regularly: A comparison of SIP performance

 How do you respond when you come across an article comparing SIP performance across various mutual funds? Read my article to understand further:

Reviewing portfolio regularly: A comparison of SIP performance

SIP Top Up - a very good facility for the salaried class

My article in Gujarati Mid-day today on SIP Top-up facility

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The English translation is as under:

Earlier, we have discussed about the benefits of SIP and also seen how it works. We highlighted the two major principles on which the concept of SIP works, viz., “Rupee cost averaging” and “power of compounding”. The power of compounding helps one accumulate large sum of money through small regular contributions. We know that small drops make an ocean. It is the same with SIP, too.

An investment of Rs. 5,000 per month for a period of 25 years adds up to more than Rs. 65.00 lacs, if the investment grows at 10% p.a. yes, every drop makes an ocean.

Well, there is practical difference here. Of course, we do not know the exact return that any scheme would be able to generate in future, there is a small difference between an illustration as above and real life. In real life, most of the time, the ability to save also increases. How do we factor for that?

That is where mutual fund companies came up with a practical and a very useful innovation known as SIP top ups. In this case, the monthly SIP amount is increased periodically. Let us assume for the purpose of simplicity that the amount is increased every year at the rate of 5%.

Thant means, in our example above, while the investor started with monthly investment of Rs. 5,000; the same was increased to Rs. 5,250 per month in the next year (Rs. 5,000 plus 5% growth on that). In such a case, the accumulation would definitely be higher, since the invested amount keeps increasing.

The calculations suggest that the amount accumulated would be more than Rs. 1.50 cr. Compare this to Rs. 65 lacs accumulated if the invested amount was not increased.

There are schemes available that allow an investor to increase the amount by a certain percentage (as shown above) or by a certain amount, say Rs. 500 per year. There are schemes that allow an investor to top up the SIP amount every six months, too.

If you expect your income to grow year after year, it is logical that the savings would also grow. In such a case, SIP top up is an ideal choice for most people earning regular income.

- Amit Trivedi

 

Equity investments simplified - chat transcript

Readers questions answered today. See the transcript below:

http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=2796

What happens if I forget to pay my SIP installments?

"What happens if I forget to pay my SIP installments? Will I be fined?" Click on this link to read the answer. ________________________________________________________________________________________ The English translation is as under:   “Is there any penalty, if I skip an installment or two of my SIP?” “What is the minimum period for which I must continue my SIP? What if I don’t? Will my money be confiscated?” These are some of the questions that I regularly face during my interactions with investors, especially in large investor meetings. I tried to understand why these questions keep coming. I think the primary reason is that SIPs in mutual funds are being compared with other forms of regular savings, e.g. recurring deposits, insurance premia, PPF contributions. Even EMIs on loans have various conditions regarding regularity and term. SIP in a mutual fund scheme, on the other hand is just a convenience and not a compulsion. At best, it can be termed as a commitment to yourselves. To that extent, one may start an SIP for 100 years and then discontinue the same after a few months. While the future installments would not be deposited in the SIP account, all the previous installments would continue as investments in the same mutual fund account. We have discussed in the past about various benefits of SIP. Let us highlight some of the operational aspects of the same to clarify and answer the questions raised in the beginning. SIP offers some great operational conveniences to channel your regular savings into investments of your choice. The investments can be made in equity funds, balanced funds, debt funds, liquid funds, international fund or even gold funds – you can choose the option. You are required to give post-dated cheques or a standing instruction to your bank through NACH mandate registration. The period can be chosen based on your cash flow – if you are 55 years and wish to invest for the next 5 years till your retirement, start an SIP for 5 years. If you are 27 years old and do an SIP for purchasing a house when you turn 33, start an SIP for 6 years. If you are 31 year old with a 1-year-old daughter, you may start a 16-year SIP to fund her college education. If you want to increase the amount of SIP, there are few fund houses that offer you to mention this right at the beginning – you may increase your monthly investment amount every year by a certain amount. If such option is not available with the fund house you have chosen, you may always start another SIP – either in the same scheme or any other scheme. If you wish to change the scheme, you may discontinue your SIP in the present scheme and start in another one. All these flexibilities make it convenient for an investor. Now let us come to the commitment part. What if your cheque bounces? Not to worry. Most fund houses do not charge any penalty for that. However, in majority of the cases, if three of your cheques bounce or a certain number of (three, in many cases) consecutive debits are rejected by your bank (for whatever reasons), the fund house may consider it as you are not interested in continuing the SIP and hence stop depositing your cheques or cancel the debit (NACH) mandate to debit money from your bank account. In case such a thing happened by mistake, you may always restart an SIP – either in the same account or in another. There is no revival charge. At the same time, let us understand the penalty aspect of any commitment. If you enter into an agreement, and want to terminate the same before the due date, there could be penalty payable to the other party, as per the terms of the agreement. As we have already mentioned, an SIP is your commitment only to yourself and nobody else. This means, if there is any penalty levied – who would pay and who would get it? The penalty is levied by your present self and paid by your future self. In other terms, while your present self may indulge into some spending, the future self is deprived off wealth and hence purchasing power. This affects the lifestyle of your future self. Be aware of this penalty. Understand the implication of this. Plan your SIP keeping in mind your present requirements as well as your future requirements. Strike a proper balance so that you enjoy life in the present as well as in the future. So, please go ahead. Plan an SIP for your future needs, as permitted by your cash flow. - Amit Trivedi

When bond fund SIP beats equity fund SIP ...

When bond fund SIP beats equity fund SIP… Investors must understand why such a situation exists and the lessons it leaves for the investors.

Read more at: http://www.moneycontrol.com/news/mf-experts/when-bond-fund-sip-beats-equity-fund-sip%E2%80%A6_8151621.html?utm_source=ref_article

When bond fund SIP beats equity fund SIP: Investors must understand why such a situation exists and the lessons it leaves for the investors.

Investors must understand why such a situation exists and the lessons it leaves for the investors

Read more at: http://www.moneycontrol.com/news/mf-experts/when-bond-fund-sip-beats-equity-fund-sip%E2%80%A6_8151621.html?utm_source=ref_article

When bond fund SIP beats equity fund SIP…

Chat transcript 12-Dec-2016

Click on the link below to read the transcript of my chat on www.moneycontrol.com today:


http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=2775

Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

Click here to read the article as appeared in Mid-day Gujarati edition today ...

The English translation of the article is as under:

Why so many financial advisors and mutual fund distributors consider SIP as the best investment strategy?

When you talk to most mutual fund distributors or financial advisors, you are most likely to come across one common recommendation: start an SIP in a mutual fund scheme. Why do they so commonly recommend this? Is SIP so good?

Well, there are many arguments and counterarguments regarding the merits of SIP. Some tend to indicate that investment through SIP may result into higher returns as compared to lump sum investing and there are arguments against this point. According to me, it is a fruitless exercise to try and figure out which strategy would result into higher returns. It is not the rate of return, but the amount accumulated for a goal that matters to an investor.

Given this, the discussion must shift to the amount required for the goal and the time available for such accumulation. With this information in hand, one has to plan to ensure enough amount is available at the time of the requirement.

There are three approaches that one may adopt:

1.     Investing lump sum

2.     Investing small amounts on a regular basis

3.     A combination of the above two

As we know, most of us often do not have large lump sum amounts available for investment and that most of us earn, spend and save on a regular basis. Due to this situation, regular investing becomes a better option, which helps us channelize our regular savings into productive investments.

SIP is not about earning higher returns, but about getting into a discipline of investing on a regular basis. It is this discipline that helps us accumulate large sums over long periods. Remember the old saying,

Every drop makes an ocean

Small amounts invested over a period have the power to help one reach one’s financial goals. This discipline is similar to the advice most seasoned cricketers give young batsmen – keep taking one and two runs and don’t rely heavily on the fours and sixes, keep rotating the strike. These runs add up to many over the course of a match.

SIP allows you to buy a diversified portfolio through investing small amounts on a regular basis. We have already seen the benefit of diversification earlier. Add to that the other benefit offered by SIP – Rupee cost averaging, which reduces the cost of buying the units. If you keep your money invested for long periods, the power of compounding sets in, helping you create a corpus enough to take care of your financial goals and your financial future.

All the best! Save regularly, in a disciplined way through an SIP.

-       Amit Trivedi