Wish you a Happy Diwali ...

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Diwali, the festival of light, is when Hindus perform a Laxmi pooja. What are we asking for when we pray to Goddess Laxmi? We ask for prosperity, not just money. There is a difference between the two. In order to understand the same, let us look at the photo of the goddess we use for the pooja.

One of my favourite Diwali posters is one that shows Goddesses Laxmi and Saraswati along with Lord Ganesh. It is not for no reason that these three are shown together.  
 

While we all need blessings of Goddess Laxmi to be successful in life and grow, she must come in our life flanked by Goddess Saraswati – the goddess of knowledge and Lord Ganesh – the god of wisdom. If Laxmi comes along with these two, it stays and brings bliss in life. And that is true wealth – not mere financial wealth.

Trying to earn more and more money without proper knowledge and wisdom can lead to ruins. Money may come but that would not bring bliss in life.

The difference between “knowledge” and “wisdom” also must be understood at this juncture. “Knowledge” is to know something – to be aware of something – to understand and being able to explain it. “Wisdom” is intelligence – it is about being able to judge – to use discretion – being able to separate the good from the bad – the right from the wrong.

First, let us address the knowledge part. It is critical to know what one is doing. “Look before you leap” is not just a proverb; it’s a great advice. Whether it is income, expenses, loans or investments, it is important to know.

Questions on income:

·       How sustainable is the income?

·       How stable is the source of income? This is especially critical for self-employed persons and small business owners. However, in the present times, even jobs are also not guaranteed.

·       Do you understand the taxes on the income?

Questions on expenses:

·       Know the monthly budget – the expenses you incur

·       How much of the monthly budget is spent on necessities and how much on luxuries? Which of the luxuries can you cut down?

·       Is it possible to reduce some expenses through finding alternatives?

·       Have you kept provision for these expenses in case there is an emergency, e.g. health issue or loss of job?

Questions on loan:

·       Have you understood the terms of the loan?

·       What is the interest rate on the loan? Is it too high or too low? If it is too low, is there a catch?

·       What are the various penalty clauses?

·       What are the flexibilities?

·       Can you terminate the loan earlier without any penalty, in case you get funds suddenly?

·       What is the security required by the lender?

Questions on investments:

·       Have you understood the terms of the investment?

·       What is the (expected) rate of return?

·       Is it too high or too low? If it is too high, is there a catch?

·       Is the risk too high? Understand the risk involved. If you do not understand the risk, please avoid the investment. Every investment carries some risk.

·       Is there a lock-in or is the investment liquid?

·       At what rate would the earning be taxed?

This is not an exhaustive list, but only an indicative one.

Discretion is required both while earning as well as spending. Is the money coming in through the right means or are you taking some actions, which may be incorrect ethically or morally? Are you spending too much money for luxuries than fulfilling your responsibilities?

Wisdom and discretion must be applied to the assets and liabilities, too. Are you borrowing wisely? Is it really required? Is it a good loan? Are you investing smart? Or are you acting on tips without understanding the risks? There have been many instances when one has asked “Is it safe?” or “I hope there are no risks” in stead of asking “Please tell me about the risks present. And how do we manage those”.

So, this Diwali, make sure to pray for Laxmi to arrive at your place – but the right type and through the correct means. Pray to Goddess Laxmi to stay in your life forever. Make sure your life is worth for her to stay forever.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Equity investments simplified - transcript of chat on www.moneycontrol.com

Questions on mutual funds - answered today at www.moneycontrol.com

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Interest rates are falling ...

Interest rates are coming down. What should one do?

This has been a common question in various forums these days. As we all know, in the calendar year 2017, the interest rates have come down by a good number. Bank deposits offer lower rates as compared to last year. Even there are discussions regarding reduction in the interest paid on the savings bank account...

Click on the link below to read the article:

Interest rates are coming down. What should one do?

Transcript of my chat today on www.moneycontrol.clom

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

Equity investments simplified

Worried about market peaking? 3 things first-time equity MF investors can consider

I have been quoted in this article. Click on the link below to read further:

A range-bound market near its all-time high make many first time investors worry. Here are three steps that should reduce their anxiety.

What you should know about mutual fund switches

Mutual funds offer a facility called "switch", which allows an investor to shift money from one fund to another within the same fund family. Let us know more about this facility. Click on the link below to read my article about this facility:

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The English translation is as under:

One of the facilities that mutual funds offer is to shift from one scheme to another. This facility is called “switch”. This shift could be for the full balance or even a part of it. This facility is available to only open-ended mutual funds and not in case of close-ended funds. This is because, anyway, one cannot transact with the fund in case of close-ended mutual funds.

Are there any restrictions? How many switches are allowed per year? There are no restrictions in case of open-ended funds, except for applicable exit loads. One can do unlimited number of switches. The only restriction is the pay-in / pay-out cycles in case of fund schemes.

For example, if you redeem from equity funds, the redemption proceeds are paid on a T+2 basis., the applicable NAV in liquid fund would depend on availability of clear funds. Hence, in case of switch into a liquid fund from an equity fund, the switch would be effective only after the redemption from the equity is processed. This would reduce the total number of switches that can be done.

If any exit load is applicable, the same would be charged in case of switches, too.

One big restriction is that switches are allowed only across schemes within one fund house. That means, you are not allowed to switch money from a scheme managed by a fund house into a scheme managed by another fund house.

Why does an investor need this facility?

There are various reasons why an investor may need this facility.

First of all, many investors park their lump sum investment in a liquid fund and then transfer the same regularly into an equity fund over a period. This periodical system of switching is also called STP or Systematic Transfer Plan.

Secondly, some investors take a view on the markets and shift money from one scheme to another. So when equity markets appear costly to an investor, one may want to shift from equity fund to a debt or a liquid fund.

Many switch from equity fund to liquid fund when they want to book profits.

At the same time, some use the facility to switch from liquid fund to equity fund when the equity market appears to be cheap.

Those who believe in the benefits of asset allocation also rebalance the portfolio through the process of switches.

However, this facility is for the benefit of the investors and must be used only when required. It should not be misused.

Finally, please remember that a switch is redemption from one scheme and a simultaneous purchase into another. Hence, the scheme from which one is exiting, there could be applicable taxes.

Both the exit loads and taxes reduce the overall return on investment and hence one must be very careful about these two.

- Amit Trivedi

Equity investments simplified - transcript of my chat on12th June 2017

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

Equity investments simplified

Equity investments simplified - chat transcript April 10, 2017

http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=2849

How does one start investing in mutual funds?

Mutual funds are becoming popular vehicles of investing. However, many still have questions regarding how to start. Please click on the link below to read my article on the subject:

How to start investing in mutual funds?

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The English translation of the same is as under:

Someone approached me the other day after an investment seminar and asked, “I understood the importance of mutual funds and that I must start investing. However, I do not know where to start and how. Can you please tell me, how do I invest in mutual funds?”

First of all, if you are starting to invest in mutual funds, or starting to invest altogether, it is better to take help from experts. There are two categories of experts that can be helpful, viz., mutual fund distributors and investment advisers. Both have differences in the way they conduct their business and help investors. However, for a beginner, both could be helpful.

Having said that, it helps to be prepared with the things required even before meeting an expert.

In order to invest in a mutual fund scheme, one must decide why one is investing – there has to be some financial goal – an expense in future for which one invests today’s surplus. The goal could be short term, medium term or long term. Once you know your goal, choosing the options becomes easy.

You must also decide whether you have a lump sum or regular saving to be invested. Mutual funds offer facilities for both.

In order to invest in any financial product, you must complete certain formalities. These are popularly known in the financial markets as KYC – Know Your Customer. This process involves submission of certain documents that prove your identity as well as your address proof. You would be given a confirmation once this is completed. In fact, the regulators have made life simpler for investors through a common KYC for any of the products in the securities markets, i.e. mutual funds, stocks or bonds. The experts that we talked about earlier – the mutual fund distributor or the investment advisor, can also help in completing your KYC.

Once your KYC is completed, you are ready to invest in mutual funds.

The next decision is whether you want to transact online or through an application form.

There are three main online platforms that one can use – MF Utility, NSE NMF II and BSE StarMF. Depending on which platform your mutual fund distributor uses, you can avail of the services. In all these cases, you need to set up your account. This process may take some time. You would not be allowed to transact before such registration.

Most mutual fund companies also offer online transaction facilities through their websites or through mobile apps. Your distributor also may have developed some such facility. Many mutual fund companies allow you to transact even without any registration if your KYC is completed.

Alternately, you can resort the age old practice of filling up an application form and submitting it to the designated offices.

Along with the application form, you would be required to make a payment. In the online mode, the payment would also be online. Hence, you would need to enable your net banking facility. Whereas if you are applying through an application form, you would need to attach a payment instrument along with the form.

Please make sure you are only making the payment from your own bank account, as mutual funds do not allow third party transactions.

So, as one can see, opening an account is a very easy process.

- Amit Trivedi, Author of "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget. The book is available in English and Gujarati and is soon launching in Hindi.

 

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

A mutual fund scheme that is good for one may not be good for another ...

What is appropriate for an investor in one situation may not be good for another investor. In fact, the same scheme may not be appropriate for the same investor in some other situation. To understand more read my article in Gujarati Mid-day today ... Click on the link below:

A mutual fund that is good for one may not be good for another

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The English translation is as under:

“Where should I invest my money? Should I buy a particular stock, or a mutual fund or fixed deposit?” This is a very common question asked by many investors.

Very often, the expectation of the person asking this question is to get names of mutual fund schemes or stocks, in the expectation that the future returns would be high from these investments.

However, it is important to understand that the best funds for someone may be a bad choice for someone else. The best funds for someone in one particular situation may be a bad idea for the same person in another situation. Focus on what is important rather than what is generally best.

So how does one know what is appropriate for one in a given situation? In order to understand what is proper for a certain situation, one must understand the situation, to begin with.

This can be assessed through analysis of one’s financial situation, i.e. by looking at income, expenses, assets and liabilities. Also add the financial goals that one wishes to achieve in future.

You also need to consider certain other details like number of dependents in the family as against the number of earning members; whether you are adequately insured or not, etc.

Your investment plan can be made only on the basis of these details. Once you have done this analysis, one would come to understand which category of mutual fund schemes to be chosen. It is only after the selection of categories that one must consider which scheme is required I the portfolio.

Incidentally, if you find this too intimidating, please get in touch with a financial advisor or a financial planner.

- Amit Trivedi

Chat transcript - build wealth through mutual funds - master your money

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

Moneycontrol - Master Your Money chat transcript

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

 

Mutual funds serve various investment related needs of investors ...

Mutual funds manage our money - almost everyone knows about this. However, most often, some of the other functions related to investing are forgotten. These are also taken over by asset management companies, making life very simple for investors. Click on the link here to read further ...


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The English translation is as under:

“If I have Rs. 100 to invest, how much money should I invest in mutual funds and how much in stocks?” Recently, someone asked this question.

This is an oft-repeated question, asked in various forums and in many different ways. Some ask as a simple question as mentioned above. Some frame their questions using technical terminology as: “How much should I allocate to mutual funds out of a total fund of Rs. 100?”

What is the correct answer in such cases? Should you allocate 30% to mutual funds? Or does it depend on a person’s situation? Or risk profile? Or age?

The person asking such questions has probably not understood what mutual funds really are and is considering mutual funds as just another product – a substitute of stocks, for example.

Are mutual funds really another option for investing in stocks? It is important, hence, to understand what mutual funds are and how these are different from the traditional investment avenues.

A mutual fund is not an investment by itself, but outsourcing the investment management and administration function to a professional organization. Instead of investing in various instruments ourselves, we can outsource that job to a professional organization.

Within a mutual fund company, there are people that take care of some very important functions:

·      Fund management team: This team handles functions related to management of funds, which involve securities research, decisions regarding buying and selling of securities, execution of trades through brokers, and other paper work related to the same.

·      Fund accounting team: This team manages the accounting function related to the investors’ money invested in the scheme.

·      Registrar and transfer agency: This team is the record keeper of investor data and transactions. This team also maintains the records of unit balance in each of the investment folio. It also takes care of issuance of account statements, as well as dividends and various investor transactions in the folio.

·      Custodian: This is an outside agency and not part of the mutual fund company. They keep custody of the securities and settle trades with the clearing house of the stock exchanges, where the trade takes place. It is a security feature that the custodian is never part of the asset management company.

In other words, you get much more than just a portfolio manager by investing through a mutual fund. And, yes, just to reiterate, you also outsource the function of finding relevant and suitable investment avenues to professionals.

So, let us come back to the question asked in the beginning, “If I have Rs. 100 to invest, how much money should I invest in mutual funds and how much in stocks?”

The answer is, “You can invest all your money through mutual funds”. There are various different kinds of mutual fund schemes to cater to various requirements of investors. There are various conveniences built into these. You take your pick. Identify your need and go take the advantage of mutual funds.

- 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

Equity investments simplified - live chat on www.moneycontrol.com

Join me on the live chat today on www.moneycontrol.com today at 4:00 PM, if you have questions regarding mutual funds:

Large-cap or mid-cap, which funds are better? Or how do you evaluate these? Click on the link below to read my article in Mid-day Gujarati edition:

http://epaper.gujaratimidday.com//epaperpdf/gmd/09012017/09012017-md-gm-15.pdf

The English translation is as under:

Equity funds based on market cap bias

“Do you think mid-cap funds are better than large-cap funds?” This is a regular question these days from savvy mutual fund investors. On the other hand, when I look at some other mutual fund investors, their portfolios are heavily skewed towards mid-cap funds.

This is bound to happen. The mid-cap sector and the mid-cap funds have seen a dream run in the last few years. See the numbers below:

Fund category	1 year	3 years	5 years
Large cap	6.49% p.a.	13.00% p.a.	13.41% p.a.
Mid cap	7.24% p.a.	24.20% p.a.	21.75% p.a.

(Source: www.valueresearchonline.com)

The numbers are surely impressive for mid-cap funds – absolutely as well as in comparison to the large-cap funds.

It is this past performance that attracts many investors towards this sector. However, while the returns are visible, the risks are often not visible. In such a situation, investors tend to ignore the risk-return relationship, which says that in order to get higher returns, one has to be ready to take higher risks. In other words, the asset category that generates very high returns may carry higher risks.

Let us first look at what these fund categories invest into. The term “cap” in both large-cap and mid-cap is abbreviation of capitalization or market capitalization. This is the value the market has put on the entire company. In other terms, if one were to buy the whole company, the amount payable would be equivalent of the market capitalization of the company. It can be calculated by multiplying the market price per share with the number of shares issued by the company.

So the large-cap stocks are those belonging to companies with large market capitalization and mid-cap stocks are stocks of companies with mid-sized market capitalization. There are small-cap and micro-cap stocks also. The schemes get the category names based on where the money is invested, e.g. the mutual fund schemes that invest in large-cap stocks are known as large-cap funds.

As a general rule, large companies are leaders in their respective markets enjoying dominant position. Most of the times, these companies enjoy stable business conditions and are able to weather the storms better than the small and mid-sized companies. Thus, investment in such stocks turn out to be safer compared to the smaller counter-parts. At the same time, some of the small and mid-sized companies may turn out to be long-term winners and end up being large-cap and market leaders. Thus, the return potential could be immense. It is this return potential that lures investors towards such companies when the going is good. However, when the tide turns, investors tend to flock towards the safer large-caps.

The risk-return relation can be seen from the graph below:

(Source: www.valueresearchonline.com)

The above graph shows performance of BSE Sensex and BSE Mid-cap indices. The former represents the large-cap stocks, whereas the latter represents mid-cap stocks.

Take a look at the years 2009, 2011, 2012 and 2014. In all these years, the indices moved more than 20% up in 2009, 2012 and 2014 and more than 20% down in 2011. These are the only years with such large movements out of the last eight years shown in the graph above.

It is interesting to note here that in each of these four years of huge movements, the mid-cap index has witnessed a bigger move compared to the large-cap index (Sensex). In other words, when the stocks went up, the mid-cap stocks posted bigger gains and when the stocks went down, these posted bigger losses in comparison to large-cap stocks.

We can easily conclude from the above that while the returns in the last few years have been high, mid-cap stocks are subject to higher risks during an individual year, or even for a longer period, sometimes.

For example, if someone invested Rs. 1,00,000 in Sensex on January 1, 2011; the value of investments would be Rs. 1,03,234 after 3 years, whereas the same amount invested in BSE mid-cap would have reduced to Rs. 85,936.

It is important for anyone to understand the risk-reward relation while considering investment in various schemes. Looking merely at the recent past performance may not be enough to take a decision.

- Amit Trivedi