FOCUS & THINK ABOUT YOUR FINANCIAL GOALS
You need money for every significant decision, such as buying a house and a vehicle, planning for children’s higher education, and retirement. You create a clear goal of what your life would look like and set your milestone based on your resources and find out the real path where you want to go in your life.
Once your goals set, you may start saving a small amount each month regularly. Your long-term goals may face uncertainty due to the volatility of the market (ups and downs), but don't stop until you reach your destination. For example, if someone makes SIP per month only for Rs.5000 in an equity mutual fund and after 240 months, he/she will get Rs.65.81 lakhs assuming a rate of return 14% per annum. Every decision has some objectives and goals. You can make a meaningful plan to fulfill your financial goals such as a child’s higher education, purchase of house and planning for retirement, etc. The above amount can quickly help to achieve one of the objectives say your child’s higher education goal after 20 years.
If you are looking for a short-term investment, then you can park your money in post offices, government bonds, liquid mutual funds, FMP and fixed deposit (FD) and if you are concentrating on long-term investment, then public provident funds (PPF ), National Pension Scheme (NPS), five-year recurring deposits(RD), PMIS, 10/ 15 years Infrastructure bonds, Equity mutual fund, and ELSS are the best options for you.
Why you invest in mutual funds (MFs)?
Mutual fund is the best option on the date to invest for long-term goals as it has several advantages, which include lower cost of financing, very liquid, higher safety in comparison to other products, and also tax-efficient. Mutual fund is also diversifying investor’s money into different asset class. It is less risky than equity, as fund units managed professionally. It is highly operational transparent, and user-friendly. On the other hand, mutual funds generate consistency return over the long-run.
Is consistency an essential parameter for the selection of a fund?
A mutual fund has outperformed its benchmark index over one year; it may not do well in the coming year. You can take funds five-year return and its benchmark returns on every month for five years. On average, if the fund return was over and above the benchmark return, we may call consistency in fund performance. The higher the outperformance, the better is the consistency. Birla Sun Life frontline equity return for five years as of 26th November 2016 is the best example of consistency performance.
What are the criteria for selecting MFs?
Two criteria will generally guide the selection of investing in a mutual fund of portfolios by the investor:
• The investor would prefer to invest in the lowest risk fund with the same expected return in a specific time frame in two funds.
• The investor would prefer the higher expected return in portfolios of two funds with the same risk.
An investor should make an investment strategy based on risk-tolerance capacity. Risk tolerance capacities differ from person to person and also their age. It is prudent for an investor to invest in large-cap, multi-cap & diversify equity mutual fund scheme, rather than aggressively invest in mid-cap as well as small-cap funds.
Invest directly in MFs:
The expense ratio is the amount an investor pays a fund every year as a percentage of investment as payment for managing one’s money. In the long term, a high expense ratio can reduce returns massively. However, a lower expense ratio does not necessarily imply a well-managed fund. Instead, a good fund is one that delivers a consistent performance with minimal expenses. You must, therefore, consider the fund management charges while investing in a mutual fund. For an investment of Rs 10 lakhs in a mutual fund scheme that offers a rate of return of 12 percent per annum, a 1 percent extra fund management charge will result in a loss of Rs 70.67 lakhs over 30 years. By investing directly with mutual fund houses instead of through distributors/ agents, you can save on distribution fees, and there is evidence that, over the long term, direct equity mutual fund outperform regular funds by over 1%.
Think before you invest:
Investing blindly in shares and other market-related products may risk the loss of investor’s capital as speculator plays a vital role in inflating the stock prices nowadays.
Security prices are affected by so many factors. It causes interest rate risks and purchasing power risks. Similar to the capital markets, more broadly, mutual funds governed by factors such as socioeconomic conditions, inflation and interest rates, global events, political stability, exchange rate fluctuations, as well as company performance and governance. Returns from shares and mutual funds also depend upon the earnings growth of companies. Hence, the concentration ratio of each fund should play an important role while selecting between different Mutual funds.
Create a balanced portfolio by Investing in mutual funds:
It is prudent to invest in different fund houses and various categories of mutual fund products, which not only protect your hard-earned money from the market volatility but also create wealth in the long-run. Mutual funds are the most suitable investment for the common man as it offers an opportunity to invest in diversified securities and different asset classes, which are professionally managed by fund housed at a comparatively low cost. Mutual funds help an investor to create a right portfolio mix due to its various categories of funds, such as: large-cap funds, multi-cap funds, mid-cap funds, hybrid funds, debt funds, and gold funds. Equity funds have a higher risk of capital loss in comparison to hybrid/ diversified funds.
“Diversification keeps you financially fit and also protects you from the volatility of the market, as it reduces the risk exposure in your portfolio.”
Review the portfolio periodically:
You can evaluate the performance of a mutual fund based on parameters such as NAV, portfolio turnover, risk and return yearly or half-yearly returns. It is also advisable to book the profit periodically or to transfer equity fund holding to liquid/debt fund when fund earns more than the bank fixed deposit rate plus the current inflation. Investment of shares during your lifetimes may give you five times positive returns and 50 times negative return. It is not a process of a win-win system. If you have known the actual market trend, you can win in this volatile market, otherwise not. Speculative effect, demographic factors, micro factors, macro factors, fluctuation of currency & also political stability play an important role in the capital market.
Besides, it is vital to consider indicators such as standard deviation, the beta, and the alpha, and the sharp, Treynor, Sortino, and concentration ratios while reviewing an equity mutual fund.
Why focus on the long-term….?
The S&P BSE Sensex yielded returns at a CAGR of 8.83 percent over the last ten years. As the tenure of investment increases, the probability of negative performance decreases. Historically, there has never been an instance of negative performance for ten years and above.
Affirming this fact, as of 1st September 2016, actively – managed large-cap and diversified funds generated a CAGR return of 15.86 percent and 17.31 percent respectively over the period of 10 years. In comparison, the benchmark index for large-cap fund S&P BSE 200 yielded a lower, 9.38% during the same period. Then, equities deliver strong returns with lower downside risk in the long term, compare to debt instruments such as bonds, debentures, and Govt. Securities. Hence, equity and equity-related investments should always be for the long-term, ideally more than five years, and one can assume returns of 12-15 percent a tear over a longer horizon.
Maintain a disciplined approach:
An investor must be well-disciplined; otherwise, he/she will lose money due to wrong decisions such as selling stocks and shares & mutual funds haphazardly due to the volatility of the market. The decision to not invest in the bear market also reflects that the investor is not well disciplined as he/she is not investing regularly as per the defined/targeted goals.
Those who invest irrespective of market trends will achieve their goal in due time. Start investing in diversify equity mutual fund at the age of 25, a very small amount say Rs.3000/- per month for your retirement after 35 years you will accumulate Rs.1.95 cores with an annual return of 12 %, which is sufficient to generate Rs.1.26 lakhs Per month (7.75% interest in bank FDR), to meet your post-retirement living expenses comfortably. The above corpus can be achieved only by disciplined approaches irrespective of market volatility. Hence, it is the ultimate path towards the success of your specific goal.
R K Mohapatra is GM - Finance, IRCON, and an eminent author
You can get the book at amazon.
http://www.amazon.in/Retirement-Plann...
Once your goals set, you may start saving a small amount each month regularly. Your long-term goals may face uncertainty due to the volatility of the market (ups and downs), but don't stop until you reach your destination. For example, if someone makes SIP per month only for Rs.5000 in an equity mutual fund and after 240 months, he/she will get Rs.65.81 lakhs assuming a rate of return 14% per annum. Every decision has some objectives and goals. You can make a meaningful plan to fulfill your financial goals such as a child’s higher education, purchase of house and planning for retirement, etc. The above amount can quickly help to achieve one of the objectives say your child’s higher education goal after 20 years.
If you are looking for a short-term investment, then you can park your money in post offices, government bonds, liquid mutual funds, FMP and fixed deposit (FD) and if you are concentrating on long-term investment, then public provident funds (PPF ), National Pension Scheme (NPS), five-year recurring deposits(RD), PMIS, 10/ 15 years Infrastructure bonds, Equity mutual fund, and ELSS are the best options for you.
Why you invest in mutual funds (MFs)?
Mutual fund is the best option on the date to invest for long-term goals as it has several advantages, which include lower cost of financing, very liquid, higher safety in comparison to other products, and also tax-efficient. Mutual fund is also diversifying investor’s money into different asset class. It is less risky than equity, as fund units managed professionally. It is highly operational transparent, and user-friendly. On the other hand, mutual funds generate consistency return over the long-run.
Is consistency an essential parameter for the selection of a fund?
A mutual fund has outperformed its benchmark index over one year; it may not do well in the coming year. You can take funds five-year return and its benchmark returns on every month for five years. On average, if the fund return was over and above the benchmark return, we may call consistency in fund performance. The higher the outperformance, the better is the consistency. Birla Sun Life frontline equity return for five years as of 26th November 2016 is the best example of consistency performance.
What are the criteria for selecting MFs?
Two criteria will generally guide the selection of investing in a mutual fund of portfolios by the investor:
• The investor would prefer to invest in the lowest risk fund with the same expected return in a specific time frame in two funds.
• The investor would prefer the higher expected return in portfolios of two funds with the same risk.
An investor should make an investment strategy based on risk-tolerance capacity. Risk tolerance capacities differ from person to person and also their age. It is prudent for an investor to invest in large-cap, multi-cap & diversify equity mutual fund scheme, rather than aggressively invest in mid-cap as well as small-cap funds.
Invest directly in MFs:
The expense ratio is the amount an investor pays a fund every year as a percentage of investment as payment for managing one’s money. In the long term, a high expense ratio can reduce returns massively. However, a lower expense ratio does not necessarily imply a well-managed fund. Instead, a good fund is one that delivers a consistent performance with minimal expenses. You must, therefore, consider the fund management charges while investing in a mutual fund. For an investment of Rs 10 lakhs in a mutual fund scheme that offers a rate of return of 12 percent per annum, a 1 percent extra fund management charge will result in a loss of Rs 70.67 lakhs over 30 years. By investing directly with mutual fund houses instead of through distributors/ agents, you can save on distribution fees, and there is evidence that, over the long term, direct equity mutual fund outperform regular funds by over 1%.
Think before you invest:
Investing blindly in shares and other market-related products may risk the loss of investor’s capital as speculator plays a vital role in inflating the stock prices nowadays.
Security prices are affected by so many factors. It causes interest rate risks and purchasing power risks. Similar to the capital markets, more broadly, mutual funds governed by factors such as socioeconomic conditions, inflation and interest rates, global events, political stability, exchange rate fluctuations, as well as company performance and governance. Returns from shares and mutual funds also depend upon the earnings growth of companies. Hence, the concentration ratio of each fund should play an important role while selecting between different Mutual funds.
Create a balanced portfolio by Investing in mutual funds:
It is prudent to invest in different fund houses and various categories of mutual fund products, which not only protect your hard-earned money from the market volatility but also create wealth in the long-run. Mutual funds are the most suitable investment for the common man as it offers an opportunity to invest in diversified securities and different asset classes, which are professionally managed by fund housed at a comparatively low cost. Mutual funds help an investor to create a right portfolio mix due to its various categories of funds, such as: large-cap funds, multi-cap funds, mid-cap funds, hybrid funds, debt funds, and gold funds. Equity funds have a higher risk of capital loss in comparison to hybrid/ diversified funds.
“Diversification keeps you financially fit and also protects you from the volatility of the market, as it reduces the risk exposure in your portfolio.”
Review the portfolio periodically:
You can evaluate the performance of a mutual fund based on parameters such as NAV, portfolio turnover, risk and return yearly or half-yearly returns. It is also advisable to book the profit periodically or to transfer equity fund holding to liquid/debt fund when fund earns more than the bank fixed deposit rate plus the current inflation. Investment of shares during your lifetimes may give you five times positive returns and 50 times negative return. It is not a process of a win-win system. If you have known the actual market trend, you can win in this volatile market, otherwise not. Speculative effect, demographic factors, micro factors, macro factors, fluctuation of currency & also political stability play an important role in the capital market.
Besides, it is vital to consider indicators such as standard deviation, the beta, and the alpha, and the sharp, Treynor, Sortino, and concentration ratios while reviewing an equity mutual fund.
Why focus on the long-term….?
The S&P BSE Sensex yielded returns at a CAGR of 8.83 percent over the last ten years. As the tenure of investment increases, the probability of negative performance decreases. Historically, there has never been an instance of negative performance for ten years and above.
Affirming this fact, as of 1st September 2016, actively – managed large-cap and diversified funds generated a CAGR return of 15.86 percent and 17.31 percent respectively over the period of 10 years. In comparison, the benchmark index for large-cap fund S&P BSE 200 yielded a lower, 9.38% during the same period. Then, equities deliver strong returns with lower downside risk in the long term, compare to debt instruments such as bonds, debentures, and Govt. Securities. Hence, equity and equity-related investments should always be for the long-term, ideally more than five years, and one can assume returns of 12-15 percent a tear over a longer horizon.
Maintain a disciplined approach:
An investor must be well-disciplined; otherwise, he/she will lose money due to wrong decisions such as selling stocks and shares & mutual funds haphazardly due to the volatility of the market. The decision to not invest in the bear market also reflects that the investor is not well disciplined as he/she is not investing regularly as per the defined/targeted goals.
Those who invest irrespective of market trends will achieve their goal in due time. Start investing in diversify equity mutual fund at the age of 25, a very small amount say Rs.3000/- per month for your retirement after 35 years you will accumulate Rs.1.95 cores with an annual return of 12 %, which is sufficient to generate Rs.1.26 lakhs Per month (7.75% interest in bank FDR), to meet your post-retirement living expenses comfortably. The above corpus can be achieved only by disciplined approaches irrespective of market volatility. Hence, it is the ultimate path towards the success of your specific goal.
R K Mohapatra is GM - Finance, IRCON, and an eminent author
You can get the book at amazon.
http://www.amazon.in/Retirement-Plann...
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