Saturday 30 July 2016

Why Diversification in a must in portfolio

“Despite roller coaster ride of stock market, You can still make a killing on the bourses with the right mix of products and an investment horizon”
We as human being usually plan everything in advance and with care, whether it is going abroad for a vacation or planning for a new home. However, when it comes to financial investing, many of us do not have a proper plan. And even if you have a concrete plan, it is quite likely that he may not stick to it.

What-is-Diversification-in-portfolio



This is where hundreds of investors make a huge mistake. There are chances that you will move out if there is weakness in the markets or redeem your investments for the fear of a further downside in the equity markets.

But you must stay focused and stick to your plan to bear fruits of investments in the future. Before entering into any financial investment like mutual funds, insurance, tax planning or equity, you need to have a proper plan and enter with a specific time frame in mind.

For instance, if you need money after one year, you should clearly put money in liquid or liquid plus funds or if you have an investment horizon of 10 years, you should invest only in equity diversified funds.


DIVERSIFICATION IS A MUST IN PORTFOLIO

Investment diversification is a risk management strategy. If the portfolio is properly diversified, you will have adequate risk-reward characteristics in your portfolio.
Holding onto one type of investment might have its own risks (like holding only sectoral fund or mid- and small-cap fund). You should allocate some amount to such products but only as a supplement to your main investments. The most basic investment diversification strategy should include both investments - debt as well as equity. Having some exposure to other categories like international fund or balanced fund might be useful to you in volatile times.

This investment diversification in mutual funds means that you as an investor is able to obtain immediate access to hundreds of individual stocks or debt papers with very minimum investments. If not mutual funds, you have to buy different stocks and bonds in order to get sufficient diversification in their portfolios.

Please bear in their mind that no matter how diversified their portfolio is, the risk can never be completely eliminated. The most important point is to find a medium between risk and returns.


TIME HORIZON

One of the integral elements that should be taken into consideration is the time horizon for which investments need to be held. Many times you are unaware of the product you invest in. This in turn reduces your overall returns.

If you are looking for safety and less volatility in your portfolios, opt for debt schemes or if you are a senior citizen looking for streams of income should invest in monthly income plans (MIPs).

Once debt funds are in trouble, you should always remain careful and your investment portfolios should be actively managed depending upon the views on interest rates. If you have chalked out your investment horizon, the next step should be selecting funds in your portfolio.

As said earlier individuals should always invest with a time horizon. If you are unsure about it, then invest in equity funds through systematic investment plans (SIPs).


DON’T BE GREEDY FOR SHORT-TERM RETURNS

In the investment world, all of us have to take few risks to generate better returns, going forward. But generally anyone who goes for short-term returns or even high returns in a short time frame tends to lose money.

Greed is one of the many evils in financial investment and, therefore, you should not invest in thematic funds or small-cap funds for a shorter duration.

No matter how big the returns are, there are many investors who put all their investments in the same basket (for example, all systematic investment plans are in one fund or in different schemes of the same fund house), which is also a huge risk.

You have to spread your money across different financial investments and different time frames to reduce the chance of losing money. This exercise would also ensure that risks are reduced even if there is fluctuation in returns without sacrificing on future gains.


PROPER ASSET ALLOCATION

After all the above considerations, next step in building a portfolio should be proper asset allocation within the portfolio. In mutual funds, asset allocations are of two parts.

One is regarding how much you need to allocate between equity and debt. While at the micro level, one needs to decide what kind of funds will suite his/her investment profile (aggressive investors look for mid- and small-cap funds, while conservative investors go for a balanced scheme).
 
The most important rule of asset allocation is to match investment time frame with the expected life span of the fund. 
Say for example, if you want to invest some amount for one year, you should blindly go in for liquid or liquid plus funds. But the thumb rule suggests that the money that is needed within the next three-five years must be in debt funds and anything that you want to invest in for over five years should be in equity funds (which can be diversified equity funds or mid- and small-cap funds).

START WITH SIMPLE INVESTMENTS

There are hundreds of equity schemes in the country and there are many among them, which are difficult for retail investors to understand. There are some arbitrage funds or P/E ratio funds or even asset allocation funds, which can also be considered for investment purposes.

However, these categories of funds are only meant for seasoned investors and those who know the risks of investing in such products. It is believed that investments for retail investors should remain as simple and hassle-free as possible.

Even in terms of returns if we look at longer duration, pure diversified equity funds have delivered much better returns compared to such thematic funds.

In financial investment, one should stick to their fund and investment horizon to reap better returns over a longer period of time. A retail investor’s portfolio should have few simple products, realistic investment expectations and a decent time frame for the money to grow. If all this is done properly, one can have positive results over a longer time frame.


GOAL-ORIENTED PORTFOLIOS

Each one of us wants to go on an international vacation or retire early or better still have continuous income in the working life. These are just a few of the many goals you may have from your investments and some objectives change as life moves on.

So, for retirement 35-year-old investors should start investing in systematic investment plans (SIPs) in large and mid-cap funds. Say for their daughter’s marriage, you should select a product that has equity and gold component.

Retired investors seeking monthly income should invest in monthly income plans (MIPs) or even post office monthly income schemes, which can protect the capital that they have invested in.

Long-term funds should be in diversified equity funds and emergency fund should be invested in liquid funds. Such implementation allows clear thinking about each goal, supported by investments, which will be able to meet that particular goal in the future.


CHECKS BEFORE INVESTING

Return on investment is the amount of money you receive as compared to the amount you have invested in. While risk is the probability that your investment will gain or lose money, before investing, you also need to consider your own risk tolerance and your ability to absorb a loss.

In general terms, higher the risk, higher is the profit on an investment. Risk is attached to each and every financial instrument. So, you need to identify risk and returns according to your investment profile.

Investments in many securities come with a degree of risk and if returns are not in proportion with the risks taken, then it is not worth investing in.

Risk-adjusted returns are calculated against returns given by a risk-free instrument, which is a usually government-backed debt paper or term deposits of banks. A superior mutual fund is one which gives better returns than others for the same kind of risk taken.

CONTINUOUS REVIEW AND ANALYSIS

There are several investors whose investments are lying in cold storage since many years. They have either stopped their investments or have not tracked them for years. There are even those investors who have dozens of funds overlapping other funds. While some have merged, others have closed down. But this is not the way to run a portfolio. You must review and analyze their portfolios once or twice every six months.

One of the best yardsticks to analyze a portfolio is to look at long-terms returns. Many times some good quality funds underperform in the market. You should never redeem your investments by looking at short-term returns.

Look at the rating of the schemes, whether they have improved or fared badly. If during the exercise you find that your investment is continuously giving negative returns over the past few years, you should immediately move out and invest in other well-rated equity or debt funds.

Bottom Line
For some investors, emotions often get in the way of the investments, but one has to keep emotions at bay in such matters. Sentiments have a dominant influence when it comes to your money. But do not let them lead you away from a good long-term investment plan.

I hope you enjoyed reading the article , it takes time to write  articles with facts and figures, request you to please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left.

Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you

Mutual Funds & Insurance Related Articles :-
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Best 3 Large Cap Mutual Funds for SIP in 2016 
Best 3 Midcap Mutual Funds for SIP in 2016
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Why you should not buy ULIP 
Real Estate Vs Mutual Funds : Which is Better Investment ?
How to Select Mutual Fund for Portfolio
Liquid Funds are better alternative than Savings Bank account 
What is FMP in Mutual Funds
Complete Guide on Monthly Income Plans
Complete Guide on Credit Opportunities Fund
How to Save Tax using Equity Linked Savings Scheme
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Disclaimer  :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.
 


Tuesday 19 July 2016

Real Estate vs Mutual Funds-Which is Better Investments?

Mutual Funds Vs Real Estate is a very interesting question that seems to haunt most of the 20+ and 30+ somethings (including yours truly). My answer to your question is both.

Real Estate is seriously long term where your minimum term may be around 10-20 years before you make some serious money of it. Only in a very specific cases, there is appreciation in short term, but that's a minority. If you are talking about serious money, then you need to bide your time.

One rejoinder to the above point is that when we talk of Real Estate, we should be talking of investment and not the appreciation that the flat (where one resides) undergoes. That's paper money and can't/shouldn't be liquidated. What good is a investment if one doesn't have a roof over the head?

MF is good in short, medium and long term. The advantage of MF is it's adaptability (it's not easy to sell one site and buy another as compared to selling one MF and buying another), Liquidity and ease of operation.


Since whether to invest in mutual funds or real estate was daunting me also I wanted to write about it from a long time and 2 things suddenly happened in a week which made me write this post , first, one of my reader suggested to me to write an article on mutual funds vs real estate and second is i wanted to change the perception of investors that real estate is best investment which i realized after having conversation with one of my friend.

mutual-funds-vs-real-estate

If you’re in your twenties or thirties, it makes more sense to invest in equity or balanced mutual funds instead. Not convinced? Here’s why.

So here is what happened in last week of month of June 2016 which made me write this post.

One of my close friend staying in my locality in western Suburbs of Mumbai named Borivali West(It could be any locality the pick one and compared it with MF) ,was discussing how he purchased his 2BHK (985 Sq Ft) flat at Rs 85 Lakhs (78 Lakhs Price + 7 Lakhs Including Stamp Duty, Registration fees, brokerage etc) way back in 2008 and the best part (according to him) was "His flat is now worth Rs 1.65 Cr and his investment has given him double the returns in 8 years".




You will find many idiots like him who simply calculates the returns on point to point basis and not in terms of CAGR. If you calculate the returns in CAGR it is hardly 8.64%.(see image above)
 
Must Read : Top 3 Large Cap Fund to Invest in 2016 via SIP

After the explanation of CAGR, he was surprised to see that in terms of returns it is very less but still he stood on his argument. On further digging i came to know that he took a home loan of Rs 45 lakhs and paid Rs 40 lakhs from his savings in order to buy his home.
It was the home in which he was staying so by no means it can be considered as an investment.
We both literally went into a tussle to prove our point,
He was of the opinion that Investing in Real Estate Vs Mutual Fund was better and i was of the opinion that investing in Mutual Funds Vs Real Estate was better.
With all facts and figures on tables finally i won the argument which is listed below which was an eye opener for me and it may be for you.





Source : magicbricks.com
 
Source : Magicbricks.com


The above images shows the price trends in Borivali West locality in Mumbai from Jan-Mar 2008 till Apr-Jun 2016.
In the first image prices were hovering around 8000 Rs per Sq feet in 2008 and in 2016 it is near about 18000 per Sq Ft.

Below is the interest calculation for home loan of Rs 45 Lakhs at 10.5%
As on Jul 2016 his outstanding loan is 35,78,000 and he got tax exemption of 2,00,000 from Interest which can be claimed as a deduction under Section 24 (Rs. 150000/- up to A.Y. 2014-15).
Since I selected Equity Linked Savings Funds the interest which he claimed in Section 24 does not have an impact in my MF calculation , this is the only area where he gets an upper hand.

Must Read : Best 3 Midcap Churning Money For Investors  
Let me begin with the investment strategy suggested by me which is a mixture of STP & SIP 
Since he had 40 Lakhs as his investment at the time of purchasing the home it was decided to transfer the amount in Birla Sunlife Cash Plus liquid fund and a STP amount of Rs 40000 to Birla Sun Life Tax Plan. (I would have selected Axis Long Term Equity ELSS fund but in order to create a realistic scenario BSL Tax Plan was taken as it has given moderate returns.)

Transferor Scheme : Birla Sun Life Cash Plus - Growth 
Transferee Scheme : Birla Sun Life Tax Plan - Growth Option
One Time Invested Amount : Rs 40 Lakhs
STP First Date :  25th of every month from 25-03-2008 till 17/07/2016
Transfer Amount : Rs 40000
Calculations are shown in the image below 
real-estate-vs-mutual-funds
By Investing Rs 40 Lakhs in 2008 in STP your money would have grown to Rs 99.37 Lakhs in 2016 at a CAGR of 12.05% 
On the other hand since he had a loan of Rs 45 Lakhs and an EMI of Rs 40000 it was suggested that he remain invested via SIP in Large Cap fund of HDFC Top 200 for Rs 40000 a month. The reason for selection of HDFC Top 200 is because it was one the best fund recommended by most of the MF distributors.


SIP of Rs 40000 invested from 25-03-2008 till today date would have grown to 73.39 Lakhs compared to an investment of Rs 40 Lakhs

So lets do the maths now 
STP one time investment : Rs 40 Lakhs 
SIP Invested amount        : Rs 40 Lakhs 
Total                                  : Rs 80 Lakhs  
 
STP amount as on 17/07/2016 : Rs 99.37 Lakhs  
SIP Amount as on 17/07/2016  : Rs 73.40 Lakhs
Total                                           : 1 Crore & 72 Lakhs 

Wealth generated from these 8 years would be enough to buy an apartment in our area (may be in your area) and
the best part is without any home loan.
Still my friend is paying outstanding home loan of Rs 35.78 Lakhs with interest.
We middle class people end up paying home loan for 20 years,at the end of our life all we have is a just a home and then again an educational loan for our children.
We should have enough money that bank should come to us for deposits rather we going to bank for loans 

Must Read : Best ELSS Tax Savings Funds to Invest in India in 2016 for Long Term



But you will save you have never heard of anyone who became a millionaire by investing in equity funds.
Because mutual fund NAVs are available to you on a daily basis, there’s a temptation to over-trade. Most people who haven’t made money on equity funds are those who haven’t stayed on for ten years or more. They’ve bought funds, sold them and bought them again trying to time markets.
If you did the same with property investments (they have cycles too) you would lose money. Even long-term investors in equity funds invest too little in them.

IN A NUTSHELL

It is now knownn that the Indian property market attracts a lot of cash money and with the government's new anti-black money initiatives in place, the property market is going to be further impacted. This makes investing in financial assets such as mutual funds increasingly attractive; not only can you invest with maximum convenience (sitting at your computer and hitting a few keys to initiate the investment), mutual funds have the potential to offer attractive investment returns thereby helping you build your wealth.

Apart from the above, once you sign up for a home loan, you can’t vary your EMI or stop paying it, if the property doesn’t appreciate or if you quit your job.
With an SIP, you can redeem them in an emergency.
Buying a home for the first time or investment in real estate is truly a personal choice.
Awaiting for your comments my friends



About the author
Vipul is a software sales professional for Asset Management Companies, Pension Fund and Stock Brokers from last 16 years. 

Vipul believes that the amount of financial information flowing our way is probably 10 times more than what it used to be 15 to 20 years back due to the advent of newer forms of communication.
All this information is creating an information overload in the minds of individuals resulting in analysis paralysis and he helps them select the right decision while creating a Goal based financial plan.
In case if you need a Financial Plan please connect to him on vipuls1979@gmail.com
 
Mutual Funds & Insurance Related Articles :-
Benefits of SIP
What is SWP in mutual Funds
Best 3 Large Cap Mutual Funds for SIP in 2016 
Best 3 Midcap Mutual Funds for SIP in 2016
Best ELSS Tax Savings Mutual Funds for SIP in 2016
Why you should not buy ULIP 
How to Select Mutual Fund for Portfolio
Liquid Funds are better alternative than Savings Bank account 
What is FMP in Mutual Funds
Complete Guide on Monthly Income Plans
Complete Guide on Credit Opportunities Fund
How to Save Tax using Equity Linked Savings Scheme
How to Budget Your Money
How Much Insurance Do You Really Need
Why Should you buy Term Insurance Upto 60 Years
5 Must Have Insurance Policies for Women

Disclaimer  :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.