The Future of Money – Will Physical Money Disappear?

Are we heading for a cashless future?

Not very long ago, a cashless society was something we would only read about in fantasy books. However, living in a fully cashless society could actually become a reality the way the world is moving. Digital payments are now an integral part of virtual experiences. While in most developing nations, coins and paper money are still the most common forms of payment, over the long term, it seems cash is losing ground very fast to its digital counterparts.

Following in the footsteps of numerous other countries, Finance Minister Nirmala Sitharaman had announced in her Budget 2022 speech that the Reserve Bank of India (RBI) will be launching its own digital rupee, the central bank digital currency (CBDC) current financial year. The emergence of these CBDCs, essentially digital representations of state-backed currencies, will hasten the demise of cash. CBDC can offer benefits to users in terms of liquidity, accessibility, scalability, acceptance, and ease of transactions with faster settlement. Remember how UPI has made digital cash easier to use.

How will CBDC be different from the current digital methods such as wallets and UPI? We may not realise it but the current methods remain inherently exclusionary as they are based on internet connections, QR codes, RFID and similar hardware and software that may seem easy but are actually complex to operate and expensive to own due to unseen costs built in. CBDC is expected to be easy to own, retain or transact and would come with the Sovereign guarantee as a physical coin or rupee comes.

It is also very obvious that Mobile or digital payments can replace cash only when these payment methods are as intuitive or frictionless as paying cash. It is expected that the same is just round the corner now.

(Contributed by Kritika Saini, Relationship Manager, Team Arjun, Hum Fauji Initiatives) 

How Many Funds Should Your Portfolio Have?

Most investors believe that the higher the number of funds, higher is the diversification and hence, lower the risk! Is it really true?

Are you holding too many funds in your portfolio or you are vexed with the question of the ideal number of funds a portfolio should have?

Let’s make a little effort to understand this subject better.

While investing directly in stocks, when you invest too much in one company’s stock, you are at a great risk of having all your eggs in one basket. To mitigate this risk, you buy the shares of many companies.

Sounds fair. But should you apply the same logic to your mutual funds?
No, not really. This is because equity mutual funds themselves are adequately diversified within themselves in terms of number of stocks and industry representation.

Say you own one large cap equity mutual fund. You’ll find that it is typically invested between 40 to 60 companies. The same rule applies almost to all the other categories. This seems to suggest that you could have one flexicap fund, which is actually a go-anywhere fund, and that’s it!

But then we run the risk of concentrating on one fund manager and one mutual fund company, which itself is a concentration risk of a different type. And we haven’t even considered the debt mutual funds and other categories of funds which you should be having in your portfolio.

Ideally, one should have 6 funds, maybe a maximum of 8 funds depending on your investment amount, the diversifications you already have apart from the current mutual fund portfolio, time horizon and type of financial goals you want to achieve with this portfolio. But to be very honest, your portfolio could have even 12-13 funds with proper justifications; but then such a case should be an exception rather than a rule.

A big problem with having too many funds in one’s portfolio is that it devalues one of the major advantages of investing in mutual funds – convenience of tracking, reviewing the portfolio and re-balancing if required.

Hence remember that, while diversification is good, over or under diversification creates its own problems.

(Contributed by Ayushi Gupta, Financial Planner, Team Arjun, Hum Fauji Initiatives)

NAV Myth in Mutual Funds – Have You Misunderstood It?

Buying cheap brings the thrill of having saved money and as they say, money saved is money earned. Does this also apply to mutual funds (MFs), in the sense, is a fund with lower NAV (Net Asset Value or the price of a MF) better than the one with a higher NAV?

Let us list out a few widespread misconceptions related to MFs.

Myth 1 – Investing in Low NAV MFs Is Better: NAV of a MF only indicates the present value of its One unit. Returns from MFs is always calculated on the basis of percentage they have increased by. Eg, if the NAV of a MF goes from 10 to 11 in a year, it has done as well as two other MFs whose value has gone from 100 to 110 or 1000 to 1100, ie 10% appreciation in a year. So current NAV does not matter but the percentage return it gives on an yearly basis is what really matters.

Myth 2 – Higher NAV indicates Good Performance: The appreciation in a MF keeps accumulating over a period of time and shows up as current NAV. So, a fund which has been around for a longer time is bound to have higher NAV. What matters to you is how will it perform in the future and not what what NAV has it built up over the years.

Myth 3 – A scheme with a high NAV has reached its peak: This is a very common misconception because of the general association of MFs with shares. NAV of a MF scheme is nothing but a reflection of the market value of the underlying shares held by the fund on any day. The stocks forming part of the MF scheme may be bought or sold at Fund Manager’s call depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that a particular stock has peaked, he can choose to sell it.

In conclusion, a mutual fund scheme’s NAV serves only to assess the success of the scheme by comparing the fund’s current NAV to its historical NAV. NAV has no other practical purpose for you. Now you can deal with any sales pitch or Whatsapp forward that encourages you to invest in a fund, including New Fund Offers (NFOs) because of its low or high NAV 🙂

(Contributed by Shaheen Akhtar, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)

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