Being always invested in the highest rated fund may not be a good idea
Car companies keep launching new models with minor advancements to compete with each other and many-a times just to create a hype around their brand. But as a customer, do you keep on changing your self-owned cars with the same frequency? Obviously No, because one cannot and one should not. We make purchases and changes based on our budget and requirements and do not get a FOMO (Fear of Missing Out) feeling there. If our requirements are getting fulfilled by the existing model, we won’t (and shouldn’t) change the vehicle.
Unfortunately, with our investments, we lose this practical rationale. We get into chasing the highest ranked funds all the time in our portfolio and feel uncomfortable if our fund slips from 5-Star to even 4-Star, even temporarily. Somehow, we get a feeling that we should forever be in the top-most ranked funds all the time, without even understanding why some fund has made it to the top rank suddenly and whether it has the capability to stay there.
There are many fund ranking agencies and their parameters for ranking funds varies, sometimes vastly. Also, in this competitive environment, every fund manager is trying to be Number One. Hence, no single fund will be a leader forever and leaders will keep rotating all the time. If you try to get into this ‘Number 1 fund chasing’ game, you will only end up incurring a lot of exit loads, taxation and of course, lots and lots of anxiety.
Your primary focus should be to see “whether my portfolio will be able to cater to my future goals and requirements or not”. If the answer is “Yes”, you should not enter into unnecessary rebalancing of the portfolio if your funds are generally in the top quartile of category performance. Funds do slip based on some investment calls not performing, a rebalancing currently on which leads to a bit of a temporary dip in performance numbers, change of fund manager, change of strategy etc, which may be just transitory. Watch the performance patiently for few quarters and if the fund still does not perform, then a call to exit may be warranted if the reasons for under-performance are known. Your financial advisor would be the best person to assist you in this exercise.
(Contributed by Devanshu Anand, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)
How inflation impacts you
Inflation is the rise in the prices of goods and services of daily or common use, such as food, clothing, housing, transport, consumer staples, etc. It simply means you have to pay more for the same goods and services now than you were paying, say, a year ago.
As inflation rises, every rupee will buy a lower quantity of goods. Inflation increases your cost of living. It also lowers the value of your savings and pensions, if they do not increase at least at the rate of inflation.
Let’s understand the impact of inflation on saving and investing with an example.
Suppose there are two persons – the Saver and the Investor. The Saver has parked his money in savings account which gets him 3.5% Interest rate per annum whereas the Investor has invested his money in a good financial instrument like mutual funds and is able to generate an average return of 10% interest per annum in the long term.
Who would you choose to be? Who do you think will be able to counter the inflation?
As the current inflation is 5.6% per annum, the saver’s money is actually losing its value big time. Also deduct the tax that he has to pay on interest income at his slab rate, and the real returns go down heavily negative.
To combat inflation, you must avoid keeping your money idle (in cash) or in your savings account, which offers negligible interest in real terms. Instead, you must invest your money in investment options where the returns from the investments are geared up to counter the inflation rate. Investing wisely not only helps you in beating inflation over the long term but also helps you in achieving your financial goals successfully tension-free.
(Contributed by Yogesh, Associate Financial Planner, Team Vikrant, Hum Fauji Initiatives)
Regular Maintenance and Insurance is a must…
We get annual checkup and maintenance done for most of the precious assets owned by us. Whether it is our car/bike or our electrical/electronic appliances like Computers, Air Conditioners, and water Purifiers, we pay a good amount of money to keep them in good working condition and to increase their life span. We also take insurance and pay a premium to avoid any heavy expense liability arising out of their unnatural wear and tear.
While we consider everything else as depreciating, we somehow have a tendency to consider ourselves as immortal and ‘non-depreciating’. We avoid our routine health check-ups (if we can!), taking health insurance if required and ignore this most important asset that we have – “Good Health”. But, if and when we do decide to, or have to, go in for our Health check-ups and it comes out to be a good-health report, we feel great and heave a sigh of relief.
There is nothing abnormal about this human behavior but this phenomenon is not restricted to only health related dimensions. It is applicable to personal finance dimension too.
Most of the people are very reluctant to start any kind of long term investment and keep deferring it till they realise that it cannot be avoided any longer if they are not to get their families into serious financial troubles. Once they start through the right financial advisor who does their regular reviews, they feel happy about it. But in any such review, if a financial planner recommends ‘No Changes’ in a 6 monthly/annual portfolio review, the investors are disappointed and feel the Advisor has put in no effort. They do not celebrate it as a ‘good-health’ report – that their financial portfolio is on the right lines and everything is fine with it.
Managing this complex human behavior and showing the right path is the biggest task that a professional performs through his/her personal connect rather than just operational convenience provided by algorithm based multiple software/apps.
(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)
