Tag: Mutual funds

31 Oct 2020
Why is investment in equity mutual funds better than in direct equity_

Why is investment in equity mutual funds better than in direct equity?

This has been a strange year!

The conversations we have had with people with respect to their investments have moved in exact sync with the equity market. In January 2020, when the benchmark BSE Sensex was hovering around 44,000 points, we were dealing with questions like ‘Should I shift from Mutual Funds to direct equity’ on a daily basis.

In March, when the Sensex tumbled to 26,000 points, many people, including some referred to in the previous sentence, frantically called us to seek advice. This time, they were panicking and wanted to exit equity altogether, direct as well as mutual funds.

Such questions usually mean only one thing: The investor is very young in the market, and has not seen market cycles.

Now that the market is again hovering close to 40,000 points, many people would like to get a share of the pie and would like to invest in direct equity. After all, the story of Reliance Industries Ltd getting doubled in value in just a few months will make anyone red with envy! FOMO (Fear of Missing Out) further…

Despite that, we are going to argue today that investing through Mutual Funds is a better idea than direct equity.

Well, the caveat is that this is true for a vast majority of people around us. There will certainly be exception of a few people who can spend time and energy to research on direct equity investments.

Why do we say so? The answer is below.

 

What it takes to ace direct equity investment?

Short answer: Research.

Long answer: Ability to read between the lines when reading news about companies and industry, a knack for thinking ahead of the curve basis the previous two, deduced information that others might not have, and lastly, capacity to handle big big losses!

Accordingly, all our conversations on direct equity investments start with the last question first! That is surprisingly the weakest link.

Remember that a cash-rich giant like Maruti Suzuki saw its share price fall from around Rs 10,000 to Rs 4,000. Will you be able to sleep peacefully if you bought Maruti at near Rs 10,000 when everybody said Maruti is the new Tesla and now your portfolio has that huge dent? It is another story that strong companies also recover from those depths over time.

The other questions revolve around the understanding of a particular industry and company. People who understand a business really well, and can anticipate the changes – positive and negative – for the company basis their analysis are the ones who gain.

Unfortunately, very few retail investors have that kind of time, energy or zeal for more than a couple of sectors. You could be a defence professional and can make investments in related stocks, but do you also understand the global energy market dynamics? Are you confident of your predictions for the automobile industry or the decorative paints sector?

If not, then it is better to stick to mutual funds.

 

How you gain through equity mutual funds as retail investors?

Most people we speak to are very enthusiastic about equity investments, but unfortunately cannot extend their research or understanding to a sector beyond the one in which they themselves work. You certainly cannot put all of your money in a single sector! It is like keeping all of your eggs in a single basket. One accident and all or most eggs are gone, not even fit for a humble omelette!

On the other hand, if you spread those eggs in different baskets, you can be certain that even if there is an accident at one or a few places, at least some of the eggs will hatch to give you a few chickens!

Okay, let’s think beyond food again.

Mutual funds will enable a defence professional to have exposure to finance, manufacturing, energy, pharmaceuticals, information technology, emerging businesses and all other sectors that we don’t even think about.

A fund manager and her team, managing your mutual fund investments will however, not miss any of these sectors. This is their profession, they get paid for it and the MF industry has huge competition to emerge out as the best fund manager.

Not only will they not miss the sectors, they will also strive to find the best companies in that space for your investments. Of course, they are doing it for a fee, but that is what makes it a truly professional decision!

In the end we would say that, by all means, invest in equity if you have the expertise. But unfortunately, most people do not have that expertise, or worse still, think that they have it due to a few ‘beginner’s luck’ wins.

Hence, for most people, equity Mutual Funds should be their first choice to get an equity exposure for their investments.

16 Feb 2018
Mutual funds

Invest in SIPs and take control of your Finances

Albert Einstein is supposed to have remarked: *Compounding is the 8th wonder of the world – one who understands it, earns it; one who doesn’t understand it, pays it!!*

Compounding as a benefit of Mutual Fund is been a very talked about subject. But as a layman not many know how does it work.

Compounding is simply an activity in which the earnings of the original investment also earn the same rate of return as an original investment.

Now in the case of Mutual Funds let’s say you invested in the fund when the NAV is Rs. 20. Now assume NAV goes up by 25%, in that case, the New NAV will be 25. Again markets go up by 20%. Now the new NAV will be Rs. 30 which is 20% above Rs 25. If there were no compounding than the return would be 20% over Rs 20 which was an original investment. This is compounding in Mutual Funds for you.

I would like to say is that for a long-term investor compounding will work in his / her favor. In fact, I must say compounding is the magic which magnifies your return over the long term.

It is a way which allows an investor to take control on the finances and Systematic Investment Plans are the way to manage finances with ease of investment.
05 Jul 2016
Inputs on 7th CPC Questionnaire

Inputs on 7th CPC Questionnaire

1) What are 5 things you advice government officials should do with increased pay and arrears once the pay hikes come?

  1. The 7th Pay Commission money will come to the Government officials in two forms– approximately seven months’ pay arrears and the monthly increased money.

Unlike the earlier pay commissions which took a long time to finalise their recommendations (6th CPC took 30 months), this one has done it pretty fast, implying that there is likely to be just about seven months of arrears that become due. Hence, the arrears are going to be quite small, just about equal to a month’s salary post-tax. For this reason, there is neither much excitement about the arrears nor could there be great plans required to be made to spend it. However, since it will become available anyway, the best way to utilise it is to retire debt, if any. This implies that one should try to reduce the loans taken – costlier loans first. A logical order to pay off the loans should be Personal loans, product loans (taken for vehicles, durables, jewellery etc), loan against property, and lastly home loans. It not only reduces the interest payment, but there is a big psychological relief too when a loan is paid off, however small. After the loans have been paid off, if some money is left, a contingency fund, typically equal to about three months’ expenses (including all loan payments) should be created or topped up, as the case be. Any further money available should be directed towards tax related savings for the financial year. Given the small amount of arrears likely to be available this time, these priorities should take care of it more than adequately.

 

More important this time will be the monthly increments that will become available. It has been clarified that this additional monthly amount is likely to be in the range of about 15-20% over and above what one is already getting. Rather than aiming to go in for a ‘better lifestyle’, or buy that long-pending big car on loan and pay EMIs, it will be better to take a look at your long term goals and how this additional monthly increment can be used to fortify them. This could go to increase your PF contribution, start or increase of mutual fund SIPs (Systematic Investment Plans) or even recurring deposits. That way, this increase would help you meet your dreams, responsibilities and obligations that you would’ve otherwise struggled to meet. Children’s higher education, marriage, home, etc are all more easily achievable if these small droplets are accumulated to make an ocean. It should not happen that few years, or maybe even few months down the line, you do not know how timely non-utilisation of the additional increment of money simply went to your lifestyle expenses without actual increase in your quality of life.

 

2) Could you give some good Mutual funds to invest?

Good funds would depend upon three main aspects – risk profile of the individual, his future requirements (or financial goals), and the market conditions. If one is a novice and entering mutual funds for the first time, primarily debt funds should be gone into with some balanced equity funds. As one becomes comfortable with equity, large cap and multi cap funds can be added. However, if one is knowledgeable about equity, a portfolio of large cap, multi cap, mid & small cap and balanced equity funds can be made. The ratio in which each fund is taken would depend on the three factors already enumerated.

 

3) How much of portfolio should be invested in gold?

Gold could be looking attractive now due to it having zoomed up lately. But please remember the old adage – ‘Gold zooms when the world is Doomed’. Due to large uncertainties associated with global economy, financial markets have been very volatile lately. Hence the rush to perceived safe havens like Gold. But these very uncertainties and rush times have also made Gold very volatile! We do not advocate more than 5-10% allocation to Gold at any time and this is true of bulk investments as also monthly ones.

 

4) What are the best tax-saving investment options?

There is a large variety of tax-saving options available under Income Tax Section 80C. However, the key issues are the safety, returns and tax status while investing, of its returns periodically received and when it matures or is redeemed. PPF is the best tax saving avenue for the risk averse as it gives decent interest of 8.1% as on date and enjoys the E-E-E (Exempt-Exempt-Exempt) status. If you find the returns low and are prepared to accept some volatility of returns, tax saving mutual funds (called ELSS – Equity Linked Savings Scheme) are very good. If chosen carefully, they also provide E-E-E status, are likely to provide higher returns than PF, can be contributed to regularly through automatic ECS from bank account and provide the option of continuing as long as you want. They also have the shortest lock-in period of all tax-saving investments of just three years. But please remember that their returns are market linked. Apart from these, five year tax-saving bank FDs, Insurance policies and NSC also are 80C investments. But low returns take their sheen off. NSC are E-E-E provided the interest received is shown re-invested in the Income Tax Returns each year (except the last year when it matures) and bank FDs are in the E-T-T bracket.

For more information, feel free to reach us on, contactus@humfauji.in or call + 011 – 4240 2032, 40545977, 49036836 or

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