Beware! How Bank systematically cheats
SIP Systematic Investment Plan (SIP) or
SIP Systematic Cheating Plan
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Who Makes Money ?
A special SIP series for members who want to do SIP on an Agents calls. Systematic Investment Plan is not a 100% systematic is what I am going to talk .... Hope you understand what I mean, because there are a number of Bankers who cheat people. As they have big tragets.
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Asset allocation, diversification key to wealth creation
Whats in it for you
The lack of basic financial literacy undermines the individual’s entire financial wellbeing. Wealth creation happens over the long-term and should not be at the cost of giving up the present lifestyle. One needs to invest in such a manner that the overall return on investment is higher than the inflation.
A basic rule of wealth creation is investing across different asset classes, or what is called asset allocation. However, different assets have different levels of risks, and one can address these risks by investing over different investment horizons. Higher the risk associated with an asset class, higher is the return potential.
The different assets that one considers while creating wealth could mainly be divided into equities, debt, real estate and gold. The least amongst these in terms of risk is debt, followed by gold, real estate and then equities. In that sense, the longest investment horizon that one must have is ideally for equities.
Equity: Look at it this way. When one is buying equities, one is actually buying a part ownership of the business, and that is the reason why one should look at equities as a long-term investment. However, Indians investors tend to look at equities as a short term investment. This is indicated by the fact that almost 90 per cent of total trades in the secondary equity market segment are in derivatives, and out of the 10 per cent trades in the cash segment, less than five per cent are delivery trades.
Trading every time don’t creates wealth, holding assets over the long term does. The equity markets have become wholesale in nature. A retail investor would find it difficult to undertake research on a company.
Mutual funds: That’s where mutual funds come to the rescue. The retail investor can get an exposure to a portfolio with even small sums of money, instead of investing directly. One also needs to remember that mutual funds are really collective pass through investment vehicles and, hence, they would do as well as the market. All that the mutual funds can produce is an alpha on the underlying market. So, if the underlying market is negative (that is, say the Nifty or the Sensex is negative) then the mutual funds would also be negative.
Typically, Indian mutual funds have been seen to deliver teo to five per cent more than the broad market index, which we call as alpha. This is critical concept for the investors to understand.
The volatility of equity markets can also be partially overcome by investing regularly in the equities mutual funds through the systematic investment plan (SIP) route. Essentially, when one is buying into a portfolio through say a mutual fund, it’s better that one considers investing at various price points in the market and the SIPs does achieve that objective.
Gold: Gold is the only asset that does not have any cashflow attached to it, till the time it is sold-off. While there is no investing formula, as to how much one should allocate to gold, we believe that an ideal approach could be anywhere between five to 15 per cent of the total financial savings. There are two issues with investing in gold, viz, one the quality of gold and the other the physical custody of A. Both these issues are now addressed through investing in a gold exchange-traded fund (ETF). One can invest directly in gold ETF units and get the units allotted in an electronic form. For every unit of gold ETF, there is a corresponding physical custody of gold. Thus, an investor wanting to convert gold into jewellery could easily sell these gold ETF units (at the reining market price of gold) and realise the cash and use the cash to buy the jewellery of his/her choice.
Fixed income: The one asset class that investors in India are absolutely comfortable with is fixed income or debt. I think that the only asset class where the investor himself goes and invests is the bank deposits or the postal deposits; while, for every other asset class, there tends to be an intermediary who would persuade and push the investor into investing. Bank deposits are the safest investment avenue available to the investor and, hence, offer lower return than the other asset classes. However, within fixed income there are other investments like debentures.
Debentures are interest bearing instruments with a finite maturity issued by companies. The risks associated with debentures and bonds are mainly that of a risk of default. Hence, they offer better returns than a bank deposit. In theory, when interest rates fall, the price of bonds or debentures rise; and when the interest rates rise, the price of debentures decline. Again, this market is wholesale in nature and one can access this market by investing through debt mutual funds.
Real estate: The last asset that I would delve upon is real estate. This asset can comprise of, say, a direct land, a residential or a commercial property. India has had problems with its land records and one needs to be careful while investing in land, whether an agricultural one or a non-agricultural one.
The funding typically in land happens through your own means. In case of commercial or a residential property, one can always go for borrowing after having put in your own funds of up to around 20-25 per cent. As long as the borrowing cost is lower than the growth in in real estate asset price, wealth creation happens. I have seen a relationship of the real estate prices with the stock market prices.
Whenever there is a large rally in the stock market, the same tends to be followed up by a rise in the real estate prices. In the long-term, both real estate and stock market returns may be largely similar. Typically, a 14.50 per cent compounded per annum return doubles your initial investment in five years. So, if a property value moves up by about four times in 10 years, the per annum return from the property investment is actually 14.5-15 per cent. This is the effect of compounding. An investor can invest in this asset class either directly, or through Real Estate funds.
These different asset classes behave differently in different business cycles. It is, therefore, important to diversify across all asset classes.
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