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investment & profitability

Reality Check: You, Your Investments & Profitability

Since the past month, equity markets have been significantly choppy. While many savvy investors have taken it in stride and are harping on the correction as an opportunity to buy more at discount prices, there is a large faction of mutual fund investors for whom the sweat on the brow has not dried since over a month.

Investors who have started investing in mutual funds only a year back or so are experiencing the real stomach-churns for probably the first time. All this time, novice investors had been exposed to only the bright side of the world of equities with overwhelming returns, many may even have regretted not investing more before the uptick. However now, as the cycle changes, the regret has switched sides because of the “red numbers” in the investment reports.

So, what’s the way ahead for a common Indian investor whose only goal to invest in mutual funds was to build wealth over a longer term? Tried & tested across periods, successful investors swear by these principles for investing during choppy times.

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” -Warren Buffet

‘Market Cycles’ are called cycles for a reason – Don’t react as if you did not know that equity markets are volatile.

Equity markets are sensitive to multiple factors including macro-economic environment, geopolitical scenarios, sectoral stress and similar. The markets react and reflect people’s expectations in the very distinct near term and quite often than not in an exaggerated manner. “Kneejerk reaction” is among the most used phrases on Dalal Street for a reason. However, those who stood the test of time and believed in investing discipline emerged with bountiful wealth.

Sure, the current pandemic has led to a steep decline in trade & commercial activities. But, do you really think that all businesses are going to come to a grinding halt, and more importantly – remain so forever? If not, there is no reason for you to not believe in a recovery of equities – which is nothing but reflective of business health in the longer term.
Right from the 2009 financial crisis to European crisis, North Korean missile tests, Fed Rate hikes and similar global tantrums, equity markets have survived it all and yet delivered spectacular returns over the period.

Ever wondered why?

Recovery and wealth building

Simple, do you believe that many years down the line, the world (includes national economies, sectors, companies, humans, art, music and everything) will reach a pedestal at least some place higher than now?

Basically, do you believe that mankind will continue to progress?

If your answer is yes, you must realise that equities are nothing but a reflection of economic progress (driven by mankind, obviously) and so has a direct correlation and reason to grow with the rest of the world.

“We continue to make more money when snoring than when active.”
-Warren Buffett

The ability to time the market right each time is not just a matter of intellectual ability, it also requires some amount of psychic abilities

Equity markets fluctuate basis the demand and supply by millions of entities.

Can you read a single mind? If not, why try read millions of them and time the market?

Millions of minds and algorithms maintain the demand-supply and consequent pricing in capital markets. What is the likelihood that you would be able to fathom the direction in which the majority decisions would flow?

Even when you think you can make some sense out of the chaos, let me tell you, very often even the entire market gets things wrong – hence the term “correction” instead of “decline” is used to describe such scenarios when sudden enlightenment reverses the effect of overtly optimistic valuations previously placed by the market.

Following is a classic illustration of what would have happened if your parents did what you are contemplating now –

Impact on skipping SIP

Honestly, nobody – literally nobody in the world can time the market while many are paid to try. The best way to go about investing is through a periodic investment (think SIP) just so that you manage to average your purchase cost across cycles and benefit from the rupee-cost averaging.

“Most People don’t plan to fail. They fail to plan.”

-John L. Beckley

Plan right & believe in it – That’s the reason you had a plan in the first place

Times like now are testing times where many novice investors get shaken by volatility and choose to step out of the markets instead of riding the tides till, they reach their goals. Statistically, an investor can expect failure 100% of the times he invests without thinking it through.

Asset allocation and financial planning are key to being profitable and building wealth. Let’s say you start exercising to get fit – you have a planned schedule, workout routine and diet plan. While planning, you knew it would take at least 8 months of perseverance before you achieve your target body. Now, what happens if you follow the regime regularly but don’t see much of an impact in one month? Would you stop? If you stop, you know who is to blame when eight months have passed, summer has begun, and you can’t get into your summer outfit on the beach.

Quite often in life, you will not be able to achieve goals (financial as well as non-financial) if you give up way before the time comes when you were expecting to reap the benefits.

It is extremely important that you plan extremely well, keep reviewing and make situational alterations – not a revamp.

Please understand, there’s a fine line between being reactive & course-correction.

While these principles are not a definite guide to becoming Uncle Scrooge wading through an ocean of gold coins, but it sure can help you achieve your financial goals.

Anybody can be a mutual fund investor with SIP

Did you know that it takes ₹100 to become an investor? Well, as curious as it sounds, it is far easier than you think to become an investor.

Anybody over 18 can be a pro-investor. Here’s how!

Did you know that it takes ₹100 to become an investor? Well, as curious as it sounds, it is far easier than you think to become an investor. If an individual has a PAN card and completed his KYC for investment, it takes only to be an adult to invest in mutual funds. But why would someone so young, want to invest in mutual funds? What kind of opportunity can it present to someone who is just out of college? 

Why would you want to be a mutual fund investor?

For every hidden Zuckerberg, Musk or Gates hidden among scholars and graduates one very essential ingredient is always missing. The ability to fund your life or career goals on your own. While this is just the tip of the iceberg, there are so many dreams and goals young individuals have that get lost in time because they don’t have the resources for fulfiling their dreams. This is where mutual funds could be the ticket to achieving goals and fulfiling dreams.

Anybody can invest in a lump sum mutual fund or an SIP. An SIP, is a Systematic Investment Plan where you are able to make investments on a monthly basis. While SIPs are a monthly affair, they start at ₹100/month and the investment amount can always be adjusted. It allows you to invest in regular intervals. It is also called the “planned way of investing.” It helps investors to cultivate a habit of saving and accomplish the goal of wealth creation. You can invest on an SIP on the go on MyWay Wealth app where SIPs are extremely easy to maintain can be tracked 24×7 with real-time tracking and much more.

How do you determine the amount and time for the investment necessary to achieve your goals?

Ever had the burning sensation of a new idea in your mind and did not know where to start? It gets tragic when people don’t work on their ideas because they do not have the financial resources. Here is what you need to do. You need to calculate how much time and how much money you would have to invest to achieve your goal. Such calculations may get overwhelming unless there is a tool which can calculate your investment requirements based on goals and invest accordingly. ‘Save for a Goal’ tool on MyWay Wealth app can help in doing so.

It takes a matter of seconds to select your goal on this tool and it will not only project the amount that you need to save for your goal but the amount of investment that is necessary to be made. You can also toggle with your risk appetite and plan your investment to save your particular goal.

What if your investment KYC isn’t done?

It has been made mandatory by the Government of India, to complete a once in a life-time KYC  process which allows people to invest in Indian mutual funds. It might sound like a task but it isn’t much of an effort if you get it done on MyWay Wealth app. It takes only a few minutes to complete it as long as you have your essential documents with you. It’s completely paperless and does not levy any charges

Don’t have dreams? You definitely need to start an SIP, then. With SIP, you would have to invest in regular investments helping you in maintaining a healthy financial routine because you know that a minimal portion of your income would go for your investment every month. Such investments would help to practise discipline when it comes to managing your funds or finances.

In other words, c’est la vie and start an SIP, only on MyWay Wealth app from an early phase of your career, so that you can use your professional skills to fulfil your dreams and not just others.

Is It A Good Time To Invest In Midcap And Small cap Funds?

The equity market is never meant to take a straight-line trajectory. It always has its shares of ups and downs based on a number of other factors like the general economic and political conditions within and outside the country, the interplay of global capital markets, movement of the local currency and many other factors.

There are 5000 odd stocks listed on the Bombay Stock Exchange, there is a classification put in place to differentiate between the stocks based on market capitalization. For the uninitiated, market capitalization is the market value of all outstanding shares of a company.

According to changed norms for fund categorization, large-cap funds can only invest in Top 100 stocks by market capitalization, mid-cap funds can choose between the 100-250th stocks and small-cap funds from the 251st stock by market cap.

What Is So Interesting About The Mid Cap And Small-Cap Space?

The Upside of Mid & Small Cap Space

Is it only the market capitalization that makes mid-cap and small-cap space unique and interesting? Of course not!!

Mid-caps and small-cap space represent that universe of the stocks which are budding or has the highest potential for growth. These companies are in their expansion phases and often prove to be value buys. These companies are not very popular so there are a limited number of value seekers investing in this space.

In a phase when the market is growing, the mid-cap and small-cap stocks often perform better than the large-cap stocks due to their potential of growth. Similarly, the mid-cap and the small-cap funds that majorly invest in these companies do well than the large-cap peers.

No wonder there is a lot of interest in this space.

The Downside of Mid & Small Cap Space

The Mid& Small Cap universe has a number of green-horn companies.

While the management of large-cap stocks is seasoned and can better weather a crisis, midcaps and small caps stocks might still be reaching there. Also, these stocks can quickly go down when there is an economic crisis/bear phase in the market.

Therefore investment in this space is not free from risks as these stocks show higher highs and lower lows (volatility).

Although, Mid-caps and small-cap mutual funds are handled by experienced fund managers yet they cannot guarantee you lesser volatility.

Performance of Mid-Caps/Small Caps vis-a-vis large caps

All said and done each one of us looks to maximize our investments. So performance is a key factor.

We looked into the performance of BSE Large Cap 100, BSE Mid Cap and BSE Small-Cap indices over a 5 year period. This is considered as a proxy for Large Cap and Mid& Small Cap funds.

5 year performance of indices

We see that all 3 indices had a common base figure (almost) in 2013. While the index figure for Large Cap is just nearing the double-figure, the Mid-cap and Small Cap indices have moved way past that figure indicating growth in these stocks.

On the other hand, the volatility (ups and downs) for the Mid and Smallcap indices is also much higher when compared to volatility for Large Cap index. For Ex: Consider a one-year horizon from Dec 2017 to Dec 2018, the fall in mid & small-cap indices has been much more than the fall in large-cap, thereby validating our view of higher highs and lower lows.

Takeaways

There is no right or wrong time to invest in any fund. Every fund stands to satisfy a certain need like large caps allow lesser returns with lesser risk and it is the vice-versa for mid and small caps.

The time horizon for holding also matters. Investments in mutual funds generally pay well over longer time horizons.

One cannot totally shun or embrace the mid-cap and small-cap funds. The investments in these funds should be guided by your risk appetite, holding horizon and your financial goals rather than timing the market.

SIP vs SWP vs STP

Choose between NAV, SIP, STP, and SWP

STP (Systematic Transfer Plan)

In simple words, STP means transferring money from one mutual fund to another. STP is a smart strategy of investment over a specific term to reduced risks and balanced returns. Here, an AMC (Asset Management Company) permits you to put a lump sum in one fund, and transfer a fixed amount to another scheme regularly.
STP is a useful tool in mutual funds to average your investment over a specific period, which depends on three factors:

  1. Market view
  2. The risk profile of the investor
  3. An investor’s current allocations to equities.

Things to remember while investing via STP:

  • STP is the method that requires discipline; it’s not you who gets to cook your money overnight; it will take time to cover your returns.
  • It would help if you kept an eye on the underlying assets and their phases.
  • STP is one of the most reliable risk-reducing investments in which you can invest.
  • Go with STP only if you have a lump sum amount to invest.
  • You need to make at least 6 STPSs as per the SEBI guidelines.

In short, STP is a useful strategy to manage risks without affecting your returns significantly.

SIP – The recommended option

A SIP (Systematic Investment Plan) is an ideal way of investing in mutual funds. It allows you to invest in regular intervals. It is also called the “planned way of investing.” It helps investors to cultivate a habit of saving and accomplish the goal of wealth creation.
Through SIP, you can invest in a quarterly, monthly, or weekly basis as per your convenience. A fixed amount is debited from the policyholder’s account and invested in mutual funds. As you start investing a pre-decided number of units get allocated as per the current market price. Besides, mutual funds plans are flexible in nature, and you also have the option to discontinue it whenever you wish. However, you make the most out of Mutual Funds investments, remember to stay invested for a long period.

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Difference between Direct & Regular Plan Mutual Funds

“One of the only ways to get out of a tight box is to invest your way out.”
-Jeff Bezos

A Mutual Fund is divided into two categories:

  • Direct Plan Mutual Funds
  • Regular Plan Mutual Funds

And in this topic, we will dive deeper into these two broad categories to understand how they work and who should invest in them.

Direct Plan Mutual Funds

The Securities And Exchange Board Of India (SEBI) introduced Direct Plan Mutual Funds in January 2013 making is compulsory for all the Asset Management Companies (AMCs) to provide an option to invest in Mutual Fund scheme directly. When an investor invests in a Mutual Fund directly with an Asset Management company(AMC) without the help of any broker, distributor, banker or any kind of intermediary, that is known as Direct Plan Mutual Fund. One can apply to Direct Plan Mutual Fund just by visiting the Mutual Fund house or visiting the company’s official website or through an online app such as MyWay Wealth that provides the option on investing online.

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Active vs Passive Funds

Passive funds or active funds

In Equity funds, we have different kinds, Active and Passive funds are one among them. Generally to brief on these funds:

“Passive funds: A lazy man’s strategy to earn money
Active funds: weathered the storm to earn money.”

Before having these two in your portfolio, let’s understand the concept.

Active Funds:

Active funds usually incur high cost because investors pool money and hand it over to a fund manager whose job is to select investments based on scientific research, intuitions and his experience. The investors take risk of investing in these funds because the outcome will be more effective.

Passive Funds:

It eliminates humanly ideas in predicting market moves. Passive investing means owning the market rather than trying to beat the market. It sounds uninteresting, but it is a desirable investing.
There is no difference between passive funds and index funds. All the index funds form the part of passive investing.

Beating or matching the market?

Passive investors consider that beating the part is impossible whereas, on the contrary, active investors believe that they can beat the market by selecting the good stocks. But with an aim to overcome the market and beat the benchmark, the fund managers end up substantially raising the cost of buying and selling the stocks.
The idea behind passive investing is to take advantage of market moves and compensate for the risk with the returns.
Don’t look at investing as a medium to make more money in a short span. The successful investors are those who invest for the longer term and understand that the returns are compounded over a period of time along with risk. This is the strategy used by investors to build the money.

Balanced funds:

The fund manager will always try to handle the asset allocation to safe the fund of the investors. And balanced funds are new kinds of funds launched and gaining huge popularity. Let’s understand the balanced funds in deep. There are 3 kinds of balanced funds-

  1. Conservative Funds.
  2. Balanced Funds.
  3. Aggressive funds.

Conservative funds have 10-25% in Equity, balanced have 40-50% in Equities, aggressive funds have 65-80% in Equities.

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Balanced funds are marketed as “Monthly Income Plans”. MIPs don’t offer any assured incomes, these are just the combination of debt funds with a small unit of equities that offer slightly higher returns than the pure debt funds.
Start investing in MyWay Wealth– to see the fractions on your gains.

“Don’t gamble- take all your savings and buy some stocks, hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it”

– Will Rogers

A Range of Debt Funds

Debt-funds

The categorization of debt funds is simpler than the Equity Funds. Debt funds are the debt papers/ bonds issued either by the government or the firms or both. When a company needs money for both short term and long term purpose, they have the option of issuing the bonds. A bond will pay regular interest to the lenders, and then at maturity, it will repay principal- same as FD’s. There is a wide range of debt products available in the market with different maturity periods. Long term bonds are generally issued by the governments and short term bonds are issued both by the companies and the governments.

Don’t buy the bond directly from the company.

Generally, the bond that we buy from companies is “company deposits”. We shouldn’t buy because as an individual, it will be difficult for us to analyze the moves of the company and we buy bonds from 2 or 3 companies and in the mutual fund, we will have a bond of at least 25 to 30 companies.

Even if one out of three bonds performs badly, the entire profit will be affected and this will not happen when we hold bonds in mutual funds, any hit on one bond will be a fraction. This is what we called diversification of funds- we reduce the risk by increasing the number of products in our portfolio.

Always remember the bond which we are planning to buy should always match up with the time horizon because we make investments to meet the future needs. We will buy short term bonds if need our money in the near term and vice versa.

Alternative: Debt Mutual Funds

Debt Mutual Funds are those funds where the investments are made in debt or fixed income securities such as government securities, corporate bonds, and money market instruments. Investors who can invest in these funds are those who are risk averse and want to maintain stability in their asset portfolio. And these Debt funds come up with tax deductions and are highly liquid. They are “Safe investment instrument”

Types of Debt Funds:

We can classify the debt funds based on time and returns. Firstly, we should decide upon the holding period of the bond and then the returns that we are expecting. There are plenty of debt funds available in the market, before buying, use the logic and look for the products that satisfy your needs.

We can see the ups and downs in the value of the bonds. When there is a fall in the interest rates, the older bonds that are locked for higher rates will have more value and vice versa. So, what’s more, important is the “Residual Time”- the time left until the date of redemption.

Why is “Residual time” is important?

When interest rate falls the older high-rates bonds will have more value. And also, one which has 10 years left for maturity will have more value than the one which has a maturity of 1 year because we will be getting paid the higher returns for the next 10 years. Thus, Residual maturity determines the risk and return of the bonds.

  • Liquid funds:

Investment in debt and money market instruments ( treasury bills, call money, and government securities) with maturity up to 91 days only. These funds are highly liquid and the offers a low return and risk associated with these funds are very less.

  • Overnight funds:

Investors who are risk-averse can buy overnight funds because these are not subjected to high market fluctuations and a period of maturity is only one day.

  • Ultra-short-duration funds:

These come up with the maturity of not more than one year. These are suitable for investors who are ready to take up a marginal risk to have high returns.

  • Short term funds:

Investments are made in these funds for not less than one year and more than 5 years and it best suits the investors who are ready to take moderate risk.

  • Dynamic funds:

These are the funds with a variety class of bonds with different maturity levels. They are dynamic because the portfolio which includes these funds varies dynamically with the changing interest rates.

  • Durational funds:

Funds are classified based on durations.

Bonds  Duration 
Low term 6-8 months
Short term 1-3 years
Medium term  3-4 years
Medium to Long term 4-7 years
Long term More than 7 years 
  • Income funds:

Investments in securities with an average maturity period of more than 4.5 years.they are highly vulnerable to the change in interest rates. These are suitable to the investors who are ready to take high risk and willing to have investments of the longer term.

  • Corporate bond funds:

These are high rated bonds where 80% of the corpus will be invested in corporate bonds.

  • Credit risk funds:

Here, a minimum of 65% is invested in corporate bonds. The returns earned from these are tax exempted. However, the returns earned within 3 years are taxable (short term capital gain).

  • Gilt funds:

80% of the investments will be made in government securities. “Guilt” is the securities which are issued by the government. they provide a considerable return and are not subject to market fluctuations.

  • Floaters funds:

These bonds will have floating interest rates. The investors will earn when the interest rate goes down and the price of bonds moves up.
Now that you have a fair idea about Debt Funds, take some time and evaluate your needs and financial goals, choose and match the right fund that would serve your investment purpose and yield suitable returns.

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Invest in MyWay Wealth– a top rated Mutual fund app in India!

Save Tax and Grow Wealth with ELSS

ELSS

Those who pay the taxes will be familiar with this product called Equity-Linked saving schemes. If you are the person who is looking to save and invest to save the tax, ELSS could turn out to the best rewarding investment option. The ELSS funds have been superior to the other tax saving investment options.

If you invest in certain products like premium of life insurance policy, Public Provident Funds or units of an ELSS scheme, you can get a tax deduction on your taxable income. Thus, ELSS is a type of Mutual Fund which has a lock-in period of 3 years along with the tax exemption under section 80C of the Income Tax Act.

How is ELSS better than other tax saving instruments?

Here is a comparison of ELSS with other tax saving investments options.

  • Lock-in period: ELSS has a minimum lock-in period of 3 years when compared with the other tax saving instruments.
Instruments Lock-in period
ELSS 3 years
FD 5 years
NSC 5 years
PPF 15 years
NPS Till retirement

 

  • Returns: ELSS have the potential to generate good returns when compared with other instruments.
Instruments Returns earned
ELSS 15-18%
FD 6-8%
NSC 7-10%
PPF 8-10%
NPS 9-11%

 

  • Taxation: Like all other tax saving instruments, the amount invested in ELSS is tax deductible under section 80C of the Income Tax Act and allows a maximum deduction of Rs 1,50,000. Unlike other tax saving instruments, the returns generated through investment in ELSS and NPS are partially taxable and are not fully taxable. Capital gains on ELSS up to 1 lakh is exempted from tax.
  • SIP option: In a few tax saving instruments like FD and NSC, only a lump sum amount is acceptable. Whereas you can invest in ELSS through SIP(Systematic Investment Plan) which allows you to deposit a small amount at regular intervals (weekly, monthly, quarterly, yearly) which can be as low as Rs 500.
  • Risk: ELSS will involve a higher amount of risk when compared with the other instruments because they are Equities are subjected to market fluctuations.

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Now that you know ELSS is better than other tax saving instruments and start investing through MyWay Wealth.

Mutual Funds & its Types

Mutual_Funds

Mutual Funds are the collective money of different investors who aim at saving money and making money through investments. The collected money will be invested back in various funds to earn returns. The Mutual Funds are categorized based on investment objective, structure and asset class.

Types of Mutual funds based on Asset Class:

  • Equity Mutual Funds: These funds are mainly invested in the Stock market. They are also called as “Stock Funds”. Equity Funds generate higher returns when compared with other fixed-income instruments such as FDs and Debt Funds. These funds best suited to those investors who are willing to see growth along with higher returns.
    These funds are further categorized into large-cap funds, mid-cap funds, small-cap funds, sectoral funds, index funds, etc.
  • Debt Mutual Funds: These are the kind of mutual funds where the investments are made in debt or fixed income securities such as government securities, corporate bonds, and money market instruments. Investors will invest in these funds because they are more risk averse and want to maintain stability in their asset portfolio. And these Debt funds come up with tax deductions and are highly liquid. They are “Safe investment instrument”
    There are different kinds of Debt funds such as Guilt funds, credit risk funds, floater funds, etc.
  • Hybrid Mutual Funds: Hybrid funds are both the mixture of Equity and Debt funds. The investors invest in these funds to avail the benefits of investing both Equity and Debt. It enables investors to have a diversified portfolio and can have access to different asset classes.
    The different kinds of Hybrid funds are balanced hybrid funds, Aggressive hybrid funds, and conservative hybrid funds.

Type of Mutual funds based on the Structure:

  • Open-Ended funds: These are the investment instruments that deal with the “Units” that are purchased or redeemed throughout the year. The purchase or redemption is based on the NAV (Net Asset Value). These instruments are highly liquid.
  • Close-Ended funds: These instruments deal with the “Units” which can be purchased only during the initial stages and can be redeemed only on the specific maturity date, and these are highly liquid.

Types of Mutual funds based on Investment Objective:

  • Growth funds: Here, the investors will always opt of “Equity Funds” because these funds come up with higher returns along with capital appreciation. Investors invest in these to see growth in their wealth and prefer to have an investment for the long term.
  • Income funds: Investments are made in “fixed-income instruments” such as debentures and bonds because they offer regular income along with capital protection.
  • Liquid funds: Liquid Mutual Fund investments are made in short term instruments such as commercial papers and treasury bills because they offer moderate returns and they have a low-risk factor with high liquidity.

Types of Mutual funds based on Investment Goals:

Investments are made by the investors in Mutual funds with a specific goal set.

  • Aggressive growth funds: These funds have a great chance of sudden growth and fetch higher returns. The risk involved is very high because they see high price fluctuations. It suits the investors who are willing to have an investment for more than 5 years.
  • Growth funds: Investors prefer growth fund because they want to make use of growth along with the profits.most of the time it is proved that growth funds are profitable.
  • Balanced funds: These funds are the fusion of income and growth. These funds provide investors with income and at the same time offers the possibility of growth. And income and growth will be moderate.
  • Income funds: These funds best suits for the investors who are retired. These are the funds where the investment is made in fixed-income securities that offer moderate returns and they are less risky.

Then what are you waiting for? Start investing in Mutual funds. It’s never too late to start. Install the MyWay Wealth app in your phone and start your investment with just Rs 100.

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