Mutual Fund Investments – A Prudent way to secure your Financial Future

Mutual Fund Investments – A Prudent way to secure your Financial Future

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There are few investments that have the potential to give you huge returns over the long term like stock market investments do.

For example, the benchmark index of the National Stock Exchange, the Nifty 50 (an index that is based on 50 stocks spread across 12 sectors of the Indian Economy) has gained over 18% in this year alone. Between June 2012 and now, the Nifty index has gained over 90% (from 5100 – 9700). This is not a surprise considering that the Indian Economy had encountered some robust growth in between, which automatically translates to growth in various sectors linked to the economy, and thereby the companies linked to the sectors. Therefore, if you had invested in any Nifty Index Fund, you would have almost doubled your investment in just about 5 years – compare that with hoarding your hard earned money in a fixed deposit in a bank that gives you about 6-7% per year – barely keeping up with annual inflation rates.

In fact the ROI of 90% on the Nifty is only scratching the surface – there have been numerous stocks that have surged to over 10 times their value in the past 5 years. Even if you leave out relatively unknown stocks that gave magnificent returns, even well-known companies have given excellent returns for those who invested in their shares. For example, in the past 5 years, MRF has given a 700% return, Eicher Motors has given a 1400% return, ICICI Bank has given close to 200%, and Reliance industries has given over 200%.

The list is just endless.

Investing in stock markets has always been prominent among those who have a sound knowledge of financial investment. Despite the occasional short-term negatives due to environmental conditions, investing in financial markets always pay off in the long term. A fundamental assumption one can make is that as long as India continues to grow economically, stock market investments will thrive in our country.

However, despite the return-on-investment one can get in equity markets, the number of people who invest in equities is only a paltry percentage of those who put money in a bank. And the primary reason is because people simply do not know better – they think it is too much of trouble and too risky, and hence vouch for the safest option (and undoubtedly, the lowest-returning one) of keeping money in an FD.

It is true that finding the right stock to invest in might be a challenge and nobody would be able to accurately say if a stock will grow many times over in the next few years with certainty.

However, even for those with limited financial investment knowledge there is a great way to invest in the stock market in a way that can maximise his/her returns while keeping risk minimal – via Mutual Funds.

Why invest in Mutual Funds?

A Mutual Fund is an investment category that is funded by shareholders and is professionally managed by Mutual fund managers who diversify the capital into different stocks (or other securities). Some things you need to know about Mutual Funds:

  1. Mutual funds are excellent investment options for somebody who is looking at long-term wealth creation. A fairly well performing fund can fetch you as much as 40% returns in 4 years (specific case in example is the SBI Magnum Equity Fund – verified as of Jun 2017) and their growth far exceed the returns on fixed returns offered by any bank.
  2. If you hold on to any Equity-based Mutual Fund for just 1 year and then sell it, you get a 100% tax exemption on your returns. This is because the returns from equities of equity-related Mutual funds held for a minimum of 1 year gets classified as ‘Long Term Capital Gains’ that are tax-free in India. On the other hand have a look at bank investments – no matter how long you hold, you still have to pay an income tax on the interest earned.
  3. Any dividends you earn through your Mutual fund holdings (equity or debt funds) are 100% tax free.
  4. Professional Mutual fund managers who manage the funds will ensure the fund capital is invested in the right stocks and securities to provide maximum returns for the fund holders and therefore it saves the investor the trouble of having to closely monitor his investment (unlike in the case of direct equity investment).
  5. Mutual Funds help in diversifying your investment in a variety of ways and are much less riskier than investing directly in shares.

Over the past 10-15 years, Mutual Funds and ULIPS (Unit-linked insurance plans – very similar to Mutual Funds but additionally also provide Health/Life Insurance for its policy-holders) have risen in popularity among the salaried class and I had personally invested in a couple of them. In fact, it was only earlier this year that I finally liquidated my investment in one receiving over 120% returns on my original investment in about 10 years – something that came as a blessing when I was really in need of money.

Back in 2005-2006, when I first started investing in such funds, the paperwork was far more than it is today, and you only had the option to apply for such funds (such as ICICI Prudential or SBI Magnum) through an agent . The fund house would charge you a commission deducted from your returns, and in addition to this commission, there were costs to entry and exit in every fund. Nevertheless, it was still a great investment given that it beat any FD hands-down in returns.

But nowadays, with the introduction of the Direct Investment Option in Jan 2013, any investor could bypass the middlemen and directly invest in the same Mutual Fund without having to pay entry/exit loads or having to pay commissions. The introduction of direct investment in Mutual Funds also meant, you no longer needed to spend time and effort on the paperwork and you had the flexibility of investing as much you required and whenever you felt like it – after all you now bought and sold NAVs (the primary units for a mutual fund) via your regular Demat/Trading account.

Types of Mutual Funds

Mutual Funds come in a variety of types and depending on your risk-appetite and outlook you can invest in the ones of your choice. Some of the most common types are:

  1. Money-Market Funds – These are very safe investments based on fixed-income securities like Government bonds. However, the flip-side to this is that their returns would be the least among various mutual fund classes and might barely give you more returns than let’s say, a fixed deposit in a bank.
  2. Fixed-income Funds – These funds provide a fixed return and will be based on high-yield or investment-yield corporate bonds. While they may give a better return than the above type, they are generally riskier than funds that hold government bonds. Debt Funds come under this category.
  3. Equity Funds – These are the class of Mutual Funds that invest in stock market equities and while they carry a certain amount of risk because they invest in the stock market that are subject to fluctuations, they give you great potential for far more returns. Equity funds are further divided into various types including those that specialise in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stock.
  4. Balanced Funds – These are funds that mix caution with risk in a balanced manner by investing in a mix of equities and fixed income securities. These funds have more risk than fixed income funds, but less risk than pure equity funds.
  5. Index Funds – Index based funds directly track the performance of a specific Stock Market Index such as the BSE 30 or the Nifty 50 and therefore their returns will directly correlate with the movement of these indices.
  6. ELSS Funds – While an ELSS (Equity Linked Savings Saving Scheme) Mutual Fund is a type of Equity fund, this has been listed separately since it is something that gives you a distinct advantage over other Equity funds – investing in them gives you a direct Income Tax exemption using the 80C category of the Income Tax act.

The above is by no measure an exhaustive categorisation and you can have Mutual Funds types that help you invest in many more varieties of securities.

Which Mutual Funds should you invest in?

You can invest in a variety of Mutual funds based on your risk appetite and depending on how much you would invest. But given that there are umpteen different Mutual Funds out there how do you decide which ones to invest in?

Simple, just pick one of the best performing funds based on their historical track record. While nobody can be 100% sure about the future, it is far more likely that a fund that has historically done well is likely to continue doing so.

CRISIL is a company that provides exhaustive analysis based ratings for the various Mutual Funds available in India today and if you are looking for the best Mutual Funds in a specific category, have a look at their CRISIL ranking and how they have performed when compared with their peers.

Check this link on the financial website MoneyControl.com http://www.moneycontrol.com/mutualfundindia/

The above page gives you information on the best performing Mutual funds sorted on their category.  Here are a few from that list:

  1. Performance of Large Cap Mutual Funds
  2. Performance of Small and Mid-Cap Mutual Funds
  3. Performance of Diversified Equity Mutual Funds
  4. Performance of ELSS Mutual Funds
  5. Performance of Gold ETFs

*PS: If you want to invest in Gold for the long term,  invest through a Mutual Fund – It is a far better option than buying physical gold – at least you won’t’ have to worry about making charges ( gold shops charge an atrocious 12-18% usually) or worry about its actual purity.

How should you invest once you short list your choice of Mutual Funds?

While I do not claim to be an investment expert, I have come to know from experience that one of the best ways to invest in Mutual is by investing regularly in a diverse set of funds.

For example, I hold 3 different types of Mutual Funds. While all of them come under the Equity category, since I believe in the long term growth potential of equities. Nevertheless I have minimised my risk by taking the following measures

Using weekly SIPS – I use weekly Systematic-investment-plans (a.k.a SIPs) to invest a fixed amount every week in 3 different funds of my choice. The use of systematic investments normalises the fluctuations in the equity market and ensures I acquire NAVs at a moderated price which assures me a better return over the long term.

Diversification of investment – I have invested in three categories of Mutual Funds as of today:

  1. ELSS Fund – Investment in this ELSS helps me meet my quota of 80C investments for the year and also ensures I get a good return on my investment
  2. Top 100 Large-Cap Fund – This Mutual fund invests in the 100 largest companies in India (in terms of market capital). The equities of these companies will be among the most stable and in the event of a market downturn, they will not tumble down by much. Hence, I invest in this for stability.
  3. Small and Midcap Fund – This is the riskiest of the 3 funds but also has the potential to give most returns (history shows the same). This fund invests in the most promising companies in the Small Cap and Mid Cap space in India today.

I invest approximately 10% of my monthly salary in Mutual Funds currently and the funds are invested in a 2:1:1 ratio in the 3 Funds above.

NOTE: Lastly, I use the Zerodha Trading Platform to buy and invest in Mutual Funds. They let customers invest up to ₹25,000 in Mutual Funds for ₹0.00 processing fee and charge just ₹25 a month once MF investments exceed the 25K limit – this is practically the best deal I have seen since I can invest directly without any hassles or without paying commissions or paying an entry or exit load.

PS: If you are looking for a platform to invest in Mutual Funds and Equities, I would recommend the brokerage house Zerodha. You can open an account with them by clicking on the logo on the left.

 

The Future is nearer than you think – Plan ahead

“Money without financial intelligence is money soon gone.”  – Robert T. Kiyosaki, in the all-time personal-finance bestseller: Rich Dad, Poor Dad.

I have lost count of the number of people I have come across who squandered opportunities to invest for the future when they had a chance. And these include those who earned very well in comfortable jobs at one point, but spent every penny as it came and when at one point they fell on hard days, they didn’t have anything to fall back on and had to count on the goodwill of others around them to give them a helping hand.

Many of us complain that we never have enough money or draw a salary that’s good enough, but how many of us had the perspective to look into the future and invest for the long term with whatever little we have?

How many of us in our 20s or 30s thought, “I’m earning a decent salary with enough left at the end of the month to save. Instead of squandering it all on frivolous stuff (like the latest smart-phone), let me invest for the future right while I have the chance.”

It’s never too late to start. After all, money that is well invested today is money that will secure your tomorrow and your family’s tomorrow too!

The Sanitary Napkin Conundrum

A couple of years ago, my wife (then my girlfriend), urgently needed to get a pack of sanitary napkins and called me over the phone and asked shyly if I could buy a pack and get it to her place since she couldn’t go out herself.

Well, I didn’t think twice about saying ‘sure, why not’. She was quite surprised because she expected that I’d be ashamed to go out and do that for her.

So I walk to this local provision store and ask the lady of the store for two packs of sanitary napkins. The lady looks around to see if anybody else was around – something that was more of a reflex action than anything else, and then gets two packs of sanitary napkins, which she hides inside folds of old newspaper, before placing them in a transparent plastic cover and handing them over to me.

I asked her, “Why bother with all the paper”? “Just given them to me the way they are.”

The lady gave me an annoyed look and retorted, “Whatever. Do as you like”!

I threw away the newspaper wrappers and left with the sanitary napkins to later give it to the person who it was bought for. She was visibly impressed with my act of ‘bravery’.

Nevertheless, till the time I handed over the napkins to my girlfriend, the only thought that crossed my mind was ”Why on bloody earth are people ashamed to show they bought sanitary napkins?”

We live in a country where nobody bats an eyelid when a man pulls out his ‘thing’ and answers nature’s call on the side of a busy road; and yet it seems strange that a person can’t carry a pack of sanitary napkins out in the open without being frowned upon.

I’ve often noticed over the years that a vast majority of young men have no clue of what menstruation is. As a teenager during my college days, I had come across youngsters who simply cracked a joke or two when they saw a female classmate leave class half-way because of some discomfort and then not return for the day. It’s simply a topic that nobody invites discussions on because the topic of menstruation is a taboo – a taboo that has roots in cultural and religious practices prevalent in each society.

Religions haven’t been particularly kind to the menstruating woman and every major world religion has its qualms and restrictions that apply to a woman undergoing her period and who is considered impure at that time (Sikhism is an exception in this aspect though– Guru Nanak apparently condemned the practice of treating women as impure while menstruating).

There’s a rather interesting article published by a lady namedBeenish Ahmed that deliberates on why religion punishes women for menstruating. Her words couldn’t sum it up better when she says “Although there are efforts to reform restrictions around menstruation or to do away with them as outdated, the period still has an outcast place in many religions. Whether it’s a prohibition from entering houses of worship or a ban from the marital bed, the commands of many faith traditions seemingly seek to hide away a bodily function that stands unavoidably at the root of existence.”

Menstruation is a natural phenomenon that every healthy girl past puberty has to undergo (till she attains menopause in middle age) and it is a sign of sexual health well-being. Uncomfortable as it may seem or sound to others around, it is a fact of life everybody needs to understand, accept and reconcile with. It is nothing to be ashamed of and shunning it or pretending it doesn’t exist only helps reinforce the blighting ignorance and prejudice that surrounds it.

Societies evolve over a period of time, but often many out-dated cultural and religious practices refuse to die out because they are never pulled out into the open for debate because of the stigmas attached to even discussing them.

Coming back to my personal anecdote, every time I purchased sanitary napkins since that first time, I made no attempt to hide them. In fact, I would sometimes openly walk around it with it, swinging it in my hand to see if anybody comes and opposes it so that I could give them a piece of my mind. It never happened though I did get a disdaining look once or twice (and from women, surprisingly).

I do hope you will do the same and the next time you carry a sanitary pad around (be it for yourself, a friend, or a family member) and somebody cringes, complains or shows contempt, do remember to give that person an educational lesson he/she shouldn’t forget.

PS: For those interested to read about menstruation related myths in India and how to combat it, there’s a rather informative journal article published in the Official Journal of Family Medicine and Primary Care you should read.

The 30 Major Reasons for Failure – A lesson from ‘Think and Grow Rich’

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If you’ve ever read a book called ‘The Secret’ – a runway success that was released in 2006 that made its author, Rhonda Byrne, an overnight multimillionaire, you should know that the underlying concepts of Byrne’s book were practically lifted and regurgitated from a 1937 self-help book called ‘Think and Grow Rich’ written by Napoleon Hill. ‘Think and Grow Rich’ ranks among the best-selling self-help books of all time and features in many best-seller lists even today.

The wide array of thoughts and concepts in ‘Think and Grow Rich’ is definitely worth a read, despite it being 80 years old. There are numerous take-ways from this book for any genuine reader, including a recipe for success and some great ideas on how to market oneself in the best possible way.

One section in the book that really caught my attention was the section in which the author elaborates 30 major reasons for failure.

While most people interested in self-improvement try to learn about success, few people genuinely try to understand and learn about failure. This is what insprired me to write about Napoleon Hill’s 30 major reasons for failure, and add my take on them.

As per Hill, the 30 major reasons for failure are:

1. Unfavourable Hereditary Background – A genuine lack of inherent brain power (as the author terms it) is arguably the only item in this list which can’t be corrected by direct means. One way of bridging this weakness, nevertheless, is by finding help through a Master Mind group. A master mind group is a peer-to-peer mentoring group used to help members solve their problems with input and advice from the other group members.

2. Lack of a well-defined purpose in life – This is an ailment that affects 98% of the common population, as per the author’s analysis.

Take a look around and you will notice how most people lack a central objective or goal to aim for in their lives. They drift from one day to another, directionless, ‘going where life takes them’ as they commonly state. Many such people often get misdirected to flawed ideals of social/political extremism or religious fundamentalism (thereby, becoming a threat to their own society) solely because some external agent gave them a life-purpose when none was present before.

Remember the quote from the well-known motivational speaker Tony Gaskins, “If you don’t build your dream someone will hire you to help build theirs.” One needs to choose a well-defined life-purpose lest it be dictated to you by somebody else.

3. Lack of ambition to aim above mediocrity – If a person does not want to get ahead in life and is not willing to pay the price for the same, he/she is simply designed to fail. The willingness to put in effort to rise above mediocrity is undoubtedly crucial for success.

4. Insufficient Education – This is a common handicap that can be overcome with relative ease. Education, by the way, doesn’t mean a formal college degree; experience shows many great successful and educated people are self-made and self-educated. Also, education consists of accumulation not just knowledge, but such knowledge that can be effectively and persistently applied. People after all, are not paid for knowledge but for how they can apply that knowledge. In today’s digital age, knowledge can easily be brought to the fingertips of those who seek it.

 5. Lack of self-discipline – Discipline comes through self-control and one should learn to control one’s own negative qualities. The author says “if you do not conquer self, you will be conquered by self”. Think about the times you have negative or spiteful thoughts – has it ever occurred to you whenever you have such thoughts, the more you think about them, the worse it gets till you are consumed from within? The lack of self-control is a recipe for failure. Practise to be in control of one’s actions and words.

6. Ill-health – Nobody can enjoy outstanding success without good health. The author outlines that many reasons of poor health can be mastered and controlled such as:

a. Overindulgence in food not conducive to health

b. Lack of sufficient physical exercise.

c. Over-indulgence in sexual activity.

d. Inadequate fresh air and improper breathing.

7. Unfavourable environmental influences during childhood – A good number of those with criminal tendencies acquire these as a result of their childhood environment or because of the influence of their associates during that time.

While we cannot go back and change our past, surely we can help youngsters realise the importance of surrounding oneself with a healthy crowd and environment. And if we were victims of such a childhood, that self-realisation should be cause enough for us to want to surround ourselves with a positive environment to offset some of the damages done.

8. Procrastination – Many people go through their lives as failures because they wait for the “right time” to do something. The time will never be right and it is up to us to start doing things with what we have. We then need to keep improvising along the way.

9. Lack of persistence – Failure cannot cope with persistence. Those who retreat at the first sign of defeat are bound to fail. Success comes to only those who persevere.

10. Negative personality – The author’s argument is quite understandable when he says success comes through the application of power, power is attained through co-operative efforts of other people and a negative personality will never induce cooperation because he will repel people. Stay positive.

11. Lack of controlled sex urge – Sexual energy is among the most powerful stimuli that can move people into action, claims the author. And being the powerful driver that it is, it must be controlled, transmuted and moved into other channels. A person who isn’t in control of his sexual urges is bound to be self-destructive.

12. Uncontrolled desire for ”something for nothing” – It is a common tendency for people to want something without having to give anything in return. A typical example of this is gambling and this kind of uncontrolled desire is a recipe for failure. Instead of wanting something for nothing, one should learn the importance of exchanging values.

13. Lack of a well-defined power of decision – Successful men are good and fast decision makers. Slowness in making decisions or the inability to make decisions will tie one to the treadmill of failure. Therefore, do not be indecisive.

14. One or more of the 6 basic fears – People often fail because they are afraid and these six basic fears are what often stop people from taking action:

a. Fear of poverty.

b. Fear of criticism.

c. Fear of ill-health.

d. Fear of the loss of love of someone.

e. The fear of old age.

f. The fear of death.

Fear is a state of mind, and more often than not, a person can master the state of his mind with considerable effort and practice. While discussing at length about each of these fears is beyond the scope of this article. It is prudent to know that presence of one or more of these basic fears are a trigger for failure.

15. Wrong selection of a mate in marriage – Marriage brings two people in close and intimate contact. A disharmonious relationship is likely to result in one’s failure and this is the kind of failure that will be marked by misery and unhappiness. It is therefore of immense importance to choose the right spouse and maintain a harmonious relationship.

16. Over caution – Being overcautious is as bad as being under cautious (or reckless). Life’s opportunities always come with an element of chance and those not willing to take them will be left to take whatever is left over after everybody else has chosen.

17. Wrong selection of business associates – When choosing who to work with, one needs to choose someone who is an inspiration, and who is himself/herself intelligent and successful. We tend to emulate those we associate ourselves with and therefore we need to pick an employer or business associate who is worth emulating.

18. Superstition and prejudice – Superstition is a sign of weakness and ignorance. The author states successful people are those who keep open minds and are unafraid of nothing.

19. Wrong selection of vocation – A person is least likely to succeed in a line of work he doesn’t like and therefore he/she should indulge only in such vocations he/she can indulge in wholeheartedly.

20. Lack of concentration of effort – The jack-of-all-trades is seldom a master of any. The author stresses on the importance of having to put one’s concentrated efforts into one ‘chief aim’.

21. Habit of indiscriminate spending –   The author states, “The spend-thrift cannot succeed, mainly because he stands eternally in fear of poverty” and recommends forming a systematic habit of saving a percentage of one’s income – this can give one a safe foundation of courage. A penniless man can only take what is offered and be glad for it. 

22. Lack of enthusiasm – Enthusiasm in an individual is not only contagious but makes that person generally welcome to any group. If you recollect an earlier made point about how success requires cooperation of other people too, and that negative personalities never get cooperation, you will realise the importance of possessing enthusiasm.

23. Intolerance – It is surprising to note that even in 1937, the author was able to identify the damaging influence of intolerance (the characteristic of a person with a closed mind). He states that people who are intolerant seldom get ahead because they cease to acquire knowledge. The author also points out the most damaging forms of intolerance are those connected with religious, racial and political differences of opinion. Personally, I couldn’t agree more looking at the world as it is today.

24. Intemperance – You would have come across the saying that anything in excess is bad (this is probably the kind of age-old wisdom that is referred to in every culture). The author goes one step ahead and states that the three worst kinds of intemperance are the ones connected with eating, drinking (alcoholism) and sexual activity and that overindulgence in any one of these is fatal to success.

25. Inability to cooperate with others – It is said that the biggest reason why people miss out on big opportunities in life is because these people are unable to cooperate with others. It is also said that no leader or well-informed businessman will tolerate a person’s inability to cooperate. Be cooperative.

26. Possession of power that was not acquired through self-effort – Power in the hand of those who didn’t acquire it through self-effort is akin to wealth in the hands of those who didn’t earn it. It is far more likely to harm a person than benefit him/her.

Quick riches are more dangerous than poverty claims the author. I have personally known such people who were left with considerable fortunes but squandered it all away in good time and were left poorer and more miserable than they were to begin with.

This is why certain societies frown upon leaving huge inheritances to their descendants. One will only learn to value and sustain wealth or power, after he/she has earned through his own efforts.

27. Intentional dishonesty – There is simply no hope for a person who is dishonest by choice, says Hill. This is because such a person will lose his reputation sooner or later. Would you want to do anything (including business) with a person who you know for certain has no integrity?  Nobody would. Be honest, at all times.

28. Egotism and vanity – These qualities are described as ‘red lights’ to others to keep away from the individual possessing them, and are therefore fatal to success. Refrain from indulging in them.

29. Guessing instead of thinking – The author states that most people are too indifferent or lazy to acquire facts with which they can think accurately. They would rather go by ‘opinion’ instead, using guesswork or snap-judgements.

I can’t help but wonder how relevant this point is even today in the Facebook-age. People go by “opinions’ based on in-your-face propaganda on social media, rather than by taking the effort to dig deep and understand something, which in turn, could give them more objective knowledge.

Put in effort to acquire facts that could help you think and decide better rather than going by blind opinion.

30. Lack of capital – A common cause of failure among those who start out new in business is the lack of sufficient reserve capital to absorb the shocks of any mistake they make. Knowing this, one should be prudent enough to plan for a financial cushion to absorb any such initial shocks so that a temporary setback doesn’t result in absolute failure of one’s endeavour.

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It is true that we learn far more from failure than we learn from success. However, understanding them, appreciating them and then taking steps to work around them or mitigate them is what could lay our way for success. Napoleon Hill’s list of 30 major causes of failure may not be a fool-proof list but it is, in my limited opinion, the most comprehensive list of reasons one can learn from.

So, have you ever failed and did you understand your reasons for failure?

Did you try to learn from them?

If you haven’t done that already, spare a few moments to think about them.  It will help you in your quest for success.