Hello there if you’re reading this you are ready to take steps towards Finzaadi.
Investing can be difficult but for most it doesn’t have to be. You should not aim to be the most successful investor of all time. Target should be to earn at least two to three percent more than fixed deposit Returns. For example, 10 % return earned each year for multiple years,decades and let the power of compounding handle the rest.
You don’t need to know a lot about finance to invest, neither do you need to know about all financial products.
From my experience, for a know nothing investor below investment plan is good enough. Important thing is to begin and delay as the magic almost always lies in the power of compounding. You need to invest early and keep the investment untouched for many years to see the true magic.
Keeping it simple you only need to invest in these productions –
Fixed deposit
Yes plain old boring fixed deposit.This is one of the simplest forms of investment which I believe is the most popular one. it is understandable because it is very easy to understand the money is relatively safe and you can withdraw it anytime you want.
However on the flip side The returns are not very good especially after tax. the current fixed deposit interest rate for more than a year is around 5% and if you are in the 30% tax bracket then the net interest rate would be 3.5%. you cannot achieve Azadi with 3.5% Returns
There are other options in debt instruments however fixed deposit is the simplest one and I would advise to have a significant portion of your investment in the form of fixed deposit. this should be at least 2 years of your Living expenses including EMI
Large Cap Index funds.
Index funds as the name suggests a type of mutual funds which directly invest in Index.
For example UTI nifty 50 mutual fund will invest in companies which are part of nifty 50 which is the most prominent index in India. The performance of such mutual funds will match almost exactly as the index it follows.
Here there is no fund manager who would decide on which stocks to invest in. The fund will track the index. So for example if Britannia is getting included in the index and Yes bank is going out the fund will do the same.
This sounds very boring but in recent years this has proven to be a very effective investment. A major benefit of Index funds is low expense ratio. You’ll find mutual funds which have as much as 2.3% expense ratio whereas index funds can go as low as 0.05%. That means you can earn 2% extra return per year which will compound each year. The small saving adds up in the longer period.
Index funds also do not depend on fund manager performance. In the end the fund manager is a human who can make mistakes and in the long run it is very difficult to beat the index.
Few bad decisions can create a serious dent in the performance of your fund and it creates a downward cycle for the fund with investors chasing only the best performing mutual funds. .
Since the index represents the top and the biggest companies by market capitalisation in India, market capitalisation is in turn decided by the collective opinion in the stock market. It is a good set of stocks to be invested in.
Index also cleanses itself automatically. The good firms are rewarded by inclusion in the index and higher weight in the index. The bad ones are eventually removed from the index.
You can see that an index is an asset which will stand the test of time.
Sprinkle of Midcap /Smallcap and International funds.
Nifty 50 and the nifty next 50 which means investing in the top hundred companies by market capitalization can be the only set of investments that you can go with. But it is good to have a mix of midcap and smallcap which can give a boost to your return.
Fortunately you have index funds for both midcap and smallcap now. I would suggest going with an index fund for mid mid cap. However for smallcap the managed funds still can easily beat the smallcap index.
You should also have some exposure to international funds. For example there are mutual funds which allow you to invest in companies in the US, China, Europe. Such funds give you exposure to developed countries which have a very stable business environment. You can also benefit by depreciating Indian currency versus the US dollar.
As an example, Equity portfolio can have 60% for a large cap split between Nifty 50 and Nifty next 50, and 30% split between a mid-cap and small cap and the rest 10% can be invested in exposure to international markets. Please note this is only for the part allocated for equity.
That is very simple. Fixed deposits and handful mutual funds are good enough for all your investment needs. However, it is also important to maintain a balance between safety of your money and the return it generates.
Asset allocation and Rebalancing will help you achieve this .
Asset allocation
As the name suggests Asset allocation is a method or the way you want me to allocate your money in different asset classes. Simply put, it is how you divide your investment between equity, debt instruments and probably real estate.
Broadly all of these products have their own pros and cons. For example
Equity – In the long run, Equity historically has given the highest return. On the other hand this is very volatile and it is very much possible to have 50% or more reduction in your capital invested.
Debt Instruments – Depending on what you choose, Debt instruments are one of the safest investments. For example, a fixed deposit is one of the safest instruments since you get assured return each year.
On the other hand the rate post-tax return on fixed deposits will not even beat inflation in the long run. This means your savings will actually reduce over time which of this is not a good thing.
Real estate– Usually Home is one of the biggest investments that Indians make, usually quite initially in their career. Real estate is often used as it is used to save money. In the last couple of decades real estate has given decent returns and overtime it tends to beat inflation. But on the other hand it is not very liquid. Which means you cannot sell it quickly if you are in need of money.
Gold – This is every traditional household’s favourite investment. Investment in gold is mostly in gold jewellery. Recent times gold has also given decent returns but it barely beat inflation.
Also gold investment in India is mostly jewellery which can have questionable quality as well as making charges levied do not make it a very lucrative investment.
This is not a complete list, merely more common ones. Asset Allocation is to take the advantage of Pro’s of each Asset class and reduce the Cons.
For example you can keep a portfolio of 60% equity, 30% debt insurance instrument, 10% gold. This Asset Allocation will give you greater returns because 60% of your investment is in Equity for better returns. Stability in returns will be provided by the because 30% and 10% invested in fixed deposit and gold.
Once a year youLook at the percentage of each asset class and rebalance to ensure you maintain their allocation.
Rebalancing
Asset allocation and rebalancing I like Laila Majnu. Both cannot survive without each other.
Once you have decided on your asset allocation you have to stick to it each year. Due to market conditions it is possible that your equity portfolio will give 100% Returns. This means your portfolio will have 80% exposure to equity
This will create risk if markets fall the next year. Hence it is important to keep revisiting and rebalancing your portfolio.
For example in this case you sell 20% off your equity portfolio and invest it in Fixed Deposit and gold to maintain your original asset allocation.
This is the simplest and as per my opinion most simple investment strategy. Ofcouse this will change depending on your investment goals. But for a person beginning their investment journey if you understand and follow the investment strategy I have mentioned, you will be better off than most.
One step close to Finzaadi.
