The need for investment planning arises from the need to meet ones financial goals. These are determined by understanding the present situation, status, income level, wealth, responsibilities, aspirations, risk profile, ability to save, past and present lifestyle, etc.
All of this being complex and dynamic, an investment advisor systematically walks through with the customer to help him maximise his existing financial resources to achieve his financial goals through the use of financial tools. To begin with an individual should first draw out his investment plan.
[1] AN INVESTMENT PLAN
An investment plan is the road map / guide for ones financial goals which serves the below purpose:
– Organize and Manage Finances
– Achieve Personal Goals Such as Child Education, Marriage, Car, Home
– To be Able to Retire Peacefully
– Protecting Oneself & Family against Financial Risks
– Maximise on Good Investment Opportunities
– Helps in keeping the big picture in mind
– Arrange Passing of Wealth to Next Generation
Initially, preparing an investment plan may seem overwhelming and/or just too much of trouble. However, the potentially devastating consequences of not having it are far greater than the initial discomfort ….. So make a decision to Get Started with your Investment Planning to be better equipped for the future.
[2] FACTS OF AN INVESTMENT PLAN
– It is a Process and discipline
– It is Not Precise and provides No Guarantees
– Understanding assumptions is important
[3] INVESTING: TO-DOS
– Understand your Investment Needs / Objectives
– Layout the Investment Plan by choosing appropriate asset allocation and proper diversification of the Investments with the right products
– Execute the Investment Plan by complying with various operational procedures viz. KYC, complete application forms, payment formalities etc.
– Maintain proper Investment Records for the future
– Monitor the performance of the portfolio
– Manage risk and events
– Maintain tax records viz. dividends, capital gains, interests, carry forward and set-off of losses.
[4] INVESTING FUNDAS
We need to invest our savings so that our investments grow at a rate that can beat the prevailing inflation rate. Further, the large ticket items cannot be met with our regular income and require us to set money aside.
Follow the below steps to go about investing your savings to meet your financial goals:
Define the goal in terms of amount of money and time
– We need to understand how much we can save per year for this goal. This depends on our income and expense patterns and our seriousness about this goal.
– Choose an investment option that generates enough return to meet the goal.
– Review investments regularly in line with your changing needs.
Timeframe
As a general rule, the shorter your time horizon, the more conservative you should be. If you start when you are young, you have the power of compounding on your side. On the other hand, if you are about to retire, then the opportunity to recover losses on your investments is limited and therefore it is critical to invest your assets conservatively.
Your personality
You need to know how much volatility you can stand to see in your investments.
[5] RISK TOLERANCE / APPETITE
Broadly, there can be 3 types of risk profiles:
• Conservative Investor : Those who have low risk tolerance and are often uncomfortable with market volatility. They choose investment products that do not fluctuate much in value.
• Moderate Investor : These investors can tolerate more risk than a conservative investor for more reasonable returns. Their primary investment goal is capital growth and can tolerate some fluctuations in anticipation of possible higher returns.
• Aggressive Investor : For such investors, primary investment goal is long-term capital growth. They can tolerate significant fluctuations in the value of their investment in the short-term in anticipation of the highest possible long term returns.
[6] ASSET ALLOCATION
Asset allocation involves dividing an investment portfolio among different asset classes, such as stocks, bonds, cash, etc. The process of determining which mix of assets to hold in your portfolio is a very personal one as it depends largely on your time horizon and your ability to tolerate risk.
Why know about asset classes ?
– Increase choices for informed decision making
– Better investment management through asset allocation & diversification
– Identifying emerging opportunities & risks for investing
– Be rational, unbiased and confident in investment decisions
How do asset classes differ ?
– Nature and characteristics
– Correlation with other asset classes
– Risk and Returns potential / trade-off
– Ideal investment horizon
– Behaviour w.r.t. markets, interest rates, economic environment, etc.
– Rules, regulations and taxation
Some common asset classes:
a) CASH
Cash and cash equivalent refers to liquid and current assets comprising of hard currency and near currency assets viz. T-Bills, Commercial Paper, Certificate of Deposits, Short-term Government Bonds, which can be converted to hard currency immediately or on a very short notice.
The purpose of holding cash is either for transaction / payment reason or as a precaution for any eventuality or as a buffer for taking advantage of opportunities in other asset classes/ products. As an investor, one should try to minimise cash equivalent holdings to an optimum level that strictly meet needs.
b) STOCKS
Long term equity as an asset class has outperformed other asset classes in India as well as in more developed economies. Equity is a risky asset class and investments should be made for long term. The returns from such investments are in form of capital gains by price appreciation and/or dividend payments by companies.
Equities are largely held directly through stock exchange or indirectly through mutual fund equity schemes. Exposure to equity can also be made through Exchange Traded Funds (ETFs) and Portfolio Management Schemes (PMS) and indirectly through pension schemes / plans that invest in equities. Insurance products, especially Unit Linked Plans (ULIPs) is an another well known route. Equity can also be held in form of stakes or Private Equity in businesses. This option, however, is limited super HNI and corporate investors.
c) BONDS
A Bond is a debt security, in which the issuer owes the holder of the security a debt, and is obliged to repay the loan amount along with an interest upon maturity of the loan period.
The debt market mainly consists of Government Securities and Corporate Bonds. The different types of bonds in the market are fixed rate bonds, floating rate notes, zero coupon bonds, asset backed securities, mortgage backed securities etc. Mutual funds schemes are lately becoming popular with retail investors too.
It is a relatively less risky asset class and returns are generally in form of interest payments and/or capital gains due to impact of interest rates changes over time.
d) GOLD
Gold as an investment has held appeal to Indians for centuries. Gold is considered to be an effective hedge against inflation. The yellow metal also provides for a store of value, and has limited downside risk.
e) REAL ESTATE
Real estate, especially residential / commercial units, gives the owners a sense of emotional satisfaction and confidence as it has its own share of social acknowledgment of your financial standing. However, it has its own share of challenges w.r.t. clear titles, transparency, transaction costs, etc. Emergence of new avenues for investments has, to some extent, made it feasible to get exposure to this asset class with less risks.
The returns in this asset class is in form of rental/ lease payments and price appreciation. Real estate are the least liquid of all the asset classes and investment horizon is generally long-term to very long term in nature.
f) COMMODITIES
As an asset class, commodities have been observed to have low correlation with the other asset classes and hence offer excellent potential for portfolio diversification. The commodity prices tend to follow the cyclical pattern of underlying commodities which is why it is important to understand the demand-supply factors.
Needless to say, this is not an asset class for the less informed or the faint hearted, especially for agro-commodities & base metals. Investment is generally for short to medium term and the idea is to profit from price movements or hedge against actual exposure.
g) OTHER ASSET CLASSES
Apart of the above major asset classes discussed, there are also some more asset classes viz. currency, derivates and collectible a considered by few investment experts.
Currency, as an asset class is distinct in nature and it derives its existence because of the exchange rate fluctuations between countries. Currency is something of great interest to governments, banks, multinational corporates having business incomes arising in different countries, and even to individuals where source of income and consumption are in separate countries.
Derivatives is an asset class that derives its value from the actual underlying asset class. It is more of a hedging and trading tool and fraught with very high risks, something which is suited only for the experts.
Collectibles is an emerging asset class where investments are made in art, antiques & other collectibles. This asset class is now finding more favour with HNI investors who are looking for some diversification & spice in their portfolio.
[6] DIVERSIFICATION
Diversification means spreading the risk over different asset classes and over different time periods. As the timeless adage goes – Do not put all your eggs in one basket. Diversification is important to reduce the associated risks since different asset classes behave differently over a period of time.
Diversification within each asset class:
Investment in Equity Stocks – Avoid concentration in a single stock, also diversify the portfolio over the market capitalisation and sectors.
Investment in Bonds – Spread your investment over bonds with varying maturities, styles and sensitivity to interest rates changes.
Investment in Mutual Fund Schemes – Consider a mix of style also check whether they have consistently performed relative to their investment style and objective.
[7] PORTFOLIO REVIEW
Portfolio Review is important because of the following reasons:
– To meet your changing needs and financial conditions
– To evaluate the overall risk exposure – In the bull run, equity exposure may increase.
– To evaluate how our portfolio is performing in relation to the market in which it is invested – A change in the interest rate cycle from high rates to low rates, means we need to move our funds from short‐term debt funds to longer term debt funds.
– To evaluate if our product is inappropriate given the market cycles – A small‐cap fund may do well in a bull market, but in a bear market, large cap blue chip fund would do better.
Without review and rebalancing, we may miss the changing market situation. Hence, either review the portfolio at regular intervals as also on the basis of the target set for the investment or when the relative weight of the asset class increases / decreases over the identified percentage.
20 Mantras of Investing
You need to invest; otherwise your savings will depreciate in value / purchasing power. However, mindless or reckless investing is hazardous to wealth; please become an investor …. And not a trader or a gambler.
Mantra 1 – Follow life cycle investing
You can afford to take greater risks when you are young. As you cross 50, you should consider gradually getting out of risk instruments. By 60, you may exit risk instruments.
Mantra 2 – Read carefully, and take informed decisions
Do due diligence, take informed decisions.
Read about options and processes on www.iepf.gov.in and visit www.mca.gov.in for more information on companies. For e.g., for IPOs , you must read, at least, the risk factors, litigation, company track record, issue objects and key financial data.
Mantra 3 – Invest only in fundamentally strong companies
Invest only in companies with strong fundamentals, these are the ones that will withstand market pressures and perform well in the long term. Strong stocks are also liquid stocks.
Mantra 4 – Consider investing in IPOs
IPOs have been a good entry point. During bull runs, almost all IPOs provide positive returns on the listing day. If investing in an IPO just because it is an IPO during bull phase, it may be advisable to exit on the listing date, as you have invested without due diligence. However, if you invest in the IPO of a company, with due diligence, then do not get bothered by immediate post listing performance or volatility. Remain invested as you would in a listed stock.
Mantra 5 – PSU IPOs deserve special attention
PSU IPOs are typically from companies that are profitable and have a significant track record and market leadership. In almost all PSU IPOs, there is a discount for the retail investor.
Mantra 6 – Invest in mutual funds, but select the right fund and scheme
Mutual funds are a better vehicle for the small investors, most of whom have little skills or time to manage a personal portfolio. Spend time to select the right fund manager and the right scheme.
Mantra 7 – Beware of free advice
Too many people in the capital market offer free advice; these come through TV, print media, websites, emails and SMS. Don’t act blindly on such advice; remember free advice carries no accountability.
Mantra 8 – Do not get taken in by advertisements
Advertisements are to make you feel good. Do not get carried away by attractive headlines, appealing visuals / messages. Do not get carried away by upward arrows, big percentages and deceptive numbers.
Mantra 9 – Do not get carried away by sectoral frenzies / bull runs
Sectoral frenzies keep changing. All companies in a sector are not necessarily outstanding. Each sector will have some very good companies, some reasonable good companies and many bad companies.
Mantra 10 – Look at the credentials of the entity / person
Many scamsters are waiting to exploit your greed, targeting gullible small investors. Be careful about the entity seeking your money, visit www.watchoutinvestors.com before investing.
Mantra 11 – Be careful of promoters issuing shares / warrants to themselves
Many a times, preferential allotments to promoters are for the benefit of the promoters only, at the expense of minority shareholders.
Mantra 12 – Cheap shares are not necessarily worth buying
Price of a share can be low because in reality the company is not doing well, the hype about the company / sector and comparison with prices of good companies may induce you.
Mantra 13 – Beware of guaranteed returns offers
Be extra careful before investing in any offer which promises very high returns. Let not greed make you an easy prey.
Mantra 14 – Do not borrow to invest
Interests mounts by the day, returns do not necessarily. Invest within your means.
Mantra 15 – Deal only with registered intermediaries
There are many unregistered operators in the market who will lure you with promises of high returns, and then vanish with your money or they will miss-sell or they will undertake unauthorized transactions.
Mantra 16 – Do not depend upon comfort factors
Like IPO Grading, Independent Directors, Corporate Governance Awards, CSR Activities
Mantra 17 – Do not take decisions based on summary accounts
Read through the schedules as well as qualifications and notes to the account. Check out for “Other Income” and unusual expenses. Look out especially for entries relating to related party transactions, sundry debtors, subsidiaries accounts, cash and bank balances.
Mantra 18 – Learn to Sell
Most investors buy and then just hold on. Profit is profit only when it is in your bank. Do not be greedy. Leave some profits for the buyer too. Set a profit target and sell, unless you have good reasons to hold on for very long term.
Mantra 19 – If after all this, you do have grievance …
Seek help of www.mca.gov.in
Mantra 20 – Be Honest
Be honest as only then you can demand honesty and fight for your rights.
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