Respect your money, follow a plan when making investments
We tend to invest in peaking markets, losing out on market gains in the
process. The wise thing to do would be to follow an investment plan.
Be fearful when others are greedy and greedy when others are fearful, said investment maverick Warren Buffet. It's good advice often ignored. We tend to invest in peaking markets, losing out on market gains in the process. The wise thing to do would be to follow an investment plan. ICICI Prudential Mutual Fund, in collaboration with MONEY TODAY, has been organising conferences, Investor Awareness Initiative-2011, in several cities to advocate sound financial planning.
Here are some excerpts from the interactive session that was part of the conference held in New Delhi. The speakers at the conference were Vikram Melhotra, Regional Head, NCR, ICICI Prudential AMC, and Tanvi Varma, Associate Editor, Money Today.
I have noticed that advisors tend to push their own mutual fund schemes. What should we do in such a situation?
There are about 330 equity schemes and over 35 asset management companies (AMCs), all of them with decent track records. Of course, there are times when a financial advisor's intent hampers the kind of planning you are looking for. However, our advice is to share all relevant information with your financial advisor.
The first step to financial planning is transparency. Your goals for the next five-ten years, cash inflow and liabilities are all important. Now, while choosing schemes, if you do not understand complex products, stay away. It is your money and you need to keep it as simple as possible. Further, it is important to control the tendency of trying for very high returns. Your greed may pressure your advisor to suggest highly aggressive products, which are also risky.
Is it better to exit equity and book profits when markets touch peaks and start a systematic investment plan (SIP) or reinvest in a down market rather than staying invested?
Ideally it would be great if you could time the market, but it rarely happens. When markets reach high levels, we tend to join the bandwagon with a hope that it may go up further. What is important is to stick to your asset allocation, which depends on your investment objective and risk profile. In fact, reviewing your portfolio every quarter or two quarters helps.
You can then rebalance it in case asset allocation has strayed from your intended allocation. If your original allocation was 60 per cent equity and 40 per cent Debt, in a rising market this allocation could have become 70 per cent equity and 30 per cent debt. Now you need to offload some equity and invest into debt to return to your original allocation.
This will help you mitigate risk. It is wise to invest systematically as well. In fact, one of the innovations that funds offer is Flexi STP, wherein a market correction will automatically result in allocation of more money into the market.
Normally, there is an inverse relationship between returns from bonds funds and interest rates. With interest rates expected to come down, what are your expectations for debt funds?
Well, there is surety on the upside considering debt funds are not volatile and move with general interest rates. The lower the duration of a bond, lower the volatility.
Currently, it seems interest rates have peaked and RBI has indicated its concerns about growth. Owing to this, market experts expect interest rates to possibly come down. Rates do have an inverse relationship with bond funds. In fact, we are bullish on the rates side.
Government borrowing has gone up in the past one year and with lowered revenue, the government has no choice but to borrow more. This year the government started with a borrowing of Rs 4 lakh crore and ended up at approximately Rs 6 lakh crore and it is expected to rise further by March.
Hence, we are not bullish over the long-term but short-term returns between 9-11 per cent can be expected. Staying in funds with an average maturity of less than three years will also result in some accrual income when interest rates start coming down.
How would you compare bank fixed deposits (FDs) to debt mutual funds?
It depends on your investment horizon and the level of taxation. Currently, you can get a fixed maturity plan in the market ranging from 1 year to 3 years, many of them offering yields of up to 9.5 per cent. These funds also offer you the benefit of indexation if invested over a longer period.
On the other side, an FD giving you about 9 per cent currently would attract tax as per your tax slab, which in the highest bracket would be 30 per cent. This reduces the effective yield to 6 per cent. In this case a debt product could generate an extra return of 2 per cent. But, if you fall in a lower tax bracket, long-term FDs is an option. As interest rates are peaking, a long-term FD at a higher rate may work for you.
Here are some excerpts from the interactive session that was part of the conference held in New Delhi. The speakers at the conference were Vikram Melhotra, Regional Head, NCR, ICICI Prudential AMC, and Tanvi Varma, Associate Editor, Money Today.
There are about 330 equity schemes and over 35 asset management companies (AMCs), all of them with decent track records. Of course, there are times when a financial advisor's intent hampers the kind of planning you are looking for. However, our advice is to share all relevant information with your financial advisor.
The first step to financial planning is transparency. Your goals for the next five-ten years, cash inflow and liabilities are all important. Now, while choosing schemes, if you do not understand complex products, stay away. It is your money and you need to keep it as simple as possible. Further, it is important to control the tendency of trying for very high returns. Your greed may pressure your advisor to suggest highly aggressive products, which are also risky.
Is it better to exit equity and book profits when markets touch peaks and start a systematic investment plan (SIP) or reinvest in a down market rather than staying invested?
Ideally it would be great if you could time the market, but it rarely happens. When markets reach high levels, we tend to join the bandwagon with a hope that it may go up further. What is important is to stick to your asset allocation, which depends on your investment objective and risk profile. In fact, reviewing your portfolio every quarter or two quarters helps.
"If you do not understand complex schemes, stay away. It is your money and you need to keep it as simple as possible"
This will help you mitigate risk. It is wise to invest systematically as well. In fact, one of the innovations that funds offer is Flexi STP, wherein a market correction will automatically result in allocation of more money into the market.
Well, there is surety on the upside considering debt funds are not volatile and move with general interest rates. The lower the duration of a bond, lower the volatility.
Currently, it seems interest rates have peaked and RBI has indicated its concerns about growth. Owing to this, market experts expect interest rates to possibly come down. Rates do have an inverse relationship with bond funds. In fact, we are bullish on the rates side.
Government borrowing has gone up in the past one year and with lowered revenue, the government has no choice but to borrow more. This year the government started with a borrowing of Rs 4 lakh crore and ended up at approximately Rs 6 lakh crore and it is expected to rise further by March.
"Reviewing your portfolio every quarter helps as you can rebalance it in case asset allocation has changed"
How would you compare bank fixed deposits (FDs) to debt mutual funds?
It depends on your investment horizon and the level of taxation. Currently, you can get a fixed maturity plan in the market ranging from 1 year to 3 years, many of them offering yields of up to 9.5 per cent. These funds also offer you the benefit of indexation if invested over a longer period.
On the other side, an FD giving you about 9 per cent currently would attract tax as per your tax slab, which in the highest bracket would be 30 per cent. This reduces the effective yield to 6 per cent. In this case a debt product could generate an extra return of 2 per cent. But, if you fall in a lower tax bracket, long-term FDs is an option. As interest rates are peaking, a long-term FD at a higher rate may work for you.
