Start small, but make a start now

Transcription

1 Start small, but make a start now As Indians, we are generally risk averse towards our investments. We believe that our money should be protected at any cost and there should be no risk involved. Hence, we agree to settle down for investments that seem to offer a guaranteed return which in reality does not beat inflation and hence devalues the money in the long term.

2 In a nut shell, very few people in India are investing in Mutual Funds. What could be the reasons? Mutual Funds are risky. Even the advertisements carry Mutual Fund investments are subject to market risk We don t know much about stock market, equities or mutual funds My father invested only in FDs, Gold, Real estate and LIC I truly believe real estate gives better returns than any other investment option Don t know whom to approach for help or assistance The process of investment is complicated

3 Equity Investment The moment you think of equity, the following questions would surely cross your mind: - How are the markets doing?, Can you tell me the best company to invest in?, Since the markets are going down, should I start selling my equity investments? Most of the people visualize Equity Investment as sitting in front of the trading screen watching business news channel and actively buying & selling of stocks. The other form of equity investing is waiting for the tips or insider information to make a killing in the short run by investing into such companies. No wonder then that the wise men compared investing money in stock market to betting money in horse race. In both these cases, you are staring at the screen with a hope that the horse/stock on which you have put your money should win. In most cases, majority of the people lose money and very few lucky ones make the fortune. But next day it s uncertain again. So equity investments are very risky. We fail to differentiate the basic difference between speculation (in common terms you can relate to gambling) and investment. When the concept of speculation or gambling is involved, one person s gain is other person s loss. The outcomes are quick and the parties involved would know whether they have made or lost the money. Investment is a scenario where it would be win-win situation for all the parties involved. The outcome may take longer but the benefits are worth the wait. When an investor invests money in a growing business, he will have to give time to the business to perform and start reaping the benefits in years to come. One can relate this to sowing a seed and nurturing before reaping the fruit. Investing is a well evaluated and disciplined process.

4 The power of equity investment: Building wealth through equities requires tremendous patience and discipline. Remember, Rome was not built in a day. While the great economist Keynes quoted, in the long run, we are all dead, it is equally true that in the short run we are blind and clueless about the course of stock markets. Some of the success stories in equity investments are given below; The top performing stocks during the period of Stock Closing Price (Rs) 25-Aug Aug-15 Compounded Annualized Growth Rate (CAGR) 1 TTK Prestige 16 3,927 65% 2 Eicher Motors ,417 53% 3 Havells India % 4 Supreme Industries % 5 Shriram Transport Finance % 6 Godrej Consumer Products % 7 Sun Pharma % 8 Bata India 61 1,184 31% 9 Bosch Ltd 1,484 26,003 30% 10 TCS 247 2,521 24% The bigger challenge is spotting a potential multi-bagger stock. Identifying the next TTK Prestige or a Sun Pharma today to make a windfall requires astute stock picking skills. If the decision goes wrong, the risk involved could be higher and might result in capital erosion. The risk is always higher when you invest your money in a single stock or a combination of few stocks. How do we reduce this risk?

5 Equity Mutual Funds Mutual funds are run by a team of professionals called the Fund management team. Their expertise is to follow the performance of various companies & sectors closely and identify the future TTK Prestige or Havells India, so that a basket of stocks are selected. Investing in a single share or pool of few shares can be very risky as it is very difficult to identify the next big success story. Hence, Mutual funds become a viable alternative to investing in equity yet reducing the risk. Mutual Funds generally are made up of a combination of 40 to 60 stocks (the number of stocks in a fund can vary based on the investment objective or the fund management style) in one fund that helps investor diversify the risk. Isn t it better to bet on a team than on a single player! In a diversified portfolio, the non-performance of few stocks or sectors would be taken care of by the performance of performing stocks/sectors which helps in balancing returns. Equity mutual funds come in various categories; Large cap funds Diversified equity funds Mid cap / Small cap funds Sectoral funds Thematic funds All these funds differ in terms of investment objective. In Large Cap funds, the fund manager looks at investing in top listed companies (based on free float market capitalization) in BSE/NSE. The risk involved is least when compared to other types of mutual funds. Diversified equity funds would have a combination of Large cap, Mid cap and Small cap stocks. Fund managers actively allocate between these 3 categories. When an investor is looking at investing in Equity mutual funds, it s always suggested that majority of investments should go into exiting equity large cap funds and diversified equity funds.

6 Systematic Investment Plan (SIP) Little drops of water make the mighty ocean Systematic Investment Plan (SIP) is nothing but small chunks of money invested on a pre-set date every month into specific mutual fund/funds. One of the best ways of investing in Mutual Funds is through Systematic Investment Plans (SIPs) as it brings in an investment discipline for the investor. SIPs help to achieve financial goals by investing small sums of money on a monthly basis that eventually leads to accumulating the required corpus for reaching the goal. The key advantage of SIP is Rupee Cost Averaging: When a date of investment is pre-set, an investor need not worry about the timing of the market but what s important is how much time invested in the market. The concept of rupee cost averaging eliminates the need to time the market i.e. an investor simply don t have to try to catch the market lows to buy and market highs to sell. SIP enables an individual to buy more units when the price is low and fewer units when the price is high, thereby averaging the purchase price.

7 Illustration of rupee cost averaging: Declining market (Amount in Rupees) Date of investment Amount Invested NAV of the fund Units bought 1st Jan st Feb st Mar st Apr st May Total The average NAV last 5 months would be ( 84/5): Rs But the investor has invested Rs and he is holding 337 units in hand. In this case the average unit cost(nav) would be ( Rs. 5000/337 units): Rs per unit Rising market (Amount in Rupees) Date of investment Amount Invested NAV of the fund Units bought 1st Jan st Feb st Mar st Apr st May Total The average NAV in last 5 months would be ( 199/5): Rs But the investor has invested Rs and he is holding 134 units in hand. In this case the average unit cost (NAV) would be ( Rs. 5000/134 units): Rs per unit

8 Average SIP returns of 5 funds over 10 years % 19.00% 28.14% 27.27% % 16.78% 12.99% 16.46% The chosen schemes are: HDFC Equity Fund, HDFC Tax Saver, HDFC Top 200, Reliance Growth, Tata Pure Equity Fund. Source of NAV is from The performance period for the 10 year cycle is between April to March. Historically, at different 10 years investment cycle, none of the funds have given negative returns. SIP Performance of selected mutual fund schemes Name of the Fund Montly Investment (Rs.) Total amount invested (in Rs. Lakhs) Current value of the investment (in Rs. Lakhs) Returns HDFC Equity Fund % HDFC Tax Saver % HDFC Top % ICICI Prudential Dynamic Plan % L&T Equity Fund % Reliance Growth % Reliance Equity Opportunities % Reliance Tax Saver % Tata Pure Equity Fund % *Monthly Investment of Rs.10,000 considered for a period of 10 years from April 01, 2005 to March 01, 2015 (120 months). The investment is assumed to be made on the 1 st of every month. Returns shown are compounded annualised (CAGR).

9 SIP and Financial goals Linking SIP is the best way to accumulate money for realizing specific financial goal. Let s assume the current cost of an engineering degree is Rs. 4 Lakhs and an investor is planning for his daughter s education 15 years from now. Current cost of engineering Rs. 4 Lakhs Inflation 7% Cost of engineering 15 years from 7% inflation Rs. 11 Lakhs Where do I get the money from? It s a big worry, when expenditure like this suddenly appears in front of us. We always tend to postpone the investment decision and when the moment of truth arrives we think of this question where do I get the money from? Today a movie ticket would cost about Rs.250 and a family of 3 people would spend Rs.750 and if popcorn combo about cost about Rs.500, we are starting at a total expenditure of Rs Dinner post movie might cost about Rs.1000.

10 Saving for the Future One outing over week end might cost about Rs.2250 Forgoing One movie and a dinner with family and saving up that money once a month, could get you Rs. 11 Lakhs over 15 years. Rs. 2300/- Invested every month in a mutual fund over 15 years... Would accomadate to Rs. 11 Lakhs Assumed Rate of 12% p.a. Starting an SIP and linking it to a specific financial goal, would always help an individual achieve the dreams and aspirations. We always tend to get charged up when we come across something interesting but unless we take action the status quo in our life would continue as it is. One of the many reason for not taking action is I don t know where to start from?. One way to start is to identify your financial goals and find out how much you need to invest every month. Visit us at, we will help you in defining your financial goals and give you comprehensive solutions for the financial goals you have in mind. The crux is Start Small, but make a start now.

11 Disclaimer: Mutual Fund Investments are subject to market risks, please read Scheme Information Document before investing. Past performance may or may not be sustained in future. Mutual Fund Units involve investment risks including the possible loss of principle. The information contained herein should not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form.past performance is not indicative of future performance. The future value of investments may rise and fall with changes in the market. ARA Management Solutions Pvt Ltd is not responsible for any error or inaccuracy or for any losses suffered on account of information contained in this report. This report does not purport to be an offer for purchase and sale of mutual fund units or any other financial products. M/S ARA Management Solutions Pvt Ltd or its employees cannot be held liable for any loss or sufferings incurred because of any of these investments.the information provided in this document is of a general nature and has been prepared without taking account of Investors personal needs, financial circumstances or objectives. The examples are hypothetical and are not meant to illustrate the circumstances of any particular individual. Before acting on this information, Investor should consider the appropriateness of the information, having regard to Investor s needs, financial circumstances and objectives. Investor should read the relevant Product Disclosure Statement and consider if the product is right for him.

12 About ARA Management Solutions: ARA is an independent investment consulting company based in Bangalore. We provide flexible, end to end solutions to Individuals and Families to enable them to achieve their financial goals & objectives. We also assist Trusts, Associations and Companies in optimal utilization of their cash flows by structuring an ideal balance between safety and liquidity. The foundation of ARA was laid with a single minded, client centric approach. Managing wealth has been our business practice as well as personal passion. While seeking to actively engage with our clients in their wealth creation process, we intend to disengage them from the associated complexities of the same. As an independent company not owned by or affiliated with any Brokerage or Investment Group, our aim is to help our investors optimize their portfolio returns. We firmly believe that we can grow only if our clients grow. Rest assured, we strive to protect our clients financial interests with utmost seriousness. ARA Management Solutions Pvt. Ltd Ph: Mobile: S 05, Concourse, Lower Ground Floor, ITPB, Whitefield, Bangalore support@aramanagementsolutions.com