New Year begins with resolutions and plans for a better future. Managing money is critical for realising your goals. A good work-life balance is supplemented by effective asset-liability management, in other words, clever budgeting, keeping your credit card bills in check, paying your loan installments on time and investing wisely. The goals for every individual may vary from saving for an exotic vacation to supporting kid’s admission in a premier league college. In this article, we shall see how some basic investing principles can help you.
Start Early
We shall consider two gentlemen, Amar and Prem. Both join a company called ABC as freshers at age 25. Amar diligently sets aside Rs. 1000 from his salary every month to invest in a mutual fund whereas Prem feels he is still too young to worry about finances. Later, in his middle age, Prem starts to invest the same amount.
Both gentlemen want to retire comfortably at the age of 50. Considering 10% rate of return adjusted for inflation, at retirement, the accumulated corpus for Amar would be Rs. 11, 80,165 while Prem would end up saving only Rs. 3, 81, 270. Clearly, Amar’s accumulated wealth has tripled because he started investing early in life.
You may think even though Prem started investing later, he can compensate for this difference by investing higher amounts in mutual funds as earnings would also increase over time. Along with salary hikes, generally, the responsibilities increase in addition to your expenses. Unlike when he was a bachelor, Prem may have a family of four whom he should be able to support. |
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If at the age of 35, Prem wishes to retire with the same amount of money as Amar and increases his investment amount, how much will he have to shell out?
To end up with an equal amount of accumulated wealth, Prem will have to contribute Rs. 37,000 every year which is again three times of the initial outgo. Thus, we can always start investing small amounts with top-ups or higher investments as and when markets or instruments look attractive for investing.
To know how much you can gain at retirement, the tool ‘Forward Compounder’ is at your service.
Simply enter your current savings, if any and future monthly installments or systematic investment amounts, to get the corpus at the end of 5 years, 10 years, 15 years, 20 years, 25 years and 30 years.
Fiscal Free
An important step towards being fiscal free is to be in control of your finances. The daily mundane routine leaves little time to fret over something as complicated as investing. Investors can prepare a simple budget in order to assess their discretionary as well as non-discretionary spending. Expenses for entertainment purpose like dining at restaurants, purchasing consumer electronics or luxury goods and miscellaneous expenditure on home renovation etc., fall under discretionary expenses. The basic necessities of everyday life comprise non-discretionary outlay. Budgeting will help you segregate your needs from your desires.
The tool Budget Analyzer on Fundsupermart.co.in will help you with this!
The annual investible funds at the end of the computation in the tool will give you a picture of the amount of money that can be set aside for investing after considering actual and anticipated expenses. Apart from this, create a contingency fund for an unforeseen emergency which should ideally be equal to 3-6 months’ of your salary.
Goal setting is the second and most crucial step of being fiscal free. The qualitative aspect within goal setting is ensuring a decent standard of living post retirement or on termination of regular flow of income and the quantitative aspect is putting a figure to it. Also, there may be major commitments in a lifetime to reckon with, such as proceeds towards daughter’s wedding or down-payment for a new house or car.
The tool ‘Crorepati Calculator’ not only helps you arrive at a figure but also tells you how to become a crorepati!
The other calculation in the tool with respect to purchasing power takes into account the fall in value of Rs. 1 crore in absolute terms after certain number of years owing to factors like inflation, opportunity cost of money etc.
Risk-Reward Trade-off
Investment experts quite often decide allocation of funds to stocks, sectors and asset classes in their portfolio according to their estimate of how that stock, sector or asset class will perform in future. The overweight or underweight positions are determined by the buy, hold and sell strategy of the portfolio. To protect the portfolio’s downside due to fall in or negative performance of a particular stock or sector, the investment is spread across different securities. The concept of ‘Diversification’ has been discussed time and again but investors should bear in mind their risk profile before exposing themselves to different products and asset classes. Apart from knowing the security’s risk level, investors should be aware of their own appetite towards risk.
To find out your risk profile, just answer a few questions in the tool ‘Risk Profiler’.
Table 1 shows the performance of different types of funds over a period of 5 years. Low risk is denoted by lower value of Risk Rating. Depending on the investment objective and the nature of fund, the risk rating of equity funds changes. Hence, for equity funds available on Fundsupermart.com, a range of values from 6 to 10 are given. The sectoral funds typically have a rating higher than the diversified funds.
The table shows that the mutual fund type having higher risk rating ends up delivering more returns. Therefore, higher the risk, higher will be the returns. Similarly, low risk will result in low returns. So, an investor having an ‘aggressive’ risk profile can have more allocation towards sectoral and equity diversified funds. On the other hand, a conservative investor can opt for balanced and liquid funds. Plus, currently dividends are tax-free for equity funds so investors can choose dividend payout option if they wish to receive periodic profits from their mutual fund investments. |
Table 1: Average performance of mutual funds on FSM
Liquid Funds |
6.55 |
1 |
Short-term Funds |
7.95 |
2 |
Balanced Funds |
17.33 |
4 |
Equity Funds |
19.65 |
6-10 |
Source: iFAST compilations |
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No matter what your risk profile is, remember that the equity asset class is for long-term holding and fixed income, predominantly liquid funds are an investment vehicle for the short-term time horizon.
To see how funds compare with indices and to check the performance of various indices and funds, you can use the tool ‘Chart Centre’.
Chart 1 shows the performance of major index, BSE 30 SENSEX against Gold Prices and Crude Oil. Similarly, funds performance over 6 month, one year, two year, three year, five year and ten year period can be viewed using this tool.
Conclusion
This article was to familiarise some of the tools available on Fundsupermart.com and how you can derive the most out of these tools. Most of us find finance and investing too complicated and irksome. Investing in small amounts regularly and keeping a check on your savings and expenses can resolve some of your monetary misery.
Happy Investing!
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