It is relatively easy to make money if you put your mind to it. What is difficult is keeping the money you earn, and even more difficult is making your money grow on its own and work for you when you need it to do so.
In the past two decades of working in banking and financial services industry, I have a strong observation that most people are not very focused on personal financial planning and wary about hiring or appointing a financial planner to help him/ her to do so.
In the name of financial planning for the future, most of the people in India hoard money in fixed deposits in banks and post offices, put some money in PPF (public provident fund) and buy one or two insurance policies.
For the younger lot, you may also find some money put into SIPs in mutual funds too. However irrespective of young or old, you are unlikely to get clarity on the reasons behind such choice of savings/ investments other than tax savings and growing money as objectives.
Questions on specific financial objectives, investment strategy, vehicles, time horizon, the quantum of money expected at maturity, etc. are likely to go unanswered.
All these require focused financial planning and a certified and experienced financial planner can help you plan your finances to ensure you meet your life goals seamlessly.
However choosing the right financial planner may prove to be challenging, unless you understand the importance of financial planning and ask them the right set of questions before contracting and trusting anyone with your hard-earned money.
In this article, our effort will be to give you the required insights on all these to help you make conscious decisions regarding your financial planning needs.
What is Financial Planning?
In a normal course of life from the time a person gets into his/ her first job till he/ she chooses to retire, the following are the financial goals and milestones in life when people generally require lump-sum money –
Wealth creation –
In the face of rising inflation, if people need to maintain or improve their standard-of-living they will have to build wealth over a period of time.
One will need money to buy luxuries/comforts of life ranging from the first car and also change it thereafter, vacations, own new home and associated things.
All these long term goals require careful financial planning and investments in mutual funds and equities to accumulate an adequate amount of wealth at different timelines.
Education of children –
Even professional undergraduate courses and higher education thereafter are already expensive today in India and across the world.
This makes it imperative for a parent to plan for the higher education of the child the moment it is born. One needs to take into account the current cost of education and inflation in the economy to calculate the quantum of money required when the child grows up.
To build the required corpus wealth by the time the child is 18 years old the parent would need to choose investment tools that will not only combat inflation but also untoward exigencies to ensure that the child’s education happens at any cost.
Parents who wish to plan a dream wedding for their children too need to plan in a similar manner to full-fill their wish, come what may.
Retirement planning of self –
Retirement per se, is no longer a set at 60 years of age. People are seen to retire even at 45 years and/ or even at 70 years of age depending on their wish, given the increased life expectancy across the globe.
All set and done, people get at least 25 to 35 years to plan for their golden years from the day they set foot in their work lives.
If proper financial planning is done at an early age, then they can start even with a small yet regular investment, in a long term investment vehicle to build a good retirement corpus by the time they retire.
Medical and other exigencies –
Given the uncertainties of life and growing lifestyle diseases, it becomes an absolute must for all to plan for their medical requirements/ exigencies very early in life to get a big medical coverage against a small premium.
All medical coverage tools are tax-efficient, thus tax benefits are enjoyed on the premium paid every year.
Tax- Savings –
Moreover with an increase in income, tax liabilities to grow. There are an array of tax-efficient savings and investment tools that not only help people save tax on their hard-earned money, but also support them in their long term wealth creation goals.
All of these expenses need to be carefully planned for in a step-by-step manner, in order to ensure all life goals stated above and more timely planned and accounted for, way in advance keeping in mind the financial capability and needs of the person.
This in short is referred to as financial planning.
Plan your finances today
Leaving financial planning and your financial responsibilities to chance or on other family members in the face of inflation and uncertainties of life might not prove to be a prudent choice.
An educated and the matured decision is to act timely with responsibility and plan for your financial/ life goals based on your life stage and its needs without delay.
One must remember that procrastination seldom works with financial planning as time available to life goals is finite.
One must also remember the following points –
Inflation is not your friend –
You must have heard your elders say that everything was cheaper back in their hay days.
Yes, of course, they were; a movie ticket would cost INR 5 to 20 that today costs INR 500, a chocolate bar would be INR 5 to 10 at the most and today they cost INR 60 to 150 at least, A bus ticket was about 50 paisa that is about INR 8 to 10, groceries and other daily necessities.
So with the increase in income levels of the people, inflation or cost of living too has become dearer so with the same saving that made life seamless then, one would never meet even their basic expenses today.
Simply because, money is losing its purchasing power – the INR 10 that could buy you a bar of chocolate in your childhood would fail to purchase any of them today. You will need INR 150 to make the same purchase as the price has gone up by 15 times!
Similarly, if you save INR 150 in your bank today at a rate of say, 5% also, you will receive only INR 157.50 which will not be able to purchase your favorite chocolate 1 year down the line.
Emergency fund requirement –
As I have always said that the biggest ‘if’ is inbuilt in ‘l-IF-e’ itself. No one knows when uncertainties of life strike with death, disease or disability. All dreams crash when any of these strike life unaware.
Having spent a considerable number of years in the insurance industry, I have seen that many people shy away from buying medical insurance and term insurance because these two policies do not have any maturity benefits!
However, these same sets of people ensure that their cars and motorcycles have 100% insurance coverage on them to protect them from any damage caused by accidents. Knowing very well that your vehicle insurance has no maturity value – you still buy it to offset any damage that can be mitigated financially.
The same logic must be applied to human lives, as life is priceless.
Moreover, unwarranted job loss too can shake up your dreams and aspirations. The emergency fund made available from timely and judicious financial planning is required to ensure your expenses are taken care of even on rainy days.
Investments in debt instruments like fixed deposits and income funds may prove to be beneficial in meeting such needs.
Funding the Golden Years –
Progress in medical science has ensured we live long and healthy retired lives. This is indeed a blessing. People can enjoy their golden years with their loved ones, pursuing passions and hobbies, travelling the world and more.
However, an important consideration here is funding all of these expenses, not forgetting medical expenses that generally arise with old age.
Only timely and proper financial planning for retirement will ensure a steady and stable monthly income during the retirement years.
All that we have discussed till now clearly defines the need to appoint a financial planner to help you create a program and manage your personal finances to help you meet your long-term life goals.
Having said that, it is also to be noted that the market is flooded with financial planners; but choosing the right one who has the ‘best interest at heart’ is essential for your financial wellbeing and peace of mind.
This is because unlike lawyers and doctors who have a defined designation per law, the financial planners can carry various titles like – financial planners, financial planning officers, wealth managers, wealth advisors, financial service consultant, investment advisor, investment manager, among other designations.
Top 5 Questions you can ask in 2021 to your Financial Planner
This makes it difficult to ascertain the right or most suitable financial planner for your needs. Asking the right set of questions is critical to meet your needs.
Here are 5 questions we feel are most relevant to for you to ask before making a choice about your financial planner.
1) How does the financial planner expect to be paid for his services? Is he disclosing it?
Mutual fund agents/ distributors are paid a commission by the fund house. It is calculated as a part of the invested amount, and on every new investment, you make in the same scheme.
The amount of commission can vary from fund house to fund house and from scheme to scheme as well. It can vary from –
About 4.5% to 1% in ELSS
About 0.5% to 2.5% in Equity Schemes to a low
About 0.2%% to 0.8% in Debt Funds
Certified Financial Planners registered with SEBI provide service to their clients against a fee-only and are expected to act only in your interest. But one may not be able to vouch for that.
Thus on the very first meeting, you must check and clarify how his/ her payments are to be calculated and paid. In case if anyone says that it is a free service or hesitates to disclose details, it should raise an alarm with you. There is no free service anywhere.
2) What is his/ her specialisation and how long has he been in this profession?
Majority of the times it has been seen that the financial planner(s) is representing a specific company or fund house and all his products/ schemes they suggest are from a specified set of companies.
There will be others who are selling various products, but their technique is to ‘push-sell’ the products drawing comparison on how other customers have benefitted from such investments.
Neither are they able to answer your questions satisfactorily. These may not be the right persons for you.
Also ask them the kind of client base they cater to, in terms of at least their age and occupation and the number of years the financial planner is servicing these clients (someone with at least 4 to 5 years of experience should serve you good).
This will give you a fair idea about whether the financial planner will suit your profile.
3) Where is the focus: on your need or the product?
A good financial planner will always spend time to understand your financial needs – both short term and long term ones, along with your current financial situation and income sources.
He/ she should ask you about your dependants and the reasons behind your investment requirements. He/ she must also check about your risk appetite and probable reactions in face of loss due to market downturn.
He/ she is also likely to educate your instruments in case if they feel that it might be suitable for your long term needs.
Only then will they will be in a position to recommend suitable investments tools to meet your needs. They will also ensure that you have a diversified portfolio to ensure mitigate future loss if any.
However, any financial advisor/ planner who positions and pushes one specific product as a one-stop solution to many needs, should raise a flag with you and is unlikely to be the right one for you.
This is because it has been observed that these advisors push those products which earn them bigger commissions and/ or required to meet their assigned targets.
4) Promising high returns? – Be aware
Is your financial planner promising you a guaranteed return of 12 to 15% annually or even on the overall investment? If yes, this should raise an alarm for you.
No market-linked investments, ranging from stocks to mutual funds to ULIPs, guarantee returns such high returns. Even if they show you any printed document with returns; remember they are merely illustrations based on either past performance of the funds/ plans.
Generally, a 7 to 8% compounded annual returns are expected over the long term; rest are inflated returns to attract retail investors like us.
Even in the case of government/ sovereign bonds, the return/ rate of interest guaranteed on the bond is subject to various terms of conditions.
To ensure you ask and get clarity and satisfied with their answers before you choose to invest in such instruments.
5) Is your financial planner explaining and discussing the risks involved in an investment?
Most of the financial planners/ consultants talk about the bright side of the investments especially in terms of returns. However only a few make their clients aware of the risks involved in certain investments.
For example, unit-linked investment plans (ULIPs) are suitable for young people who have a 15 to 30 years time horizon to maturity at that will reap good returns because of the power of compounding.
However, for old and retired people in their 60s and 70s, ULIPs are not suitable at all, as mortality charges will be very high at these ages and secondly this is not the age to get exposed to market-related investments that expose this set of people to market volatility.
Moreover, there are investment planners who pursue old people in their 70s and 80s to propose insurance policies for their grandchildren or children – the latter being aware of such investments being made.
They do this because their lives are beyond insurable age and/ or they are likely to have old age health issues as well.
So to make an easy cut, they get the policies issued in the names of younger people in their families – not mentioning that the policies will lapse in case anything happens to the proposers.
Thus one must ask enough and more questions about risks involved in any investments an advisor proposes to them to clearly understand the pros and cons involved.
In case aged investors, if you think you need to involve a family member to understand the proposal(s) better, please do so to ensure no money is lost in the deal.
Never go by the level of knowledge, polished outlook and smooth-talking of your advisor.
Instead, focus on whether he/ she is thinking solely about your needs and interests when strategising and suggesting you various investment options.
It has been observed that financial planners sometimes suggest unregulated investment options like Alternate Investment Funds, Bitcoin to young affluent and progressive customers.
Be sure to read on your own and understand every detail of such products – given that they are very complex and risky investments to step into unless you are a millionaire and have spare money to get into such things.
It is never advisable to hurry investments in instruments like these.
The Koppr Edge: How can Koppr help you with your financial planning
We at Koppr are dedicated to serving our clients to understand their detailed needs with our specialised mechanism and plan their finances to help them achieve their financial goals. You may read the Financial Planning guide for your reference: https://www.koppr.in/financial-planning/
You can simply start your investing journey with Koppr by starting your own Financial Planning.
1) Step 1: Sign-in or Sign-Up your Koppr account with your own credentials: https://www.koppr.com/
2) Step 2: After you log in, you can see your investment portfolio
3) Step 3: There is a list of your Financial Goals for you to choose from. You can choose any of the listed financial goals like home, car, marriage, child planning, higher education, family financial support, vacation, paying off your existing outstanding debts, home improvement, emergency planning, etc. or even custom your own plan as per your requirements.
4) Step 4: Suppose you wish to buy a house, you need to enter the approximate value of your house now that you wish to buy. So, say you wish to buy a house which is now priced at INR 50 lakhs
5) Step 5: Then you need to answer the question: “When do you plan to buy the house?” Say, you choose Apr-2023.
6) Step 6: Then, you need to enter how much loan you wish to take, in terms of %. So, suppose to wish to opt for a 60% loan
7) Step 7: The calculator simply calculates the amount of money you need in the mentioned timelines, which in our example is INR 22.05 lakhs in 2 years and 2 months
8) Step 8: It also specifies the amount of money you need to save on a monthly basis to achieve your dream home
9) Step 9: This can be added to your Financial Goals with “Create Goal”
10) Step 10: Likewise, you can add other goals as per your requirement and create your Financial Plan on the Koppr App.
11) Step 11: You can also like or unlink your current investments to your financial plan so that you can track the progress of the same.
Our mission is to provide you with the right tools and financial products and take care of your financial well-being.
Download the Koppr app and take care of your finances today!
Irrespective of the current financial state of a person, everyone wants to die a rich person. However, in the 20 years that I spent in the financial services industry, I have noticed that most people either lack the awareness of proper financial planning (though they may not acknowledge it) and to add to it, hiring or consulting a certified financial planner freaks them out.
If you too feel the same way, let me tell you that you have many on your side even today.
However, if you are looking for mental, emotional wellbeing for yourself, then paying attention to your financial wellbeing is an important key to achieve the former two. Financial wellbeing refers to how ably you have planned for the future and not just your current financial status.
If not paid proper attention to, your financial security/ stability is likely to affect you as badly as your combined stability in your profession, relationships and concerns around your physical health.
However someone specialised in comprehensive financial planning helping you sort and plan your finances can be life-changing for you – you are likely to have a 5 kg brick off your head, thus freeing up your capacity to concentrate on your professional and personal matters efficiently and effectively.
It is quite natural that you may feel that you do not need a financial planner/advisor to help you plan your finances/ investments. But beware before you arrive at that conclusion.
If the answer to any of the following questions is a ‘no’, then you might think twice before you dispel the idea of hiring a certified financial planner-
Do I have enough knowledge of finances and investments?
Is wealth management your forte? Do you have a knack of learning or reading about financial planning, wealth management or any other financial subjects or like researching them?
Are you an expert in managing and monitoring various financial instruments?
Do you really have the time to evaluate your portfolio from time to time and make periodic adjustments in them to reap your best returns?
Who is a Certified Financial Planner?
A certified financial planner India is an individual who helps people manage their finances. These individuals are given this formal designation of ‘Certified Financial Planner’ or CFP by the ‘Certified Financial Planner Board of Standards, Inc.’
This is because they are trained and thus equipped to guide people plan for various financial goals in their lives viz. Education, weddings, retirement, buying assets like houses/ apartments, protection with various insurance coverage and tax planning as well.
To become a qualified Certified Financial Planner (CFP) is a difficult task. One has to undergo stringent processes and conditions pertaining to passing of standardised examinations, experience, ethical standards and formal education.
Most importantly, all CFPs are ethically and legally bound to take all decisions and act solely in the best interest of their clients. This is referred to as being on ‘fiduciary duty.’
Certified Financial Planners offer comprehensive financial services against certain considerations –
One Time fee – If you are consulting a CFP for a specific need, like resolving a specific issue or making a financial plan for you, the Certified Financial Planner is likely to charge a one-time fee from you. You then take your investments ahead on your own basis the roadmap defined by the CFP for you.
Hourly fee/ flat rate – Many investors consult CFPs against a flat fee, on a regular basis in order to review their portfolios or plan new investments from time to time.
Commission fee – Common in India is a commission fee, i.e. a percentage of amounts of money being invested in any vehicle are shelled out as a fee to the CFPs by the respective companies/ vehicles where the money is invested.
Why do you need Certified Financial Planner?
You may be a fresh graduate seeking to pay off your education loans post landing with your first job, or someone about to retire and is looking for avenues to ensure a seamless flow of monthly income, or maybe at a life stage somewhere in between, we all look want the money we are making or have made in life to work towards meeting our financial needs.
These life events and more prompt us to reach out for qualified and custom made financial advice. This is because there is always a chance of making a bad financial decision leading to major losses of hard-earned money.
Detailed below are various life scenarios when you might want to go for professional financial advice by either individual CFPs or financial planning firms.
I am on my first job and have my education loan to be repaid yet want to start saving for the future.
I need proper tax planning to ensure I pay a minimum tax on my salary from service/income from the business.
My parents are retiring and I being the sole earning member need to ensure family expenses in the face of an unforeseen event in future.
I plan to buy a house/ apartment in a few years from now post I get and settle down in life. I need help to plan for my future down payment.
I recently got married and now need help to plan our finances together as a couple.
We just got a child and need to plan for its future education, marriage and other financial needs.
My spouse and I do not agree on financial decisions and need comprehensive financial planning by an expert who can act as a mediator and give the right advice.
I am a single person and have no inheritance; thus need to plan investments towards wealth creation for myself to achieve my dreams in life.
I have inherited some wealth from my parents and need guidance to fruitfully invest the funds to yield maximum returns in future.
I do not have knowledge of the right financial instruments to invest my money and need expert advice to help me manage my finances.
I have been managing my finances till now, but need a second opinion to understand if I am on the right track to achieve my financial dreams.
I do not enjoy saving or investing money but/ and need professional advice to ensure I do not mess up my future financial health in the face of uncertainties.
I recently got widowed/divorced and need guidance to reorganise my finances for my future to move on as a single person.
I am about to retire and need professional support to ensure a regular flow of income henceforward from all the money I have earned so far to take care of my expenses and live my post-retirement golden years as I have dreamt of my me and my spouse.
My parents are growing older. We need professional help to check if all the financial planning done till date will suffice their financial needs going forward.
Advantages of Consulting a Certified Financial Planner
Famed English fashion photographer David Bailey had once said, “To get rich, you have to be making money while you’re asleep. “ If your aim is to get rich, then seeking professional advice from a certified financial planner can prove to be advantageous to you.
However, comprehensive financial planning is aimed at and comprises strategies to increase returns on the portfolios by keeping a close watch on the various investments vehicles; with the investment objectives of the client in mind.
Trying to get this done by one’s own self poses a complex task as too many investment options available in the market; mostly leaves investors confused. Further one needs to be mindful of the various instalments and/ or maturity dates to ensure continuity of the schemes to benefit from them.
Also, timely churning of maturity amounts into profitable reinvestment options (keeping taxability in mind); need exploring of advanced investment strategies. All these may prove to be overwhelming to an investor who is required to devote his/ her time and attention elsewhere to take care of various priorities.
Top #5 reasons to hire a Certified Financial Planner:
Hiring a certified financial planner is likely to prove a prudent decision if one wants to save time and reduce hassle – thus reduce stress at the same time.
One of the most common reasons a CFP is hired is with the expectation to maximise the net returns on the portfolio investments. Though no one can guarantee the above, there are several advantages of hiring a Certified Financial Planner to manage your investment portfolios.
Let us take a look at the advantages of employing a CFP.
1) Helps to reduce stress by saving time and energy:
The most important reasons behind making investments revolve around the facts that –
We want to achieve all the financial dreams and meet exigencies along our life’s journey, and
Post-retirement we should be able to reap returns from our hard-earned money to ensure a stable flow of income during our golden years
However, managing and monitoring investments on our own may actually pose a hurdle to the above objectives.
This is because our jobs and businesses demand full attention to make money and progress in our chosen careers.
Making and dedicating enough time to research and plan our investments to make our money work while we are sleeping or away in earning money, requires persistence, and dedicating so much time on a regular basis is definitely a challenge.
On the other hand an expert in this field – a CFP will happily and proactively take the desired responsibility while you are away.
2) Dedicated specialist to make money work for you:
Certified financial planner and financial planning firms are specialists and trained portfolio managers who dedicate their lives to plan and manage investment portfolios as their vocational expertise.
Thus their service with their functional knowledge, expertise and continued investment strategies can truly prove to be helpful to individual and organisational investors as well.
3) A timely and thorough review of investments:
Employing a qualified CFP to manage and control investments means giving complete control on one’s investments to an outsider. This can be a cause of doubt or suspicion for many as money has an emotional attachment to its owner.
This apprehension can always be taken care of by consulting and taking a second opinion from another CFP.
4) A stepping stone to learning investment planning:
If you are not a trained investment advisor by profession; appointing and observing a Certified Financial Planning Manager work out personalised investment strategies for you and others is a great learning experience in itself.
Most CFPs have their unique consulting and approach to investments for every client based on the latter’s needs. Thus watching the applied investment strategies and tools used to meet various financial objectives, will lay the foundation to your own interest in investments and acquiring further knowledge in the field to subsequently help you manage and monitor your own portfolio as a financial planner too.
5) Trained and expert capabilities:
Generally an externally hired qualified CFP approaches investment planning for their clients with their personal experience and expertise coupled with a foolproof financial planning tool which may otherwise not be available to you as an investor.
Neither will an investor be in a position to think about it on their own. The comprehensive financial planning done for you by a certified financial planner using his/ her business acumen is likely to widen your horizon of market information around unknown territories of investment categories, tools and opportunities to strengthen your portfolio thus improving its efficacy in supporting you in achieving your life goals.
All of the above is likely to make you aware, more interested and raise your accountability towards being mindful and be focused on achieving your investment goals to help you live your financial dreams in life.
We at Koppr aim to enable you to be financially fit and lead a financially healthy life. If you take charge of your financial plan with the help of experts along with the necessary tools to assist you, you can take control of your financial plan. As said, financial freedom is just not for the riches, it’s for every one of you. You can simply start your investing journey with Koppr.
Investment = wealth creation or at least what you want to believe. However, whether it is due to mistakes, ignorance or a lack of financial literacy, your investments might not give you the desired results and might also result in a loss.What can you do to avoid losing money through your investments?
Investing is an art and unless you learn to master the art properly, your investments might leak money rather than accumulating it into a corpus that you need.
So, here are 9 tips on how not to lose money by investing right –
What is the basis of your investment? Creation of funds for your financial goals, isn’t it? So, start at your goals first. It is useless planning a journey anyways without having a destination in mind.
So, jot down your financial goals, both short-term and long-term. This listing would give you two distinct benefits – it would help you find out the corpus needed for each goal as well as the time horizon.
These two inputs form the basis of your financial plan and so, knowing your goals is the groundwork that you need to do before you jump on the investment bandwagon.
Plan your Financial goals for 2021 with Koppr’s Free Financial Planning Tool
2) Risk Profiling
The next thing to find out is your risk appetite. Risk appetite means your capacity of taking risks. Depending on your risk appetite the investment avenues would be selected.
If you don’t mind taking risks, you can invest in equity-oriented avenues and if you are risk-averse, fixed income avenues would be better.
Risk profiling should assess your tendency to bear risk vis-à-vis your age. Nobody like losing money and so, risky avenues are always seen with a bit of hesitation.
However, if given time, risks tend to smoothen out and you can get very good returns from risky investment avenues, i.e. equity. So, even if you are risk-averse, you can invest in equity provided – age is on your side and you have a long term investment horizon.
When you are young, you can give your investments time, time which minimizes the inherent risk. So, equity is suitable for long term goals. Do not lose your money by investing in the promise of equity for a quick buck.
Equity is highly volatile and while it can give quick gains, it can result in capital erosion too.
3) Tax Planning
Many of you also lose out on your returns because you don’t plan your taxes properly. Remember every investment avenue has its own tax implication.
If you understand such implication and then plan your investments around them, you would be able to save tax and generate good post-tax returns.
So, tax planning is essential, both when investing as well as on redemption. Find out which avenues help you save tax on investment so that you can reduce your taxable income while saving (Section 80C should be understood properly).
Then, when you redeem, check how your gains would be taxed and if you could do anything to avoid or reduce the possible taxation. A very common example is redeeming equity mutual funds.
If you redeem your investments within a year, a short term capital gains tax of 15% would apply on the returns that you have earned. On the other hand, if you redeem them after a year, you would be able to save tax if your returns are within Rs.1 lakh.
Even if your returns are greater than Rs.1 lakh, only the excess return would be taxed, and that too at 10%. So, if you are redeeming your mutual fund investments, check for the tax implication to see if you can save tax.
Losing money is not only through negative returns but also by not planning your taxes efficiently and letting them eat into your returns.
4) Know When to Hold and When to Redeem
This is a very technical aspect, especially when investing in equity stocks or equity mutual funds. Balancing between holding and redeeming is a fine line, one that you should toe with careful consideration.
If you hold your investments and the market falls further, you would lose money. On the other hand, if you redeem or switch and then the market rises, you would lose again as you could have earned better profits.
So, this is a tightrope and many investors fall flat while trying to walk it.
Wondering what you should do? Well, the answer lies in the first two points discussed earlier – goals and risk appetite.
If the market is falling and your goals are long term in nature, you can hold onto your investments as the market would correct itself, no matter its bearish run. In fact, the Sensex has emerged stronger after every crash. Have a look –
If you are on the initial curve of the fall, you can also book your profits and switch to debt mutual funds to protect against the volatility.
If you have a low-risk appetite, then also you should book your returns and switch to debt to prevent losing money.
5) Invest When the Market is Down
When the market is in a bear run and falling, it is a good time to invest as the stocks would be undervalued. Thereafter, when the market would rise, your investments would give you attractive returns.
So, a falling market is not necessarily a sign of losses. If you look on the brighter side, you can actually make profits by investing in undervalued stocks at that time.
That being said, try and buy good companies at a cheaper value and not bad stocks. Good companies would give good returns but bad ones would never do, even when the market is bullish.
So, try and choose the best-rated stocks with a high Price/Earnings (P/E) ratio as these companies would deliver good profits.
Which is your favourite investment avenue? If only one or two names spring to your mind, it is a cause of concern. Can you live on one food for your entire life? Variety is the needed spice, isn’t it, both from the taste and nutrition point of view?
So why play favourites with investments?
Your portfolio should be a mix of different investment avenues with different asset classes.
You need a mix of –
– Equity and debt investments
– Long term and short term products
– Fixed and liquid avenues
So while mutual funds are good, a little bit of fixed deposit should also be a part of your portfolio. Similarly, if gold is your preferred avenue, invest in equity too for liquidity and better returns.
A skewed portfolio, with a majority of one or two investment avenues, is a recipe for disaster. If any one of the avenues does not perform well, your entire investments would be in jeopardy.
For example, if you have a heavy proportion of real estate investments, where would you get money for emergency needs?
Too much exposure to equity is fatal in a market crash and too much investment in fixed income avenues is suicidal from an inflation point of view.
What you need is a balance of flavours, a balance of nutrition and a balance of investment avenues. Create a balanced and diversified portfolio and losing money on investments would be a thing of the past.
7) Factor in Inflation
Remember that inflation always eats into the purchasing power of money. Moreover, inflation is a reality and if the economy is growing, there would always be inflation.
So, when you invest, factor in this inflation. Invest in avenues that give you inflation-adjusted returns, i.e. returns that have a positive value even after factoring in inflation.
If you invest in avenues where the returns are not inflation adjusted, you would ultimately lose money even though the avenues give returns because such returns would have a low real worth. For example, say a fixed deposit scheme gives you a return of 6% per annum.
If the inflation in the country is 6.5% per annum, the return that you get from your fixed deposits is actually negative.
Let’s see it in monetary perspective.
Rs.100 would fetch you a return of Rs.6 in a fixed deposit scheme. You plan on buying an item costing Rs.6 with the return that you get. Now, after a year, inflation has driven the cost of the item to Rs.7 but you get a return of Rs.6 from the deposit scheme. Is the return worth it especially since you can no longer afford to buy the article that you wanted?
Inflation, therefore, puts a leak into your returns, a leak that can be plugged by choosing inflation-adjusted investment avenues.
8) Review Your Financial Portfolio, Regularly
Another mistake that most investors make is that they invest and forget. This is another reason why they end up losing money on their returns. How many times do you opt for rollover of your fixed deposits on maturity?
Your financial needs keep changing with changing lifestyle. Your financial portfolio, therefore, needs to change to keep pace with your changing needs.
Change is the only constant and if your portfolio is stagnant you would lose out on the opportunities of maximizing your returns. So, make it a point to review your portfolio periodically, at least once every 6 months or a year.
This reviewing helps you make the necessary changes to your investments. You can redeem your investments if the time is right, you can make additional investments into a fund that is performing exceptionally well, or, you can switch around your portfolio to change the investment combinations.
Review and shuffle your portfolio to reflect whatever you think is the need of the hour to keep your investments relevant and to maximize returns.
Do you know why investors lose money even when they try and pick the best investment avenues? Lack of financial knowledge, that’s why and in India, financial literacy is depressingly low.
As per a Standard & Poor survey conducted in the year 2014, more than 76% of Indian adults did not understand the basics of financial planning. Have a look at the numbers of the survey –
Lack of financial awareness is the reason why investors cannot plan their financial right. They have limited knowledge of risk diversification, inflation, interest-earning, etc.
As such, they fail to choose the right avenues that would help them get the best returns on their money. The result – they lose out on returns. Financial literacy is, therefore, the foundation for building an effective financial portfolio. It is the bedrock of your finances and if you get the knowledge part right, you can avoid losing money on investments.
Here are few courses on Koppr Academy that will help you to get the right knowledge in Finance
If financial literacy is not your strong suit, you can take the help of online courses designed to impart the necessary wisdom. We have curated some of the most comprehensive financial courses on different financial instruments and financial planning as a whole. You can take the help of our courses and learn the ABC of finance.
Acknowledging is winning half the battle in investing right. Armed with sufficient financial knowledge, if you avoid the earlier discussed pitfalls, you can create a leak-proof financial portfolio which prevents loss of money either because of losses, tax cuts or improper financial planning.
So, start your financial journey on a strong footing. Learn the basics first – our courses are there to help you. Then start your investment journey. Plan your goals, understand your risk appetite, plan your taxes, invest right, redeem right, have a diversified portfolio and do a periodic review.
Plug your portfolio leaks and avoid making losses by investing right.
The year 2021 marks the start of a new decade. Moreover, with the COVID vaccine almost on the verge of being launched, the year is also filled with hope and new beginnings. In keeping with the tradition of every New Year, you make various resolutions. But how many do you stick to? As January progresses to February and then February moves to March, most of the resolutions are done away with. How about doing something different for a change? If the year 2020 and the COVID pandemic have taught us something, it is the importance of being financially prepared. The pandemic took everyone’s finances by surprise and if you want to avoid a possible reprise, how about taking some financial resolutions for the year ahead so that you can be financially healthy?
Here are some of the best financial resolutions that you can set for 2021 to sort out your finances –
Even though the COVID vaccine is almost ready, the time by which you and your family get the shot is still uncertain. It might be one or two years before the vaccine effectively reaches everyone and till then, the threat of the infection is considerable.
If you face complications and are hospitalised, which is not uncommon, the treatment costs might tax your savings considerably. While many States have specified a cap on COVID treatment costs are private facilities, the figures are still grim. Have a look –
To top it off, if multiple family members need hospitalisation, the costs would only multiply. To meet these costs head-on, invest in a health insurance policy with an adequate sum insured.
You can opt for COVID specific health plans which have been launched – Corona Kavach and Corona Rakshak, especially for protection against COVID related medical costs. For other illnesses and injuries, invest in a comprehensive health insurance plan for your family.
Opt for a high sum insured because the medical costs are increasing steadily. If affordability plays a spoil-sport, opt for top-up or super top-up plans to supplement your coverage but do take up the resolution of having an adequate cover, at all costs.
Pro tip: Don’t get complacent if you have an employer-sponsored group health plan. While the policy would cover hospitalisation expenses, it would be insufficient in covering high treatment costs.
Even if your employer offers a group health scheme, consider it to be a bonus and invest in an independent health plan for customized and sufficient coverage.
While health insurance takes care of your medical expenses, what about the risk of premature death? Whether it is due to COVID or other illnesses or even accidents, you are constantly exposed to the risk of a premature demise. While you cannot eliminate the risk, you can definitely insure it.
Term insurance plans help you cover your life risk at affordable premiums. You should opt for a high sum assured so that your family receives adequate financial assistance to fulfil the financial responsibilities if you are not around.
So, after you are done with health insurance, resolve to buy a term insurance plan for complete financial security.
Pro tip: Compare the available plans and then invest in one which offers a comprehensive scope of coverage at affordable premiums. For the right sum assured, there are online Human Life Value (HLV) calculators which you can use.
3) Creation of an Emergency Fund
The past year taught us one thing – anything can happen anytime. People in established jobs can lose their positions, availability of liquid funds can become an issue, a profitable business might completely shut down and whatnot.
To be financially prepared against such contingencies, an emergency fund is needed. You should set aside at least 6 months’ worth of your income in a liquid fund which can be accessed whenever an emergency strikes.
If you have an emergency fund, review its adequacy. If you haven’t created one, do so in the coming year so that any financial contingency would not threaten your best laid financial plans.
Pro tip: If you are unable to set aside a lump sum amount into an emergency fund at once, start small. Spare what you can and then build up the fund slowly but steadily.
4) Paying off Debts, Without Default!
Loans have become a common part of modern man’s lifestyle, both in the rural and the urban segment.
According to the Household Survey on India’s Citizen Environment & Consumer Economy, also called the ICE 360° survey, which was conducted in 2016, 27% of the surveyed households had at least one outstanding loan.
While 30% of rural households were found to be indebted, the percentage was 21% for urban households. Have a look –
Moreover, by March 2020, Indian households accounted for Rs.43.5 trillion in debt thereby causing retail loans to account for 21.3% of the total GDP. (Source: https://www.business-standard.com/article/economy-policy/household-debt-touches-record-high-at-rs-43-5-trn-amid-covid-19-crisis-120041701789_1.html)
While loans provide easy funds for your financial obligations, repaying them on time is of the essence. Defaulting on loans not only causes heavy interest outgoes, but it also hampers your credit score.
Ultimately, with mounting default, you enter into a debt trap, coming out of which takes years. So, pledge to pay off your debts timely in the coming year so that you can avoid the possibility of a debt trap.
Pro tip: Pay off your credit card debt and personal loans first because they have high-interest rates and affect your credit score considerably. Home loans, on the other hand, can be continued because they give tax benefits but make sure to pay the EMIs on time.
Plan your financial goals for 2021 with our free financial planning tool
5) Reviewing Your Portfolio Periodically
2020 was not so great when it came to your investments. Market-linked investments were in the red when the financial year started. However, since then, the equity market has recovered and now, the Sensex is trading at pre-COVID levels. Have a look –
As the Sensex has rebounded, your investments might have recovered too but there is an important lesson to learn from this crash.
The market is dynamic and so are your financial needs. So, it is important to review your portfolio regularly in tune with the changing market dynamics and your financial needs. Try and churn your investments to minimize risks and maximize gains.
For example, as the COVID impact was increasing in March, if you would have shifted to debt, you would have been able to book your equity profits and protect them against market volatility.
Similarly, now, as the markets are rising, it is sensible to shift to equity to gain on the bullish market. Having a stagnated portfolio is bad as it prevents you from getting the maximum returns and also exposes your investments to unnecessary risks.
Pro tip: Invest in mutual funds to get the benefit of diversification rather than picking specific stocks. You can choose different mutual fund schemes as per your risk appetite and investment horizon.
6) Picking Your Investments as Per Your Need and Risk Appetite
Planning a financial portfolio is no joke. You need to pick investment avenues depending on your financial goals, investment horizon, disposable income and, most importantly, risk profile.
Creating a haphazard portfolio by mimicking what others have invested in would not meet your financial needs sufficiently.
Your portfolio should be unique to your needs and requirements. So, first and foremost, assess your risk appetite. Usually, if you are young, i.e. in your 30s or 40s, you can afford to take risks since you have long investment tenure in front of you.
At this age, equity-oriented savings avenues would be the best as they would help you maximize your wealth.
In your older years, however, your equity exposure should reduce as you are nearing retirement and you need to protect your capital. So, understand your life stage and risk profile and then select investment avenues.
Moreover, whatever risk profile that you belong to, have a well-diversified portfolio. Keeping all your eggs in one basket is not wise. Variety is the essence of life and of investments too.
So, if you are risk-loving, allocate a part of your savings in debt to create a stable portfolio sturdy enough to weather out market volatilities. On the other hand, if you are risk-averse, invest a part of your savings in equity-oriented avenues too which would help you earn attractive returns and create a considerable corpus for your financial goals.
Just like a balanced diet is necessary to remain healthy, a diversified portfolio is needed to remain financially healthy.
Pro tip: When you start financial planning, first assess your disposable income and risk appetite. Then list the investment instruments available and classify them as risky or non-risky.
When investing in debt, choose debt mutual funds or other market-linked debt instruments to earn inflation-adjusted returns from your investments.
Tax planning is also necessary when creating a financial portfolio to ensure that you can minimize your tax liability and maximize your investments.
How many times do you find your income being spent before the end of the month arrives and you scraping by just till the month ends?
If your answer is ‘Often’, something is wrong with your financial planning and this something is ‘Budgeting’.
Budgeting is the first step in determining your disposable income and the amount that you can invest. If you skip this, overspending, being in debt and not having enough would always be a reality.
If you want to get your finances in order in the New Year, start by budgeting. Create a monthly budget listing all the sources of income on one side and the possible expenses in the other.
Besides the essential lifestyle expenses, make room for personal expenses as well but be a bit stingy in this aspect, especially if your income has shrunk due to the pandemic. Budgeting helps you figure out your incomes and expenses and also plugs unknown leaks. Moreover, when you have a budget, you are less likely to splurge or overspend.
If you haven’t learned the importance of budgeting as yet, it is time you do. Weed out unnecessary expenses and follow a strict budget if you want to save a decent amount of money for investments.
Rather than using up your income on expenses, try and create investments first and then allocate your income towards expenses, especially personal ones.
Pro tip: Budgeting is a pen and paper job or a computer screen and keyboard one. Don’t plan your budget over the top of your head. It would not prove fruitful.
Instead, take out some time and plan as detailed budget as possible at the start of the month. And of course, stick to the budget, only creating it is useless.
Watch a video on how to plan your monthly budget effectively with a FREE budgeting sheet!
8) Make a Resolution to Follow Through with Your Resolutions
What’s the point in making the above-mentioned resolutions if you don’t carry through with them? So, after you are done making the above-mentioned resolutions, take one more step and make a resolution to stick with them.
Backing out of your diet-related resolutions or habit-related resolution might not have as far-reaching implications as backing out of your financial resolutions will. Financial health is the most important one and if you are financially secured, you can face life’s challenges head-on.
So, ensure that you follow through with your financial resolutions for your financial well-being.
Pro tip: Write out your resolutions and stick them somewhere where you are bound to glance at them every day. This would give you the necessary discipline to soldier on with the resolution for finance that you have made.
The year 2021 is round the corner and only you have the power to start the year on a positive note. Don’t blame the economy, the Government or the markets for your financial problems.
Instead, make these financial resolutions for 2021 and create solutions. None of the resolutions is difficult or impossible to inculcate. It all boils down to your motivation and dedication towards your finances.
Start planning your finance for 2021 with Koppr’s FREE financial planning tool
So, what would it be? A financially healthy year or a struggling one? Comment Below 👇
The year 2020 passed in a blur. While it started on a positive note, the Coronavirus pandemic and the subsequent lockdowns brought about an economic slowdown in the country.Even the financial markets buckled under the global effect of the pandemic. The BSE and NSE, which were at their highest values at 42,273 and 12,362 in the first month of January, fell by 38% when the pandemic struck.The tourism, hospitality and entertainment sectors also fell by more than 40% due to lockdowns and transportation restrictions. (Source: https://www.researchsquare.com/article/rs-57471/v1.pdf). Though the markets are regaining their luster slowly, investors are confused about where to invest in 2021for maximum gains. What do you think?Though 2020 was a roller-coaster, investors are eyeing the year 2021 with hope. Investment in 2021 is primarily guided by the recovery of the financial markets after the pandemic as the industry is waking up and normalcy is being restored.Certified financial planners have also pitched in their recommendations for investments in 2021. Here are, therefore, some of the lucrative investment opportunities for 2021
For most risk-loving investors, stock trading and investing into direct equity always holds attraction. Even though the equity market suffered losses in the beginning half of 2020 on the pandemic fears, the market is correcting itself and as of the market closing time on 27th November 2020, the NSE and BSE are already at their pre-COVID levels of 12,968.95 and 44,149.72 respectively. (Source: https://www.financialexpress.com/market/stock-market/).
The boost in the stock exchange was largely due to the promise of the COVID vaccine which is almost in its ready stages. This has resulted in positive market sentiments globally and so, direct equity is once again looking good.
Moreover, history has been a witness that the stock market always bounces back even after a crash, whether it was the Harshad Mehta scam or the 2008 crash. If you invest over a long term period, direct equity is known to yield exponential returns.
Have a look at how the stock market has performed over the last 30 years –
For investors who do not like direct exposure to equity but want to invest in a diversified portfolio, mutual funds are the best solutions. Mutual funds are beneficial because –
They help you own a diversified portfolio
They come in different variants and you can choose a scheme which is relevant to your investment preference and risk appetite
ELSS funds allow you the benefit of tax saving on your investments
They are professionally managed allowing you to invest in the best stocks and instruments
You can invest in mutual fund schemes with as low as Rs.500 making them ideal for small-time investors too who want market-exposure with limited savings
Given these benefits, the mutual fund market is another avenue which you can explore. In fact, equity mutual funds are less risky compared to direct equity because of the diversification that they provide.
As far as returns are concerned, some equity funds have even outperformed the stock market in several instances. For example, Invesco India’s Growth Opportunities Fund, a large and mid-cap fund, has consistently outperformed the S & P BSE Index over the years. Have a look –
So, as far as returns are concerned, you don’t have to worry. You can also choose SIPs to invest every month in a disciplined manner and build up a substantial corpus over a long term horizon.
In fact, the mutual fund industry has become so popular, that investors are increasingly investing in the avenue to bank upon its returns. The AUM of the mutual fund industry has, therefore, consistently grown over the years –
Have you invested in the National Pension System introduced by the Government? If not, you can consider it in 2021. The reasons? Let’s see –
#1 – It helps you create an earmarked corpus for retirement
#2 – The scheme is market-linked promising inflation-adjusted returns
#3 – You get lifelong incomes in the form of pension after maturity
#4 – Investments into the scheme are tax-free under Section 80CCD (1B) up to Rs.1.5 lakhs
#5 – Additional investments, up to Rs.50, 000 can be claimed as a deduction under Section 80 CCD (1B)
Moreover, if you choose the new tax regime and if your employer contributes to the NPS scheme on your behalf, such contributions would be allowed as a deduction from your taxable income for up to 10% of your basic salary and dearness allowance under Section 80CCD (2).
Besides the market-linked returns, the additional tax benefit, both under the old tax regime and the new one, tilts the scales in favour of the NPS scheme.
You can invest in the scheme for long term capital accumulation for your retirement. On maturity, you would be allowed to withdraw up to 60% of the accumulated corpus as tax-free income which would also be tax-free in your hands.
So, if tax-saving and retirement planning is your goal, you cannot go wrong with the NPS scheme.
4) Invest in Fixed Deposits (FD)
This is the avenue for traditional investors who are averse to any kind of market risk and want secured and safe returns. Fixed deposits have been an Indian favourite for a long time and this favour is not going to end anytime soon.
Even though the interest rate on fixed-income instruments, including fixed deposits, has been slashed in recent times, fixed deposits continue to find investors for the safety that they promise.
The popularity of fixed deposit schemes, especially when volatility struck during the pandemic, increased and the trend is expected to continue in 2021.
So, if you want to be safe with your investments, you can choose fixed deposit schemes. However, do not dedicate a large portion of your investment in fixed deposit schemes.
Direct about 5% to 10% of your investment in fixed deposit schemes and the rest should be invested in other market-linked avenues. If you are choosing fixed deposits, here are some tips which you can follow –
Invest in 5-year fixed deposit schemes offered by banks and post offices. These schemes allow tax-saving on investment under Section 80C
If you want higher returns, opt for fixed deposit schemes offered by NBFCs (Non-Banking Financial Companies)
Compare the rate of fixed deposit schemes across institutions and choose the scheme which has the highest rate
Do not withdraw your deposits before the completion of the tenure. It would attract a withdrawal penalty which would reduce your interest earnings.
For risk-free returns you can also choose debt mutual funds which would help you earn inflation-adjusted returns and also earn the benefit of indexation if you redeem your funds after 3 years.
5) Invest in Unit Linked Insurance Plans (ULIP)
While the primary objective of insurance plans is to offer financial protection against premature death, Unit Linked Insurance Plans (ULIPs) serve a dual purpose. Besides allowing insurance coverage, these plans also help you create wealth, a la mutual funds.
ULIPs work on the model of mutual funds. The premium that you pay is invested into different funds of your choice. Each of these funds invests in the capital market depending of the fund’s objective.
For example, equity funds invest in equity stocks while debt funds invest in debt instruments. Depending on the growth of the underlying assets, the NAV of the fund grows and you can earn returns on your investments.
In case of death during the policy tenure, you get higher of the sum assured or the fund value and on maturity, the fund value is paid. The distinct advantages of ULIPs are as follows –
Invested premiums qualify for tax deduction under Section 80C up to Rs.1.5 lakhs
A single policy gives you the option of different types of investment funds to choose from – equity, debt and hybrid. You can invest in one or more funds as you’re your investment preference. Moreover, you can switch between the chosen funds during the policy tenure depending on the market movements. This switching is completely tax-free and almost all ULIPs allow free switches up to a specific number of times
Partial withdrawals from the fund value can be made from the 6th policy year. These withdrawals are also completely tax-free in nature
The death benefit received is completely tax-free
If the premium paid is up to 10% of the sum assured, the maturity benefit received on maturity is also completely tax-free under Section 10 (10D) of the Income Tax Act, 1961
Moreover, the charges involved under ULIPs have also reduced in recent times pitching them as a favourable product against mutual funds.
6) Invest in Real Estate
This avenue is for those investors who want to bank on the growth in the real estate market. In 2019 the real estate market was valued at Rs.12, 000 crores and it is expected to reach Rs.65. 000 crores by 2040.
In 2019, real estate investments amounted to Rs.43, 780 crores and the number is expected to increase in the coming years. (Source: https://www.ibef.org/industry/real-estate-india.aspx) The introduction of RERA, reduced interest rates on home loans and the need to own a house are the major driving factors for the growth of the real estate industry.
Housing is one of the basic needs of individuals and if you want to create an asset, you can explore the real estate market as the pandemic has led to a reduction in the prices which would be good for you.
Moreover, if you avail a home loan to invest in a home, you would be able to avail tax benefits under Sections 80C, 80EEA and 24 on the principal as well as on the interest payable on the loan.
The loan would also improve your credit score and allow you to own your dream house. So, if you have considerable funds at your disposal, opt for real estate either for owning your house or for creation of an asset.
Gold is another investment avenue which you can consider if you are looking to hedge against volatility and uncertainty. Gold holds a traditional value for Indian investors as festivities, weddings and gifting is marked with physical gold ornaments and jewellery.
From an investment point of view, however, different avenues are in vogue in recent years with the availability of gold ETFs, gold mutual funds and, the all new, digital gold.
These gold investment avenues are getting much attention because of their safety, liquidity and ease of investing in small amounts.
When it comes to returns, gold is a safe haven, especially if you are looking for long-term savings. Gold gives cyclical returns and when the markets are volatile, gold is looked upon as a safe investment avenue and its prices surge.
The very recent example is the COVID pandemic wherein the prices of gold jumped in April and May when the pandemic struck India. Moreover, over the last few years, gold has outperformed the Sensex in terms of returns. Have a look –
So, you can consider gold as an investment avenue but invest in Gold ETFs or gold mutual funds for liquidity and safety of storage rather than physical gold. You can also trade in gold through these investment avenues and book returns when the price of gold climbs.
2021 is supposed to be a breath of fresh air for the Indian economy and the financial markets as the effect of the unprecedented COVID pandemic is expected to ebb.
Use the afore-mentioned 2021 investment opportunities and make wise investment choices to grow your wealth especially if the pandemic ate into your portfolio in 2020. Plan your investment strategy for 2021.
Understand the avenues before you choose them and then pick suitable options based on your investment need, financial planning in 2021 and, most importantly, risk profile. Also monitor your portfolio regularly so that you can make changes to it as per your changing financial needs and market dynamics and keep your portfolio profitable in all seasons.
Here’s a FREE financial planning tool to help you with your investments in 2021
The Indian economy has a plethora of investment options these days with Exchange Traded funds (ETFs) being a very lucrative alternative. Last five years has witnessed a phenomenal 30-times volume growth in the domain of ETFs, attributed to pension funds and increasing investor awareness.Seventeen asset management companies have launched ETFs based on Nifty50, which contributes to 49% of the total market share, as of September 2020.The fund manager purchased stocks from Nifty50, which allowed the fund to offer returns, similar to those of the index. The total AUM of ETF is pegged at INR 2.07 lakh crore as of 31-Aug-2020, out of which nearly half of it was focused on ETFs that were based on the Nifty50 alone. However, retail investment is quite low on this product compared to the mutual funds, which is one of the main retarding factors to its growth. Hence more awareness needs to be created on how to invest in ETFs to foster an upward trending growth curve. Let us explore an investor’s guide to fine out how to invest in ETFs.
ETFs were launched in India in December 2001, though the fund flow in the ETF industry was very scanty till August 2015. Research shows that the effective growth in Nifty50 AUM and in the industry has taken place only in the last five years.
An Exchange Traded Fund (ETF) is basically a fund that pools in funds from several investors and can be traded on the stock exchange or the secondary capital market, similar to shares.
You need to have a Demat account and a Trading account to start investing in ETFs if done via an investment firm. It is a passively managed fund with a designated fund manager and has a Net Asset Value (NAV) like a mutual fund.
Though they are traded like stocks, their individual price is not determined by the Net Asset Value (NAV), instead by the demand and supply mechanism operating in the market.
Since ETFs track benchmark indices, their returns are closely linked to market movements, to overcome most mutual fund investment schemes. The buying and selling of the ETF units are usually done by any registered broker at any of the recognised and listed stock exchanges in India.
Since the units of the ETF are listed on the stock exchange and the Net Asset Value (NAV) varies according to the market sentiments, they are not traded like any other normal open ended equity fund.
The investor has the liberty to trade in as many units as feasible on the exchange, without any kind of restrictions being imposed on them.
To state it very simply, ETFs are investment funds that track indices like the CNX Nifty or BSE Sensex, etc. Hence, when you decide to invest in the shares of an ETF, you are investing in the shares of a portfolio that tracks the yield and return of its native index.
Investing in ETFs does not entail it to outperform their corresponding index, rather replicate the performance of the Index as they depict the true picture of the market.
Are Exchange Traded Funds (ETFs) a Lucrative Option for Investment?
Exchange traded funds (ETFs) are a safe bet for beginner investors due to their innumerable benefits like higher daily liquidity and lower fund fees as compared to the mutual funds. Here’s a FREE course on mutual funds
Few factors like the wide range of investment choices, low expense ratios, high liquidity, option of diversification, low investment threshold etc. make them an attractive investment option for the individual investors.
These special attributes render the ETFs to be perfect options for adopting various trading and investment strategies to be used by new traders and investors. ETFs are a lucrative investment option due to the following reasons:
Diversification of the portfolio –
In today’s volatile market, diversification of the financial portfolio is mandatory and hence the need for ETFs, which can introduce investors to a huge variety of market segments.
You can diversify your mutual fund portfolio by investing in Gold ETFs, by using the price of physical gold as its benchmark. You can also diversify your wealth among ETFs covering different types of investments like commodities or bonds.
High Liquidity due to absence of a lock-in period
Investment in Exchange Traded Funds help in portfolio diversification along with providing liquidity. They are open ended funds with no lock-in period, which gives them the liberty to withdraw their holdings according to their requirement.
Since there is no holding period, investing in ETF is a lucrative investment option.
Cost Efficiency due to Passive Management–
The expense ratio for maintaining the ETFs are comparatively lower as they are not actively managed like majority of the mutual funds.
Since there are no management fees or commissions involved, the incremental value of the overall fund is usually increased.
An ETF held with a low expense ratio can add on to the pay-outs if held for very long. For example, index ETFs just track the index, so the portfolio manager does not need to manage the fund. This calls for a lower management expense ratio (MER).
Single and transparent transactions –
Investing in ETFs require you to make one single transaction similar to owning a mini portfolio.
Therefore, when you have to track the performance of this portfolio, for example if you have invested in a Gold ETF, you would need to track the price movements of gold only as a daily commodity, which is much easier for the investor.
Also most of the ETFs publish their holdings on a daily basis, hence you can find out their holdings, their relative weightage in the funds and if there has been any movement, thereby fostering transparency in the financial chain..
Offer flexibility to buy and sell –
Unlike mutual funds, ETFs can be purchased and sold from an investment firm or at the stock exchanges on a daily basis, similar to the intraday trading mechanism.
They have the flexibility to be bought short and sold at a profit margin in a day during the market operating hours, at the current market price at the time of the transaction.
Professional Fund Management –
Though ETFs maintenance or operation costs are pretty low, they are very professionally managed.
Tax Efficiency –
ETFs are considered to be equity oriented schemes, which entails them to follow a taxation norm similar to any other equity related investment scheme.
Types of Exchange Traded Funds
With several options among ETFs available in the financial markets these days, consumers tend to get perplexed in which to invest.
Hence there are 4 broad categories of ETFs that one can invest in, namely:
Equity ETFs – Equity ETFs usually track the movement of sector or industry specific stocks. Here the performance of the index or the specific sector is replicated by investing in stocks accordingly.
International exposure ETFs – There are few ETFs that track stock indices of foreign stock markets. Since they give the investors an opportunity to gain exposure in some international markets, they are actively involved in weaving the growth stories for few economies.
Debt ETFs – Few exchange-traded funds try trading in fixed-income securities.
Gold ETFs – Gold investment is always considered a great hedge against currency fluctuation and a volatile market. However, investments in physical gold is faced with several concerns like quality, security, resale, taxation, etc. Hence, Gold ETFs are a safe option where you can invest in gold bullion, thereby having gold in your portfolio without the risk or fear of investing in physical gold.
Factors to be kept in mind before you decide to invest in an ETF
Today’s financial market is flooded by too many options even within the ETFs. There are four factors that one must consider before you decide to invest in an ETF:
Trading Volume of the ETF – You should chose an ETF with higher trading volume if you need liquidity and a good price for the units traded on the stock exchange.
Class of the ETF – Since ETFs are of four types, equity, international, gold and debt, once a category is finally selected, its sub category also needs to be decided. The specific sector ETF or their market capitalization needs to be focused upon if you are investing in an equity ETF.
Lower Expense Ratio – Usually the expense ratio of an ETF is much lower than an actively managed fund. But even then many fund houses offer more discounts on the expense ratios to attract more investors, thereby increasing the chances of higher returns.
Lower Tracking Order – ETFs usually track an index as they invest in securities that comprise the index in a manner that the returns are almost similar to those offered by the index, thereby making some differences feasible between the returns offered by the index and the ETF. Tracking error usually identifies variance in the performance of the ETF in comparison to the underlying index. If the tracking error is lower, the returns of the ETF will be closer to that of the index. Therefore, you should always invest in ETFs with a lower tracking error.
Comparison between Mutual Funds, Stocks and ETFs
A detailed study on ETFs has been quite helpful in understanding the market and drawing a comparison between them as against the mutual funds and stocks:
Exchange Traded Funds
A financial set up comprising of a pool of money collected from many investors to invest in different securities like bonds, stocks, money market vehicles and various other assets.
The investment capital raised by a company through the issue of shares, thereby signifying some ownership in that company for the investors.
An exchange traded fund (ETF) is an asset class consisting of a collection of securities like stocks, that track an underlying index or a specific sector.
Though the exposure is diversified, there are market specific risks.
Very risky proposition as the performance of the stocks are directly proportional to the company’s performance.
Though the asset class is diversified, it however carries market related risks.
Mutual fund trading is done only once a day after the financial market is closed.
Can be traded throughout the day.
Can be traded throughout the day.
Degree of Control
Not very highly regulated or controlled investment.
Very highly controlled investment.
Higher control on these type of investments as compared to mutual funds but lesser than stocks.
Tax Implications on ETFs
The taxation policy applicable on ETFs are quite unique as compared to the tax treatment meted out to mutual funds.
The index ETFs and sectoral ETFs are considered as equity-oriented schemes from the tax perspective. They have the unique selling proposition of creating and redeeming shares with in-kind transactions, which are not rendered as sales.
Since there is no sale involved, they are not taxable.
However, if you plan to sell your ETF investment, this transaction will be taxable. The tenure of holding onto this ETF investment will decide if it was a short-term or long-term profit or loss.
Therefore, research reveals that short term capital gains from ETF units held for less than one year are taxed at 15% vis-a-vis the long term capital gains on ETF units being held for more than one year, being taxed at 10% without any indexation benefit.
If you are a new investor planning to enter the Indian financial market, ETFs consisting of a basket of securities offer a well-diversified approach. They are a much better proposition than purchasing the stocks directly for first time investors.
You should do a thorough research on the investment options available and devise a suitable investment plan based on your financial objectives, tenure to invest, intricacies of investing in ETFs and your risk tolerance level.
Since these funds are passively managed, they are cost efficient and usually match the returns offered by the index.
Also if you are an aggressive investor, ETFs are still a good option for stable investments if utmost planning is done well in advance.
Thus, with adequate knowledge and research, all the first time investors should allocate some of their funds to ETFs for a better wealth creation.