In this world, there are rules for almost everything. Whether you are cooking some food or playing sports, everything has some rules binding it. However, whether you follow these rules or not, that is completely up to you.
While some people think that rules are limitations to someone’s ability others think rules protect them from falling apart.
Similarly, there is the rule of investing which are followed by some investors and some define their own rules.
However, in investing, especially when you are a beginner, following the thumb rules can mitigate a lot of losses and increase your chances of making money from the market.
Here in this article, you will be reading about 20 thumb rules which are beneficial for investors.
1) Bulls and Bears make the money:
While everyone is afraid of the volatility in the markets, but this volatility can earn higher returns.
If the market is going up or down at a very slow pace, then it is highly difficult to amplify the investment. The returns are lower and also the time required is higher.
However, when there is volatility in the market and bull or bear is at its top pace, you can make money out of the market. The terms bulls and bears describe how the markets are performing.
If the stock market is increasing, it is called a bull market and the economy is growing and is sound.
However, when the stock market sentiments are negative and the market falls with most stock prices decreasing, it is called a bear market. For instance, the stock market index Nifty 50 at present is roaring and at an all-time high. It has reached almost INR 15900 and this indicates that the market is in a bull phase.
If you have shares of the companies that are going up, then you are bound to make a huge profit in this bull run. However, most people invest when the market is bullish, i.e. it is rising and only a few people tend to invest when the market is falling.
Moral of the story: You need to invest when the market is volatile, irrespective of whether it is bullish or bearish. The volatile market fetches more return and a stable market.
2) Do not buy everything together:
It is the second thumb rule of investingthat you must not buy everything together.
The market is going up and down all the time. So, if you buy every at once, and at the next moment, the market may go upside down and all your investment can go into vain.
Thus, you must analyse each market individually, each asset separately, and then invest. Also, when you are buying in huge volume, there is no need to buy all at once.
You can buy the same instruments in multiple lots. This gives you the chance to wisely analyze and observe the market.
If anything goes wrong you can close your position and stop trading or investing in that instruments. However, if you have bought in volume together, and then after some time, the market turns around, it can be sudden death as well.
Moral of the story: You can invest systematically. This would not only help you beat the odds of not investing everything together but also help you with rupee cost averaging.
It is always advisable to learn before you earn, You can enroll in many financial courses on stock market, financial planning, mutual funds and more. Check them here
3) Rule of 72 of investing:
The rule of 72 is really interesting. Who doesn’t want their money to get doubled up, isn’t it? However, the number of years for doubling the amount is not easy to anticipate.
This rule of 72 however, helps in finding out the number of years your investment would take to double itself. Only with the help of the rate of interest and the number 72, you can find out.
You need to divide 72 by the rate of interest. So, if the rate of interest is 8% and you have invested Rs. 2 lakhs then it would become Rs. 4 lakhs in 9 years. Moral of the story: You can gauge the time you would need to double your entire investment portfolio (in a fixed return product) with the help of the interest rate.
This would give you a tentative value of the expected pre-tax portfolio (keeping other factors constant such as the associated risks).
4) Rule of 114 of investing:
Now as you know in how many years, your money gets doubled, aren’t you feeling the urge to know the number of years it would take to triple itself? So, you can find that out using the rule of 114.
Similar to the previous rule, here you have to divide 114 by the rate of interest.
So, given the example above, the Rs. 2 lakhs would be Rs. 6 lakhs in (114/8) years = 14.25 years or 14 years and 4 months. Moral of the story: Again, you can find out the timeframe of when your entire pre-tax investment portfolio can be tripled. However, taxes can be a significant part of your portfolio if not planned properly.
5) Rule of 144 of investing:
Similarly, you can also find out in how many years, your invested amount can be 4 times.
For this, you need to use the rule of 144 which is similar to the previous two rules.
Here you need to divide the number 144 by the rate of interest which is 8% in the example above. So, your Rs. 2 lakhs will be Rs. 8 lakhs in 18 years. Moral of the story: Similarly, the timelines for the pre-tax investment portfolio can be quadrupled can be calculated.
6) Rule of 70:
You seem to be happy seeing all your money doubling, tripling but here is the catch.
The amount may increase but the value will not be the same as the amount due to inflation after time passes.
So, it can eventually get halved as well and that can be determined by the rule of 70. Here you have to divide the number 70 by the rate of inflation. For instance, you have Rs. 20 lakhs and the current rate of inflation is 4%. So, your money will be Rs. 10 lakhs in the next 17.5 years.
Moral of the story: Inflation can really reduce the real value of your investment portfolio. So, if you need to grow your portfolio, you need to factor in inflation and then grow the portfolio to your desired returns to give you an inflation-proof return.
7) Emergency fund rule:
Life is uncertain, anything can happen within even a blink of an eye.
Even if you have a lot of investments, you may not be able to use them if they are not liquid enough.
Moreover, there are penalties for withdrawing money early from your investment instruments. However, the most important factor is, if you are using your investments in the first place to deal with emergencies, you can completely ruin your portfolio.
Obvious investments are for the financial security of the future, but for emergencies, you need to have a contingency fund. This will not only help you in smoothly handling emergencies but also help you safeguard your investments. Moral of the story: Experts suggest at least 3 months of your monthly expenses be set aside for emergency in an easily accessible fund so that it can be seamlessly accessed even by your family members.
8) Insurance planning rule:
After emergency fund, another important part of investing in insurance planning.
You may be wondering how it is within the rules of investment, then you must understand that when there is some medical crisis, or natural disaster, or anything of that sort, your investments can go for a toss if you rely on them completely.
Especially for medical emergencies, it is important to have Mediclaim policies, health insurance policies, and other insurance policies to safeguard your life, assets as well as investments.
The insurance penetration in India is very low and it is still not bought, but sold. This is where most insurance plans are also ‘mis’ sold.
However, if the story changed, and everyone ’planned’ their insurances and bought them proactively, then the entire concept of mis-selling wouldn’t even exist! Moral of the story: Insurance is your Plan B, i.e. your family’s safety net. This is why it is crucial to plan it ahead of time so that they are not in a fix in case anything happens to the primary breadwinner of the family!
9) The 4% Withdrawal rule:
For planning a financially secure future, you need to be very particular about the withdrawal rule.
Especially if you are planning for retirement, then you must follow this withdrawal rule of investing.
It says that you must not withdraw more than 4% of your retirement corpus in a year. For instance, you have accumulated Rs. 2 crores for your retirement. Now, going by the 4% rule, you should only withdraw Rs. 8 lakhs which is Rs. 66666 per month. Now, there is inflation which needs to be taken care of as well. Suppose, the inflation rate is 5%. So, in order to accommodate inflation, you can also increase the withdrawal by 5% every year.
So, in the first year, you withdraw Rs. 8 lakhs, and then in the second year you can withdraw Rs. 8.4 lakhs and so on so forth. Moral of the story: The only aspect you need to consider while withdrawing from your Retirement Corpus is to ensure that the corpus grows at a higher rate than the expected rate of inflation in order.
10) 10% retirement rule:
When you are young, you would hardly think about retirement, isn’t it?
However, if you start investing early using the 10% rule of investingfor retirement, you can save a huge corpus when you retire. Suppose you started earning right after completing your graduation at 21 years and your starting salary is say Rs 21,000. Applying the 10% rule, you can save Rs 2000 every month. This Rs. 2000 may seem a very negligible amount, but using the power of compounding, this small amount can grow like wonders. Here is a snapshot –
Calculating retirement corpus
Investment amount every month
The average rate of return
10 per cent
Tenure of investment
Total retirement corpus
With just an investment of Rs. 9.36 lakhs, you can build a retirement corpus of Rs. 1.15 crores. Moral of the story: The power of compounding is the 8th wonder of the world and the advantage of investing early manifests it to a humongous amount.
11) Rule of diversification:
One of the most important things in investment is risk mitigation and the smartest way to mitigate risk is to diversify your portfolio. Rule of diversification tells you about the correlation between the asset classes.
The correlation between the asset classes you are investing in must be low or negative.
This means, if one asset class is getting affected or going down, the other must go up or remain unaffected. For instance, when stock prices go down or there is a bear market, the gold price usually goes up. In fact, it is also considered as a hedge investment.
If you compare the two charts above, you can understand that when the stock market was a little sluggish in 2020, the gold prices were at an all-time high. Moral of the story: Each asset class reacts differently and thus you need to diversify using such assets that your risk of investment goes down.
12) Don’t buy damaged companies, but buy undervalued stocks:
A stock may be damaged which means it is undervalued but the company itself is damaged, which means the stocks are not worth buying. So, it is important to evaluate the company in the first place.
The stock prices can be anything in the market, you need to find out its real/ intrinsic value. Moral of the story: If the intrinsic value is higher than the prevailing market price of the stock, buy the stock. However, if the company is damaged, the intrinsic value cannot be higher than the market price of the stock.
13) Pay taxes wisely:
There are multiple investment instruments that can help you save your taxes. Invest in ELSS, ULIP, FDs, and many others. When you are investing, you need to check the tax implications for each investment.
For instance, the profit from investment in stocks is taxed as per capital gain tax rules. Moral of the story: Plan your investments keeping their taxes in mind, so that your real return, i.e. the post-tax income from it is high. Otherwise, your tax pay-out would wipe out a significant part of returns.
14) Make sure you do your homework:
Investing in any asset requires in-depth knowledge and analysis of the asset and the market. You can do your homework by analysing multiple resources both fundamental and technical. Moral of the story: You can also do your research by visiting the site of Koppr. Here you can get an abundance of information and data which can help you in your financial planning and analysis.
15) Book your profits:
Greed is not good for investors. If your anticipated or targeted price is achieved, then it is wise to sell the assets and book profit. Moral of the story: The urge of earning more may end up in losing your capital investment as well. Hence, you need to weigh the pros and cons well before investing.
16) Expect corrections, make the most out of it:
Corrections are part and parcel of investment and the financial markets. There cannot be a continuous rise or fall in the prices. If there is an excess rise, it will eventually fall and vice versa.
So, you cannot be worried about corrections. Rather, you must understand how to use them in your favour. For instance, if there is a correction for ABC stock price, and you hold 500 shares worth Rs. 1000 each.
You bought the shares at Rs. 700 each. So, you are already at a profit of Rs. 150000. However, after reaching Rs. 1000, it started falling. Wait, do not sell all your shares. Analyse whether it is a correction or momentary fluctuation.
If the prices decrease a little, no need to take any action. However, if the prices decrease drastically, then it is better to sell the shares and wait until the correction ends. Moral of the story: Once the price is at the lowest and again starts climbing up, you can buy the shares back. This is a very tactical investing strategy which if followed properly can be very effective!
17) Keep your ears and eyes open while investing:
The prices go up and down within a blink of an eye. You missed the update, and the price becomes different the next moment. So, it is important to keep a constant check on the market. Moral of the story: With the help of the Koppr app, you can monitor the market round the clock. You can find all news about the markets on this app.
18) Panicking leads to losses:
When you are investing in the financial markets, you need to stop being worried. If you do panic buying or selling, you would only end up in huge losses. Moral of the story: Markets will be volatile and that is the basic nature of financial markets. However, if you start panic buying or panic selling often whenever the prices go up and down, then your investment would go for a toss.
19) Flexibility is the key:
If you are rigid about your investments, then it becomes difficult to mitigate risks.
When one asset price is tumbling, or a company is continuously running in losses, you need to sell them.
If you are rigid and do not alter your portfolio, then you will only end up in massive losses. You need to be flexible enough to alter your portfolio whenever necessary. Moral of the story: Reallocation and rebalancing of portfolio is the key to profitable investment if done at the right time. You need to know your ideal asset allocation and then keep rebalancing your portfolio accordingly.
20) Listen, analyse and invest:
Finally, the most important rule of investment is to listen to everyone, then analysing each point, and then acting according to your final findings.
Suppose, your financial advisor suggested one stock, your friend suggested another, and your colleague another one. You need to evaluate all three of them, also find your promising stocks.
Then analyse them all, check whether they are rightly valued or not. Moral of the story: After thorough analysis, you need to pick the most suitable one for your portfolio. Listen to everyone, but do what you think is right and what you believe is best for you and your investment portfolio!
Rules of investing are pretty much interesting if you thoroughly read them. Following these rules are up to the investors and traders. You can choose which one to follow and which one not to.
However, these rules are for making your investments better and optimize your profits and reduce the risks.
Emergency funds as the name entail cater to sudden and unforeseen financial exigencies arising from a range of unexpected situations viz. job loss, accident, major illness, natural calamity, etc.
Thus the nature of these emergencies can be short-term or long term in nature, but the need for availability of such contingency funds is immediate when the need may arise.
An emergency fund not only helps you tide over your critical financial needs in your most difficult times; it also ensures that your investments for other long term financial goals remain undisturbed.
Such is the importance of building and/ or having a contingency fund at your disposal. But remember, an emergency fund is usually not meant to fund daily expenses of life unless emergent from unforeseen circumstances.
In this article, we will focus on all the things you need to know about emergency funds for you to plan and manage your finances prudently.
We aim to cover–
The reasons why you may require an emergency fund
Types of financial emergencies
The right amount of money to keep in your emergency fund account
How to Build an Emergency Fund?
Different instruments available to build emergency funds in India
Benefits of having an emergency fund
The reasons why you may require an emergency fund:
For all of you who have witnessed and are still experiencing the wrath of the landscape scale Covid-19 pandemic for the past eighteen months, you are sure to have witnessed the worst emergencies so far in your life, either in the form of pay-cuts, job loss, death of a family member, natural calamity, etc.
Medical emergencies, job loss and natural calamity if faced call for immediate requirement of money and here is where your emergency funds come to rescue.
You must keep in mind that your emergency fund is kept liquid in nature, such there if met with a financial crisis, you can avail of the money without delay.
Neither should withdrawal from the fund cost you an exit load or withdrawal penalty. This is the most critical feature of emergency funds that you must keep in mind when deciding on your investment vehicle to save for emergency.
Types of financial emergencies:
Emergency savings may be required to mitigate a range of financial emergencies that can be classified into –
Small/ Short-term emergencies
Big / Long-term emergencies
Small/ Short-term emergencies entail but are not limited to –
Accident of personal vehicle on the roads or breakdown at home
Unplanned and emergency family travel (inter-city) to give care to a sick parent/ elderly family member or attend a family funeral
Home/ office repair work to be undertaken post a natural calamity like floods/ very severe cyclones
Medication and/ or minor surgery required for unique illness not covered in medical insurance policies
Major robbery or theft during the journey or at home
Pet emergencies/ accidents that require professional vet care
Business slowed down due to prolonged periods of lockdown owing to a pandemic situation where payments are also held up
Big/ Long-term emergencies may include but not limited to –
Long periods post-job loss/lay-off
The medical condition of an immediate family member that requires your 24×7 attention and care
Medical condition for self that may require a sabbatical from your work
Major damage to house due to a natural catastrophe
Unforeseen and unplanned education fees for children to ensure ‘golden career opportunities are not lost
There will still be a section of people who may feel that while the concept of emergency funds is great, and is good for all others; but you do not need one just now as –
Maybe you do not need to shoulder any financial responsibilities at home at the moment
The family is financially stable as the father is still earning and has the family finance sorted
You may also think that just in case if at all, a financial emergency occurs, you will have the credit cards that you can swipe and meet your expenses and use your 45 days interest-free period to further plan balance transfer on other cards till you tide over the crisis.
Believe you in me, when crisis strikes, it is not easy to maintain such calm and composure to calculate and play with such high interest revolving credit. You might be putting too much at stake.
You might also be thinking that you are highly skilled in a niche job; demand for which is always high in the market.
That gives you a notion that in case there is still a chance of job loss, you will easily be able to find one.
In that case, I would urge you to consider the following before you choose not to invest in emergency funds.
What if the country faces a major economic downturn and/ or enters into a recession and your job is no longer in demand leading to a job loss?
What if your company gets merged or acquired by a larger company and the department you are a part of is now redundant resulting in your lay-off?
What if your parent in the home country gets paralysed or becomes immobile due to a major accident and you need to travel back as the caregiver and sole companion for your lonely parent?
Yes, sooner or later in life, everyone faces financial emergencies that need serious attention and makes emergency savings a critical part of financial planning.
To understand and get further clarity on the subject, we urge you to take a quick financial planning course from Koppr to make a conscious money decision.
What is not a financial emergency?
I would also like to highlight here some of the situations that definitely does not consist of or should never be considered as a financial emergency and you must not lay your hands on the contingency fund you have created for them.
For example –
You badly need to invest some money into your business for a deal you are looking forward to. This is because you should have had provisioned for future business opportunities from your earlier profits alone.
You or your family member wants plastic surgery to enhance your facial beauty.
Being an ardent football fan, you have got a great deal on vacation travel to watch the EURO CUP finals on 12 July 2021 and wish to avail of it.
You have been invited to a destination wedding and you decide to fly at the last minute
You have a sudden desire to change your home flooring to a complete wooden makeover
Replace your HD TV with a high end large smart TV of the latest model to offset the inability to go to movie theatres, courtesy of the pandemic.
The right amount of fund to keep in your emergency fund account
Emergencies as we saw can come in ways more than one and can range from a big one like a job loss to a small one like your family car breakdown.
In most cases, you may have noticed that misfortunes, when they strike; strike hard and in a series – so don’t be surprised if you can have a car breakdown when you don’t have a job too among other losses/ exigencies! Whatever the situation is, you will have to ensure that your living expenses are seamlessly met even when you don’t bring home an income for several months.
And, you will still have to pay your investment EMIs, loan EMIs along with credit card dues without a worry.
You will find some extreme cases as well; where some people are seen to account for their luxuries like an annual vacation as well while planning to save for emergency, while some others trim their budgets and stick to bare-bone living expenses budget to tide over the crisis times.
So to start with, make an exhaustive list of living expenses for any month and prioritise the key (must have/ need to) expenses that you must account for to seamlessly tide of the crisis period.
You would need to take a call whether to consider one or two small ‘to haves’ in the list depending on your current financial/ job status and affordability.
Though most of the financial advisors/ planners would suggest keeping aside 3 to 6 months of your living expenses in and as your emergency fund, it will be prudent to set aside and build an emergency corpus that consists of 6 to 9 months of your living expenses.
This suggestion stems from the widespread experiences we are witnessing courtesy of the Covid-19 pandemic since the beginning of 2020.
Even the Subprime Crisis during 2007 – 2008 had witnessed prolonged periods of job loss for the salaried class if you remember.
How to Build an Emergency Fund?
Just as Rome was not built in a day, your emergency fund needs time to build gradually.
You will need to set aside a certain amount of money into a separate account every month, and soon in some time, you will find a considerable corpus built.
Wondering how much money to save for emergency? Say, the modest monthly living expenses that you would like to maintain in the face of financial exigency is INR 15000 at any point in time.
So you will need a corpus of at least INR 90000 or INR 135000 if you aim to build a provision for 6 or 9 months respectively.
You can decide on the amount you want to set aside every month towards your emergency savings depending on your choice and intent – you may choose, say, for example, INR 5000 or INR 10000 a month to build your contingency corpus.
You may choose to cut down on your ancillary expenses or even small investments for a while, to build this all-important emergency fund.
Different instruments available to build emergency funds in India
Time is now to think about where to invest for emergency funds.
While deciding where to invest in emergency to build the desired corpus you must keep in mind a few things like;
The fund must help you without hassle when you need it the most and must easily convertible into cash without any delay.
While some emergencies give you a few hours and maybe a couple of days to get prepared, others can be ‘right here – right now’ kinds, so you must invest accordingly.
Thus the investment options you decide on must be highly liquid to ensure you or even your representative/ chosen family member/ friend can access the money if and as required.
The money must be easily accessible such that it gets transferred to your account preferably within the same working day.
The investment avenue should get you decent returns as well.
a) A separate savings bank account:
The easiest option is to open a separate bank account in your chosen bank and keep depositing a specified sum of money into that account through auto-debit mode.
This will ensure forced saving without missing out on a monthly deposit you committed to making to save for emergency.
Below is the list of banks offering the highest rate of interest on a savings account as of 24th Jun 2021.
Though it is otherwise discouraged, along with emergency savings in a separate bank account, it is prudent for you to keep cash in hand in lieu of at least one-month expenses.
This is because some of the emergencies do not give time for you to go to your bank to withdraw the money or any other option.
Moreover, there can be other technical glitches like the following that can be best bypassed to a certain extent if you have some cash in hand.
Failure of internet connection due to a severe storm or cyclone may not allow for digital payment/ transfer of cash
System failure at the medical facility to not allow for online payments
ATM machine does not work due to technical failure
ATM can run out of cash at times
Emergencies or hospitalisation in the middle of the night will also not allow you the scope to withdraw cash from the bank against a cheque.
Thus when considering where to invest in emergency, you must also regard keeping some cash at home.
c) Sweep-in Fixed Deposits:
You can also look at siphoning off your emergency savings into a sweep-in FD if you do not want to open and maintain a separate account exclusively to invest in emergency fund. There are two benefits to this action of yours –
Your money will earn better interest than lying in your savings account
You still have 100% liquidity on the money as you can withdraw the money if and when required to mitigate financial emergencies by withdrawing the money with your bank debit card and/ or online transaction without delay on a bank working day or even on a bank holiday.
However, it is important to remember that only single holding accounts are entitled to have sweep-in FDs.
This is definitely a good security measure to protect the interest of the primary account holder.
d) Liquid mutual funds:
If your emergency corpus runs into a few lakhs of rupees, then you may also look at keeping a part of the fund in a liquid mutual fund of repute.
This is because, generally a liquid mutual fund gives more return compared to a fixed deposit, especially when the equity market is on the downturn.
However, as an investor, you must also know that liquidating the money from a liquid fund can take up to one to three working days.
A certain mutual fund allows for ATM card facility to allow the investor to pull out up to INR 50,000 a day from a scheme, Example – Nippon India Mutual Fund has their ‘Nippon India Any Time Money Card.’
While a fixed deposit has a deposit insurance cover of INR 5,00,000 on it, there isn’t any such protection available on any liquid mutual fund investments.
Thus as an investor, it will be completely your call on choosing to invest in the various tools depending on your risk appetite and decide how to manage the emergency fund on your part.
Benefits of having an emergency fund
There are several unsung benefits of an emergency fund as listed below.
a) It gives peace of mind:
Financial stress can be detrimental to health and life as the inability to provide for basic yet serious financial needs in the face of an emergency situation can be very depressing and disrespectful for the bread earner of the family.
It has been seen to create panic in people leading to loss of sense of balance and calm too.
The existence of an emergency fund gives peace of mind and psychological power to concentrate on other areas of life as you know you know you are protected against unforeseen expenses in case they arise.
b) No need for revolving credit and/ costly loans:
If you have your emergency funds in place to fall back on in the face of the short-term or long-term financial crisis, you know you will not need to swipe your credit card or take any loans to tide over the financial crisis in life.
This is because repayment of loans and interest on credit cards only adds to your mounting financial owes instead of lessening them.
c) It protects your long term financial goals –
This is because, in case of any financial emergency, you know your emergency savings will take care of your emerging financial needs.
You will not need to break any investments planned for your future dreams and aspirations.
d) Makes you a disciplined investor –
When you get into the habit of saving money in your emergency fund; you see the results in term of building a corpus for a defined purpose on one hand and the tangible and intangible returns associated with it on the other.
This is bound to give you a sense of joy and accomplishment that will urge you to invest in bigger financial goals in life through disciplined investments.
Wisdom often comes through proper coaching and this is precisely why you need to impart financial wisdom to your kids at the earliest. Children who learn about money early on in life are more confident about it later in life.
They handle all the money matters with greater ease and become financially independent and confident adults. Money management is a skill that needs to be learnt through training and observation.
As a result, you need to be the best coaches as well as role models for your kids to look up to.
Take a look at this article to know why financial literacy for kids is important and how to go about it.
Teaching kids finance
It is important to have some financial lessons for kids. But simply making the child sit and listen to lectures about money management won’t help your case too much.
Children learn through practical experiments. This is why you must try to include financial literacy in their day-to-day schedules. From making them earn their allowance money to making them responsible for every penny they spend, financial knowledge is imparted through practice.
Tips to teach financial responsibility to your kids
Take a look at these 10 handy tips on how to teach financial responsibility to your children:
1) Introduce the concept of earning money
It is a common practice for kids to receive money from their parents. You give your children allowance money, or you give them money on special occasions.
Try introducing the concept of earning money with your children. I suppose you pay your kids INR 2000 as their monthly allowance, break it up into small sums and ask them to earn the money.
If you have a small child, start with something like putting away the shoes in the shoe cabinet every time he comes back home. For this, he earns INR 500 a month.
For an older child, set up a chore like taking the garbage out each morning. For even older kids, set tasks such as washing the car every Sunday or walking the dog in the evening. Set fixed amounts of money as ‘salary’ for each chore and make your kids earn their allowance.
Reason: Doing so will make the children more responsible. They will also take daily chores more importantly. Then, the greatest benefit will be that they will start valuing money.
When they have to earn the money, they will understand its importance in a deeper and more detailed manner. They will stop assuming that money is just an object that comes from their parents’ wallets.
2) Commission, not allowance
One of the best financial literacy activities for kids is to give them a commission. This can be done in a simple manner. If you are sending your kids to buy vegetables, tell them that they will get 10% of the money that comes back.
So if they take INR 200 with them and spend only INR 100, they get to keep INR 10 for themselves. This is an important financial concept and also a wonderful way to make your kids understand the value of money.
When they have this incentive, they will look for better bargains and offers. Else, they’ll be lackadaisical and just buy vegetables from the first shop they see. If they know they can earn some money out of the process, they will try to bargain, look around and also understand deals and discounts in a better way.
Reason: This is an activity that not only teaches your kids about money, it also makes them more responsible in general.
Kids, especially tweens and teenagers, are often laid back and least interested in household matters.
They may even end up thinking that money is free as they see their parents buying and arranging for all their needs, without them having to do anything.
Prevent your child from getting into this mindset by introducing the concept of commission and see a visible difference in them.
3) Make a jar for savings
Rather than just handing over a currency note to your child when he’s going out or at the end of the month, encourage him to have a savings jar.
Each time he completes a task and earns an income or commission, ask him to put the money in the jar. Also, if he has any money left over after using it to buy his toys, etc, he can put the change back in the jar.
Reason: This will broadly introduce him to the banking system. You can then explain to him how money is saved and how it is taken out for expenses. This is a very simple, but highly effective way to teach financial literacy to young kids.
4) Give them three piggy banks
When teaching kids finance, try giving them three piggy banks instead of just one. A piggy bank is a common household item that almost every kid has.
Kids enjoy putting their money in such piggy banks and taking them out when needed. Put three distinct labels on the three banks – SAVE, SPEND and GIVE.
Whenever your kids get a sum of money, whether it is the money you pay them for completing their designated tasks, as a commission or simply as a gift, they need to segregate the amount and divide them between the three banks.
The first bank, labeled ‘SAVE’ can be used to keep the money they want to save for large expenses such as buying a video game or going on a trip with their friends.
Each time they receive a sum of money, they need to keep aside a part of it to make the ‘SAVE’ fund grow. The next bank can be labeled as ‘SPEND’. Your child will want to make small expenses such as buying an ice-cream or a storybook.
For that, he can dip into ‘SPEND’ bank and take out the amount of money needed.
And finally, the third bank can be labeled as ‘GIVE’. The money in this bank can be used to buy presents for a friend’s birthday, to buy a Mother’s Day card, etc.
The concept of three piggy banks is an excellent way in which you can teach budgeting to your kids.
The kids will learn about dividing the money they have and also being judicious about spending.
They will get to know the value of money too and this will add a lot of value to your overall financial lesson plans.
5) Consider cash as gifts
These days, a lot of the financial literacy curriculum for elementary schools include lessons that talk about the importance of cash as gifts. Holiday gifting, birthday gifting, etc can be easily replaced by cash.
There are several benefits of doing so. First and foremost, as parents, you are saved from the troubles of thinking about what to get the kids, spending time and effort shopping for the gifts and finally having to deal with the disappointment of your kids not liking the gifts!
Rather than giving gifts, switch to cash of the same value. If you decided to give your 8-year-old daughter a new bicycle worth INR 6000 for her birthday, give her the cash instead.
She can then divide the money among the three piggy banks, and consolidate her concept of budgeting. Next, handling money will definitely sharpen her math and calculation skills and finally, it will make her shrewd and responsible about the cash she has in hand.
As you can see, there are several benefits of giving cash as gifts to your kids. Also, encourage your friends and relatives to give your kids money instead of unnecessary gits during birthdays and other occasions.
6) Open a bank account
Once your child has understood the concept of saving and budgeting, proceed to open a bank account for them.
If you are looking for a true answer to how to explain money to a child, your best bet would be to open a bank account for them.
There are many, many benefits you get when opening a bank account for a child. Some of them are:
Understanding the rules – Involve your child in the process of opening the bank account. While doing so, explain the steps such as filling in the application form, reading the clauses, arranging the documents, signing forms, etc.Your child will find it exciting as will learn immensely from it as well.
Handling bank documents – After the account is opened, your child will receive the banking kit which will include the important banking documents such as the cheque book, ATM card, etc.You will have full authorisation over these documents, but tell your child about the way in which they work. Every time you go to the ATM, encourage your kid to insert the card, enter the PIN and count the money, while you supervise the entire process.This will make the child very organised and also very knowledgeable about the entire banking process.
Being responsible – The biggest advantage of doing this perhaps will be that your child will become financially responsible.He or she will also feel important and take pride in the fact that he or she has a bank account.This will build the base for a strong understanding of the banking system in the future.
These are all important financial lessons that your child can learn after having a bank account of his or her own.
7) Introduce them to online payments
Using your phone to scan a QR code to make daily payments has become very commonplace these days.
From the grocery store to the medical store, from restaurants to hospitals, everywhere online payment modes are now preferred over the traditional cash payments.
Your kids always observe what you do and you should grab this opportunity to teach them about electronic transactions.
E-money is a very pertinent topic in today’s day and age and every child should be aware of it. Coach your kids on how to properly use this payment mode. Also, tell about the possible frauds that can take place in the medium.
The same applies to online card payments and net-banking. If you’re sitting at home and paying your utility bills online, make your child sit next to you and teach them how it is done.
While doing so, you can also talk to them about how bills are generated. Explain to them hope savings and proper usage of the various materials can lead to cost-cutting.
Reason: Regular participation in such important financial matters will definitely make your child money-wise from a very young age.
8) Discuss family finances in their presence
You need to discuss the family financial matters in front of your kids. Sadly, in many families, money is a taboo topic and hence it is never discussed in the presence of young kids.
This is unfortunate because the children also grow up with the understanding that money is evil and they never discuss it openly with their parents.
Parents are the first teachers of a child and so you should impart proper financial knowledge to your kids. Tell them that money isn’t evil. Inform them about the importance of money and about the need to be responsible for it.
Reason: Make money as a dinner-table conversation topic. Discuss the expenses, bills, etc with your spouse in a very matter-of-fact manner. This will make your kids realise that money is a part of life.
They will also learn that money matters can be discussed openly. By doing so, you pave the way for them to be confident about discussing all the challenges they face while handling finances later on in life.
Many young adults mess up their financial health, but with proper guidance can recover from these mistakes. Ensure your child always has the confidence to come to you when he or she is in a financially sticky situation.
9) Make them aware of the debt
A very important component of money is debt. Debt is a necessity, but it can turn into a huge liability. Your kids need to be told about this as early on in life as possible. Doing so will prevent them from misusing debt as a medium to escape their financial duties.
Children will eventually learn about debt, but if you teach them, they will learn it in the way you want them to. If you are happy with the way you are managing your own debt, just tell them about the model you follow.
If you yourself are not happy about the mistakes you made in regards to debt, tell them what to avoid.
A few good guidelines in this respect are:
Encourage them to budget. The less they spend, the less they have to pay.
Tell them to stay away from things that are not affordable. Encourage them to save enough before they get the item, instead of using credit to buy it.
You need to be a role model, so if you have debt, pay it off diligently. Share the EMI details with your kids and show them how you are paying the EMI each month and what you are achieving out of it.
If your child is slightly older, explain the concepts of credit and the interest rates associated with it.
Make a clear demarcation between the things that are NEEDED and the things that are WANTED. Need and want are two sides of the same coin, but play a huge role in maintaining a person’s debt and credit balance.
Reason: Make your children understand the concept of debt very clearly at an early age so that they are conscious about it and avoid piling on debt upon themselves as they grow older.
This is one of the most valuable financial lessons for kids.
10) Teach them to appreciate the money they have
Many kids indulge in comparison. They will compare their clothes to the clothes their friends wear, or they will complain that their cousins have a better car than they do. You must discourage this habit and tell them to appreciate what they have.
Children are often used to receiving everything on a platter. Make your kids understand that money isn’t free and it isn’t just an object that is readily available in their mom or dad’s purse. They should learn to value what they have.
To do this, introduce the concept of saving. If they want something, ask them to earn it. Once that is done, they will understand how difficult it is to earn money and buy something.
Reason: Kids who value what they have and value money in general, grow up to be financially smart adults who are responsible for their savings and spendings. They are also content and happy in life because they know what they have is what they rightfully earned.
To put it in a nutshell
Children are very smart and they learn very well.
They are like sponges who soak up what they see and hear around them. Impart the best financial knowledge to them and make them financially aware and independent adults.
Finance for kids is not a difficult topic to navigate around – just keep all the points mentioned above in mind and you will be able to do it without any hassles whatsoever.
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 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.