There are 8 facts to know to get better control of your investment before you start your long journey.
- Look before you Leap
- The interest rate on bank or savings account can’t beat inflation
- You can’t copy-paste somebody’s investment plan
- Constant cash flow is important
- The retirement plan is under saved
- The portfolio growth is more important than individual performance
- Time in the market is more important than timing your investment
- Never churn portfolio too much
Fact 1: Look before you leap is the standard word of caution before you invest. Did you ever think about the scheme and its risk before investing? There is some basic statistical measure that gives you an indication such as Alpha, Beta, Standard deviation and Sharpe ratio. Knowing something about them helps to understand the color of risk
Fact 2: While investment in a bank or cash deposit is safe, did you ever analyze the net real return from such investment? Better do it. if you adjust for inflation the most interest rate income will turn negative for many years and you will realize why you remained poor.
Fact 3: if you would like to start investing and you heard from your friend about it the general tendency is to copy it. This is where the investment blunder starts. You think that let me not lose time and kick start the action without researching into what has he done and how does that suits me. The asset class, the risk involved and time horizon planned can grossly make the product unsuitable for you. So avoid copy-paste strategy when it comes to investing
Fact 4: In pursuit of your goal, the biggest assumption is a continuous investment. So constant cash flow as income and so too investment into the plan is critical for achieving the goal. If there is a long break and you don’t contribute to the schemes and rather withdraw funds it can be a double whammy. So stick to your investment plan and stay on course and see that you get uninterrupted cash flows.
Fact 5: Retirement fund is the longest goal and the farthest goal to achieve for any individual. This should be the first goal to start savings. However, over 80% of Indian salaried class has not planned to save for retirement needs. So either you have under saved or not started yet. You can be young without money but not old without it.
Fact 6: Every goal-based investment will have a portfolio of schemes. The portfolio based on risk profile may include Cheetah or Lion or Deer type of aggression and has to be viewed in unison while measuring the investing. The overall portfolio return is more critical for you than the individual stellar performance. For e.g., if you have a large-cap fund that has 20% and small-cap fund that has -30% return Also if you have invested 60% in large-cap and 40% in small-cap then the overall portfolio return is ZERO. The following table
| Scheme | Investment | Return | Current value |
|---|---|---|---|
| Large cap Fund | 60,000 | 20 | 72,000 |
| Small cap Fund | 40,000 | (30) | 28,000 |
| Total Value | 100,000 | 0 | 1,00,000 |
So total portfolio returns matters most than individual returns.
Fact 7: Mutual fund investments are meant for long term. So if you try and time the investment based on events it has little or no relevance in the goal. All the returns get averaged out in a term of 10, 20 or 30 years. So you can’t predict the event risk. The only tool that you have is staying long and invested to overcome volatility. So the moral of the story is that “How long you stay invested matters most than timing your investment”. Also, it is near impossible to outguess markets. The below table shows SIP returns over the 10 and 20 year period that includes mover 6 – 12 market corrections and still able to generate a positive return
| Category | 10 YR SIP | 20 YR SIP |
|---|---|---|
| Multi cap | 13.06 | 16.96 |
| Large cap | 11.66 | 14.60 |
| Mid cap | 15.75 | 18.68 |
| Small cap | 14.56 | NA |
Past performance may or may not be repeated in the future
Also please note that the above returns enjoy tax-free status as dividends for the most part of the years except for last 1 year
Fact 8: Mutual funds by themselves are diversified and they churning the portfolio anywhere between 50-70% during the year. So on top of it, if you churn then it does not makes sense. Exiting portfolios once in a year due to change in fundamental attribute may be one strong reason. A scheme merger can make your original decision redundant. Except for such unforeseen changes or due to very bad portfolio performance, stick to your investment and ride the market wave to realize the full potential of the schemes