Lack of clarity between asset and liability

There is a lot of difference between assets & liabilities, however, many fail to differentiate between the two and end up buying a liability thinking as an asset.

Any valuable could be an asset if it starts creating wealth for you by generating capital appreciation or dividend or interest income. There would be cash inflow which eventually helps to increase your net worth. The asset provides future economic benefits and generates revenue for you.

On the other hand, liability is recurring expenses or cash outflow or loan EMI which reduce your net worth. Taking a loan r investing in a depreciating asset is also a liability. Liability is a future obligation. 

Assets include the value of securities, mutual funds, FD, saving accounts, retirement funds, PPF, EPF, holding in Demat account, and real estate. Liabilities include any debts the individual may have including personal loans, credit cards, student loans, unpaid taxes, and mortgages. House may be an asset but if it on a mortgage, then surely it is a liability.

One should focus on acquiring the assets and not liabilities. There is also a difference between good liabilities and bad liabilities. If a house taken on a loan gets appreciated over time is an example of good liability whereas a car on loan is an example of bad liabilities. That means if you leverage your capital and start earning revenue then it falls under good liability. However, the life of a person who owns any kind of liabilities must be insured to protect against any causality like death or accident. 

Avoid lifestyle & fancy products if they are depreciating in nature.  

Invest with Peace of Mind

It is by and large said that don't promise when you are cheerful, don’t reply when you are angry and don’t decide when you are sad.

We should never allow our emotions to control our actions. When we irritate, our mind tends to think negatively and respond adversely. At the point when we are cheerful, we tend to just think emphatically, however once in a while our satisfaction doesn't allow us to see the consequences of our decisions.

In investments, our state of mind is very important. We all invest to get peace in the future and therefore we need to remain in a calm state of mind today even. It's simple logic... so as you sow so shall you reap.

Most investors get distracted because of surrounding events, market movement with unpredictability & volatility. It is essential to understand the nature of an asset class and its movement. Simultaneously, it is equally important to understand our own nature and behavior pattern.

We get possibly succeeded when both things get aligned. An equilibrium of emotions is essential to ensure making the right decision in every sphere of life, otherwise, the investment journey never ever reached the planned destination.

Myths about Mutual Funds (MF)

There is still a lot of confusion & myths going around Mutual Funds (MF) despite MF was first launched by UTI in 1964 and since 1993 lot of private asset management companies (AMC) also started serving the investors. Let me address a few common misconceptions about MF:

1) MF means only equity investments:

MF can invest in any of the asset classes including equity, debt, gold, real estate, & cash equivalent products as per the scheme objective you have chosen. You can also invest in hybrid and/or multi-asset funds.

2) SIP & MF are different:

SIP & MF are not different but SIP is the way of investing in MF. In MF you can invest in 3 different ways - Lumpsum, SIP & STP

3) MF investment is only for the long term:

Depending on the scheme's asset class category, one can invest in MF for 1 day to 99 years (perpetuity till you withdraw). Generally, for shorter duration liquid funds, medium duration debt funds & longer duration equity-based funds are recommended.

4) MF don't provide guaranteed return whereas Insurance is:

Any market-linked product can not provide a guarantee of returns whether it is MF, Insurance, NPS, Gold, Equity, Real Estate, etc. MF does not provide any guaranteed return whichever class you invest in. If you want a guarantee take Bank FD or small savings schemes.

5) Can save lacs of rupee if investing in Direct MF plan:

The direct plant saves more on expenses compare to a Regular plan. However, you should be an expert & possess that knowledge to manage your own portfolio & select an appropriate scheme. Learn & acquire that skillset first and then go for a direct plan. Proper advice from an expert helps as we as an individual always govern by our emotions of greed & fear.

6) MF don't give a higher return in comparison with direct equity investments:

Direct equity stocks are having more potential to generate a high return. Again risk is equally high. MF never targeted to give high returns as their portfolio is diversified. MF works on risk management first. It's always better to go with MF rather than creating our own portfolio without having technical & fundamental knowledge, which can prove to be disastrous. one should have fundamental & technical analysis skills for taking direct exposure in equity.

7) You need a lot of money to invest:

Unlike direct shares investment where you need a very good amount of investment to make a diversified portfolio for example if you buy only one share of all Nifty50 index, you have to invest around 1.5 lacs, whereas in MF you have the option to own a Nifty Index fund or get exposure to different sectors & multiasset classes by investing just Rs. 5000 if investing a lumpsum, or Rs. 500 in case of SIP.

8) There is no risk involved in mutual funds:

MF are subject to market risk. Every asset class has its own risk-return parameter which is applicable to MF investments as well. However, MF is said to be managed better on risk parameter in comparison to the individual person having direct exposure in the respective asset class, if you don't have that much expertise in managing the portfolio. Mutual Funds invest in the underlying asset class as per the scheme mandate and returns are dependent on the respective asset performance.

9) You need to be a Mutual Fund expert to make money:

Not necessarily. In fact, MF redesigned for a common & layman purpose. However, you need an expert advisor for guidance & monitoring purposes to select an appropriate scheme as per your risk profiling to help you to achieve your financial goals. A certain amount of homework is required to select a scheme.

10) Investing in best-performing schemes give better returns:

Returns keep on changing on daily basis. There is not a single scheme that remains at the top continuously. Selecting a scheme based on the basis of a historical return should not be a single criterion to invest.

11) Mutual Funds can make you rich:

It's not a mutual fund that can make you rich. It's the process one needs to follow religiously for a longer period of time without losing patience. In fact, wealth comes from the power of compounding when actual magic starts happening. Many people lost their money in mutual funds just because they failed to understand the basics of investments. Investment time has a very important role to play out.

12) Mutual Funds with lower NAV is better than a fund having a higher NAV:

NAV of a MF scheme has nothing to do with its performance and should not be the criteria for fund selection. Generally, the older the fund, the higher the NAV. Any capital appreciation in the MF scheme will depend on the price movement of its underlying securities. One should look at the portfolio if having a piece of knowledge about the securities analysis and not the NAV.

13) One need to have a Demat account to invest in MF:

Having a Demat account is optional to hold MF units. Unlike direct equity shares, where Demat accounts mandatory, units of MF can be held in physical account statement mode or Demat mode as per investors' choice. However, if one wants to buy exchange-traded MF (ETF), then Demat account is required.

Nothing Lasts Forever

Never ever chase money in your life. Money is just a byproduct or medium to realize your life objectives. Always think & plan what you wish to try to do or achieve with the money. Money can bring pleasure, comfort, or lifestyle but not happiness or bliss. It's important to be happy than merely rich.

Always focus on the higher motivation behind life which could be helpfulness or usefulness instead of materialistic stuff, which are simply meant to carry on with day-to-day existence. The secret to happiness is well inside your reach. You can have bliss right now regardless of your finances or what's going on in your life because happiness is a choice.

The harsh truth is that nothing lasts forever, so when you have it now enjoy it, appreciate it. Don't take it for granted, nothing is permanent!

Investment Trends in Post Covid World

Every crisis comes with an opportunity, the only thing is how much we are prepared. Not necessarily we can anticipate any calamity or pandemic, however, we should not become rigid. We should be flexible enough, have the right mindset & attitude to change along with trends, and take appropriate decisions as per the circumstances. 

A lot many people lost their jobs, businesses got shut down during the lockdown. Then we realized the importance of skills, self-development and become more aware to cope up with changing trends.

Following changes are observed whether you are an employee or employer:

• Become more tech-savvy
• Geographical boundaries are no more barrier in business
• Joined online training to upgrade/upskills - online classes become cheaper with lifetime access
• Communication plays a very important role in business development
• Overspending & luxury spending taken a back seat
• Travelling got restricted
• Health awareness & hygiene cautious (although some put on weight)
• Keep on learning & upgrading ourselves every day

As far as the changes in investment patterns are concerned, investors become more aware, mature than earlier.

• Financial infusion, education & awareness on how to manage money properly
• People started taking insurance seriously in all segments - TP, HP, CI, PA, PMJJBY & PMJSY
• Felt the importance of contingency fund, which should ideally be 6 months to 1 year of monthly expenses
• Start thinking of savings & investments rather than only spending
• Identify the difference between needs & wants
• Start diversifying the portfolio in all asset classes with portfolio rebalancing
• Asset allocation is the key to wealth creation
• Understood 'Cash is the King' when nothing works it's only cash that supports
• A lot many opened Demat account for equity & commodity exposure
• Gold - never ignore this precious metal
• Cryptocurrency emerged as a new Avatar

The moral of this crisis is to spend more on self-development & keep upgrading everyday & always!

The magic of compounding

The basic compounding formula may work wonders if we know how to use it in our favor and also the same compounding can work against us if we are not aware of it. Which way would you prefer to go?

Although in real-life we are far away from the said theoretical formula which we had learned in class-VI, and might have solved hundreds of questions then & there only. Even then we fail to apply those learnings in our practical life because we have only practiced theoretical questions and not learned how to apply & get benefitted in practical finance problems.  

The compounding formula contains three variables - principal amount (P), interest rate (R) & time period (T). Out of these three variables, the most powerful element is the time period which provides exponential gains.

In personal finance, creating wealth requires 'time' to generate compounding benefits. We don't get linear interest rates in market-linked instruments and the market rates fluctuate on daily basis. This thing we missed out on in our theoretical classes as all problems were solved at a fixed rate only. 

We failed to realize the following things in reality:

• Rates are fluctuating, not fixed.
• Interest impact over decades (time period) is huge.
• Compounding growth is slower in initial periods but extremely fast later which is beyond our imagination.
• The early you start investing, the more time period you get for investments & compounding, the higher would be the corpus eventually.
• Keep on watching our portfolio value now & then is not at all required. Monitoring once in a year or six months is more than enough. 
• If savings is started late, you tend to lose out on the power of compounding.
• When the market correct, people start to panic and forget their long-term goals.

People redeem from their equity link investments / MF because not getting returns in the initial years of 5 - 7 years. They fail to understand how equity behaves in real life. On the other end, they keep on paying compounding interest towards the loan by way of EMI.

How to Rebalance Asset Allocation

While making investments, one of the most important criteria individuals usually ignore or give the least priority is Asset Allocation & Rebalancing. Research shows that over 91% of the returns being generated by maintaining proper asset allocation. However, this is easy said than done.

Practically investors are driven under various biases & emotions, which act as a hurdle to take corrective action at a later stage. It is also observed that people are left with junk or penny stocks as they exited from performing stocks quite early. The rule says that one must keep booking the profit from the performing asset class and transfer that amount to the underperforming asset class. That doesn't mean averaging on junk stocks and keep on accumulating. Also, this process should be executed over a fixed interval preferably once a year. 

Let's understand with a practical example. 

You intend to invest Rs. 1 lac and created a portfolio comprises 60,000 in equity, 25000 in debt, and 15000 in gold. One year returns on equity, debt & gold are 11%, 6% & 9% respectively. At the end of the year to maintain your current asset allocation, you need to rebalance your portfolio by shifting.......

After a year, you need to shift excess gain from equity to debt & gold funds to rebalance existing asset allocation. The wealth creation formula is that you must focus on your goal & asset allocation and not on the return or market movement. 

Disclaimer: This is not a recommended asset allocation, please check your risk profile & other parameters before taking an investment call. Investment in securities & mutual funds are subject to Market Risk

Credit Card Trap

Many people start using credit cards without understanding how actually it should be used. Although the Banker or Agents who provide the card explains everything, but who cares to listen to them and most people get into the trap. A credit card is very beneficial if used properly however it is extremely disastrous if you miss making the payment in full. Therefore, it is important to learn how to get benefits in our favor else dropping it all together making more sense.

A credit card works on basically two principles, one "buy today & pay later" and second "liya hai to chukana padega!" Being a credit card is an unsecured loan therefore rate of interest is extremely high and could be 40% - 50% p.a. And that is also a prime reason Bank provoke to use a credit card because they know the human tendency & psychology of people very well. The Bank never gets profit when the entire outstanding amount is paid in a lump sum on the due date because that remains interest-free. The more you default the higher Bank will charge the interest. The rollover debt trap can ruin your entire savings in months. 

Now whether you should use a credit card or not, before taking any decision just go through the following checklist:

Go with a credit card if:

1. Can you control your temptation for window buying if cash is not available and you have only a credit card to swipe? It means no buying at all unless you can arrange full payment before the due date.
2. Are you capable to make full outstanding payment at one go before the due date?
3. Are you a disciplined person who aware of your current financial status?

Don't opt for a credit card if:

1. Are you a person who prefers to avail EMI for most of the things irrespective of interest charge?
2. Your attitude is like 'spend today & save later'
3. You prefer to enjoy today at any cost.
4. Are you paying the minimum amount due on your existing credit card, if any?

Credit card is not bad at all, only you learn how to control your emotions. I have been using a credit card for 20 years now without any single rollover of the amount and I pay the entire outstanding amount in full before the due date. A lot many benefits/points/discounts are associated with credit cards. Always remember, it is easy money available to you, and you pay in full or part, with or without interest, that totally depends on your payment habits & your psychology.

Buying things just because they are on discount!

Have you ever received a call from any of the insurance agents that XYZ policy is going to close in the next 2 - 3 days and you must invest in this policy otherwise you will never ever able to buy it again or it a lifetime opportunity for you that would be missed forever? And you have bought that policy finally without checking whether it helps to achieve your financial goals or not. What made you tempted to buy that? Have you ever thought over it?

Have you ever purchased goods to see front full-page publication by e-commerce companies for Big Sales Week or Maha India Sales, etc?  And you will be getting such notifications every month or so and almost daily during festival seasons.

Or you have just fixed an exotic trip based on certain discount being offered to you on a social media platform. 

We are all human beings and make our buying decision based on emotions mainly greed & fear. The seller knows that very well and they take full advantage of this very cleverly without making us feel so. Whenever there is a discount or closing of the sale, we just rush because of FOMO (fear of missing out) and we end up buying that stuff, whether actually needed or not.

Buy the goods which is required to us and not because of some offer is going on. Many times, of course, we get a good bargain or lucrative offer, in that case, avail it! However, never ever fall into a discount sale or out of a stock trap every time. This will exhaust your savings. Therefore, purchase only things which you can use on an immediate basis.

 

It is seen that rather than savings, we end up buying more due to the temptation of discounts. We get attracted by discount psychology of 50% off or 1+1 free or buy for 5000 & get 2000 coupon free or so. Although there is no fixed formula do decide whether you must avail that offer or drop it altogether.

Just ask the following questions as a verification check before making any buying decision:

• Whether you would have still purchased if there were no discount available?
• When are you going to use that stuff? 
• What would be the total expenditure after the discount?
• Are that expenses as per your budgeted amount?

Companies keep on promoting their products & services on print media, digital media, or social media. Just check the suitability of that stuff to you and also make differentiation in your needs & wants clearly before taking any call.