Staying anchored when you can't control the winds?

Those who invest in the equity market for the long term even opting for a SIP route, concern about the market crash which could happen at any given point without prior intimation. Your SIP after some point in time just becomes a lumpsum investment. Therefore whether you had invested at one go or on a recurring basis, the accumulated value is prone to volatility and market mercy. While it’s important to invest regularly, one should also have an exit plan. Now how can one protect their portfolio from such unforeseen events like a black swan? 

One strategy is a Systematic Withdrawal Plan (SWP) which is the opposite of SIP. When you set up an SWP, a fixed amount from your corpus is systematically transferred directly to your bank account at the chosen interval, and therefore, you don’t exit at one go.

In fact, there is a formula for when one should start SWP. Ideally, if your goal is five years away, one should go for opting SWP from aggressive fund to conservative ensuring withdrawal amount to be distributed over a span of 60 months. This will mitigate the risk of withdrawing money at the bottom of the market crash.

Don't wait till March for tax savings

As we already know, our Financial Year starts in April and ends in March. We get the entire year to invest for tax-saving purposes. However, people rush at the eleventh hour, and it is observed that maximum tax savings investments come in the month of March only. Logically, either your investments should be distributed throughout the year in a span of 12 months or if it is a lumpsum investment then instead of investing at the end of the financial year, one should plan to invest at the beginning of the year always. That way you get enough time to plan for your finances and therefore take care of taxes if you do so at the beginning only. Otherwise, in the last movement, you only focus on tax saving and not on the scheme or policy details whether suits you or not. 

The problems with the people have; when they plan early:

• They try to procrastinate being human nature
• They never feel they have enough to save
• Investment remains their least priority
• Want to spend first than savings
• Get tempted for spending to buy instantly / window shopping
• Don't invest unless getting a TDS deduction
• Never follow 'to pay yourself first' rule
• Don't plan anything - neither investments nor expenses

Everyone knows that spending sensibly and saving regularly is key to financial security. Yet, many are not able to save as much as they want to. Worst even, many missed the last ball too and realize only after when the financial year gets over. One needs to understand that investing in tax-saving instruments is important not just for the time being but also for the long run. When one invests in a tax-saving instrument, they save tax and at the same time save up for the various goals they need to meet at different life stages. This efficient tax planning should ideally be done at the start of the year. To go easy on the pocket, one can start something as simple as a SIP in ELSS. It ensures regularity and discipline of investment while serving the purpose of saving tax.

Mastermind Alliance

A thumb rule says you are the average of five peoples by whom you are surrounded... whether it is your personality, values, character, or net worth. You might have observed that if five friends are smokers, the sixth one also gets addicted to this sooner or later. You become the average of five with whom you spent most of the time.

This rule also applies not only in life but in investing too. If your friends are traders, you start trading in the market. If all of them putting money in FD or taken a particular policy, you also start following their footsteps. Herd bias is very common in investors in which people start chasing the crowd blindly and suffer losses eventually.

One should understand and be aware that if your friend circle belongs to a mediocre mindset, you will never ever able to get rich. The difference between Rich & Poor people is that while Rich create at least 10 different sources of income, the Poor rely on a single source only. One should always ready to grab the opportunity whenever there is a chance to create an add-on source of income. It could be passive as well as active income.

Therefore, in life or in the wealth creation process, always follow those, who already succeeded in their respective field. Unsuccessful people can not make you successful and at the same time, poor people can not make you rich.

To grow in life, one should always seek for mastermind alliance to help, learn & grow together! However, one needs to keep on upgrading their knowledge, skillset, and become aware on a continual basis. Investing in a Brain is far better than investing in a Bank!

Risk never looks risk, when generating a high return!

For many 'Risk' is only when they encounter negative returns, whereas, by definition, any unexpected outcome whether positive or negative is a Risk.

However, in the investments, we only see 'High Risk' when the portfolio is not performing, returns are muted and we struggle with negative or below FD returns. But we ignore the risk altogether when bull really resumes, suddenly we start getting huge returns, and many of us start chasing the crowd.

The rule of wealth creation says rather than watching the portfolio returns, better to monitor your asset allocation! One should not exit from the market saying it's too high or take entry just to ride an ongoing rally. Profit booking and/or top-up in Equity should always be on the basis of allocation and not because of market phases.

The perception of risk and actual risk of investing move in opposite directions. When the market crash by 40% - 50% like in the years 2000, 2008, 2020, people perceive the investments in the market as riskier while the actual risk was low at that time as valuations had gone cheap after the crash. In a bull market, the perception of risk is very low despite the market hit a new high every day. However, always remember that big returns don't come with taking big risks!

Active Vs Passive Investing

Before you decide which investment style one should go with, understand the difference between the two:

Active Investment Style: Your portfolio is being monitored by the fund manager & their team and they try to generate alpha i.e. excess return over scheme' benchmark return using their expertise and experience. However, if investment calls go wrong by the fund manager, it impacts the scheme performance adversely. Also, any change in the fund manager, the respective scheme performance may get impacted and the future depends on the new fund manager skills.

The products available under active fund management are generally all diversified or sectoral funds in the equity segment.

Passive Investment Style: Under passive investment, you don't get any dedicated fund manager as your investment portfolio is just a replica of the respective benchmark. The return generated under this style is more or less equivalent to the benchmark performance. Mostly monitoring or trading of a scheme portfolio is done under a system-based automated process that is predefined and without the interference of human emotions. The scheme just tracks their respective benchmark portfolio and becomes the replica of it by investing in the same stocks and in the same weightage.

The products available under passive fund management are generally ETF (Exchange Traded Funds), Index Funds, FOF in equity segments.

It has been observed over a long period of time (+7 years), actively managed schemes try to beat the passively managed schemes. However, in a short span of time, it may be possible that passive funds do much better than active funds. 

Although, active funds schemes are costlier than passive schemes as their expense ratio is higher due to the fund manager & their team cost, however, active funds have more potential to generate better returns, and therefore it justifies the higher cost. In the case of active funds, the fund manager pics the specific stock after due research to get the best possible return. When to buy or sell any stock, it's total in the jurisdiction of a fund manager.

However, studies have shown not all active funds are doing well and able to beat their benchmark. It is better to do some homework to select any fund house and further scheme. One should see a scheme track record over a period of time across all phases of the market, not just 3-5 years, verifying other statistical parameters like standard deviation, beta, alpha, churning ratio, expense ratio, etc. and then take a call to choose a particular scheme. 

Conservative investor may prefer the passive style who don't want to monitor their investment portfolio frequently, and those want an aggressive bet and can monitor their investment portfolio, can rely on fund manager expertise.

Should you invest & forget?

In Equity or equity MF, it is generally recommended to have a pretty long term horizon (+10 years) to get the actual benefit of compounding. Does that mean that you just invest once and forget till the next decade? The answer is absolute No! 

Every financial asset classes need monitoring and rebalancing at a certain frequency, whether it is equity, debt, or gold. It is also recommended to have a negatively correlated asset class in your portfolio so that you can book partial profit from one asset class that has performed and shift that profit to the underperformed asset class. The moto here is to book profit at fixed intervals from one asset to get it average the other one.

Although this process is simple but not easy and 90% of people fail to do it on regular basis. This requires a system, process, monitoring, awareness, discipline, and decision ability without being emotionally involved or under the influence of the market or that particular asset class. Certain;y, you need the help of an expert or professional advisor to do so for you.

 However, while rebalancing you should also look at the stock/MF scheme whether there are any fundamental changes that happened which lead to underperformance of the same. It may be because of :

• change in the objective/mandate of the scheme
• change in fund manager
• change in SEBI guideline
• change in the company / AMC management
• change in fundamental attributes
• increase in the size of AUM beyond the comfort level
• change in your risk profiling
• change in your financial goal
• change in tax laws or compliance issue

Despite having a long-term approach, it is equally crucial to monitor your investment portfolio.

Credit Card Fantacy

You might be getting frequent unsolicited calls from the Bank (or their agency) to avail of the credit card. They usually offer 30 - 45 days of interest-free spending. Even if you have one, they insist to take another or transfer your existing outstanding to the new one with EMI options. 

Credit cards work on the principle of 'spend today and pay later' and if you pay entire dues within the prescribed date without fail, you get another credit-free days.  

You may be wondering Bank generally pay interest of 2.5% - 4% p.a. in a savings account and around 5%-7% in FD. However, if you don't maintain a monthly average balance or default in cheques, they levy a huge penalty. If you take a personal loan, the interest charged is very high. Then all of sudden how they are so generous to you to provide you interest-free services through credit cards! With credit cards, Banks earn huge profits in form of penalties & interest. 

We must understand the following points:

• There is no 'free lunch'. All things in life which come to us as 'free' cost us indirectly.
• If you default in payment or pay a partial amount then monthly interest is being charged as 3.5% appx., which comes out to be 42% p.a. (APR)
• Now, people by nature, are not very disciplined with respect to their finances. People even forget to pay their electricity bill, insurance premium,  or other utility bills in time and always bear a penalty of late payment. 
• Banks know that around 70% of people are going to default on their payments and where Banks can charge you late payment fees, interest on the borrowing goods, surcharge & tax.
• The point is that if anyone is not disciplined in their life, should not get into the marketing gimmick of the credit-free offer. That will cost you huge later. And discipline means military discipline in your finance - strict control over your habits.
• People also overspend through credit cards in comparison with when they pay through cash. This is human psychology, when you pay in cash, taking your wallet out from your pocket, you get concerned/aware about your spending. However, when you swipe a credit card, you don't feel any concern/pinch as it required to be paid later even if you don't have cash in the bank right now.
• Making the part payment is not a default, however, it attracts huge interest. When you skip the payment or delay the entire payment then it falls under the default category and downgrades your CIBIL score, which affects your creditability & future borrowing in form of a loan from any financial institution.
•  A credit card works as a double edge sword. You become more lenient w.r.t expenses due to easy availability of money and on other hand, if default, you end up with paying huge penalty & interest payment. 
• Many people get into the trap of rolling interest month by month and find themself very difficult to get out of it. Your entire savings & investments can be wiped out in a short period of time.

If you are the kind of person who is financially very disciplined, you can make use of a credit card in your favor, however, if you lack such control, better to avoid using a credit card and go with a debit card instead.