Whatever be the earnings of an individual, everyone saves money to fight bad weather in life, but is only saving money sufficient? There are many financial products out there in market especially Mutual Funds, which can help you build wealth. And yes; saving money and building wealth are different things. It is a good idea to understand concepts of Mutual Funds, why they are an important element in Financial Planning and things as an investor you should avoid doing.
Why Mutual Funds
If you don’t get a feel of how mutual fund works, think of a potluck party. You put in effort of making one delicious dish but get to taste many. Similarly, you can’t alone buy shares of 20 or 50 different companies but mutual fund pools money of all investors and if you invest Rs.1000, your money goes to all 20 shares and your risk reduces and diversification happens at the same time. Also, it can be aligned with all kind of goals like liquidity, fixed income, wealth building, low risk, tax saving and so on.
Think long term, think Mutual Funds. If you have a seed, you have to put it in soil to grow crops. If you just keep collecting seeds in a box, like kids collect marbles & jump with joy to see how much they have collected; you will end up with lot of seeds. In reality, you can sow the seeds and can reap a crop which would give you abundant supply of seeds. So, don’t keep seeds in box, sow them and have good harvest.
When you plant your seed, the time taken to grow a tree, crop, fruit and vegetables are different. Similarly, investing your money as seed in mutual funds and growth time is based on goal of investing; as per your financial advisor’s guidance; you can build wealth to Retire rich, for children’s marriage, education and many other Life Goals. Also, there are all different kinds of funds which can serve every purpose like need of cash, capital protection, income, tax saving etc.
Time is important not Timing. Investors try to time market and behave like extremists. At one extreme, they want no risk and end up putting money in FDs or saving accounts & at other extreme they invest in chit funds and give money to thugs who promise to double the money but they avoid the coveted middle path of calculated risk through mutual fund investment. And yes! poor Mutual Funds are also abused as gamble too, despite their transparency and all information availability.
Recency of information also impacts judgement process. If markets are down, we forget the purpose of mutual fund, forget that we have invested for 10-15 years or so. People who are able to think about good past memories to let go occasional hurt over friends or family are good investors in relationships, similarly you have to develop a long-term relationship with your investment to let turmoil not bother you.
Everyone heard story of monkey sowing mango seed and checking again and again if it is turning into a tree or not. When mummy makes ice-cream, kids end up checking freezer again and again. We tell them to have patience. There are investors who are financially informed, made good decision to invest in Mutual Funds but panic as they see little turbulence in market. Mostly investors sell after turbulence and try to re-enter market after run up; needless to say, their endeavor to time the market is total waste of time and energy.
Let us have example of HDFC Top 100 fund(G); from feb,2008 to feb,2009, Rs.100 invested reduced to Rs.56 and it is extremely painful to see hard earned money getting wiped out like that but then in feb,2010, it became Rs.114. Imagine yourself panicking and exiting market at Rs.65 and you think, wow! It went till Rs.56, I saved my losses. Yippee! You were jumping with joy and then market starts picking up, price is now at Rs.80, you are sad now, you wait for correct time; price goes up till Rs.90 and you re-enter market reading news of great bull run. Eventually you end up being a loser with poor returns or even sometimes losses, if you lose patience.
Funds like Franklin Prima plus, Franklin India Smaller Cos Fund and BNP Paribas Multi Cap Fund, Mirae Asset India Equity Fund, Invesco India Midcap Fund have given approximately 15% plus returns between 2008-15 and now even higher. Reliance Growth Fund converted Rs.1 lakh into Rs.1 crore, only if investors stayed with this fund for twenty-one years and for similar time period Birla Sun Life Tax Relief 96 Fund(G) turned Rs.1 lakh invested in ~Rs.1.4 crore. In brief, they made investors rich; let me correct, they made patient long-term investors rich.
Gist is to refrain from timing the market as neither Warren Buffet nor computer algorithms are able to do it.
Points to be noted in turbulent times.
Sometimes we sell to avoid further losses even when rational mind says to invest more. Selling winners and holding losers just for the sake of mental relief that we have not lost money, we end up selling better performing investments. Diversified portfolio serves a purpose. If advisor suggested us three funds; for example, one tax saver, one capital builder and one hybrid fund and we end up selling wealth builder because it showed in red; we not only cause portfolio imbalance but put our goal in jeopardy too. All time portfolio checking on finger tips through smartphone has made matter worse and has caused increased anxiety amongst investors.
Another painful mistake is to stop the SIP; you stop saving (also spend more needlessly) with overall poor returns. Bad financial decision after pressing panic button doesn’t affect you only but your family and so the society as whole. Noble prize winner Thaler famously wrote, ‘Does the Stock Market Overreact?’; answer is simple, NO. Investors make behavioral mistakes but at last we are human and hence the role of reliable Financial advisors like Investocafe becomes very significant . Investocafe is an online financial Planning platform which offers hassle-free and paperless investing in Mutual Funds
And yes, invest in tax saver mutual fund too, if you have not done your tax planning yet.
Indian economy is in great phase; turbulences are minor hiccups. It is a roller coaster ride but the only difference is that this adventure is an unwanted one. Bear the bear phase with patience.
Shruti Sharma,Phd Scholar in Investor Behaviour towards Mutual Funds-Content writer with Investocafe
Investocafe is official Partners of Indian Army to provide Financial Services to Veterans and Serving Personnel.Investocafe offers automated Portfolio Management Services to help accomplish your Life Goals.Visit www.investocafe.com to know more and start investing today!