Four Asset Allocation Strategies to Create Wealth Through your Investments
The primary aim of every investor is to accumulate wealth or to achieve their long-term goals without the need for loans. Asset allocation is dividing one’s investment portfolio into categories of debt, equity, stocks, bullion, real estate, and other financial investments. Having a correct mix of these investments, which is in accordance with the risk appetite and financial goal of the individual, will help in wealth accumulation. Put simply, asset allocation balances the risks involved with every asset class.
However, certain factors should determine your asset allocation strategy:
- Goal: It is imperative for investors to decide their need for investing and the range of the investment (short-term or long-term) before they start investing.
- Risk appetite: Risk appetite refers to how much an individual is willing to stake in order to earn substantial returns. For example, investors who are risk-averse predominantly invest in securities with guaranteed profits. On the other hand, risk-tolerant investors choose securities that come with high risk with an aim to earn higher returns.
- Period: The duration for which an investor will stay invested is the time horizon of the investment. Primarily, the investor’s goal determines the period of the investment and also the risk tolerance.
It is important to figure out the above points before you begin your investing journey.
Here are four commonly used asset allocation strategies to create wealth.
Strategic Asset Allocation
This is a traditional method where the target allocation of investments depends on the investor’s preference of risk tolerance, time horizon, investment objective, and other conditions. Strategic asset allocation changes its holding as per the investor’s preferences. It aims to provide an optimal balance between risk and return for long-term investments. Strategic asset allocation is based on the modern portfolio theory, which recommends diversification to lessen risk and increase portfolio returns.
In the case there is a deviation from the investment goals, the portfolio is brought back to its original allocation.
Tactical Asset Allocation
Tactical asset allocation is also based on the modern portfolio theory and is a moderately active strategy. It is an alternative for investors who think that the strategic asset allocation model is too rigid in the long run. This strategy aids investors in making tactical deviations from their investments to profit from any unique or unexceptional opportunities present in the market. It adds timing to the portfolio and allows the investor to benefit from economic conditions favorable to an asset. However, when investors gain short-term profits, the asset portfolio is brought back to its original allocation.
Dynamic Asset Allocation
Dynamic asset allocation is an active strategy which continuously allocates asset classes as per the prevalent market and economic conditions. Through this strategy, investors sell weakening asset classes and purchase assets that are increasing in value. Dynamic asset allocations allow investors to benefit from the best-performing investments, thereby ensuring exposure to market momentum and substantial returns if the trend rises upward. Equally, it will also lower the portfolio’s exposure to those classes that are trending lower to minimize losses.
Diversification is the key feature of this model as it exposes the portfolio to many asset classes and reduces risk. The portfolio may consist of equity, mutual funds, index funds, currencies, and other investments.
Insured Asset Allocation
This type of asset allocation sets a limit under which the base portfolio value should not decrease. If the investors can garner returns above the threshold, they can undertake active trading based on analytical research, market forecasts, and expert views on various asset classes to increase value. In the case the value drops, the investor should invest in risk-free assets to bring back the threshold. At such times, most portfolio managers overhaul their allocation or might altogether change the investment strategy. Insured asset allocation is suitable for risk-averse investors who want active trading with a guarantee of a safety net.
Asset allocation involves both active and passive trading techniques for investors to realize their financial goals. Nevertheless, it differs for every investor, and the investor has to continually change their strategies according to the market and economic conditions to achieve their financial goals.
Top Reasons Why One Should Invest in ELSS
Mutual funds have become a favorite option for investments nowadays. However, the recent imposition of the long-term capital gains (LTCG) tax of 10% on returns over Rs1 lakh has made investors wary of mutual fund investments, including ELSS funds. Nevertheless, the advantage of earning potentially significant returns still makes mutual funds a better investment option.
Here Are Some of the Top Reasons to Invest in ELSS Funds:
- Tax Benefits
Equity-linked saving schemes, or ELSS funds, are a popular investment instrument as they offer tax exemption of up to Rs1,50,000 under Section 80C of the Income Tax Act. Individuals can also gain tax-free dividends and capital gains up to Rs1 lakh, after which, the LTCG tax of 10% is applicable.
- Low Lock-in Period
ELSS funds come with a mandatory lock-in period of three years. This lock-in period is very low when compared to the other tax-saving investment instruments like Public Provident Fund (PPF), bank fixed deposits (FDs), and National Savings Certificate (NSC), which have a lock-in period of 5 to 15 years. So, the individual can choose to change their fund after three years if it is underperforming and still claim the tax benefits.
- Higher Returns
ELSS funds derive their returns by investing in the equity markets or equity-related products, which give higher returns over other fixed-rate investments. Historically, ELSS funds have generated inflation-beating returns over time. This has prompted many to opt for these funds.
- Magical Power of Compounding
The benefit of compounding is singular to equity markets and is directly related to the amount of time an investor stays in the fund. ELSS funds come with a compulsory lock-in period of three years, which can also be extended as per the needs and requirements of the investor. The more you stay invested in a fund, the higher are your returns. This is the benefit of compounding.
- Flexible Investments
ELSS funds are suitable for both experienced individuals as well as new investors who have just started on their professional journey. An individual can either make lump sum investments or start a systematic investment plan (SIP), which allows them to pay specified amounts at regular intervals. This amount can be as low as Rs500. SIPs inculcate financial discipline and a savings habit among investors. SIPs also give the benefit of rupee cost averaging, and as such, one need not time their investments.
- Transparent Dealing
The Indian capital markets watchdog Securities and Exchange Board of India (SEBI) regulates the dealings of mutual fund houses. As per SEBI, mutual funds have to disclose critical information regarding the fund such as its investments, expense ratio, and the current asset allocation on a regular basis. Hence, ELSS, being mutual funds, have a higher degree of transparency, which ensures that investors have up-to-date information regarding their investments.
- Easy to Invest
Technological advancements have made investments in ELSS funds quite simple. The investor has to complete an Aadhaar based e-KYC (know your customer) to start their investing journey without even having to leave the comfort of their home. Once the formalities are clear, one can simply set a standing instruction on their bank account and the amount to be invested will automatically get deducted from their account.
These are some of the top reasons for investing in ELSS fund, which is not only a tax-saving instrument but also assists individuals in earning considerable returns over time.
How Can You Invest In Direct Mutual Funds?
Direct plans of mutual funds enable the investor to save on costs. Direct Plan investors are not charged the distributor and trail commissions. For an average equity fund, this reduces the Total Expense Ratio by 60-70 basis points. This makes a big difference over longer periods.
The KYC process remains the same, irrespective of whether you opt for the Direct Plan or the Regular Plan. Also you have to register with the AMC or the aggregator once. The investor can either do a lump sum investment or follow SIP route through the Direct Plan. Once your SIP is registered as a Direct Plan, then it continues that way. You can convert a Regular Plan into a Direct Plan by writing to your fund. How do you invest in Direct Mutual Funds?
Direct Plan Investing Through AMCs
Walk into the nearest office or Investor Service Centre of the AMC of your choice. If you are a first time investor, then you will have to complete your KYC and you will be allotted a ‘Folio Number’. Once folio number is allotted, subsequent investments can be done online. Ensure that you specifically check the Direct Plan box in your application. The only challenge in this approach is that you will have to obtain a distinct folio number for each AMC.
Direct Plan Investing Through Fund Registrars
Registrars are the record keepers and folio managers of all mutual fund accounts. There are two key players viz. Karvy and CAMS. You can register with either registrar online to invest in Direct Plans. Of course, when you approach a registrar, you can only invest in funds for which they are the registrars. In fact, when you submit an application to your AMC, it is processed by the registrar only. So, this is an extension of the first method.
Leveraging MFUs and Fund Aggregators
Mutual Fund Utilities (MFU) or aggregators are an agnostic platform to invest in mutual funds. You will have to take a one-time registration and obtain a Common Account Number (CAN). Once the CAN is obtained, you can map all your existing folios to that particular CAN and they would be treated as Direct Funds. The advantage is that you don’t have to interface with multiple AMCs and the MFU aggregates and gives you requisite analytics for better decision making. The challenge is that you can only deal in the funds where the AMCs have tied up with the MFU. This platform is convenient and centralized.
Direct Plan Investing Through Investment Advisors, Online Direct Investment Portals
The challenge in the above 3 methods is that you still have to be self-driven. As an investor you need to take all the decisions including screening, selecting and ensuring that funds are in sync with your long term goals. One alternative is to go through on online platform of Registered Investment Advisor or through a Robo Advisor. These platforms provide investment recommendations to investors on the basis of certain details keyed in by the investor.
Direct Plans Of Mutual Funds – How To Make The Choice?Investing through Direct Plans requires that you are comfortable with a self-driven approach to investing in mutual funds. While mutual funds offer diversification and professional management, they are also exposed to the vagaries of the markets and macros. You must be confident to handle these gyrations. Ideally, Direct Plans are for investors who have the time, wherewithal and resources to spend in making investment decisions. Otherwise, you are better off opting for a Regular Plan and letting your broker advice you appropriately.
The Difference Between Regular and Direct Mutual Fund
Browse through the NAVs of mutual funds either in the pink papers or the AMFI website and you will find that the same growth or dividend scheme of a mutual fund is subdivided into Regular plans and Direct Plans. Have you ever wondered what are these Direct Plans and Regular Plans? Let us check out a live NAV table first.
Date Source: AMFI
In the above table, you will find that the DSP Top 100 Equity Fund is subdivided into Direct Plan and Regular Plan. You will also find that the Direct Plan has a higher NAV compared to the Regular Plan. Before comparing Direct Plans and Regular Plans, let us briefly dwell on the brief history of Direct Plans.
A Brief History of Direct Plans
Prior to 2009, fund houses charged investors entry loads on mutual funds to cover selling and distribution costs. In August 2009, SEBI banned the collection of entry loads from mutual fund clients. However, the official model of Direct Plan came only from January 2013 when SEBI asked all fund schemes to classify into Direct Plans and Regular Plans.
Currently, funds are allowed to debit their annual expenses up to a ceiling of 2.25% of the AUM in case of equity funds to the fund NAV. This is called the Total Expense Ratio (TER). The fund does not bill the distribution and trail commission costs to Direct Plan investors. Hence, Direct Plans are subject to lower TERs and the NAV are higher. Here are three key points.
Direct Funds Have Lower Expense Ratio
The TER on Direct Plans is lower since the distribution and trail fees are not billed to them. However, there are other costs too in a mutual fund. Mutual funds have to incur operational costs, fund management fees, auditor fees, registrar charges, execution costs, statutory costs and brand expenses, among others. Even if you are holding a Direct Plan, these expenses will still be charged to you. It is only the distribution and trail commissions that are not billed to your NAV. In a typical equity fund the regular plans will have a TER of around 2.25% while the TER for a Direct Plan will be 60-70 bps lower. This cost saving each year enhances your return over the longer period of time.
Direct Plan Does Not Involve Any Intermediary
Direct Funds are simple in nature and the process of investing, especially through an online platform is easy as you do not deal with any intermediary. You can invest directly and make your own investment choice. Just ensure that the NAV in your statement actually reflects the Direct Plan NAV as available on the AMFI website.
Choose Direct Plans If You Can Make Financial Planning Decisions Independently
The common question is - who should opt for a Direct Plan. There are no hard and fast rules. If you are savvy enough to manage your financial planning and investments on your own, then you can consider Direct Plans. When you invest via Direct Plans you do not get the benefit of the advisory services of a broker or financial advisor. Hence, you need to make your choice of Direct Plan after due consideration. Ensure that you have the time and resources to make your financial planning decisions independently.
5 Factors to Look at While Selecting a Stockbroker
Today, there is an abundance of stockbrokers offering their premium services to individuals wanting to accumulate wealth through the financial markets. As such, it is vital to choose a good stockbroker who understands the investor’s financial goals and guides him/her towards substantial returns.
Investors of today have two choices when it comes to stockbrokers: the traditional stockbroker and the discount brokerages. Traditional brokers charge a certain percentage as a fee, which differs with the type and size of the transaction. These brokers also send out trading tips and research bytes to the clients.
Discount brokerages, on the other hand, offer the standard services but at a fixed (flat) cost, i.e. regardless of the type and size of the transaction. They, however, do not offer any trading expertise, i.e. they do not give out trading or stock tips nor do they provide any insights into a trade. As such, they are suitable for those who prefer to self-educate themselves and take independent decisions.
Considering these, an investor has to carefully think about his/her requirements as well as exercise caution when choosing a stockbroker.
Here are five factors that would help a new investor in selecting a stockbroker who understands the financial goals of the investor.
It is vital to perform a thorough background check on the stockbroker before entrusting them with your life savings. Finding out how many years the stockbroker has been in business, how it has performed in the past, what do the clients say about the firm, and any other relevant questions. This will help the individual to know more about the broker.
- Minimum Balance
Investors need to maintain a minimum balance in their stockbroking account, and hence, it is vital to inquire about the same. This amount varies from broker to broker, hence, investors should choose a broker who not only provides the best services, but also has a low minimum amount threshold so that it does not tax their monthly budget. Other than the minimum amount, there should also be ease of access when it comes to depositing and withdrawing funds. Typically, brokerage houses have tie-ups with local banks which lets investors access their funds at any time. Withdrawals normally take three days to reach the client’s account.
- Technological Expertise
Brokers who constantly update their platforms with the latest technology are able to give a unique advantage to the investor. There are also able to match the evolving needs of the investors and educate them on new features and solutions. Choosing a broker who consistently provides a stable and steady platform to their clients is a must.
A broker should be available during stock market hours to execute orders without any lag or delay or to address any issues that may arise on their electronic platforms. An investor should also check the speed and the stability of the website/mobile applications, especially during peak hours, to ensure that the pages load quickly and easily as even a split second can lead to the investor losing out on a profitable trade.
- Transparency and Capability
Transparency and capability are also important parameters when looking for the perfect stockbroker. There are many ways in which brokers charge their clients. Hence, the client has to ensure that all charges involved are mentioned in a lucid and transparent manner while opening an account. This will help you avoid any hidden costs that brokers might impose later. Apart from this, a broker should also have strong business policies that maintain the quality of the business.
When it comes to the capability of the brokers, investors should make sure that the stockbroker and his team have a strong background and passion for trading in order to have a hassle-free experience. When the team is able, it largely influences the business practices and delivers a profitable outcome to its investors.
Choosing the right stockbroker is vital to trading as the investor is entrusting their life savings into the former’s care. If a stockbroker or his brokerage satisfies the above-mentioned criteria as well as provides real-time customer support, add-on financial services and, as a bonus, is interested in enhancing the client’s knowledge of the markets, then engaging with them is a wise decision.
Do’s and Don’ts of Stock Market Investing for Beginners
With a trading account and demat account you are ready to trade. But if you are a beginner in the stock markets, then that is not all. You also need to keep a tab on some major do’s and don’ts before you venture into investing in the stock markets. Let us look at 10 such key dos and don’ts for investors.
10 important do’s and don’ts for investment beginners
Do’s are about doing the right things in the market when you are starting off on your investing journey while the don’ts are the ones to avoid. Here are ten such important dos and don’ts for investing beginners.
Do your research before investing? Remember, research of a stock is not a rocket science and it is all about getting your research process right. Get comfortable reading the balance sheets and income statements of a company. Also read the Management Discussion and Analysis (MDA) of the stock you are planning to invest in.
Start with your goals in mind. You must be clear about how much risk you are willing to take and how much risk you can afford to take. Your equity portfolio should be within the limits defined by your allocation. Always start with a plan.
Don’t put all your eggs in one basket. That is age old wisdom and applies to investing as well. In technical parlance it is called diversification where you effectively spread your equity investments across sectors and themes so that your investment performance is not dependent on any one stock or sector.
Take a long term view and cultivate that habit in the very beginning. It is futile to time the market. Not only that it is hard to consistently get the tops and bottoms of the market right but it hardly makes any difference to your eventual returns.
Try to invest consistently and regularly instead of putting a large corpus in a stock of your choice. The advantage of being regular is that it instils discipline in your investment and also gives the added benefit of rupee cost averaging. That means; over time your average cost of investing comes down.
Even through equity is about the long term, try to get bargains. Even if you are convinced about the long term prospects of Infosys, it makes a lot of business sense to buy at Rs.650 than at Rs.750. Quite often, a market correction creates salivating bargains. Use such corrections to add quality stocks at low prices.
Divide your equity portfolio between core holdings and satellite holdings. Your core holdings are your long term investment portfolio and you don’t sell these stocks at every correction. On the other hand, the satellite portfolios are more of a trading portfolio where you look out for short to medium term opportunities in the market. Have a separate approach to both these types of stocks.
Don’t ignore trading costs. Even if you are a long term investor, take at a close look at your costs. Your cost is not just about brokerage costs but there are a number of other costs too. There are statutory costs, exchange charges, demat AMC, DIS charges, demat and remat charges etc. All these need to be added to calculate your effective cost. Nowadays, it makes a lot of sense to opt for low-cost discount brokers who can give the same execution at a much lower cost.
As a beginner, remember that quality always wins in the end. When we talk about quality we are talking about quality at a number of levels. Look at quality of earnings; more of the earnings must be coming from the core business. Look at profitability; the company must be earning more margins than the peer group. Take stock of asset turnover; it tells you how efficiently the business is using assets. At a qualitative level, prefer companies that have high standard of disclosure and transparency. Large caps or mid caps, this quality approach always works in your favour.
Make effective use of technology and if you are a beginner then you better get used to it early. Ideally use the online trading platform; it gives you a lot more control over your trades. Also, if possible you can download the app on your smart phone which allows you to trade on the run. Get used to reading electronic contract notes and ledgers; they are a lot more convenient and environment friendly than printed stuff.
In an effort to chase stocks, investors tend to forget that investment success is a lot more about discipline than about skills or flair. It is in your hands to make your investments work in a systematic manner.