How to be a millionaire?
An individual’s ultimate dream is to become a millionaire without breaking a sweat. Though this dream seems highly improbable, it is possible to become a millionaire and also have enough time to enjoy your life. All you require is the right strategy, discipline, and consistent savings.
There are certain areas where you can invest your savings and earn a significant amount of money.
Where can you invest?
The most important step towards becoming a millionaire is to inculcate the habit of saving money. Without savings, there won't be any investments, and without investments, there won't be any profits. Once you get into the habit of saving, you can invest the saved money in one or more of the following areas:
Real estate is the largest investment option. Your investment in real estate can rise in value over time. You may use this as a part of your overall strategy to begin building wealth. Investing in real estate can prove to be the best investment if you are planning for long-term capital gain.
For example, if you buy a house or a land for Rs 30 lakh in 2017 (even after taking a loan for the same), the price of this land or house can go up to Rs 50 lakh within 5 years. You can earn a profit of Rs 20 lakh in just 5 years of time. Furthermore, you can invest this Rs 20 lakh in other investment options without losing the initial 30 lakhs that you invested.
Buying equities of a company means that you buy shares of a company and generally, retain them for a long period of time. By investing in a company, you become part-owner of that company and are entitled to cash benefits like dividends and bonuses. If the company is doing exceptionally well and the share price is at its peak, you can sell these shares in the market; thereby, reaping substantial profits.
For example, let’s assume that you have bought 1000 shares of ABC company at Rs 500 per share; this means that you have invested Rs 5,00,000 in the company. Until you sell these shares, the company is liable to give you a certain amount from its profits annually (called dividends). When the company is doing well in the market and the price of each share goes up (say, by Rs 1000); you have the option to sell these shares. On selling these shares at the higher value, you’ll be earning Rs 10,00,000 in total; thereby, making a profit of Rs 5,00,000.
Investing in mutual funds requires a considerable sum of money for investing. If you are looking for a more disciplined option to invest your savings, investing in mutual funds through a SIP (Systematic Investment Plan) is the best option.
A SIP is a flexible and an easy investment plan. Your money is automatically deducted from your bank account and is invested in a specific mutual fund scheme. Your mutual fund account is credited with the same units of value exact to the money you have invested.
Every time you invest more money, additional units of the funds are credited to your account.
Investing in mutual funds through SIP allows you to invest as low as Rs 500 per month in a mutual fund account; the rest is taken care of by the magic of compound interest.
For example, if you invest Rs 5,000 per month for 15 years and the expected return on an average is 12%, you could end up with Rs 25.22 lakh. If the expected return is 14%, this figure can become Rs 30.64 lakh. This is the magic of compounding.
In the long run, this amount can prove to be really useful as you can choose to invest this amount in real estate or equities. By doing so, you can multiply this profit.
Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you make profits by betting on the future value of the underlying asset which is a financial instrument(such as stock, futures, a commodity, a currency, or an index) on which a derivative's price is based.
There are two types of derivative instruments:
Futures: It allows you to bet on future trends in the prices of an underlying instrument without paying the whole amount, but only a fraction of the value.
Options: It gives you an option to buy or sell the stock, commodity, or a debt instrument at the target price.
For example, if the price of a stock is Rs 100, and you expect it to go up to Rs 150 in a month’s time, then can you buy a contract of 1000 stocks at Rs 100 today (amounting to Rs 1,00,000), and agree to sell it at Rs 150 at the end of the month. Hence, you will gain Rs 50,000 (150*1000 – 100*1000).
These are some of the best options for you to invest in and fulfill your dream of becoming a millionaire.
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When should you invest in Fixed Maturity Plans?
Fixed Maturity Plans (FMPs) continue to garner a lot of attention among investors in the past few years due to ease of investing, tax benefits and good returns.
Fixed Maturity Plans are close ended debt schemes with a fixed maturity horizon, meaning they are open for investments for a few days and closed until maturity. This time range could be as short as 1 month to as long as 5 years. FMPs are often compared to Fixed Deposits (FDs) due to the tenure. They often invest in money market instruments, bonds, governmental securities, etc.
Low-risk opportunities such as FMPs are a good option for investors who are spooked by the market. It’s always viable to invest in FMPs if you are looking for predictable and better returns. One thing to note is that they don’t get affected by the change in the market’s interest rate. When debt funds benefit from the fall in interest rate, the FMPs won’t join.
Why should you invest in FMPs?
Due to their investment in debt and money market instruments, they provide less risk of capital loss as compared to equity funds
Low Exposure to Interest Rate Risk
They are not affected by interest rate volatility as they are held till maturity.
Tax effectiveness and indexation benefits are seen both in the short-term as well as long-term as they offer better returns as compared to FDs.
Indexation lowers the capital gain, thus lowering the tax.
This allows an investor to take advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years.
Lower Expense Ratio
There is a cost saving with respect to buying and selling of instruments since these instruments are held till maturity.
They provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.
Who should invest in FMPs?
Investors with low-risk tolerance, looking at stable returns over the medium-term
Investors who are not pleased with returns from traditional fixed income avenues like Bank Deposits, Bonds etc.
Investors who want to invest money for a fixed tenure to meet certain financial goals in the future
Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income.
Investors who have a three-year investment horizon and do not need liquidity during the tenure of the investment
Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes.
When you understand the risk-return characteristics of FMPs, you will realise that FMPs can give better risk-adjusted returns than FDs, even after factoring in the risk-free nature of FDs.
While FDs give us assured returns, FMPs give us an expected range of returns, when we go through the scheme information document and calculate carefully.
In a nutshell
Fixed Maturity Plans:
They are basically the FDs of mutual funds. Close ended debt scheme with fixed maturity.
Low risk, tax benefits, ease of investing, good expected returns.
The more you know about FMPs, the more you realise that they are still excellent alternatives to FDs!
What is stock market? What should I know about investing in stock market?
Stock market and the rules for investing in stock market
Have you ever been in need of cash and reached out to your relatives or friends for help? After the situation is under your control and when you have enough cash, you return your relatives or friends’ money. However, since they are your friends and family, they do not expect any returns. That said, if you were to return the money after a substantial duration, you would also consider the inflation and other interest charges when returning the money to your relative. Now, imagine that instead of a personal situation, you need money for business opportunity. Then, your friends and family who lend you would also expect returns. This is the underlying principal of stock market.
Let’s glance through the rules of investing in stock market:
Do your research well: As a kid, you used to achieve success in exams by regularly doing your homework. This works even in case of stock market. Success is just a hands distance away if you invest appropriate time in research.
Don’t be a sheep: Following in someone great’s footstep is good. However, this is not true in case of stock market. It is advisable to avoid the herd mentality. Don’t be influenced by the actions your acquaintances, neighbors or relatives.
Invest in only what you understand: If you appear for an exam, you can answer the questions only that you’ve already prepared. You could prepare for questions only that you understood. This is true even for investments. You can be successful only if you invest in what you understand.
Be target-based instead of time-based: Even Warren Buffet doesn’t like to time the markets. Thus, instead of investing for specific time, invest with a specific target in mind.
Be disciplined: Discipline is the most essential ingredient for success. Without discipline, you tend to divert from your goals or miss the timelines and be relaxed about it. Discipline ensures that your investments help you reach your financial goals.
Be more practical, less emotional: Attachment issues are realistic and we all tend to face them at some point in our lives. However, it is best avoidable in case of stock market. It is advisable that you not get attached to a particular company or a sector. You need to see the trends and invest according to your research. Be practical and choose your stocks; don’t let your emotions chose your stocks.
Don’t put all your eggs in one basket: Change is the spice of life. Diversification is the spice of investments. To maximize your gains and insure your investment against market volatility and inflation, it is recommended that you diversify your investments and not put all your eggs in one basket.
Be optimistic but be realistic: Optimism is a great asset. It can take you places in life. However, when it comes to stock market, you need to have a perfect balance between being optimistic and realistic. You need to set realistic targets and not presume your stocks to be made of superman DNA.
Try and invest only the bonus: Occasionally, market volatility effects the stock market as a whole. Thus, you are bound to get your gains, albeit after longer time period. If you invested all your earnings into stock market without diversification, you could be in for a surprise. Hence, it is advisable that you only invest the extra amount that you have.
Scrutinize strictly: Investments are like babies. You need to constantly monitor their progress. If you allow them to grow unmonitored, you stand a chance to be in for a surprise. Thus, monitor your plans and be a proud investor.
To sum it up
Your investments in stock market have the potential to earn huge. However, it demands time and efforts. If you are ready to make some intelligent investments, you can rest assured that you will get guaranteed returns.
What are your top 5 Investment Lessons in 2017?
In 2016, the total wealth in India stood at $5.2 trillion. According to market research group New World Wealth, this means we are the 7th richest country in the world!
People are often under the impression that they have to be an economist or have a strong understanding of investments to know how money works. But that’s not true. All we have to do is look at everything that happens around us; the constructions of residences and malls, people vacationing, jobs created by new companies, money earned and spent, etc.
Some look at investing as a science, some look it as an art, and others look at it as a craft. But we can improve our understanding of investments and other related decisions only with practice. There is much to learn from the perceptive insights and thinking. Here are just a few things that we learnt this year.
It’s essential to invest in the stock market for a long-term. The right time to invest in stocks is when they are available cheap, i.e. the bear phase. Purchasing opportunities in the downturn can help your stocks multiply and become wealthy, over a period of time. One should wait till their stock appreciates a good percentage.
Before buying a stock, it’s important to study closely all aspects of the company. Value oriented companies tend to offer higher value for the long term. If there are two products similar nature, go for the one that is less expensive.
For instance, direct plans of mutual funds are priced lower than regular plans. A lower expense ratio directly translates into higher returns for the investor.
Consistent investment in the stock market will reap a lot of benefits. If done right, the stock market will always deliver, though the quantum or strategy of investments can differ.
For instance, the banking and financial sector was benefitted with people forced to deposit cash into their bank accounts during demonetization. Any investor who could have thought about this strategically would have made a windfall from his investments by now.
You can’t make wealth the same way someone else did. You need to do your own research before making any investment. You can take advice and help from someone but it’s important to make your own decisions as per your requirements. One should invest only in businesses that they understand.
Tangible and intangible assets are also considered while valuing a company. Investors must be wary of the intangible assets, i.e. goodwill, involved. Sometimes due to goodwill, companies with good brands usually trade at higher multiples. Paying too much, even for a great branded company, might not be a good investment then.
To sum it up
Here is a quick recap of the important investment lessons:
Time: Buy when stocks are cheap, sell when they are high.
Value: Value-oriented companies offer higher stock value for a longer term
Stability: Consistent, and not sporadic, investment for greater benefits.
Inspection: Advice from experts is necessary as scenario changes for every person.
Evaluation: Tangible and intangible assets (such as goodwill) to be assessed while evaluating company’s stocks.
The coming year could play a crucial role in achieving India’s long-term potential of sustainable economic growth. Investors such as us can participate in this growth story through the equity route.
Is Dividends from Mutual Funds a Boon or Bane?
A mutual fund scheme can declare dividends only from the realised profits in its portfolio. Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (in the case of debt funds) from the instruments the scheme holds.
Dividend schemes can announce dividend daily, monthly, quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavour to give a monthly dividend to their unit holders.
For example, if you have invested in a fund at the NAV of Rs 15 and opted for dividend option. The scheme performs and after appreciation, the NAV reaches Rs 18. The fund house may decide to pay out Rs 3 as a dividend. So you receive Rs 3 and simultaneously the NAV will fall back to Rs 15. If you invest it back your NAV will go back to Rs 18.
What can you do With Dividends?
Unrealised profits or paper profit from the instruments held cannot be used to pay dividends. These profits are added to the NAV. Some part of this can be declared as dividend depending on the fund manager.
Alternatively, the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.
When is Dividend a Boon?
Lower Risk: Financial planners recommend dividend option for conservative investors in equity for those who are risk averse and those who need some cash flows.
Regular Cash Inflow: Another case when it is useful to collect regular dividends is where you need income to meet your expenses and dividends can be a good way to achieve the same.
Tax Benefit: Dividends received from all mutual funds are tax-free in the hands of the investors. However, in the case of debt funds, the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund, there is no dividend distribution tax.
When is Dividend a Bane?
Reduces Investible Fund: Every time it pays out a dividend, the mutual fund reduces its own investible funds. Either it uses the cash available with it or it sells some of the investments to generate that cash and pay the dividend to you.
Eliminates Compounding Effect: As soon as the money arrives in the bank, it is out of work. It is highly possible that you will spend it. The same money, if it had stayed invested, could benefit from the power of compounding leading to a growth in the final investment corpus. As an investor, while you may feel you have gained (dividend), you are actually at the losing end.
To sum it up
Many investors opt for the dividend option in a mutual fund scheme, as it gives them intermittent cash flows, which comes handy in meeting their regular expenses.
However, when it is not required it is best to reinvest the dividend back into the fund. This is because the compounding benefit is lost when the dividend is paid unless the amount is invested immediately in a higher than equity yielding asset.
Things to remember when investing in stock market
When you think about climbing a mountain, you start with a lot of enthusiasm. However, when you realise the amount of effort that goes into it, your enthusiasm often turns into the feeling of being flabbergasted. The matter worsens when you realise that the weather conditions are about to get unfavourable for mountaineering. This is the same lifecycle of someone trying to invest. They start with a lot of enthusiasm, but when they realise that investing involves a lot of efforts, the market situation becomes unfavourable and investing requires a substantial amount of time to give considerable gains, they get overwhelmed.
Let’s revisit a few basics to remember when investing in stock market
Do not overlook the fundamentals
If you do not know the fundamentals of mountaineering, it is advisable that you know them before even thinking of setting foot on a mountain. This is true even for investing. Before investing, one needs to ensure that they have done their homework. You have to know all the basics terms and jargons of the market. Also, it is advisable that you gather information about the company you are investing in beforehand.
Set long term goals
Try to not have a prejudiced vision. Keep your eyes on the ultimate peak that you want to capture. You need to give time to reach the peak. Investing in the stock market also demands time to get you substantial gains. Occasionally, the markets could be highly volatile and your returns could be shunted as a result. Long-term investments have the prowess to unleash the true potential of interest compounding.
Understand your risk tolerance
You need to know when to back down and save yourself to give another chance at climbing the peak. You need to understand your risk tolerance. This is same when investing as well. Your risk tolerance is more psychological. However, sometimes following your heart can prove beneficial. Also, when investing, you need to limit yourself. If you don’t, there won’t be any difference between investing and gambling. If you start losing, you need to realise that you’ve reached your limits.
Buying and forgetting
Say, you’re in a situation and you are starving halfway up the peak. In these situations, you think about a power bar that could be of certain help. That’s when you remember that you did get a power bar. This was a situation of life and death. However, in the case of investing, this could be a dead investment waiting to be resurrected and resuscitated. It is advisable that you do not forget about your investments and regularly keep track of them. Ensure that you unburden the scrip at the right moment.
Not willing to book losses
It is great to be optimistic, but it pays to be realistic. When you are climbing a mountain, you need to understand if the weather conditions worsen, you need to start moving down. You cannot hope to climb and conquer the peak against all odds. That would be wonderful but highly risky. The same is the case with investing in stock market. You need to understand that if a stock is on the decline, you must not wait for too long. You should try to unburden the portfolio or re-think your strategies.
Try to not enter at peak and exit at loss
You do not start from the top and reach the bottom and get the glory. There is no glory in it. Similarly, if you enter a stock when it’s at its peak and exit when it’s losing, you suffer losses and not gains.
Ensure that you NOT follow the tips to the T
All the training that you’ve had helps you when you are trying to conquer a peak. However, your basic instincts up there ought to be your best friend. When investing as well, expert advice is good to listen to, but it must not always be followed. Take everyone’s suggestions but follow what you feel is right. Follow your experience and your training, and follow the advice only if you feel that it’s the correct option for you. Occasionally, the expert could also have an ulterior motive that you might be unaware of.
When you get equipment for your mountain trip, you do not just blindly trust the vendor. You double verify the equipment. Similarly, you don’t put all your finances in the hands of your broker. You do not let your broker trade on your behalf. It is advisable that you keep a track of all the trading that your broker does and ensure that he follows you and not the other way round.
Do not put all your eggs in one basket
Up there, you do not want to be found without a spare bottle of oxygen. Thus, you strategically place them to ensure that they be of help when needed. When you are investing, you do not want to invest in just one sector or portfolio. You would want to diversify your investments. This will ensure that market volatility and other factors like inflation do not give you stunted returns.
Avoid Leveraged money
You do not climb mountains with borrowed money and neither should you invest in stock market. If things do not go the way you planned, there is a chance that you might fall into a debt trap. You must always invest using the money that you have to spare. This way you can ensure that the lifestyle that you’re habituated to doesn’t get disrupted if you suffer a loss.
To sum it up
Investing in stock market is subject to market risk. Read this document and many others before investing. However, do not be afraid when investing. Just follow the adage, prevention is better than cure and you will be able to conquer the peaks that only a handful have conquered before you.