How should you invest - Goals and Risk profiles

Prasanth Menon

11 May 2017

New Page 1

Investing is a complex process. You need to define your goals before you invest.

From the above cycle, we can deduce that any investing decision fundamentally revolves around how aligned the investment goals are with your goals and how risky it is. Let’s further explore the effects of these two fundamentals on your investment decisions.

Goals

As explained earlier, it’s a thumb rule that you set your goals before you plan your investment. This is because you need to understand your requirement: What are you investing for? You could be investing for to pay the amount for the down payment of your house or your car. You could also be investing for your retirement or for your child’s marriage or education.

Based on your goal, you may set a timeline for your investments. If it’s a short-term investment like arranging for a down payment, you would want to invest in short-term debt instruments. For a long-term investment like retirement or your child’s education or marriage, you would want to invest in equities as they have the potential to earn in the long run. The next factor determining your investment is your tolerance for risks. If you are in your youth, you can afford to take more risks. If you are married and have a family, you would want to play it safe. If you are nearing your retirement, you would want your investment to be risk-free and stable.

Risks

We have heard so many times that "Investments are subject to market risks; please read the offer documents carefully before investing". What are those risks and how do they affect your investments?

The recent economic breakdown of Greece and Zimbabwe and other economic depressions like the one caused by Lehmann brothers have had hyperinflation as a major factor. Thus, inflation has the potential to break down an entire country’s economy. Imagine what it can do to your savings. Inflation has the potential to eat into your savings. Inflation is one of the risk factors you need to consider while devising your investment strategy.

There are some other global or national or business decisions that can heavily impact your savings and investments. For example, the recent demonetization move had a drastic impact on world economy. Your savings could or couldn’t have been directly affected by the demonetization. However, there are other decisions that could directly impact your investments like the decision to not issue H1B visas. This caused many IT companies to lose their market share. Thus, many big IT companies had to take drastic decisions like offer VRS to the top management team or fire 300-400 of their employees. Thus, if you were invested in IT companies, it would have definitely affected your investments.

To sum it up

Your investments are usually vulnerable to all economic turmoil and while you can protect yourself against many of them, you cannot protect the outcome of many financial decisions. Thus, it is advisable to diversify your investments for damage control in case of an economic turmoil. It is advisable that you do not keep all your eggs in the same basket.


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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How should you invest - Goals and Risk profiles

Prasanth Menon

11 May 2017

New Page 1

Investing is a complex process. You need to define your goals before you invest.

From the above cycle, we can deduce that any investing decision fundamentally revolves around how aligned the investment goals are with your goals and how risky it is. Let’s further explore the effects of these two fundamentals on your investment decisions.

Goals

As explained earlier, it’s a thumb rule that you set your goals before you plan your investment. This is because you need to understand your requirement: What are you investing for? You could be investing for to pay the amount for the down payment of your house or your car. You could also be investing for your retirement or for your child’s marriage or education.

Based on your goal, you may set a timeline for your investments. If it’s a short-term investment like arranging for a down payment, you would want to invest in short-term debt instruments. For a long-term investment like retirement or your child’s education or marriage, you would want to invest in equities as they have the potential to earn in the long run. The next factor determining your investment is your tolerance for risks. If you are in your youth, you can afford to take more risks. If you are married and have a family, you would want to play it safe. If you are nearing your retirement, you would want your investment to be risk-free and stable.

Risks

We have heard so many times that "Investments are subject to market risks; please read the offer documents carefully before investing". What are those risks and how do they affect your investments?

The recent economic breakdown of Greece and Zimbabwe and other economic depressions like the one caused by Lehmann brothers have had hyperinflation as a major factor. Thus, inflation has the potential to break down an entire country’s economy. Imagine what it can do to your savings. Inflation has the potential to eat into your savings. Inflation is one of the risk factors you need to consider while devising your investment strategy.

There are some other global or national or business decisions that can heavily impact your savings and investments. For example, the recent demonetization move had a drastic impact on world economy. Your savings could or couldn’t have been directly affected by the demonetization. However, there are other decisions that could directly impact your investments like the decision to not issue H1B visas. This caused many IT companies to lose their market share. Thus, many big IT companies had to take drastic decisions like offer VRS to the top management team or fire 300-400 of their employees. Thus, if you were invested in IT companies, it would have definitely affected your investments.

To sum it up

Your investments are usually vulnerable to all economic turmoil and while you can protect yourself against many of them, you cannot protect the outcome of many financial decisions. Thus, it is advisable to diversify your investments for damage control in case of an economic turmoil. It is advisable that you do not keep all your eggs in the same basket.