Investments through Mutual Funds

So you have done your calculations and arrived at a figure that you should invest regularly to achieve your goal. Now you have decided that some portion of your investment needs to be in equity. So which equity share would you start investing, so that you achieve your goal? It’s difficult, leave it to the professionals.

You have two choices, hire a portfolio manager or invest in a mutual fund scheme investing in equities. Now both the types of investments have its pros and cons. For investing using the services of a portfolio manager, you need to commit a big sum of money, also the upfront charges are high.

In a mutual fund, you can start with a very small amount and the charges are also less. So now that we have decided to invest in a mutual fund investing in equities. The next hurdle begins. Which fund should I choose, yes we said equity mutual fund, but do you know that there are hundreds of equity mutual funds.

So let us now narrow down our search. We should chose a fund whose cost is the lowest. The cheapest equity mutual fund is the index fund. It is cheapest because the manager tries to mimic the index and you do not have to worry about the stocks chosen by the fund manager, since he has to mimic the index.

If you look through the performance data, you will find that most of the index funds have actually beaten the index. So the next thing to do is select the fund which has done well over a period of time. It’s always better to go by performance that to go for new index fund. In a new index fund, you cannot be sure that the performance will be good.

So if you are new to investing, start with an index mutual fund with a good track record.

Loans – Deep down in Debt

We all like a good life style, but we do not have the money to match that life style. Many of our friends have a better life style than us, so to keep up with them ( we call it peer pressure) we take loans. So at the end of the day we end up with different loans viz. Home loan, Car loan, Personal Loan (to go on a holiday), etc.

As time passes, the pressure on our finances keeps mounting and you do not have more options to go directly to the bank. So to service these loans you go for an easier option. Your wallet, yes, the credit card in your wallet. The moment you start servicing your debt using the credit card option and you are in deep trouble.

Interest on credit cart dues is usually the highest. In case you reach such a stage, the best option is seek professional help. Don’t dig the pit deeper for yourself, the deeper the pit, more difficult for you to climb out. As your borrowing grows your credit score starts going down and it would become difficult for you to get loans.

Currently the interest rates are not linked to your credit score, but it would start soon and your interest rates would start rising if your debt starts increasing. Should you wait till you reach the stage of borrowing using your credit card or your try to assess the damage you have done earlier?

Earlier, then the thumb rule would be the moment your loan repayments goes beyond 50%, its time you had a relook at your loans. You have to start looking at repaying and getting out of debt. So which debts should you repay first? Those loans which do not help in building an asset should be the first to be repaid.

There would be cases where there are multiple, in such case repay the one with the highest interest. The task is difficult. You cannot just pay off the debt; it needs to be done over time. You first prepare a plan and stick to the plan. This requires discipline and a lot of sacrifices. It would change your life and lifestyle.

The first loans to repay should always be credit card loans. As mentioned earlier they are the costliest. Try by taking a personal loan or converting the credit card balance to a personal loan. This way you would have shifted from a high interest bearing loan to a lower interest bearing loan.

With your outgo coming down, because of lesser interest rates, next target the higher interest bearing loans. There might be pre-payment charges for repaying earlier, but it will still be worth it. Don’t just repay loans which give you a tax benefit, though the interest rate may be high, if you consider the tax benefit, it might be low.

As mentioned earlier, you could get a cheaper loan to repay a high interest bearing loan. You could borrow from your PPF, where the interest rate is 2% higher than the current interest rate. So if you are repaying a loan with interest rate or 12 % or more with a PPF loan, you are still better off.

Another method of repaying loans would be to liquidate investments. If your rate of return on investments is lower than the interest rate you are paying, it is better to liquidate the investments and use the money to repay the loan. Markets might go up, but it would be better to get out of debt first and then use the money saved to invest when you have funds in hand.

The cheapest funds you can get is by cutting down on expenses. Cut down your expenses and use the money saved to repay the loan. The faster you come out of the debt trap, you could start enjoying life better faster.

Is this the best time to invest in debts?

Once a friend of mine came to me and asked is it safe to put money in RBI Bonds? I did not know what to say, was he ignorant or was he pulling my leg. With so many scams around, people have just lost trust, especially in corporate bonds. The debt market was very good till now, with interest rates going up. It looks like the rates would start going down and this would be the best time to lock your money for a fixed rate of interest. It would be better to lock the interest rate for a longer period.

Now the question comes, how much should go into short term and how much into long term. This depends on an individual’s goals. Next question that would come up is where to invest. Should one go for corporate bonds or for government securities? Corporate bonds are issued by companies and government bonds as the name suggests by the government. So which are safe, definitely Government bonds. Corporate bonds carry a higher risk and that is the reason corporate give higher rates of interest. Higher the risk of not getting your money back, higher the interest rate.

Since Government bonds are secure, the rate of interest is a bit lower, but note the rate given by the government is usually taken as a benchmark. Government is borrowing heavily, this has happened, because of the fall in stock markets. Stock Markets? Yes, the stock market, since the government had planned some disinvestment, but did not do so, since it would have got the minimum base price. So what is the other way to get money to meet all its plans? Borrow, yes borrow, through bonds.

The coming budget will give us an idea how the bond rates would go. The reason is if the interest rates just keep going up, inflation will go up. So the government would plan to generate income through some other way. If it does happen, the interest rates would fall. But with high inflation and poor market conditions, businesses have also seen a slow down, they had issued corporate bonds, to ensure they would be able to complete the projects they had started. Their money is locked in inventories, because of low off take.

Hopefully as markets start recovering and inflation would come down, the business risks would be lower, leading to reduction of interest rates. So as we see, interest rates would go down, one way or the other. So what should you do? The best thing would be go for corporate bonds for the short term and Government bonds for the long term. In case you are not sure what to do, invest in Debt Mutual funds. These mutual funds would take care of assessing the risks. Yes, if you do the investment on your own, the yields would be better.