Slow and steady wins the race

Every time we keep telling invest in SIP and watch your funds grow, SIP’s have always given better inflation adjusted returns, etc. But we have always said in the long run and by long run we always mean 10 years or more. I read an article in The Times of India, some days back, where the financial planners were trying to convince two businessmen brothers to start a SIP for their children’s education which would be after 15 years. But they were both very adamant. For that matter all of us are. We have come up the hard way and managed to succeed with whatever odds we have faced. So we assume that we will still be able to manage.

What we forgot at that point of time, is that it is our parents who have bailed us out and done it with a lot of sacrifices and you are ready to go down the same route. It was only when the Financial Planner told them that after 15 years the amount would run into crores after taking inflation into account, they agreed. Why? Because they knew they would not be able to remove that kind of money out of their business at one go, without doing a lot of sacrifices. So when there is an easy way out why do you insist on waiting? Start a SIP today. The brothers did it and they were tension free, why? Because they were assured that now whatever happens to the business, their children’s future was secure.

Even when the market was down and their business was not doing well, they still had a smile on their faces. They had seen the results for the last 3 years and were assured. Frankly unless we start we will always be sceptical. Don’t you want a smile on your face all the time? The beauty of SIP is that you can start with as little as Rs. 1,000/- a month. I’m sure this is a very small price to pay for securing your children’s future and reduction of your tensions. In this article I just spoke about children’s education, but your goals could be anything, say marriage, retirement, own house, holiday, etc. Start now and secure your goal. Slowly and steadily you will reach your goal.

After all reaching your goal is equivalent to winning the race.

Want Guarantees for your investments

There are some persons who would like to see their investment grow, but cannot think of anything other than Fixed Deposits. If you suggest anything else, they want a guarantee. But you are aware that in Mutual Fund investments there are no guarantees, whether it’s Equity or Debt. Ask any financial planner and he would say, if you want to grow your wealth and beat inflation, go with equity. So what do these people do, they invest where they have guarantees i.e. Fixed Deposit, Post office, Insurance, etc. and these are the very investment which erode your wealth in real terms. Many of them had burnt their fingers with equity investments in 2008 and with the many scams which took place.

This year they saw the market go up all the time and now they are again scared to invest in equity, because of their fear, which is, the market can crash anytime. Such investors should go for hybrid funds, which invest in both debt and equity. The debt portion would take care of the security of the investment and Equity would take care of the growth. This is one of the safe investments in mutual funds which would ensure you do not erode your wealth.

One of the most commonly named funds in this hybrid category are monthly Income plans. These funds invest around 75% in Debt and the balance in equity. The debt portion increases if the market is too heated. So the debt portion gives you a stable return just like fixed deposits and depending on market situation equity would give growth. So when the going is good, the returns would go to say 13-15%, but in a bad market the returns could be from 11-13%, which is not bad at all. If you look at all the Monthly Income plans the average returns for the last 5 years is around 12.5%. Here as I had said earlier, we still cannot give guarantees for returns.

Investments in these funds should be for a minimum of 3 years, as a major portion of the funds are invested in debt, these are treated as debt funds for income tax purposes and if you have read some of my earlier posts, you would have seen, that debt funds definitely beat fixed deposits if the investment is for more than 3 years. So Monthly Income Plans are tax efficient investments as well. If you go for dividend option, it’s even better as Dividends are tax free, but remember, the income tax department taxes their pound of flesh, in the form of dividend distribution tax, which is quite heavy at around 28% after adding surcharge and tax. So it is better to go for growth option and withdraw any time after 3 years when you need the money or go for a systematic withdrawal plan after 3 years.

Are your investment strategies right

You have been very careful about money and a vivid reader. You have managed your funds right and have been following certain strategies. But then you see everyone around you flouting their wealth and you are still saving and able to reach your dreams. What is wrong? The problem is planning. In our effort to save pennies we are losing pounds, which could have grown our wealth. You might be saying that the others are lucky, then why don’t you try and get lucky yourself. I’m not asking you to gamble nor have the others got their wealth gambling.

There could be many reasons why your savings have not been growing, you might be investing in shares based on tips and those tips are not going right. As I said earlier, everyone will give tips, but the same persons investing based on those tips. Also they set a stop loss, do you do it or just wait. You should be ready to bear losses as well.

Of course there are some safe investments like Fixed deposits, where you would get a return of 10%, but then this is taxable, if you are in the highest tax bracket, your post tax return would just be 6.1% which is less than the inflation rate. So though you have increased your money you have lost to inflation. Therefore it is always recommended to invest in such a way that you beat inflation and then only you can be wealthy, like those around you. Those people have not been lucky, but have been investing wisely.

Insurance is good, it secures the future of your loved ones in case you are no more. But do not treat it as an investment to make you wealthy, but an investment to take care of a risk of death. Real Estate is good, it has been growing, but for how long? Have you considered the tax implications?

Asset allocation is the most important method of increasing your wealth. Just equities will not help, unless it is for the long run. Just don’t hope for the market to just keep going up for ever. Follow a plan, based on your financial goals and you will be wealthy.

Are loans bringing your wealth down? Have you made best use of the cheap loans available? Is there a better option available? Are you using your credit card for loan purposes?

You need to reassess and check where you stand financially and get a good financial advisor. Now every person who sells mutual funds or insurance calls himself an advisor, don’t get carried away. Check the advisors credentials and check if he spends time to understand your goals, before suggesting you a solution.

Usually financial advisors will spend at least an hour with you to first understand your goals and assess the type of investor you are. He will then assess your existing investments and only then will come up with a strategy based on your goals and risk appetite. Take help and get wealthier faster, with the right investment strategies.