What to do in a Volatile market

In the first week of March a retired gentleman called me asked what should I do with my investments in mutual funds as the market has crashed? I just asked one question, do you need the money? He said no. My advice was then just hold on. A few days later he again called, saying my debt funds have also fallen and again I asked him the same question and our replies were the same. This gentleman now was very frustrated as he was losing money and did not know what to do. The thing is, was he really losing money or that losing money was just in his mind. More often than not, it is usually in our mind. The market is an unknown beast and we are trying to tame unknown and milk it. This is our problem.

Why do we want to go into unchartered waters without even learning the basics? My advice to such persons is, just do regular asset allocation. If we have decided to keep 50% of our financial assets in equity and the balance in debt, then on a regular basis just ensure that you are maintaining that balance. This will help in lowering the risk of your portfolio. Asset Allocation is the most boring job. We want excitement, but this most boring job helps keep our portfolio safe. This is what most of us want. We are ready to keep our money in fixed deposits in the name of safety, which is also boring, then why not asset allocation with higher returns and a little higher risk compared to Fixed Deposits.

Over a log period studies have shown that regular rebalancing even once a year has given better returns than doing nothing. Rebalancing is necessary because different asset classes give varying returns over different periods of time. Because of these varying returns, the asset allocation changes over a period of time. Regular rebalancing helps in restoring the asset allocation and also reducing the risk. In the bargain, you tend to book profits from the asset class which has grown and purchase at a lower price the asset which has not grown to the same extend. Mind you, we are not timing the market, but we are still booking profits on a regular basis.

So do not let your emotions drive your decisions, just do regular rebalancing. If you find it difficult, just go for professional advice.

Success and Finances

What is success? For different people, success means different things. But we usually see similar traits or measurement of success in a particular age group. What I have seen, is for people in their 40’s success means having a good position in his/her job and earning is good. So here the focus in mostly on making money. Taking the current working environment, earnings growth peaks in your mid 40’s (this is average). This is the time to invest so that your wealth also grows aggressively.

Most of the couples, I have met (who are in their 40’s) have very good income streams, but their finances are in shambles. The reason is simple, they have been totally concentrating on their earnings, then add to it, home and car loans, Children’s education and holidays to beat the pressure and the worst peer pressure. In all this they did not get time to look at their investments. Most of them are professionals, but have not even thought of employing a professional to look after their investments, even when they do not have the time. Some are so burnt out by the time they reach 50, they just give up, if they do not reach the board room.

One of the things they could do is start investing wisely with the help of a professional, so that even if they plan to quit, they do not have to worry. As your earnings increase, increase your savings percentage. Most of them have savings, but in Fixed Deposits and PPF. This is good, but this investment will not beat inflation and your rising lifestyle expenses. When I talk about SIP’s they say let’s start with Rs.5000/-, it’s like only 1% of your regular expense is lifestyle expense. Rs.5000/- is small at the age of 40, it should be a minimum of Rs.40000/- pm. After 10 years when you look back and see the corpus, this Rs. 40000/- will look like a small amount.

The other think I have seen most of them do is go for a second house as investment. Do not do this till your goals are met. If you need a bigger house depending on your status, go for it. As with most capital intensive purchases, all you will do is build up your liabilities and your savings will come down. As this is the time to let your money grow. This is the time to work on your dreams and let a professional work on your finances to help you reach your long term dreams. It should not happen that you meet your current dreams and then when you reach your sunset years, you will spend your time dreaming, instead of living your dreams.

Arbitrage Funds

Arbitrage is a term used to describe the purchase of a product which is then immediately sold to make a profit. Arbitrage is popular in the stock market or as a means to make profit from goods being sold at differing prices in varying markets.

Let’s take an example of arbitrage. Suppose a tailor sells a shirt for Rs. 400/- the cost for him is Rs. 300/- He makes a profit of Rs. 100. One day when he at the cloth manufacturer, he meets another tailor who also makes shirts and sells. The cloth and accessories are the same, his fitting is also more or less similar, but he sells his shirts for Rs.250/- So our tailor to increase his profits, buys from the other tailor at Rs. 250/- and sells for Rs. 400, increasing his profit to Rs. 150/- per shirt. This is arbitrage, basically taking advantage of the price difference in the other market for the same product.

The above type of arbitrage is available in the financial markets as well. In the financial markets there are 2 types of markets, one is cash and the other is derivative. There is always a price difference in both these markets. So if one buys in the cash market and sells in the derivatives market it will be called an arbitrage trade.

Now if it was so easy everyone would have been doing it. But here is the catch. In the cash market you can buy today and sell tomorrow. But in the derivatives market it is a contract which is valid for a fixed period. One just pays a premium initially and at the end of the contract period, s/he has to settle it by paying the difference between the then prevailing price and the contract price. So if your bet goes wrong, you could lose big. But since you have done the opposite in the cash market, the loss will be minimal.

Arbitrage funds returns are very similar to debt fund or fixed deposits, but this product is treated as an equity product. The reason is tax.

Therefore it is very important that you know about the tax treatment and investment options before making any investment decisions.

For income tax purpose, as mentioned above arbitrage mutual funds are classified as Equity oriented funds.

·         Long Term Capital Gains on Arbitrage Fund

      o   If you make a gain / profit on your investment in an Arbitrage Mutual Fund scheme that you have held for over 1 year, it will be classified as Long Term Capital Gain.

      o   The long term capital gains on Equity oriented funds will be taxed at 10% if the total Long Term Capital gains is more than Rs. 1 Lakh in a year. It is tax free till March 31, 2018.

·         Short Term Capital Gains

   o   If your holdings of an Arbitrage Equity mutual fund scheme are less than 1 year old i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain.

      o   The capital gain tax rate of 15% is applicable on Short Term Capital Gains of Arbitrage Fund.

   o   Kindly note that interest income on Fixed Deposits will be charged at as per your income tax slab rate.

   o   The Short term Capital gains on Debt mutual funds too are taxed at as per your income tax slab rate if the holding period is less than 3 years.

So, as per the current tax laws, the Arbitrage Funds have clear tax advantage over Fixed Deposits or Debt Mutual Funds.

 

 

Asset Allocation

If you look at any smart investor, s/he follows these 3 strategies

1)     Asset Allocation – Smart investors do not put all their eggs in one basket. The allocation of funds to different asset classes is based on his/her risk profile and time horizon.

       2)     Differentiation between risk and reward – Wherever the risks are more than the rewards they avoid those     investments.

3)     Discipline – Once a strategy is devised they follow it, till the goal is achieved. This does not mean that they will not review the strategy. Strategy is reviewed periodically and not daily, even this review is done in a disciplined manner.

Let us look at asset allocation. Asset Allocation is a strategy where investments are done in different asset classes so as to balance the risks and rewards. Depending on the risk profile an investment portfolio is designed to diversify the risks and increase the rewards. As you are aware, each asset class has a different market cycle and the time frame for each cycle also varies, but we will never be able to time the market, so the next best thing to do is follow an asset allocation strategy and follow it. This discipline will help you get better returns.

Historically the major investment asset classes are real estate, Gold, Equity and debt. But Investment in real estate requires high investments, for doing asset allocation with real estate would be difficult, unless you have a lot of money. In that case we usually do an asset allocation between, gold, Equity and Debt. As you know each of these assets moves up or down at its own market cycle and we know of the market cycle only as an historical fact but not on a day to day basis. As market conditions change the risks and returns of the asset class changes, so by asset allocation you tend to reduce this risk. But how do you make money by just reducing risk. This is the second part of asset allocation i.e. rebalancing.

In rebalancing what we do is at every periodic interval we rebalance our portfolio. What does this mean? As time passes, one asset class would have given better returns than another. So if initially we had decided to invest Gold, Equity and debt in the ratio of 5:50:45 and at the end of the period the ration becomes 6:55:39 then we will sell some equity and gold and invest the same in debt to bring the ratio back to 5:50:45. This way you sell when the market is high and buy when the market is low for that particular class of asset. If all this sounds difficult, just go for a balanced fund which will keep doing this for you.

Hesitating to invest

Let me start with the story of Edwin C Aldarin, also called as Buzz Aldarin. Do you know that he was chosen to be the first person to step on the moon as he was the pilot of Apollo mission? The story goes like this, when the spacecraft landed on the moon, they received a command from NASA center “Pilot first” Aldarin hesitated and not for long but a few seconds, but in the meantime NASA sent the next command “co-pilot next” and rest is history. Neil Armstrong become the first person to step on the moon. This happens to us in everyday life. Nobody remembers the person who comes second. Go through history, it is always first person to …. Etc. All of us the potential, but we hesitate. The only thing that stops us is our fear.

All of us know that equity gives us the best returns, but then we have heard so many stories of failures or have the fear of the unknown like Aldarin. We are even scared to ask for help. Is there any player who has succeeded without a coach? The reason they go to a coach is to bring out the best in them. Every person has the talent, but then the coach gets the best out of them. In investing also, we also fear or hesitate, because of the fear of losing money, but this fear will get us the next best think. Aldarin had all the qualifications and training, but he hesitated. Why are you hesitating, if you are not sure, get hold of a financial advisor, who will help you remove the fear? With the current market volatility there are a lot of opportunities, do not hesitate go out and invest. There is money to be made, be the first.

Rebalance your portfolio

One of my clients had a very large portfolio with major investments in Real Estate, Fixed Deposits and Insurance. He even had some money lying idle in his saving bank account waiting to pay his son’s fees which were to be paid a year from now. As per the government and RBI, inflation has been low and would remain low for some time, so they think the interest rates should be low and hence they have kept reducing the interest rates so that industry would take advantage of the low interest rates and start investing, whereas we would stop saving and start spending. This would bring about demand and so the economy would rise. But how does this impact my client? Now when he wants to invest his money lying in the saving bank account, in fixed deposits he would get a lower interest rate and when his existing fixed deposits come for renewal they would also be at a lower interest rate.

The era of high interest rates is gone. One option would be to go for debt mutual funds, depending on the time frame for which he intends to keep his money, he can decide on long term debt funds, medium term debt funds or even short term debt funds. The returns would be definitely higher than the bank FD’s he has and they will be tax efficient if the investment period is greater than 3 years. Net, the return after tax would always be better. This is the time to have a relook at your portfolio and decide if you still need to keep those FD’s. As regards insurance, don’t use it as an investment option at all. Returns from real estate depends on when and where you have invested, if the return has not been good, have a relook at it both from the investment and tax point of view. So rebalance your portfolio now.

I want to buy a car

These days everyone wants a car with no parking space. But the question to ask is do you need a car or do you want a car. A car is convenient and useful, but if you do not have frequent travel then car is just a want. Car is both an asset as well as a liability. Asset if you need to travel frequently, liability from the point of loss of value from the date of taking possession itself. What does it mean? The value of the car goes down the moment it is on the road, add to that maintenance and fuel cost. Whether you run the vehicle or not, maintenance cost will always be there. Car is convenient, but with so many car hailing apps, do you really want a car, just for convenience and because all your friends and relatives have one?

It is good to have aspirations, but these aspirations should not come at the cost of your other goals. So check, if the car is really as important as your other goals. After taking everything into account, if you feel it is a need, then check if you have at least 25% of the cost for down payment and enough surplus to pay monthly EMI. These EMI’s are not tax deductible, so try to keep the repayment period as short as possible, as the interest would be eating into your other goals. Check if a new car is really necessary, these days you get good second hand cars, you can upgrade when your finances are comfortable. If you want to upgrade, do not do so, unless the maintenance cost have really gone up and the car is giving frequent trouble.

Planning to start a family

Just married, what next? Start a family. Starting a family is not just an event but a life changing event. Though there is excitement, there would be a lot of pressures. The pressures would not only be psychological, but also financial. We need to be ready to take care of both, the physical and psychological part would be taken care with guidance from your medical practitioner, but what about financial, and you need to take care of that. Are you ready? Have saved enough for this event and after that. Remember your expenses will start mounting. Now you will have to take care of 3 persons and the third person will need a lots more care both in terms of time and money. Have you take a health insurance policy? If yes, or you have one provided by your office find out if it covers maternity expenses.

On the contingency front, you would have to recalculate your life insurance requirement, as now you would have many more aspects to take care of in your absence. This life changing event can become less stressful, if you have planned properly as the event is just not one time but it will change the rest of your life. If your wife is working, you would also have to consider the possibility of her quitting her job. This means lower income. Though we usually recommend 3 to 6 months of contingency expenses, during this time we recommend to increase it to at least a year’s expenses, that too the increased expenses. Plan early and enjoy the joys of starting your family.

When will the markets go up?

Brexit results are out and everyone has started to predict the conditions of the market. Nobody is concentrating on the company results. What is the point? If the companies are not improving on their profits or their sales are not improving, do you think the market will go up? Even if the market goes up, will all the stocks go up? You need to concentrate on specific stocks and not the sensex or the Nifty. With good monsoons Rural consumption will improve and that will help companies which are impacted by rural consumption. Though Oil prices fell, commodity prices fell, consumption did not improve, this led to a total slow down. Therefore companies were not able to capitalize on this and companies which benefited, their prices have already gone up.

RBI Governor is on his way out and we would have a new governor soon, do you think this will bring down the interest rates? Even if the interest rates come down, would Banks make good margins. If you noticed the last quarter, private banks were the most profitable, the reason is loan writeoffs. Private banks had the least loan writeoffs. Brexit or Rexit the macroeconomic conditions are improving and this will reflect in the earning of the coming quarters and then see the markets just zoom. The government would also be giving more stimulus once the rainy season is over with spending on power, rail and road. So bright days are there ahead. So enjoy.

Becoming rich by buying right and sitting tight

We keep hearing that if you want to make good money equity is the best. You would have heard many stories of people becoming rich by buying a stock and sitting over it. This sounds too good to be true, because whenever you have invested you have lost money. Does this sound familiar? These days you would have heard, when the market is down buy and when it is up sell, but how do we know if the market is a falling market or a rising market. This is difficult to tell. It is not easy to time the market, you just need to be lucky to have brought a stock at its lowest value. There would be numerous instances of the stock falling soon after you purchased it, the only reason is nobody knows when a stock or market would stop falling.

You just cannot become rich without taking risks. Equity investing is risk taking and you need to have a risk taking appetite, but not all of us want to take risks. Most of the people I talk to say, I do not have money to invest, but at the same time ask for tips. All want to make it rich soon, not ready to put in efforts or understand the risks. The first thing you need to do is think long term. Next treat the investment like your child, keep track of it, and if you find something is going wrong, take corrective action. Now when your child makes a mistake, you first analyse if it was really a mistake and only then take corrective action, same way, find out if what is happening is natural or the management is not taking corrective action and then decide. Do not regret if you made an error of judgement, this happens to all of us. Next check if the company you are investing has been creating value over a long time and is capable of creating value over the next 3 to 5 years. If it is a new company, would it be creating value over the next 3 to 5 years? Because markets change daily, our lives are also changing daily.

Do not go for IPO’s as they give you a very short term view as their intention is to get the IPO through, take a long term view. Understand that what is good today may not be good tomorrow, so try and take a long term view of any investment. Last whole market keeps following the index, which is a good indicator, you also should track, but track which stocks are part of it and which are not. Remember the index stocks are ever changing and usually only the good stocks remain in the index, so if a particular stock you are holding is removed from the index, it is time you too exited from it. If you do not have the ability or time to do all the above, go for the next best option i.e. invest in Mutual Funds, the fund managers are trained to do all the above and that is their full time job. Here you can just buy the units and sit tight.

Best Mutual Funds to Invest

The market has started to move up and now everyone is thinking of investments. IMD has predicted good monsoons and government has presented some good numbers. We want to invest but at the same time do not want to take too much risk, so most people tell invest in mutual funds. But which mutual fund scheme should I invest in? When the markets are up all the funds show good growth but the best way to check is how the fund did perform when the markets were down. Now many fund houses will give you this information directly. You will have to do your own research, last year was a good example. Check the fund’s performance for the last one year. This will help you narrow down on the schemes you would like to look at. Once you have done that, check the long term returns of these funds. If you find they have done well on both these parameters. You would have been able to narrow down to a funds in single digits. Now this strategy is good if you are a long term investor. So what are you waiting for, do your reading and research and start investing.

Is your portfolio real estate heavy?

A friend of mine came to me asking if there were good investment opportunities in real estate. I was wondering why real estate, as he already had 2 houses. One he was staying in and another on rent. He used to save money and he had enough to make down payment, he would invest in real estate under development project and then keep paying off the loan. Now he is 53 and he want to purchase another flat. On probing he said real estate gives good returns and the rentals would give him regular income. While it is true that there will be appreciation, but when he needs the money liquidity would be an issue. Selling a property is time consuming. Another issue is market prices of real estate are opaque. When you actually try to sell, you will get a much lower value than you actually believe your property is worth and if you really want the money urgently, you would have to give further discount and also with a lot of running about. .

The other issue would be even for a small value you would need to get rid of the whole property as property is indivisible. We always look at the rental income, but we usually tend to discount the expenses which we have to bear on the property on a regular basis viz. property taxes, repairs, painting, maintenance bills, etc.  There could also be times when the property will be vacant. Now what happens is people who talk of investing in property always talk in absolute value terms, if you acutally look at the returns it would be around 3% of the current value. So in such a situation any other investment would have given better returns. But then they will not understand as they are emotionally attached to real estate. So I told this friend that not more than 50% of his portfolio should be in real estate. He said I’ll get back to you and I am still waiting.

Keep your investments under lock and key

Are you one of the persons who has the habit of keeping your money invested in Safe Bank Fixed Deposits? Then this part of the story is for you. Once a man got married to a beautiful girl, he was so possessive of her that he did wanted her to remain beautiful forever. So he locked her up in one room of his house so that no bad air or sunlight would affect her and she would remain beautiful. Initially he would see her everyday, but as years passed, he would see her less frequently and as more years passed he would see her just once a year. He had reached his retirement age, he decided now was the time he would spend with his beautiful wife, but when he opened the door, he saw an old lady. This is what happens when we keep our investments in Safe Bank Deposits, when we need the money, it is not enough as inflation would have reduced its worth. Just like the man, if he had allowed the lady to move around, she would have attempted to look good all the time. Same way if we invest our money properly, our money would work for us. So why don’t you make your money work for you instead of locking it up and then regretting when you need it.

Plan for your holidays

A few friends met a few days back and one of them had just returned from an international holiday along with his family. As usual after mentioning how he enjoyed and where all they went, one of us asked him how big a hole was it on his pocket, he mentioned Rs. 3 Lakhs for 4 persons. Hearing this rest just said, we don’t think we could afford it or they would have to take a loan. That is when our friend told them he did not borrow nor was he a high earning individual, which all of us were aware of. So the next question was how, our friend just told them that he had been setting aside Rs. 8,000/- per month for the last 3 years and this amount grew to Rs. 3 Lakhs along with interest. This was a simple solution, which all of us can follow and still be debt free and both you and your family will be happy.

A break every year is a necessity, but a vacation is a luxury. Saving for a necessity is important, so do not borrow for a luxury. Setting aside money for a dream holiday should be done only after you have set aside money for your necessities. Also do not use your credit card for and during such trips, the foreign currency conversion costs are the most expensive ever. Always stick to the budget you have set aside. Your budget should include so unforeseen expenses as well. All said and done the travel bhoot cannot be stopped, what with so many advertisements and societal pressure. So if you must, then start by keeping aside some money every month and start researching from day one. As you have started researching, you would know most of what you require and costs early, so you could start planning early as well.

 

Doing your visa early would help you with getting good deals on your hotel and air bookings. You could also work on your foreign exchange requirements. Banks are not the best providers of exchange rates, so you could check out and get good deals on foreign exchange rates as well. Early bookings would easily help save around 10 to 20% of your costs. Last but not the least, where you keep your monthly savings, earning the best returns without losing on the capital, connect with your financial advisor before investing. Many travel firms comes with good schemes of saving for your holidays in association with banks, only hiccup is that your dates have to be fixed a year in advance. So do not fret, plan from your holidays in advance.

Is the timing right for Investment?

In the global markets, Gold had fallen some time back and it has now started to pick up again. Why is this happening? The only reason is uncertainty. As you must have seen, whenever there is uncertainty in the market, gold rises, this is the time to make money by selling gold. Worldwide all commodity prices are falling, we all want to know reasons, can’t you see, sales are not picking up, hence the prices are falling. All assets follow a cycle of 30 years, 10 years rise and 20 years fall. So are we in a rising or falling cycle for gold? You take a guess, gold prices just kept going up from 2002 to 2012 and then started falling, and so do you think history will repeat itself? Only time will tell. As regards equity market the cycle is for 7 to 9 years, 4 to 5 years of rise and 3 to 4 years of fall, looking at history where are we?

Real Estate also goes through cycles which is around 20 years i.e.10 years of rise followed by 10 years of stagnancy. Real Estate kept going up from 2004 to 2013, so now what? If you look at all the markets they are all supposed to be in fall mode and hence the uncertainty. Add to this interest rates are going to soften. So in such situation only thing that will go up would be rents, as people will not buy waiting for real estate prices to correct and interest rates to fall. But then you do not want to invest in real estate, so those who have already invested are bound to benefit during this time. So what should one do in such a situation? Depending on your investment horizon you can plan your investments. For short term go for Debt funds again here your choice of Liquid, short term and long term debt will depend on the period you are ready to wait. For medium term go for balanced funds and long term would definitely and always be Equity and that too using the SIP mode. For detailed investment plan or advice please contact your financial advisor.

Anytime is the right time to buy real estate

Many of us want to buy real estate some for self-occupation and some for investment. If it is for self-occupation, do not wait, this is the right time. But if it is for investment, then wait for another year or two. You must be saying that prices will fall, but are they really falling? The inventory levels are high and the demand is low, developers are looking for new ways to con the customers into buying at the current prices. Buyers are excited, with interest rates falling, but for reality to sink in i.e. for prices to fall, will depend on the holding capacity of the developers. The other issue is getting all clearances. With the government changing, the well-oiled machinery also started finding problems and now you have buildings ready but no permissions to stay.

The government is working hard or hardly to bring the real estate regulation act. This should act as a booster and give us more surety with getting what is promised in the agreement. But if you still want to buy for self-occupation, please do the following, verify that the various permissions have been received, and check the track record for timely delivery with all permissions and facilities. But better still is go for a ready to move property, the hassles will be lesser, ultimately you would still go for the same amount of loan and you could benefit from the falling interest rates. Saying all this, remember that by nature real estate market is full of risks, you put in your hard earned money, so if you would want to reduce some risk wait for a year or two. Till then safely park your money in some good debt oriented mutual funds for good low tax returns than in fixed deposits where interest is taxable.

Are you an emotional investor?

We make goals and prepare plans to achieve them and we are very emotional when it comes to meeting them. We face many hurdles, even the best of plans have problems, not because we did not do our best, but because of external factors. But there are many cases of internal factors which we find difficult to acknowledge or accept. One of them is our lack of knowledge with regards to investing. We all believe that with so much information available on the net as well as through personal contacts, we believe that we cannot go wrong and because of this we tend to take wrong decisions. We are emotionally involved. You do not believe it, lets take an example, review your portfolio and check how many stocks you have in it which are loss making, but you are reluctant to sell, all the information in the market says it is not worth the stock, but you are still hanging on to it. The reason is you believe you did the right thing and are still hopeful you will at least get the cost back.

Now look at the portfolio and check the number of cases where you have made money by selling good stocks, you would be telling all your friends and relatives how you made money on these stocks by selling, but really, did you make money or a loss. Because currently the value of those stocks which you sold is much more. So end to end you have lost money, but are not ready to accept. If you were not emotional, then you would just get rid of these loss making stocks and put your money to better use. Most of the emotional investors tend to put in their money in the market just on hearsay. If by now you have realized that you are an emotional investor, go for SIP’s in mutual funds, this way the emotional bias is taken care of, because of discipline.

Another problem with emotional investors, is they are so determined to make money that they are not ready to spend for good advice. Though you could start an SIP, it should be based on one’s risk profile and goal. Again periodic review is important, even the best of plans need to be tweaked as circumstances change with time. Not only own, but also environmental. The biggest problem with emotional investors is greed, they would like to make money fast, so they just concentrate on returns. Returns should also be matched with risks and your time horizon. It should not happen that when you actually require the money, the market is down and you do not actually get what you require for your goal or it would so happen that you withdrew your earnings early, just on seeing some profits.

One thing to remember is any asset class will give you a certain average return. When we say, average, there would be times when the returns are high and other times when they are low. The problem with emotional investors is they tend to go by only the recent news and ignore the average and they end up entering the market when it is high. Remember that investing is not gambling, so not get emotional. If you find it difficult, consult a financial advisor.

Angel Investing

What is Angel Investing? It is basically investing in start-up's or companies which require funding but have no track record. The person giving this money is called an Angel or god sent. We keep hearing that many people have made money by Angel Investing. But not many tell how much they have lost. I am not sure if you are aware, but 70% of all start-up’s fail. Then why do people still invest? People invest because the return is so high that it covers up the loss incurred. So if you are interested, you should have a lot of money to take such risks. You just can’t invest in one venture and hope it gives you returns. If you are ready to take a risk, you really have to be strong hearted knowing fully well that there are 70% chances that you will lose money.

Remember that your returns could give you assured returns of around 16% if invested in good large cap mutual fund over a ten year period compared to Angel Investing over the same period where the return is not assured and chances of losing this money is high. Sometimes the returns could be good, but the waiting period could be long. So if you require money, there are chances you might not be able to get it back, even if the value has grown. But then if you still would like to gamble or take a bet, you need to do a thorough study before investing. Given the efforts required to do the research, many people find it better to invest in mutual funds. You need to research the idea, business plan, marketing plan and of course the management and if you are so good at this research, then you might as well as start the business yourself. 

There are sites which do this type of research for you for a fee. There are many sites which have become a meeting place for Angel Investors and startups for a fee. The cost of research is high, so many people just register on meeting places, which can give you an investment opportunity. But at the end of the day, Angel investing is not for the light hearted.

Care to be taken while investing

All of like to do investments in equity, but we are not sure where to invest, the reason is not that we do not want to put the efforts, but the lack of time and expertise to do it. Avoid some of these regular mistakes

• Invest on tips – When we buy electronics, we usually do some research, speak to some friends or relatives who have purchased same or similar items. The reason is simple, we do not want to lose money. But when it comes to investing in equity, we do not do this. For us research is usually limited to tips given in the newspapers or heard on television or even found through a search engine on the net. We do not usually do our own research.
• Investing for the short term – Whenever we buy equity we say we want to make money and we want to make it fast. Ask yourself, what is the timeframe by which you want to have this money, what is your goal? Most of the tips received is based on short term movements, but if you look at how big market players have made their money, it is over long periods and not short term. If long term is the way to make money they why do you track price movements daily?
• Booking profits – This is the most common mistake most of us do, i.e. sell as soon as we see a profit. If you have invested for a long term, wait for that period, do not book profits early. You end up missing a bigger opportunity.
• Following the crowd – As I had said earlier, just because some market expert says that a particular equity share is good, you have purchased. So if there are many people like us who run after the same equity share, the price of that equity share is bound to rise. Then you start rationalizing. But if you do a bit of research, you should be able to separate the wheat from the chaff.
• Tax – Some people just hold the equity shares for more than a year, so that they do not have to pay capital gains tax. Equity Shares should be purchased and sold based on valuations and not on tax considerations. If the equity share is in profit, but the market outlook for that particular share does not look good, get out of it, it is better to pay taxes than to end up with a loss. Also when the equity share is not doing well and the outlook is also not good, cut your losses. Do not keep holding it for eternity hoping one day it will go up.

If you find all the above a bit difficult, then just let some experts handle it. It is much safer paying some money for advice than hoping to make money based on free advice.

Success formula for equity investing

Most of us want to invest in equity to make fast money. The reason is simple, all data shows that equity has given very good returns over a period of time. But then all good returns have their share of risk. It’s looks too easy, whom do you trust on the advice to invest. One of the best things to do is invest in a portfolio of equity shares and review them on a regular basis. Get rid of the ones not doing well, this is the most difficult part for most investors, they tend to hold on to them. You do not review your equity shares daily, it will be futile. If you had the time, then you and the rest of the world would have been doing only this. If you look at the list of wealthy people, you would have noticed that their wealth is in the form of equity shares. They invest their money in shares of a company, which they believe will grow, the company might be their own or of someone else.

So if they can get rich by holding shares, why not you and me. The challenge is picking the right shares. These wealthy people, believe in making money by participating in the growth story of the company, you and me can also do the same. But then we are lazy and want tips. What tips do you want? Look around, what do you and your neighbor’s use daily? Buy shares of those companies. If you trust those products to use daily, then the company would be growing for sure, so you should participate in the growth. There are many persons who give tips or follow tips given by many, but only a few make money. This is because only those who stuck with the shares made money. Daily trading does not make money in the long run, unless that is your full time job.

So what should one do? The easiest way would be to go for a well-diversified mutual fund scheme, where the fund manager does the job of stock selection. Best would be a index fund, here the fund manager does not need to do much, the index is managed by the stock exchange, all he has to do is ensure that his scheme is in tune with the index.