What type of investor are you and how actually do you manage your personal finances? Am guessing that this is not something that many of us are familiar with or will find easy to answer. Unfortunately, while it should be, personal finance is not as “personal” a topic to most people as personal health is.
Hence over the last many years, while we have seen many customers with regards to how they manage their personal finances, they themselves are not as clear as we can see it, and hence make the wrong decision about what kind of personal financial assistance they need.
That said, it is important to have the right fit between your type and the kind of professional help you take. This article helps you determine what kind of an investor you are and whether the current relationship you have with a financial advisor is of the right fit. Published in Moneycontrol.
In the past weeks, the 32nd Olympics, Tokyo2020, provided the world with sporting excellence and entertainment on display across a range of disciplines. For avid sports fans, these two weeks were exciting days, merrily switching live-streams across events as diverse as hockey, gymnastics, track & field, badminton and golf.
While there were winners, we discovered there were many more heroes, some whose names we heard for the first time, but will remember for long. The Olympics provided some memorable moments but also lots of food for thought. Here are a few observations, particularly pertinent in these raging bull markets.
Our behaviors towards money and the money decisions that we make at various junctures in our life are influenced by our experiences at a formative level, right from childhood.
Am sure that this comes as no surprise, after all, money experiences are also a part of the various influences that form us through our life. Where I see a bit of a twist is that while my family was a fairly orthodox one, the women in the family were curiously still quite involved, and to some extent, even dominant, in some of the money decisions that were taken.
A friend was talking to me recently about an interaction he was having with some others, where there was a furious debate on about where to invest, as well as which asset classes including geographies would deliver better returns going forward. As you would agree, this particular topic of debate is not uncommon at all and today’s information-empowered world has led to both more aware investors as well as more confused investors.
Investors usually seem overtly focused on “returns” and are always keen to know where to put their money next. This is especially so during a bull market, and when the recent past has given very good returns. But, excessive focus on returns is usually a function of “not enough focus” on a few other important yet ignored aspects. Focusing adequately on these other aspects leads to enough and more clarity on which asset class an investor should choose and what “returns” the investor should expect going forward.
Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families invest for their financial needs, follow their passions and achieve financial independence.
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A slightly modified version of this article was published recently on fpstudycircle.com.
In the last couple of years, there has been a lot said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices.
That said, it can still be quite confusing for the lay investor to understand these categories. Thankfully, there is something else that is universally understood. Cricket! And within it, IPL!
Fans know every team’s strengths and weaknesses while having his or her favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, who would they be?
Read our latest article, published on Moneycontrol.
For most people, the last few months has been a never-before experience. Whether it is about finding out how secure is your financial position in this crisis, or about understanding what is really important for you versus isn’t, or about looking for new opportunities in an otherwise generally hopeless time, it has been a period of discovery.
For me, this period has reiterated a few money lessons which I have learnt and personally tried to follow over the last few years. If anything, this crisis has confirmed to me that the path towards financial, in fact, overall well-being lies along successfully practicing these lessons.
Read about them in our latest article, published on Moneycontrol.
A few months back, I met a friend of mine who was down from the US on a holiday. This is someone who had done quite well for himself over the last nearly 20 years in the US, and has built a fairly large investment portfolio. As part of it, he has also successfully built a real estate portfolio over the years in the US. Discussions veered towards that, and he said something that made me sit up.
His words were “I love Leverage”.
The use of the word “Leverage” instead of “Debt” somehow made all the difference for me to look at it in a new light. Yes, loans are bad, and one should be debt-free in one’s pursuit of financial well-being. That said, I have since also realized that Debt is not as one-dimensional as one thinks it is.
Coming back to the original question, let’s look at Debt differently and build some simple rules around it, which can be generally followed, towards one’s financial well-being.
Read our latest article below, published on Moneycontrol.
As the economy slowly begins to start up and get back on its feet, it is the time of the year, post extensions, when companies require you to let them know what income deductions you will be availing of in the current financial year and the quantum of investments in various tax saving schemes. This year, however, there is an added dimension to this, you will have to also let your company know if you will be availing of the previous tax regime or the new one.
While this decision is entirely dependent on your ability and willingness to invest in tax-saving instruments as well as various deductions available to you, we are writing to give you some broad indications of which one may be suitable for you.
Below is a quick recap of the tax slabs in both the old and new regimes. The rows highlighted in grey in the new regime are the income slabs which are benefited on income tax versus the old regime. Also, important to remember that if you choose the old regime you can avail of various deductions, whereas you cannot avail of any deductions in the new regime.
Most availed deduction/exemptions in the old regime are as follows
Standard deduction (available by default to everyone)
Sec 80C – up to Rs 1.5L (normally taken care by the EPF contribution for employees, as also school tuition fee or principal repayment of house)
Sec 80D & Sec 80DD – Medical insurance Premium paid for self and Parents
Home loan interest repaid
Let us look at which option seems beneficial under various scenarios.
You are able to avail of entire 80C and 80D medical benefit without investing in any further instruments
What we have noticed with a large part of our customers is EPF or NPS contributions take care of the entire Sec 80C limit. In a few cases where it is not so, the education tuition fees of children or principal repaid from home loan can cover up.
No one takes health insurance to save tax. It is supremely important to have a medical insurance to ensure that your financial goals are not de-railed thanks to an illness. Most customers do have medical insurance and are able to claim a deduction of 25K for self and family. If you are paying the premium for senior citizen parents, you can get a further deduction of 50K.
Since you are not forced to invest any further money to save tax it normally makes sense to stay with old regime.
You have a home loan
If you have a home loan, it is a no-brainer to stick to the old regime, primarily because you will get home loan interest deduction upto 2L apart from availing 80C for principal repayment.
You are a senior citizen investing in PPF for 80C and have fixed deposits or Senior citizen saving scheme
If you are a senior citizen who has been investing in PPF for many years and are comfortable investing further and you hold substantial FDs or Senior Citizen Savings Scheme (SCSS) it would be beneficial to stick to the old regime. This is because you get deduction of Rs 50,000 on interest paid under section 80TTB. This is over and above 1.5L deductions under 80C for investments in PPF.
If you are wondering why a senior citizen will be investing in PPF, many of our customers use this as a tax-free estate planning device. They keep investing and leave it behind for their children. As part of asset allocation, they put some part of their debt monies into such schemes.
If you are eligible for HRA deductions and can avail of deductions under 80C for your ongoing investments or expenses, it is an added reason to be in old regime.
If you are taking Voluntary Retirement and expect to get a compensation amount
Compensation upto Rs 5L received under voluntary retirement scheme is exempt from tax once in your life time. If you are choosing to avail of Voluntary retirement this year, you should stick with the old tax regime.
While the above are basic pointers, there are additional benefits available to you if you choose to invest Rs 50,000 in the NPS scheme, have an educational loan or plan to donate to recognised institutions, in all such cases the old regime is beneficial.
As you can see, I have highlighted many cases where the old regime is beneficial. You must be wondering why bring a new tax structure if it is not beneficial for most. The key to this is that you can claim deductions without making fresh investments in sub-optimal instruments only to avail of the tax deductions. Also, we have looked at the above primarily from a salaried employee’s perspective.
For self-employed or professionals where Sec 80C is not a given, they will need to invest money to avail of tax benefits. In many cases, the choice of investments will be at cross-purposes to their financial goals. In such cases it would be better to opt for new regime and invest your money in instruments of your choice which are aligned with your overall financial goals.
If you have already made the choice of tax regime as a salaried employee, you can change your mind at the time of filing your tax. This is not an option with non-salaried people. As mentioned earlier it is always a good idea to consult with your financial advisor/ tax consultant to get advice which is customised to your unique situation. However, the above pointers may help you understand the reasoning behind the choice.
Image credit: Gerd Altmann, Pixabay
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Last week, I did a financial well-being session at a well-known corporate, the participants being predominantly women in their 30s. While they were all keen on taking charge of their finances and made for an attentive audience, most of them were extremely risk-averse.
This was startling, since women, usually, are not in a hurry. They are very patient, and once they understand the way a product is built and have realistic expectations of the short-term as well as long-term performance, they wait out the turbulent times patiently and truly stay put for the long term.
Given this fact, it was surprising to see that most of the women mentioned earlier were shying away from equity since they perceived the volatility in the short term as risk. There are several compelling reasons for women to take more interest and understand the best options available to them when it comes to investing. Here are three big ones.
Read our latest article, published on Moneycontrol.