There are more than 500 mutual funds and 3000 stocks to invest. It not only makes choosing difficult but more importantly the choice you make, leaves you a feeling that other choices were better.
As a new investor and wanting to invest money is the best thing you have thought of. Next is where one should start investing because there are so many options to investments.
There are more than 500 mutual funds and more than 3000 stocks to choose from. It not only makes choosing difficult but more importantly the choice you make, leaves you a feeling that other choices were better.
So we tend to avoid the difficult part which is to make a choice and rely on others to make that decision for us.
As an investment mantra, never rely on others for investment ideas, it has never worked in the past and it will never work in the future either. Everyone on this planet wants to make money and so if you rely on them blindly to make money for you, you are on the wrong planet.
If you are looking for investment advice, go to your parents, they may give you outdated advice which may provide you less return but it won’t wipe your capital.
So if you are starting your investment career, here are few critical points to consider.
Invest in Debt
If you have debt and you are paying a fixed income on the borrowed money, you should consider investing in your debt as the first choice of investment.
If you are one of those persons who want to be doing the arbitrage of getting money at lower cost and then trying to make better returns in the market, you are trying to trick the financial system and it doesn’t work at least in India where the cost of money is 10 to 12% rate of interest. In the US where the cost of money is 10 times cheaper, it may be considered. Warren Buffet can manage to borrow money and invest but it isn’t something that you can do on the first day of your investment career.
I always have the view of no borrowed money and it hasn’t changed for decades now. Here are some of the articles that I have written over time that says on the same line.
- Home Loan Or House Rent – How to Make The Right Choice
- 3 Factors to consider before investing
- Stay Invested or Pay Back Home Loan?
And then recently I shared about financial freedom re-iterating that one should invest in their debts. Here I am today stating the same point. It is the basic first step towards investing.
Invest for Big Purchases
We Indians are fascinated about owning a house. The first investment of most of the Indians is a place to live which is be either the flat or a house.
Most of the middle-class Indians are in home loan debt. Housing finance companies are one of the best-performing companies in the stock market and there shouldn’t be any surprises for them doing so well.
Real estate was one of the better performing asset quality in Asia as a whole for the quite a few decades and we have grown up seeing our dad or uncle’s make a good fortune investing in real estate.
To add fuel to the fire, renting agreements in India are possibly from the 18th century and it isn’t very conducive to live on rent in India either.
All these factors lead us to own a residential property and there is nothing wrong with it either. I also own one. The irony is, the day we accumulate 2 to 5 lakhs, we tend to book a flat that is worth 50 to 75 lacs with the assumption that 85 to 90% of the amount will be financed by the bank. So the real estate becomes more of a liability than an asset and the price appreciation will be all eaten up by the bank.
I have shared details of how much one should contribute to purchase of a property.
If you want to buy a house or a super luxurious car or want to be doing a luxurious world tour, you shouldn’t be thinking about where you will get the money from. You should invest in it and have the money ready when you want it. Invest with a goal in mind.
Invest in Your Education
The last but the most important aspect of investing is to invest in your education.
In the 90s, there wasn’t any foreign money in the market and so it was all retail investors investing in the market and so it was that much easy to invest in the market because the focus was who has the information about a stock first and invested before the others but in 2017, the advantage of information doesn’t exist. There is nothing that an FII can know more about a company that you can’t. It’s just that you have to make the efforts.
Everyone wants to be investing in the next Eicher motors or next MRF or next Lupin but those who invested in them did the groundwork about knowing the company.
If you aren’t investing in your education, do you think you can beat the foreign investors or the domestic fund managers to identify such opportunities well in advance? If you expect opening a demat account with a broker is enough, you are expecting way too much.
There is so much to learn and understand in the market. I have been investing in the market for a decade and doing fairly well to generate some kind of returns but I am still learning the process of investing.
Forget about me, even Warren Buffet after 65 years of experience is one of the sound readers on a daily basis. There is no limit to how much you can know but there is definitely a minimum that you must know before you should put your hard earned money in the market.
As a new investor, it isn’t to hit the nail on the head in the first investment but the more important aspect is to learn the process of investing and make a habit of investment.
Joseph Vaz says
Correct Me if I am Wrong,
Ordinary Investors get jittery when they hear the Bank cuts Interest rates and are often advised to go for DIRECT MFs but the info below is confusing cos when one thinks of saving on the MF expense and going for DIRECT MF Not much clarity emerges. Most paid
advertisements in Financials just recommend DIRECT MFs saying that the expense is low. The Ordinary Investor is Not aware of this.
November 1, 2015:
If you think all investors get the same dividend per unit of the same fund, you’re wrong.
If you invested in the direct plan of a mutual fund scheme, chances are that you will be paid a different, usually smaller, dividend than a regular plan investor. .
For instance, in August, Birla Sun Life Advantage Fund declared dividend of ?20 a unit on its regular plan.But in the direct plan, the dividend was half that – ?10 a unit. Earlier, in March, ICICI Prudential Value Discovery Fund declared dividend of ?3.3 a unit on its regular plan, while investors in the scheme’s direct plan got just ?1.
In March again, regular plan investors in DSP BlackRock Small and Mid Cap Fund got ?2.3 a unit, while direct plan investors in the same scheme got nothing.Other fund houses too follow this practice of different dividend payouts.
Why the difference?
The difference in dividend payout is not a ploy by fund houses to make direct plans less attractive.
In fact, direct plans are supposed to give investors better returns than regular plans as the fund saves on the commission payable to the distributor. Then, why is the dividend lower?
It turns out that the fund houses are just toeing the line of market regulator SEBI on dividend distribution.
A Balasubramanian, CEO, Birla Sun Life Asset Management Company, says: “It is an accounting challenge which is causing a change in the distributable surplus in the plans.”
He adds, “It is an industry-wide issue.” Fund houses are supposed to calculate the dividends for each of their plans based on the distributable surplus.
A plan’s distributable surplus is computed as its Net Asset Value (NAV) minus its face value, unrealised gains and accumulated Unit Premium Reserve (UPR).
UPR is determined at the plan level after apportioning realised and unrealised gains in the ratio of the respective assets under management.
As a DSP BlackRock MF spokesperson explains: “Distributable surplus is computed after taking into account the unrealised gain and the balance in the UPR.
So, the ability to declare dividends in a plan depends on the UPR balance. Some plans did not have a distributable surplus due to a higher proportion of UPR and, therefore, the trustees have not been able to declare dividends in those plans.”
The differences between plans arose because direct plans were introduced only recently in early 2013.
According to DSP BlackRock, “Direct plans witnessed huge one-time inflows and switches from regular plans when they were launched.
Based on the unrealised gain at the time of initial inflows, there are large UPRs created in direct plans resulting in situations where a regular plan has more distributable surplus as compared to the direct plan.”
To sum up, the dividend declared in a plan depends on its performance, position of gains and the UPR balance.Even if the returns in the direct and regular plans under a scheme are similar, the dividend could vary depending on the UPR balance in the plans.
Talking to SEBI
Balasubramanian of Birla Sun Life says that mutual fund players under the AMFI are trying to sort the matter out with SEBI, so that investors under both direct and regular plans get the same dividend distribution.
I am Not sure everyone understands this ,I have personally found DIRECT FUNDS paying much less than regular Funds
(This article was published on November 1, 2015) The Hindu–BusinessLine – ANAND KALYANARAMAN
sapan shah says
HI SIR SBI DECREASE THEIR RATE TO 3.5% CAN WE HAVE TO CHANGE SAVING ACCOUNT IN TO KOTAK OR YES BANK? OR SURPLUS MONEY TRANSFER IN TO LIQUID OR DEBT FUND?
Shabbir Bhimani says
Sapan, so if you have 1L amount lying in your bank account for a year would mean now you will fetch 3500 per year instead of 4000 per year. That is a gain of 500 Rs or a gain of 42 Rs more per month when you have 1L amount as balance for the full year.
Take a better financial decisions than being fooled by those 50 bps here and there. Don’t be penny wise and pound foolish. Invest in good mutual funds on a regular basis and those news of 50bps cut here and there makes market correction and use that to invest in good stocks or mutual funds.
sapan shah says
Thank you, sirji
Suraj BJ says
thought provoking article. Investment is a process and not a lottery. One need to disciplined in that process to achieve success.
Shabbir Bhimani says
So true Suraj
Invest in your education. So true Shabbir and this has come at the right time. Your email about the books that you have recommend and I have ordered all of them.
Shabbir Bhimani says
Oh thats a very good timing Rahul and I am damn sure those books will be really useful