Saturday, 22 February 2020

Investment Factors

Investment Factors

Friends let us  start the journey to the fascinating world  of  wealth creation through investments.

I feel there are 2 basic  Investment Factors  which  further have sub factors.

A]  Internal Factors

  •  Neutral Mindset
  •  Discipline
  •  Willingness to learn new things
  •  Unbiased approach while evaluating any new investment proposal.
  •  Above all a passion to create wealth.

Internal factors needs to be developed by one himself by reading appropriate books,articles.  

B] External Factors

     Macro Factors

    There are macro factors like government policies,inflation,crude,
           political stability,interest rates etc.
          These cannot be changed by any individual .
    One only has to accept them and perform in the given conditions. 

  Investment Products

So lets try to understand how we can develop our knowledge about the products which are given to us and play them right in the given set of macro factors.

First of all let us understand the basic difference between the investment products.
Investment products can be classified into 2 categories.
Physical assets and Financial Assets.

Physical Assets
Financial Assets
Real Estate , Gold, Silver

Poor transparency
Poor liquidity
Fluctuating returns
High maintenance cost
Not tax efficient

Equity Shares, Fixed Income Securities, Mutual Funds.

Highly transparent
Highly liquid
Depends upon the instrument
Low  maintenance cost
Equity and Mutual Funds are tax efficient

Now let us understand the Financial Assets

1] Equity Shares

For simplicity purpose

Assume a company issues 100 shares of Rupees 10 each and raises a capital of Rs 1000/- to do business. You purchase 10 shares by investing 100 Rupees.
This means you are owner of the co to the extent of your share capital in the company.

If the company makes progress your share  appreciates , your dividend income goes up etc. Similarly if the company does not progress you stand to make losses.
Essentially it means when  you own equity shares you own the company to the extent of your capital.

You take a risk on the performance of the company .The returns on your investment can be high or low or even losses are possible.

Equity is all about owning a business. It is a good instrument for creating wealth.

B]  Fixed Income Instruments also known as Debt Instruments

Fixed Income Instruments are all about lending your capital to the borrower at a predetermined  fixed rate of interest also called as coupon for a fixed tenure and the borrower returns the capital back after the tenure is over.

The interest rates are determined by the market forces like inflation, demand and supply etc credit rating of borrower etc.

The risk here is comparatively very less (depends upon the borrower) and the returns are predecided , which are in line with inflation.

This is a good instrument for savings, short to medium term goals and protecting the  capital  created through equity investment.

C] Mutual Funds

Equity investment carries risk and hence it is very difficult to decide which cos to invest .

Similarly there is also some element of risk in fixed income investment  like counter party risk , interest rate risk,  etc.

So there is a option of Mutual Funds where the funds are handled by experts in the particular asset class and the investor invests into the units of mutual fund scheme.

Here also there a lot of schemes in each asset class and to decide which scheme is suitable to  the investor it is better to consult a financial advisor.

The benefits of mutual funds are

1) Professional Management
Fund managers monitor market and economic trends  and analyze securities in order to make informed investment decisions.

2) Diversification – Mutual Funds offer investors an opportunity to diversify across assets depending on their investment needs.

3) Liquidity   -(Subject to no lock in )
Investors can sell their units on any business day and receive the current market value of their investments within a  short period.

4) Affordability
The minimum initial  investment for a mutual fund is fairly low for most schemes (as low as Rupees 500/- for most schemes)

5) Convenience
Mutual Funds are highly convenient  as the investor can make  lumpsum investments, monthly investments, automatic withdrawal plans, automatic reinvestment of dividends etc.

6) Various Investment options
There are various investment options in Mutual Funds like equity funds, debt funds, hybrid funds, money market funds, gold funds etc.

7) Simplicity
Mutual Funds provide you with detailed reports and  statements that makes record keeping simple.

8) Tax Benefits
The income tax act provides various tax benefits  on returns earned from investment in mutual funds.

Following are some of the Basic Investment rules for success and achieving financial independence 

In my next article we shall discuss the techniques of investing .


Vivek R Mulay
AUM Financial Consultants
Office no 18 , Shreeram Complex , Model Colony,
Shivajinagar, Pune - 411016

Saturday, 11 January 2020

Why Is Investing necessary ?

Investment Insight no 1  - Why Invest ?

What  else can be a better reason for a logical  mind  to invest  specially when it comes from a stalwart  like Warren Buffet  whose only business is to invest and the result is he is the 2nd wealthiest person in the world.

This is to give an idea where can a successful investor reach in life.

But  lets keep aside the big story and concentrate on why even in our daily life we need to save and invest ?

I would like to mention here that Saving is different from Investing.

Saving is done with a short period in mind for attending short term cashflow requirements and hence return is more or less in line with inflation.

Investing is with a longer time horizon to achieve bigger financial goals with a focus to beat inflation and create wealth.

Friends first let me take you to the 3 basic factors required for saving and investing.

1] Money 
2] Instrument to invest
3] Time to stay invested.

Now comes the  most interesting aspect of investing phenomena.

1] Money - can be unlimited , depends on how much you earn  and  also can be recurringly earned- Infinite

2] Instrument to invest - are always available in plenty and can be manufactured in plenty in the days to come by financial institutions - Infinite

3] Time to stay invested - Cannot be manufactured  as everyone has limited time and by the passing of each day , one is lesser by one day to invest.- Finite

So there are 2 infinite factors and one finite factor.

Now what is more important  ?
Obviously finite factor is most important as it is limited.

The most important point is not to allow time to pass by without using it to invest .

Now you may say that unless money is there to invest what use is the time ?
So we are talking about only those who are already earning money .

Now even after earning money people neglect to invest and allow the money to lie in savings bank accounts or in bank Fixed Deposits ?

So friends Investment is a financial sport and in every sport there are following 
points which we need to take note of

1] Rules of the game
2] Challenges of the game
3] Right technique and Right temparament.
4] A coach

A good coach takes care of first three and also gives the necessary handholding .

A person who wants to get into the game without the coach has to manage the first three himself.

e,g lets talk about cricket

Rules of the game are known before hand but the challenges keep changing 
in every match, so you need  a coach to constantly guide you on the technique, temparament and also physical fitness.
The work of the coach is before the match, during the match and also after the match for the next match.

The coach can guide better because he observes the entire game and is a intense observer during the match and is doing nothing else than observing.

The point I am trying to make here is if you are playing the Investment Sport then 
its better you have a proper qualified Financial Advisor as a coach.

Now coming to challenge ?
The biggest challenge in the Investment Sport  is INFLATION  

Inflation is the rise in prices of goods and services.
e.g the rate of inflation is 6 % p.a.
Now what does it mean ?
It means that the goods costing rs 100 today will cost 106 Rs 1 year later .  
This means that 100 Rs you have to day should become minimum 106 rs after 1 year to purchase the same goods.
Now by remaining in savings bank it becomes 103.50 
This means the wealth has depleted by Rs (106-103.50 )=2.50 Rs
This is the cost of not investing.
on 1 lac rs it becomes rs 2500/- 
The same money can be invested in a liquid fund which will at least earn the inflation return.
The effect is much larger on a 20 year period. 

So the  Insight is 

1] Do not allow money to lie idle in Savings bank acount.
    Always invest in liquid fund for a short term requirement

2] Always have a coach.

I hope you enjoyed this article,would request your feedback .
I shall share more insights in my further articles on Investment Insights.

Vivek Mulay
AUM Financial Consultants