5 things that long-term investors do differently

Afrequent question asked by investors is: how long is long term.
There will be several market cycles ,I would now say that long term is infinite.A long-term investor would want to hold on to his investments forever.Its more about attitude than number.

When we choose a career,we do not invest in ourselves hoping to cash out some time soon in order to pursue something else.Even those who switch careers successfully give their all to what they do.They invest in their careers as if it was all that they would do for a long,long time.Long-term investing requires this attitude.Don't we spend a long time to build ourselves by going through school and college. The same applies
in investing.

First,long-term investors take the time to understand what they are doing and why.Those who buy an IPO because they have made money mostly by buying IPOs earlier are not long-term investors.They are only replicating a lazy tactic to make money.If there is no method to selecting investments,they are not longterm investors.Such people want to know all about the investments they are buying.They spend time and effort on learning,research and analysis.Many take offence when I tell them they have bought a stock or a mutual fund on a whim or a tip.I then ask them to list their investments and tell me why they bought those.By the time we reach the fourth item,the truth is out.Most investors buy without adequate groundwork and think that if they hold it for a long time,they are long-term investors.This is not true.

Second,long-term investors understand that returns will be reasonable;they do not expect miracles.If they manage a multi-bagger stock or a winning fund,they know that in the process of acquiring this star,they have also bought a few not-so good investments.They may have exercised the same diligence in selecting the latter.Despite this,all their investments will not rise and shine.Long-term investors know that there is no formula for picking winners,that they will be fine on an average,and hence,keep their return expectations normal.If they earn a return of 15-16 % in the long term,they have beaten inflation,earned more than the bank deposit rates,and built reasonable wealth.Getting to this number involves a few losing picks and a few multi-baggers,and longterm investors know this is the process to build wealth.They do not insist that each investment earn a high rate of return every year.

Third,long-term investors accept economic cycles as an inevitable reality.They know that a growing economy will create a large number of enthusiasts,who will set up,expand,grow and showcase their businesses as investment opportunities.They know that a cycle of high demand will take prices up and every business could make profits.However,they also figure that this optimism would become irrational when poor quality businesses get money,and when investors are greedy to grab unknown stocks.When the cats and dogs,as penny stocks are called,tend to make headlines,the long-term investors know the market has overdone its enthusiasm.They use this euphoria to get out of the mediocre stocks.During times of desperation,when the cycle is at a low,the long-term investors see opportunity.When even the good stocks are shunned,and when businesses have turned around their balance sheets,they step in to take advantage of the
cycle.They know that they have to be in tune with the cycles and time their investments.

Fourth,long-term investors admit their mistakes and make corrections.Since their investment logic is pre-stated and they know why they have bought a particular product,they are willing to put their investments to test.They have learned to identify the critical factors that impact their investments.If they see the leverage increasing even as margins are falling,they know that their company needs a high-revenue growth to stay attractive.If they find that asset acquisition is not translating into revenue,they know that without the pricing power that brings a higher margin,their stock will be under stress.They can track their investment,anticipating a growth path they had envisaged.They then differentiate blips from course correction and act accordingly.To get long-term investors to sell,it is important that the case they made while buying the investment,fails.

Fifth,they do not see investing as easy and quick.They are more fundamentally grounded.They also know that they are not alone in the market and that several other players express their views on a stock.So,they accept gyrating prices as a market reality,but do not see it as an opportunity to make quick money.They do not buy into tricks and thumb rules.They see investing as a strategic decision,where they have to choose,decide the proportion to invest in each pick,monitor and manage how the portfolio is doing,and take action when the big picture seems to be changing.This is why finding long-term investors is tough.Those who bought anything offered in 2007-8,are angry and desperate on finding that their investment has not provided any return in the past six years.They ask how long they may have to wait.If they did not buy with the intent to hold on forever,they were short-term investors.Time will not make their investment decisions right.


The author (Uma Shashikant) is Managing Director,Centre for Investment Education and Learning.

SMART THINGS TO KNOW: Transfer of EPF account

1
The contributions to the Employee Provident Fund (EPF) account are made by the member (employee ) and the employer.A new account is opened every time the employee changes jobs.

2
The contributions made by the previous employer and employee,as well as the interest earned on it,continue to be held in the previous account unless it is transferred to the new one.

3
The older accounts can become inoperative and may not earn any interest.The EPF accounts become inoperative if no contribution is made for a continuous period of 36 months.

4
Since no interest is paid on the balance in inoperative accounts,it is essential for employees to get this amount transferred to the new EPF account and earn interest on the consolidated amount.

5
The EPFO has launched its online transfer facility from October this year.The employees will be able to request for such transfers through its Online Transfer Claim Portal (OTCP).

US default fears: Dummies’ guide to the debt ceiling problem

The US government, like most governments, spends more than it earns.
Example:
$ 2.4 Trillion it earns from Taxes
$ 3.5 Trillion it spends on Salaries for government workers, various subsidies, foreign aid, healthcare, running various institutions such as national parks, security apparatus, etc., space programmes, etc.
$3.5tn - $2.4tn = $1.1 trillion

So how can it bridge this gap?
- By printing more money
- By issuing bonds
- By cutting spendings
- By raising taxes

Raising taxes and cutting spendings are not popular. And the political party in government wants to come back to power. Printing more dollars stokes inflation — meaning goods become more expensive. Again not popular with voters.

So the best option is to issue BONDS, also called US TREASURIES.

These bonds are sold to - individuals, banks, and foreign governments.
Thanks to US' global heft, these are favourites with investors. According to May 2013 US Treasury figures, China owns roughly $ 3.4 tn of US bonds.

Federal Reserve coordinates the issuance of bonds. Ben Bernanke is the chief of Fed. Janet Yellen will replace him next February.

By issuing bonds, the US government is essentially borrowing. But the lawmakers have set a cap on the amount the government can borrow. This is known as the debt ceiling. The current cap is at $ 16.69 tn Over the years the debt ceiling has been raised — over 70 times since 1962. But this time round the US congress has refused to budge.

The reason is political: Barack Obama, the president, is a Democrat but the Republicans led by Paul Ryan have a majority in the House of Representatives.

At the centre of this slugfest is a healthcare bill termed as Obamacare.

It basically wants to expand healthcare and improve quality. Republicans think that the scheme is too expensive and will add to the country's economic woes.

The US government has enough money in its kitty to last till October 17. After that it could be staring at default of payment. If that happens credit ratings agencies will downgrade US' credit ratings — and that will surely hit the business confidence; no investments, no jobs and a looming shadow of recession.

US' inability to repay its creditors will have a domino effect — banks and corporates will collapse across the globe. At the time of writing, Republicans have offered Obama a short-term debt limit increase to stave off default. 

Concept and Evolution of Mutual Funds in India

As the name suggests, a 'mutual fund' is an investment vehicle that allows several investors to pool their resources in order to purchase stocks, bonds and other securities.

These collective funds (referred to as Assets Under Management or AUM) are then invested by an expert fund manager appointed by a mutual fund company (called Asset Management Company or AMC).
he combined underlying holding of the fund is known as the 'portfolio', and each investor owns a portion of this portfolio in the form of units.

History

The mutual fund industry in India began in 1963 with the formation of the Unit Trust of India (UTI) as an initiative of the Government of India and the Reserve Bank of India. Much later, in 1987, SBI Mutual Fund became the first non-UTI mutual fund in India.

Subsequently, the year 1993 heralded a new era in the mutual fund industry. This was marked by the entry of private companies in the sector. After the Securities and Exchange Board of India (SEBI) Act was passed in 1992, the SEBI Mutual Fund Regulations came into being in 1996. Since then, the Mutual fund companies have continued to grow exponentially with foreign institutions setting shop in India, through joint ventures and acquisitions.
As the industry expanded, a non-profit organization, the Association of Mutual Funds in India (AMFI), was established on 1995. Its objective is to promote healthy and ethical marketing practices in the Indian mutual fund Industry. SEBI has made AMFI certification mandatory for all those engaged in selling or marketing mutual fund products.


Why should one invest in a mutual fund?

1. MFs are managed by professional fund managers, responsible for making wise investments according to market movements and trend analysis.
2. MFs allow you to invest your savings across a variety of securities and diversify your assets according to your objectives, and risk tolerance.
3. MFs provide investors the freedom to earn on their personal savings. Investments can be as less as Rs. 500.
4. MFs offer relatively high liquidity.
5. Certain mutual fund investments are tax efficient. For example, domestic equity mutual funds investors do not need to pay capital gains tax if they remain invested for a period of above 1 year.

How does one earn returns in a mutual funds?

After investing your money in a mutual fund, you can earn returns in two forms:

1. In the form of dividends declared by the scheme
2. Through capital appreciation - meaning an increase in the value of your investments.

How economic cycles influence returns ?

Indian investors need to stop leaning on structural factors to make gains,and instead,wake up to the reality of economic cycles,and the risks and returns that they entail,says Uma Shashikant.


Several investors worry whether the optimism of the 2003-7 period will return.The hope about emerging as the next big economic miracle has been replaced by despair.Everything that seemed to be a good thing feels like a burden now.Investors refuse to see some of the issues as cyclical and agree that a downturn will unleash the very factors that shall take the economy back to an up cycle.The reluctance to build economic cycles into an investment strategy comes from a dominance of structural factors that have influenced returns for a long time.
Economic cycles represent the correction of excesses that take place over periods of time.During an up cycle,there is an overall optimism.Capital is available to set up several new businesses as investors are confident about the future.Economic activity expands with assumptions about revenues,costs and profits riding on growing consumption and demand.Investment increases as revenues increase.Inevitably,these assumptions tend to be too sanguine to convert into reality over sustained,long periods.Unless unlimited capital is available at low costs and demand remains high even at higher prices,the up cycles cannot last forever.The up cycle collapses and businesses soon reach the bottom,trying to protect against failure,while cutting investment and costs,and looking for demand for their products and services.The cycle of boom turns to bust,then moves on to recession,followed by recovery,and back again.
The investors in emerging markets such as India take time to align their portfolio strategies with economic cycles.This is because a dominant number of structural factors influence their returns,sometimes overshadowing the logic of economic cycles.If someone were to tell Indian investors that real estate prices tend to move cyclically on the basis of the demand and interest rates,they would laugh it off.The real estate market in India is structurally insulated from the developments in the economy by a blanket of black money.It is a parallel asset market funded at high rates by cash,used dominantly by investors who want to acquire and hoard the asset.Several of these people are not impacted by the interest rates set by the RBI,the tax regime,the processes of the banking system,or the rules of law.When such an asset defies the laws of the economic cycle,it begins to attract ordinary investors,who see it as a safe haven during difficult times.The problem with this approach is that the simpler investors assume risks they are ignorant about and could be hurt if these risks manifest.The real estate market may not remain insulated completely if the money being invested here is sought for other purposes,or if the players have stretched themselves by overestimating the demand.The cyclical factors inevitably come into play,perhaps with a lag.Small investors in real estate hope for the structural inefficiencies in this market to continue forever,and that is the risk they take.
Leaning on structural factors does have its advantages.It is a tough,long road to correct structural imbalances and problems,and every policy correction offers investors the opportunity to make abnormal profits.Several investors in the Indian equity market have benefited from such structural changes.The first large set of retail investors in equity in the 1970s came from investing in the IPOs of multinationals.These were share sales by blue-chip companies,which were mandated to reduce the stake of foreign parents and offer shares to the Indian public at a price decided by a government agency.Subscriptions to these IPOs made several small investors very rich.This was a structural gain.What this triggered,however,was the tendency of
companies to go public too soon,making venture capitalists of the retail investor.There were windfall gains in some cases,but many other companies simply vanished.Even so,investors remain convinced that IPOs are a good way to make money.Their expectation from equity investing is skewed in favour of abnormal profits of a venture capitalist.What they fail to see is that they neither have the skills of an early investor,nor the ability to take on the risk of several failures and a few sparingly available successes.
Several equity investors base their investment thesis on structural factors.In the early days,they would bet on what the government would do in the budget.It was normal to dismantle some control or the other to alter the fortunes of few sectors in the 1980s and 1990s.Then came the structural advantages offered by a now open economy.There were technological advancements waiting to be deployed (banking ),markets that were unknown and untapped (mobile phones),productivity gains from scaling and modernisation (capital goods,auto).These structural gains were the themes of the winning investments in the post-liberalisation period.Add to it the consumer boom that was unleashed when incomes moved up,and aspirations of a young population skyrocketed.Investors in the equity markets in 2007 felt so confident about the structural advantages of India that the popular theory was that the country was decoupled and,therefore,would not be impacted by the developments in the rest of the world.
The past five years have grounded these risky and overtly optimistic views about investment returns.For the first time,a large number of investors is discovering that economic cycles dominate everything when it comes to returns from assets.It has been a tough lesson to learn.As most businesses remain grounded,investment and consumption are badly hit.The problem now is that making structural changes to the economic environment has become tougher than before.It is obvious to many that sustained economic well-being is possible only if we carry out structural reforms in several thingselectoral process,education system,infrastructure,governance,health and institutional structures.These alterations will take a painfully long time.
A shift is needed in the investor mindset.First,investing cannot always be about making opportunistic short-term gains.Economic cycles may dry out these tactics for too long.Second,return expectations should be realistic as windfalls cannot be a regular,sustained event.If some gains are made by sheer luck,it cannot be the basis for what might happen in the future.Third,the risk in investing needs to be acknowledged.Every awesome opportunity to make money has a hidden risk that needs to be dug out.It is time investors learnt to look out for economic cycles,instead of waiting for the next unexpected windfall.

Should you continue with equity investment during an economic downturn ?

While  PPF is earning an 8% return,the equity fund is generating a low return. Most of investors are wondering if they should stop the SIPs in equity fund and invest only in the PPF for safety and return.



It is important to understand that when a goal needs growth,it is good to invest some money in equity.As an asset class,equity goes through economic cycles,and the current low level of returns is due to the down cycle in the Indian economy.By investing during this phase, it will allow the money to enjoy the benefits of the next up cycle.If you stop the SIPs, you will find that the overall returns after 15 years will be significantly lower,both on account of not investing in equity,and from investing,if at all,when the markets are higher.

An asset allocation strategy of below method is a good way to manage risks and earn a stable long-term return.
The downside risk from equity is arrested by the investment in the PPF,yet the upside of the portfolio will be capped at 8% if you were to invest all his money in it.

The goal for each of us individual should protect the investment from another possible downturn in the equity markets.Therefore,after staying invested in the next up cycle in equity,we should book out of equity with 3-4 years left for the goal,and put the money in the PPF or any other debt product (if the PPF limit for annual investment is breached) to protect the corpus.

Buying your first house?

Recently on weekends I met few of my newly wed friends. The topic was buy their own house.
And I came across the below article and do I share with all:
Newly-weds make up their minds to buy their own house. The first trigger came last year, when two of their close friends bought property. Then their landlord sounded the warning that he would raise the rent again. What sealed the decision was the salary hike  this year. "We might as well pay an EMI instead of giving rent to the landlord every month," comes the thought.
The couple is not alone. Many young people are planning to buy their dream houses, but have been held back by high property prices and an uncertain job market. This is prudent because the decision to buy a house should be based not just on the need, but also on the individual's financial readiness. It involves a big financial commitment, and one should go ahead only if one is absolutely sure.
As the festive season approaches, salesmen and agents are preparing to lure you with freebies and discounts. Here's how to see through some of their sales pitches and take a decision based on facts.

"You can never go wrong with property."

The first thing a builder or realtor is likely to tell you is that real estate prices never go down. In other words, don't think about the price, just go ahead and buy. This is also the wisdom you may have received from friends, relatives or parents, the people who had bought property earlier. However, what was true then may not be so now.

Real estate, like other asset classes, goes through periods of ups and downs. The only difference is that it is not as volatile as, say, stocks or gold. Property prices in some markets have been stagnant for the past 1-2 years. In fact, some areas have actually witnessed a fall in prices.

For young people, buying their own house is too tempting a thought. They feel it is better to pay the EMIs than the rent. However, staying on rent may not always be a bad idea. For instance, if you have just started your career, you may not be sure where you will settle down. So, instead of locking your funds in a house that you may not need immediately, you could invest to build a corpus for buying it later.

Also, remember that buying a house in a far-flung area may be cheap, but will come with other costs, including long commutes to office, children's school, weekend shopping, social visits, etc. As a tenant, you can choose a better location from where it is easier to commute to office and other destinations.

Don't fall for projections of high rental income from property if you are not planning to occupy it immediately. "No one can predict the rent a property will fetch in the future. These days, a reasonable annual rent is 4-5 per cent of the value of the property. However, in most cases, it is not possible to earn this much because property prices are very high," says Pankaj Kapoor, managing director, Liases Foras, a real estate rating agency.

If you are not planning to buy a house now, the best strategy is to be a pretend buyer and save for your dream house. If you keep putting away the EMI amount in a safe investment option, you will be able to save for a higher down payment when you eventually take the plunge.

"There may have been some correction in other areas, but we have not cut prices."

Recent media reports have talked about a correction in real estate prices, but if you mention this to the builder, he might laugh at you. Even if he agrees that some locations have witnessed a price correction, he will contend that the area where his project is coming up has not been affected. However, if you look around, you will see the signs.

A correction in the property market does not necessarily mean that the builder has brought down the prices. Even if there has been an increase in price in the past year or so, it effectively means a correction in real terms if one accounts for inflation. Likewise, steeper discounts than the previous year on the same property are a correction in real terms.

"The top 10 developers in the country are sitting on Rs 58,000 crore worth of unsold inventory," says Pankaj Kapoor, managing director of Liases Foras.

"This is the most affordable project in this area."

If a new project has 2-BHK flats priced at Rs 42 lakh each, when the going price in the area is Rs 50 lakh, isn't it a steal? Not really. The full-page ads in newspapers speak a lot about the facilities and features of the project, but miss out on an important detail—size of the flat.

A recent report by Jones Lang LaSalle, a property consultant, reveals that the average apartment size has come down in top metros in the country. In Mumbai, for instance, the average unit has shrunk 31 per cent in the past five years. "The median size of apartments across the country in 2008 was close to 1,600 sq ft. While this number continues to remain more or less the same in most other cities, the unit sizes in Mumbai have drastically reduced, and are currently 15 per cent lower than the national median size," says Ramesh Nair, chief operating officer (business), India, Jones Lang LaSalle. So, don't compare the price tag, but the price per square foot, to know whether a project is cheaper than the others.

Another ground rule is to not go by the price quoted by the builder for the flat because there will be a long list of attendant charges. You will have to pay extra for parking, club membership and preferential location. All these can add up to a significant amount.

"These rates will be revised soon."

IT's the favourite trick used by almost every builder to entice buyers. If you tell a builder that you need time to think it over, he will say that the project is almost sold out and prices will soon be revised upwards. The fact is that today developers are more desperate to sell than buyers are eager to buy.

Overheated markets, sliding stock prices and rising interest rates have made matters worse. While the IPO window is now closed, at least for the short-to-medium term, listed real estate stocks have taken a beating and tighter lending norms by banks have made capital scarce. Money is not cheap for builders, even if it is available. The only cheap source of money for developers is the sale of projects. This is where the discounts come in.

Given that the situation is unlikely to get better anytime soon, builders will continue to offer discounts to attract buyers even if it means taking a hit on their profit margins. The moment they realise that you are a serious buyer, most developers will be ready to negotiate.

"We will deliver on time since there's a penalty clause."

Project delays are a reality and very few are completed on schedule. Some builders do offer compensation for delays in handing over possession, but it's not something you can bank upon.

One, the amount offered will be nowhere close to the EMI you are paying. This is because you would be paying the instalment for the total cost of property, but the compensation offered will be linked to the base price, which does not include additional charges for parking, club membership, etc. Some builders slip in a clause in the agreement, which insulates them against any claim by the buyer. Others have an upper limit for the compensation they will pay.

Most, however, have a clause in the agreement which states that if the project is delayed because of 'factors outside their control', they will not be liable. "It is in the interest of the potential buyer that the purchase agreement include a clause which mentions the date on or before which the developer will hand over the possession of his property," says Ravi Goenka, advocate at Goenka Law Associates. "There have been instances when the developer has included a price escalation clause in the agreement, mentioning that the potential buyer would need to bear the additional cost in case there is a delay in the project," he adds.

Take a good look at the sale agreement because these points are hidden away in the fine print. There have also been cases where cheques issued for these penalty charges have bounced. Getting a compensation from the builder is easier said than done. Prevention is your best bet.

"What you see is what you get."

Is neither true for the price quoted by the builder, nor for the sample flat that you see at the construction site. The latter may look like the perfect home you have been dreaming of, but the reality is quite different. The interior designers hired by the builders to do up the sample flats are experts at creating optical illusions. They know how to use lighting and place furniture in such a way that the house appears bigger. Even the furniture is an accomplice in this charade. The customised beds and dining table sets are smaller than the normal size and the cupboards lack depth.

A gullible buyer is likely to think that the bedroom will have enough space to move around even after placing a double bed and a study table. The sample house itself may be much bigger. Such flats are made only for marketing and, therefore, the walls are much thinner than those in a normal structure. Some of the walls may just be plywood partitions, which help add precious square inches of carpet area to the house and make it bigger.

However, there is no way you can compare the sample with the real. These flats are demolished after the units in the project are sold out and construction begins. There is also the issue of location. Sample flats are standalone units that offer a great view from every balcony and window. It may not be so when it is a part of a cluster of flats.

For a buyer, a better indicator of what he will get is the architectural drawing of the apartment, as well as the layout map of the project. These drawings will tell you the exact carpet area of the flat. Compare it with the super area promised by the builder and you will get a fair idea of the price being charged for common facilities. These will also tell you whether the flat will overlook a sprawling park or stare into the neighbouring tower.

"A potential buyer should make a note about all the things shown by the developer or his representative. Later, you can crosscheck whether these would be part of your house or not," says Pankaj Kapoor, managing director, Liases Foras.

"You can take your money back any time you want."

Don't take the builder's word for it. Getting a refund from a cash-strapped company is not easy. The salesperson who is hawking the property is focused sharply on the down payment. He knows that once you have done that, you won't be able to get out as easily. There is no norm that builders are required to follow while cancelling bookings. While some builders deduct 10 per cent of the booking amount, others quote the same figure on the 'cost of property'. Yet others deduct up to 20 per cent, whereas smaller developers may forfeit the entire booking amount.

The only way to avoid getting into a situation like this is to do your homework before you book an apartment. As the cancellation fee varies wildly, shop around before you give the cheque. Even after you have decided on a project, avoid paying the booking amount in cash. This is because some developers don't give the receipt till you pay the full booking amount. If the rest of the amount is in the form of a cheque or demand draft, the builder may issue a receipt for this amount alone, claiming to adjust the cash in the balance payment. So, insist on a receipt for the full amount.

If you do decide to buy a property, look at the sale agreement very carefully. "Read the document and avoid making any payments or signing documents if you are unsure," says Goenka. "The contract is binding on both the parties, and if any one of them fails to fulfil his commitment, it automatically gives the other party the right to term the contract null and void," he says.

"The freebies bring down the effective cost."

Freebies are the flavour of the season. From registration fee to modular kitchens, even cars, all are being offered when you book an apartment in a project. Don't fall for these lures. All freebies are already factored into the price of the apartment.

The same goes for the attractive schemes on offer. The truth is that developers urgently need the cash and many of the projects have not even got approvals from the authorities. This puts a question mark on these projects.

Another such lure is the 'attractive' financing schemes that builders offer by tying up with banks and housing finance companies. In most cases, you will get a better deal by approaching the bank directly.

The bottom line is, don't look for freebies; try getting a cash discount instead. "Developers are doling out discounts and incentives, which is a direct result of the lack in demand. So, though they may not agree in open, the serious buyer would be able to get a decent discount on the deal," says Pankaj Kapoor of Liases Foras.

"Don't worry about the loan. We have tie-ups with banks."

Builders do have tie-ups with banks, but this is no way an endorsement for the project. "Even if the project has been approved, it is advisable for the buyer to hire the services of a legal expert to verify the authenticity of all the documents associated with the project," says Goenka. According to him, there have been instances when the developer has reneged on his promises even when the project has been approved or has had an association with a bank.

A tie-up also does not promise the best home loan rate. What it means is that you are more likely to get a loan from those banks than with others. However, for the best rates, you may still need to go to the bank branch to negotiate, instead of relying on the representative at the bank site, a person who may not even be from the bank. You may also be told not to worry about the high home loan interest rates as 'rates will come down soon'.

Sure, home loans may get cheaper but they may also get costlier. Plan your purchase according to the current interest rate, not on the expectations of a future rate cut. The new RBI governor has done a lot to boost the market sentiment, but hasn't cut interest rates. The situation may continue.

Also, banks are usually aggressive in offering competitive rates to new customers, but are not so charitable once you take the loan. This means that any subsequent drop in rates may not be passed on to you immediately. So, it is better not to stretch your finances and plan it on the basis of a higher interest rate than the one you are currently paying.  

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Financial mistakes young investors should avoid

If the youth want to build long-term wealth,they should do away with lame excuses about managing money and develop good financial habits that can serve them well in later life.

I have discovered a common characteristic among the young people who have begun to earn and feel good about it.They do not engage seriously with money or investment decisions.There are several excuses not enough money;too many choices;very complex;uncertainty about where to start;too much paperwork.While they procrastinate about money,they allow their money life to play out by default.Lets consider a few common issues.

First,many young earners think that managing money is complex and is not for them.This is when they have already opened a bank account,taken a credit card,and a loan for a motor vehicle.Money decisions have to be taken by default or design once you start earning.The simplest way to understand personal finance is to see yourself as an asset that generates income.If you save and invest,you are buffering the income.If you spend more than you earn,you need a higher or an alternate source of income.If you borrow,you create a liability and take away from the future income.Beyond these four ideas of your assets,the income they make,the expenses you incur and the loans you take,there are no personal finance decisions to take.Evaluate every money decision in this context.

Second,youngsters tend to whine and complain when the world they see and experience is different from the comfort zone that they are used to.They revel in the problem,become cynical,crib about how it makes their life difficult,and spend too little time on solutions.Protective parents make the process of growing up tougher.The simple rule is that money decisions require action,and this calls for evaluating the alternatives and making a decision.I have known of intelligent students processing complex case studies in class,but unable to fix a healthy meal for themselves at the hostel.They do not see that this problem also requires a similar solution-oriented approach,with real-life constraints of time,energy,resources and skills.The 2-minute noodle has been a hostel staple for way too long.This quick-fix approach continues in the young peoples money lives,where the search is for quick,comforting solutions that are easy to arrive at.Young investors need to think strategically as if they were a business unit.Without this orientation,they may remain clueless earners,who do not know how to take money decisions.

Third,procrastination about money is simply irresponsible behaviour. There are several youngsters who have not opened their bank statements,havent deposited the dividend cheques,not filed the tax returns,or completed the KYC process with a mutual fund or broker.They have a PAN card since the employer insists on it.The taxman would want to know if they can establish how they built their assets,and whether they paid the taxes on their income before doing so.Those who share transactions for fun also create short-term capital gains that are taxable,and there are penalties for not paying these.Assuming you wont get caught is a bad idea. Keep empty shoe-boxes to store statements,bills,papers,and notices and take the time to sort them periodically.Form groups to know how to file your tax and do it on time.These habits,if developed early on,will help as you move up in your career and can afford to hire someone.You can avoid being ripped off if you deal with your paperwork in the early days.

Fourth,several young investors are overconfident about their future incomes.They believe that they can find a new job since a growing economy like India would have opportunities.They also are big spenders since they do not visualise a dark future for which they have to set money aside.Instead of defining saving as the amount left after spending,it might be a good idea to set some money aside right at the start.The direct debit options that take money away from the salary account,systematic investment plans that ensure money is invested regularly,and deposits that are created when the savings account reaches a limit,are all good options to ensure disciplined saving.To spend is to make the seller rich;to save is to make ourselves wealthy.It always makes sense to pay ourselves before paying everyone else.

Fifth,young investors are very tech-savvy
and should find out how modern technology can impact their financial lives.
The high default in educational loans comes from ignorance about technology that credit bureaus can use to aggregate repayment records.When the home loan is rejected because one fails to pay an education loan,it is too late and expensive to make amends.The core banking solutions ensure that money can be easily accessed,used and transferred without recourse to a physical branch,by using Internet and mobile banking instead.This,however,also means dealing with new risks of password protection,guarding against phishing and Internet frauds,and keeping an eye on salesmen who ask for account access to make it easy.It is now possible to aggregate all the money transactions into applications that help budgeting,spending,investing,and recordkeeping.The youngsters should leverage their ease with technology to make money transactions simpler and more efficient.

Sixth,many young investors start at the wrong end of the investing spectrum.Several think that speculating in stocks,buying a few IPOs,or conducting derivative transactions are the easiest ways to make money.It is pertinent that various management schools have stock and derivative trading games,not ones on asset allocation.The former is a high-adrenaline activity that creates a buzz;the latter is a life skill,but quite boring.A solid foundation for creating wealth is through simple and staid products,such as fixed deposits and PPF accounts.Diversified large-cap mutual funds and bonds can be added to this gradually.Speculation comes last,and should only contribute marginally.Young investors need do build a solid base first.

Young investors have time on their side.Anyone who has dealt with money will be able to tell you how magically compounding can work if good investment decisions are taken early on.It will be a pity if this is frittered away due to procrastination or unwillingness to learn the ropes

MFs: One-stop shop for investors

Mutual funds offer a range of options that can cater to the various investment needs of investors.Depending on their need,suitability and risk profile,investors can select funds best suited to them.Based on the asset class they invest in,mutual funds can be categorized as follows:

Equity-oriented funds

These funds invest in shares enabling investors to benefit from investment opportunities in the stock market.They tend to be high risk-high return investment propositions.There are various types of equity funds.

Large-cap :

These funds primarily invest in the shares of well-established companies.Broadly speaking,the top 100 companies by market capitalization would form the investment universe for these funds.

Mid/small-cap :

These funds target companies whose market capitalization is lower than that of large cap companies.Prices of mid/small cap stocks tend to be more volatile than those of their large cap peers.

Equity-linked savings scheme (ELSS):

These are equity funds offering taxbenefits.Investments of up to Rs 1 lakh in a financial year are eligible for tax sops under Section 80C of the Income Tax Act.ELSS investments are subject to a lock-in of three years.

Index funds:

They try to replicate the performance of a chosen benchmark index such as S&P BSE Sensex or CNX Nifty,by investing in the stocks that constitute the index and in exactly the way these stocks have their weight in the index.

Sector funds:

These funds focus only on stocks from a certain sector such as healthcare,technology,financial services etc.These funds perform at their best when the targeted sector is in favour.

Debt-oriented funds

These funds invest in fixed income instruments such as bonds,debentures and government securities.From the risk-return perspective they are less risky and have lower return potential than equityoriented funds over the longterm.There are different types of debt funds which are categorized based on their investment tenure.

Liquid funds:

These funds primarily invest in money market instruments with maturities of up to 91 days.Liquid funds expose investors to low interest rate risk and are apt for parking monies over shorter time periods.A similar category is that of Ultra short term bond funds.The primary difference between liquid and ultra short term funds is that the latter types hold slightly longer tenured instruments and are apt for investors with an investment horizon of upto a year.

Bond funds:

These funds invest a bulk of their assets in bonds and debentures,and could make smaller allocations to money market instruments and government securities.Bond funds can expose investors to credit and interest rate risks.Investors can select an apt variant based on their investment horizon: Short-term bond funds (1-3 years); Intermediate bond funds (3-7 years) and Longterm bond funds (over 7 years).

Government bond funds:

These funds primarily invest in securities issued by the central and state governments.Unlike bond funds,investors here are only exposed to interest rate risks.Investors can select between Short-ter m gover nment bond,Intermediate government bond and Long-Term government bond funds.

Fixed maturity plans:

FMPs are close-ended debt funds with a fixed time to mature.They invest in a host of debt instruments whose maturity is either lower than or coincides with that of the FMP.They are best suited for investors whose investment horizon matches the FMPs tenure.

Allocation funds

These funds provide benefits of asset allocation by investing across asset classes.The most popular variants are balanced funds and monthly income plans (MIPs).
Balanced funds typically invest at least 65% of their assets in equities and the balance in debt,mainly to take some tax advantages.MIPs on the other hand invest roughly around 70%-80 % of their assets in debt instruments and the balance 20%- 30% in equities.
Finally in recent years,Gold funds have attracted a lot of investor interest.Simply put,these are funds investing in units of gold exchange traded funds (ETFs),offering exposure to gold via the mutual fund route.