India wins World Cup 2007. Sounds like Wishful thinking but yes it can be true if you have the right players, attitude and commitment to win. I don't know whether India will win the World Cup but I am confident that each one of us can win in the investing world if we focus on some basics and implement them diligently.
Know thyself
Socrates said "Knowing Thyself is the key to human advancement" and hence it is important that you know what is important about money to you. Money is a means to an end and not an end in itself. At the risk of sounding philosophical, know what your values are about money.
When you know what your values are, decision-making becomes far easier and focusing on your values can motivate you to achieve. Just look at how powerful the values of Bhagat Singh and all freedom fighters were. They were clear that they valued freedom more than anything else. (Also read - How to build your MF portfolio?)
When you ask people what their values are, a common answer is 'Security of their family', but yet when it comes to ensuring that you have done something in that area, people end up buying a Rs 500,000 -10 lakh insurance policies as if this amount were to last a lifetime.
It's good to see LIC ads showing a mother after her daughter's wedding looking at the husband's photo and thanking him, but this seems difficult for most of the people with the kind of cover they have. A rough estimate, around 95 per cent of the people in India might be underinsured.
Create your own Sensex
This means knowing the returns that you need to achieve your financial goals. Concentrate on what returns you need to achieve your goals as this can help you to stay away from risk that is unnecessary.
Look at risk as well as returns
People often look at returns ignoring the risk component. Most of us want an investment with high returns and no risk or less risk. Just like cigarette smokers who choose to ignore the warning that 'Cigarette Smoking is injurious to Health', investors too will look the other way when it comes to the caveat that mutual funds are subject to market risk. Investors tend to focus only on returns when investing in stocks and mutual funds.
Look at the following
- What kind of stocks is this fund invested in?
- Is this concentrated in a few stocks or few sectors?
- What is the Standard Deviation and Beta (something that your advisor should be able to explain) of the fund?
- What is the portfolio turnover of this fund? (When the fund buys, sells and churns its stocks very often)?
Practice asset allocation
At the risk of sounding clichéd, as this statement might have been repeated so many times by financial planners and investment advisors, I wish to reaffirm that Asset Allocation is the most important decision that an investor must make to achieve his financial goals and effectively manage risk. This means you need to focus on what percentage of your money should go into Equity, Debt, Real Estate, Gold and Cash. (Also read: How to handle volatile markets?)
A number of studies have shown that a portfolio's asset strategy is the driving force behind portfolio performance and that over a period of time, it accounts for more than 90 per cent of the variation in overall returns. In India there is an under ownership of equity and hence most of the portfolios are skewed towards Cash & Debt (RBI Bonds, Post Office Schemes, & Endowment Plans from LIC) or Real Estate (due to the ticket size) and Gold.
Have a Dravid and a Dhoni in your portfolio
Every portfolio must have an exposure to equity to maintain purchasing power. Every equity portfolio should comprise essentially of rock steady large cap stocks like Rahul Dravid. At the same time it could be helpful to have a Dhoni (Though Dhoni is a superstar now, in terms of characteristics, I have linked him to a Midcap stock, someone with tremendous potential to become a large cap).
Midcaps can act like toppings on your pizza and can be there to provide that extra punch when the aggressive streak is needed. (Also read - Investment lessons from Sachin Tendulkar)
Costly mistakes
One of the biggest mistakes that people commit is in their selection of insurance products. Like it is said, insurance is always sold and never bought because if you know you need insurance, you will go and buy a basic insurance cover like you do for your car.
People spend Rs 20,000 or more for their car insurance for a cover of 600,000-700,000 but when it comes to insuring their lives for around Rs 40 - 50 lakhs (Rs 4-5 million) for the same premium, they prefer an investment policy to a pure term plan on the pretext that "I will not get anything back if nothing happens to me". Most of the endowment products cost you around 30-40 per cent, which is reflected in the returns that you receive.
Even when it comes to ULIPS with front-end costs of around 15-65 per cent (even assuming a 25 per cent cost), you will need a 32 per cent return in the first year just to break even. This can only happen in bull markets but in volatile markets, just breaking even on ULIPs will take at least 3-4 years or more.
Some other critical mistakes include, not recognizing the impact inflation has on one's wealth, thinking that you can time the markets, delay in making a Will, and not having a written Investment Strategy and Plan.
Just do it
We all know Nike's famous tagline but when it comes to implementation, many of us tend to simply procrastinate waiting for the ideal or the best time. Eat Less and Exercise is the key to great health but how many of us manage to do that. Just knowing the right thing is not enough. You must do the right thing to get results and achieve goals while staying away from stupid and costly mistakes. (Also read - 7 investment tips to improve your returns)
We end this article with a powerful statement from Benjamin Franklin, "The person who does things makes many mistakes, but he never makes the biggest mistake of all: Doing Nothing."
We strongly believe that even if your financial decision is not perfect, it may still leave you in a better position than if you had not made a decision at all.
The author is a practising Certified Financial Planner and runs My Financial Advisor (www.myfinad.com). He can be reached at amar.pandit@moneycontrol.com
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