Anything done without proper planning will turn out to be a dud! This holds good for almost everything in life, from marriages to managing finances to running businesses.
Today, one of the most important things is managing finances. Going by recent trends almost everything else in your life hinges more on one huge binding factor called money!
Believe it or not, making money is no big deal, neither saving it nor cutting down on your expenditure for that matter. These are all important but above everything is mastering the art called investment!
It is the only sure way you could build on your wealth and protect it. Investment is a science. And a wise investment is about choosing the right scheme based on certain underlying principles and algorithms.
And unless we do our home work right even the effective steps of the regulators will not help us. So, let us see what it takes to turn into a smart and wise investor that will help you protect and multiply your investment!
To begin with, know your goal
Perhaps the first point to consider before investing in a financial product is to understand your goal! Are you looking at the investment for the long term or short term?
For instance, never invest in a product like Unit Linked Insurance Policy (ULIP), a long term product, if you have plans to surrender it after paying the premium for the mandatory first 3 years called the lock-in period in industry parlance!
When you finally decide on the nature of the investment scheme it is better to do a comparison of the similar products available in the market. Do not give in to selling pressure. After all, it is your money and investment.
Don't try to do things that are really outside your purview, portfolio management for instance. Approach your financial consultant or a fund manager for expert guidance on these issues.
These areas and things like timing the market are expert zones that requires years of experience to understand and practice and not like simple investment methods like the public provident fund.
Also, misunderstanding does as good as not knowing a product at all and probably even worse! Just one ore two instances of making accidental profits don't put one anywhere in the vicinity of financial disciplines.
Proper asset allocation is important
Allocation of assets in a portfolio is very, very important. Simply put, it is deciding about the mixture of stocks, bonds, real estate, derivates and mutual funds you want to hold in your portfolio.
The fact is that most asset allocation is ad hoc but aims to minimize risk. Asset allocation begins with considering your objectives. This is perhaps one area where even the most seasoned investor might go wrong. Though there is no select formula for a perfect asset allocation, you can still try to do a few things that could help you build a safe portfolio.
Firstly, weigh the difference between risk and returns. For example, investors willing to take a higher risk should allocate more money into stocks. Do not fully rely on planner sheets.
Find out the real cost of your investment from the company. Timing is also important, the earlier you start the better but do consult an expert before you implement it.
Watch out for costs
The one area which many investors fail to decode is the breakup of the costs involved in an investment. Failing to see the hidden costs such as the brokerage costs particularly in a mutual fund or a life insurance company could actually hurt you real hard.
Mutual fund companies often subtract fees from your portfolio known as fund's expense ratio before their annual results are announced. These are expenses paid to the advisor as fees, marketing efforts, legal expenses and accounting and auditing costs.
According to statistics, every year on an average, the expense ratio for a U.S stock fund is roughly between 1 and 1.5 per cent. Apart from this there are other hidden costs like trading costs involved. Learn about the impact of this break up on your investment.
Fund managers often churn their portfolios to whopping per centages thus putting your investment at a higher risk by making your yield fall far below the index return.
Hence, as an investor it is very important for you to keep a watch on all costs, including the fund manager cost, churning cost and other associated costs.
The role of regulators in safeguarding investors' interests
Ever since the global meltdown the regulators across the world and in India have been formulating ways to become 'proactive' instead of being 'reactive'.
The Reserve Bank of India, along with the Securities and Exchange Board of India and other market leaders, is rushing to protect the investors from bad performing fund houses.
For example, there is this system in place to check market malpractices such as the front running practice where the fund managers or brokers or institutions misuse prior information about the markets to make illegal profits.
The consent system introduced in 2007 to resolve disputes is also effectively in place. Of late, the introduction of the currency futures trading and the re launch of interest rate futures trading are some of the laudable measures by the Sebi and the RBI.
Having said that it becomes equally important to do more and create a level playing field in the market and protect investors.
One way of doing this is to educate the investors about the products, their rights and responsibilities. And it is the duty of the regulators to do this.
For example, the regulator-run Investor Education and Protection Fund (IEPF) should focus more on having workshops in various segments of the investing public on basic subjects like how to set a goal, the various investment schemes available, the risk factors, the rights of the investors', compounding, how to keep track of investments, and so on and help spread the word among investors.