IMPORTANCE OF FINANCIAL KNOWLEDGE - PART 6

The next big step in Investment is to look for Returns with some risk.  The ability to take risk depends on the appetite of an Individual and the knowledge of the Instrument in which they would like to take risk.  People generally are good at their own profession but do not have much knowledge about various Asset Classifications that are available for Investment.   

 

For many, Investing in Stock Market is like gambling.  Totally, a wrong understanding and judgement of the Stock market.  We will talk about Stock market later.  For now, let us understand that Investing in Mutual Funds is a best way to get good returns with some risk.   But many do not know how the Mutual Funds work.  Many feels that they need to spend time watching the market daily, if they Invest in it directly or through Mutual Funds.  Yet another wrong understanding.  

 

Mutual Funds is a pool of money invested by a group of Investors and managed by a Manager by Investing in Stocks and Themes as laid out by him.  The objective of the Fund, how it will be Invested and the Management Fees that need to be paid will all be notified.  There are hundreds of Mutual Funds available for Investment.  Some funds focus on Growth, some on dividends, some on one industry, some on debts, some on debts and equity, the list goes on and on.  How to know which one suits an individual’s risk profile and how to know which fund will perform better.  Both are very difficult to answer, especially, if one lacks basic knowledge of economics and financial markets.  

 

So what options are available for people who are new to Financial Markets?  Buying the total stock market is the best option.  There are funds that reflect the returns of the Stock market index.   The managers invest in stocks that represent the Stock market index and in the same proportion and weightage.  As a novice, one should not worry about these details.  If the market is up by ‘x’ percentage, it is likely that their fund is also up by ‘x’ percentage.  The market might have ups and downs but in the long run the market is always up.  

 

One must have heard from friends on how much money they gained in stock market.  Everyone wants to disclose only their good stories.  In the greed to make more money than the Stock Market Index, many of them underperform in the long run.  Data indicate that only 25% of the Investors perform better than the Stock Market Index.  So, if one invests in the Stock market index and get the same return as the Stock market, it should be considered a fair deal.  

 

Set aside an amount of Rs. 5,000 or Rs. 10,000 or whatever amount you are willing to Invest every month in Stock Market.  Give instructions to the Bank that this amount will be deducted from your Account on a specific day of every month and utilized to purchase the Index equivalent to this amount.  This way, as a discipline, every month, you will be Investing automatically, without a break.  What happens when one Invests for a specific amount every month?  When the Index is higher, you get to buy less units.  When the Index is lower, you get more units.  This mitigates the Price risk.  This systematic investment plan on a specific date of each month is called SIP.  This gives a better average per unit in the long run.   

 

Let your SIP run for a long term of 5 years.  Where to buy these Funds?  These Funds that are linked to the Stock market index is openly available in the Stock exchange.  That is why these funds are called Exchange Traded Funds or ETF.   

 

Investing through SIP in ETFs reduces the risk considerably.  One need not worry about timing the Market.  Meaning, try to judge the low price and buy more units.  One must always remember that success in Stock market is not about timing the market but about spending more time in the Market.   

 

The Stock markets keep rising and falling all the time, in a cycle.  With SIP, the cost of buying units is average out over time as one get more units when the markets are down.  By entering a SIP, one has a check on the emotions as well.   

 

Once you have set your SIP in motion, you need to worry too much about monitoring the market.  Your returns will compound gradually.  Since the Investment is made for long term goals, the fluctuations in the market should not worry you that much.  

 

Just to put things into perspective, the Stock Market Index SENSEX was around 20,840 on 2nd Jan 2014 and 38,667 on 30th of Sep 2019.   

 

(To be continued...)

 

(The above article was written for publication in Oct. 2019 issue of PRINCE’S VOICE – A Community eMagazine)