Myth Busters about Investing
With virtually unlimited supply of financial information accessible today, there has never been a more profitable time to know more about investing. Regrettably, there is also a good deal of misinformation that goes together with useful data.
Falling prey to market misconceptions can make you commit silly investing mistakes. Getting influenced by investing myths can majorly affect your financial journey. Common myths about investing can have a severe impact on quality of investment decisions you make. So, here is an attempt to tackle some myths about investing which is decoding investment myths is essential.
Myth 1. Too young to think about retirement
Reality: It’s never too early. You can build significant amount of corpus when you have time on your side. Being a stereotype who believes in not starting early will lose out later. Actually, starting early can help you build an enviable retirement kitty.
Myth 2. Tax-saving is the objective of financial planning
Reality: There are lot of people who rush to invest only for tax-saving purposes. However, meeting tax goals is not the only criteria in investment. Investments are to be planned in advance to meet your financial goals too.
Myth 3. Investing requires lot of funds
Reality: Times have changed. You don’t need a large sum to invest anymore. There are investment options like mutual funds which allow you to invest in smaller amounts. You can invest in them for as low as Rs 500 every month.
Myth 4. Fixed deposits are the best
Reality: Fixed deposits are safe and provide guaranteed returns. But fixed deposits cannot fetch you inflation-beating returns.
Myth 5. Bonds are very safe
Reality: This is a common misconception. There are various types of bonds. The degree of risk depends on its credit rating, maturity and interest-rate volatility. Understanding the relationship of price and yield is crucial in this case.
Myth 6. Quick money can be earned from stock market
Reality: Stock market is a great place to make money only if you have time, hard work, patience, discipline and rational approach. There’s no other substitute.
Myth 7. There’s no harm over-diversifying
Reality: It’s true that diversification is the key to investment success. But, over-diversifying your portfolio can dilute the return potential.
Myth 8. All advisors are the same
Reality: There are many advisors like fund managers, investment advisors, financial planners, brokers and insurance advisors; the scope of these advisors differ. The key is to choose the right advisor depending on what you are looking for.
To sum up
Rational thinking and trusting the right information are two key truisms that should stick with you. This can be more than enough to debunk the general myths about investing. Nothing else should matter. People may offer to give advice but it is important for you to sift the truth from the faff.
A number of factors can eat into your pension or retirement pot. These are, typically, medical costs, lifestyle upgrades, assisting children with their education, caring for older people, and most importantly, inflation that can be a huge drain on one's finances.
This means it is even more essential to ensure your invested money is working hard to help you take care of yourself and the ones closest to you. At the end of the day, investment myths are more than disheartening; believing them could prevent you from building the kind of financial plan you require to address lifetime purposes.
Let the myths stay with the storytellers and speak to a professional finance expert to know more about savings and investment plans.
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Investment Jargons to know
Before you start investing, it’s crucial to understand a few basic financial terms. Every investment comes with its own set of investment jargon that could sound highly intricate and intimidating. Not knowing basic investment terms may push you off investing. In fact, understanding key terminologies helps you make an informed decision. Knowing about some basic financial terms and definitions can be helpful before you take the plunge in stocks, bonds and mutual funds. This is why it is crucial to know how available investments can help you make smart decisions for your investment portfolio. Here we look at decoding the financial jargon that would be useful to you.✓ Compounding✓ Volatility✓ Inflation✓ Market capitalization✓ Price earnings ratio✓ Systematic investment plan✓ Capital gains✓ Liquidity The simpler terms✓ Asset classAsset class refers to group of securities or financial instruments that show similar characteristics and behaviour. Asset classes are classified as equity, debt, cash equivalents, real estate and commodities. ✓ Risk profileRisk profile indicates your risk appetite. In other words, it suggests how much risk you can take when it comes to investing. ✓ Investment portfolioInvestment portfolio refers to your collection of investments. ✓ Investment strategyInvestment strategy refers to planning an investment and taking investment decisions based on goals, risk level and future need of money. ✓ DiversificationDiversification refers to investing in wide variety of asset classes in order to management the overall risk. The complex terms✓ Asset allocationAsset allocation is a process of spreading your money across different asset classes. The entire objective is to reduce the overall risk of the portfolio while maximising returns. There is no guarantee but asset allocation can help you absorb market volatility because your investments are diversified across various sectors of the economy. For instance, if your gold investment doesn’t fare particularly well, you can rely on your equity investment to protect you. ✓ Cash flow analysisOnce the cash flow is determined, it becomes easier for you to plan your investments accordingly. ✓ NAV Net Asset Value (NAV) is the market value of each mutual fund unit. The NAV also determines the total fund value.NAV = (Sum of Market Value of all shares (Including Cash) – Outstanding Liabilities)/ Total number of units outstanding in the market. ✓ Post-tax yieldThe actual return of any investment needs to be weighed on a post-tax basis and not in isolation. This is because the tax implications of any investment might show a completely different result than otherwise. Hence, the post-tax yield is what matters the most as that is what affects the customers directly. ✓ BetaBeta is the risk associated with any investment. It is measured as the standard deviation of the return from the mean return, i.e. the volatility of the investment can be ascertained through the beta of the fund. So, while opting for investments, the beta needs to be kept in mind along with post-tax yield so that the overall risk of the portfolio doesn’t rise too much. ConclusionUnderstanding the fundamentals of basic investment terms definitions and getting it are the key to successful investing. It’s important to be well aware of products and market where your hard earned money is getting invested. Knowing the basic investment jargons can help you make prudent choices.
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Thumb Rule for Financial Planning
Financial planning may not be all that an easy task. In fact, it can be easy to make mistakes or get the steps confused. This, however, needs to be rectified right away. Otherwise, a flawed plan has the tendency to negatively affect your financial health. Don’t worry, though. There is a thumb rule for financial planning that one must follow, just like most crucial planning. Or you could avail a qualified financial planner to save on time and effort. Refer to these basic financial planning rules of thumb, which, if followed, can help in creating the perfect financial plan:• The 30/30/30/10 ruleOne of the thumb rules for financial planning is a very simple rule that helps allocate your monthly income to various priorities. According to this rule, your monthly income should be divided in the following manner: This allocation of your income lets you take care of all aspects of your financial plan without any strain.• Loan EMIs: Never exceed the 30% of gross monthly incomeThe 30/30/30/10 rule also gives a direction of your liabilities. If you have loans, the aggregate EMIs of your car loan, home loan and any other liabilities you have should not exceed 30% of your monthly income. At best, this can be pushed up to 50%, but no higher. If it does, you would invariably fall into a debt trap. So, assess your EMI payments as a percentage of your monthly income. If it is more than 30-50%, it’s time to manage your debt.• (6*monthly income) for your emergency fundEvery financial plan is incomplete without the provision of an emergency fund. This fund takes care of sudden expenses which might blow your carefully planned budget and hamper your savings. The 30% of your income that you invest should also contain a provision for emergency funding. Ideally, you should direct 10% of your investments towards an emergency fund. An ideal emergency fund should have at least 6 months’ worth of your income. Many also suggest that it should have enough to fund expenses for 3-6 months. • Life Cover: The Rule of 10Just like how half-knowledge is dangerous, underinsurance can be hazardous too. Unfortunately, many make the mistake of under-insuring themselves or their family. Yet, optimal life cover is essential for providing financial security for your family. When choosing a term life insurance plan for covering your death risk, decide the coverage basis your gross annual income. Your life cover should be at least 10 times your gross annual income. Only then will you be able to create a sufficient corpus for your family in your absence.• Choose appropriate investments through the Rule of 72Do you know how long it would take for your investments to double? The Rule of 72 helps you find just that. No need for complex mathematical calculations. Just divide 72 by the rate of return promised by an investment avenue. This should give you a tentative idea of how long it will take to double your investment amount. For example, if an instrument promises 8% interest, it would take 72/8, i.e., 9 years for your investments to double. Similarly, for a 12% interest rate, 6 years would be needed to double your investment. So, use this rule to understand for how long you should hold your investment to get a 100% rate of return. • Retirement fund: Minimum allocation of 10% per month.When investing, direct at least 10% of your investments towards your retirement corpus. For a more comfortable retirement, increase this allocation to 15%. This can help you benefit from the power of compounding through long-term investments and build a decent retirement corpus. Also, ensure that your retirement corpus is at least 15-20 times your gross annual income. • Asset allocation ruleYour portfolio should have proper asset allocation depending on your risk profile. Ideally, (100-your age)% of your portfolio should be invested in Equity. In fact, this is often indicative of your risk appetite. At younger ages, a higher equity exposure can be manageable. Any volatility you face can be smoothened out over time and you can earn attractive returns. Debt allocation should, consequently, be equal to your age. Thus, as your age increases, your equity exposure can reduce and debt allocation can increase to cut down on risks. The bottom lineThese are the basic rules of financial planning which are universally applicable. When you are designing your financial plan, follow the financial planning thumb rule as mentioned above and other helpful tips to avoid mistakes.
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