Remember the first time you tried to swim? You probably swung your arms and legs in every direction trying to stay afloat in the water. But when the coach came and corrected your mistakes, you started swimming better. It is always easy to perform a task in a better way once you know the mistakes that you’d naturally make. This way, you can avoid the mistakes altogether and concentrate on the task. Same is the case with investments such as debt instruments. In this article, let’s explore some of the common mistakes to avoid while investing in debt instruments.
1) Investing in low-quality bonds
Don’t invest in bonds that have a low credit quality. Each and every bond in the market is given a grade to indicate its credit quality. Independent rating services offer these ratings on bonds. Bonds with a rating of AAA (or Aaa) are investment grade bonds and are considered to be of the highest quality. In comparison, bonds with a rating of B or C are considered to be junk bonds. Such bonds offer a higher rate of interest in order to attract investors. Avoid bonds as a debt investment if you are interested in stable and consistent returns.
2) Ignoring inflation
Debt instruments like bonds offer stable returns and reduce volatility in your portfolio. However, in the long term, the returns may not be very high. This can be a big problem when inflation comes into the equation. For instance, imagine you buy a 15-year bond that offers 5% fixed coupon rate. Since the returns remain constant, your purchasing power may in fact come down over the years due to inflation. Keeping this in mind, it is a good idea to expand your horizon and incorporate investments that offer higher returns to your portfolio.
3) Investment-goal mismatch
Identify your investment goals and invest accordingly such as in short term debt instruments. It sounds simple but surprisingly, many investors make mistakes in this aspect. For example, the common goal of people nearing retirement is to earn a little income in addition to capital protection. Here, the priority is capital security. In this scenario, investing in emerging market debt or a junk bond may not be the right decision. Instead look for a bond (government bonds, for example) that offers low volatility and capital safety.
4) Selling bonds when interest rates rise
Bond prices have an inverse relationship with interest rates. That means, when interest rates rise up, bond prices go down and vice versa. As a result, the price of a bond can vary subject to the change in interest rates. Many fixed income investors tend to dispose their investments based on these fluctuations. However, this is not the right option. It is best to hold your securitised debt instruments until the maturity date. This is because of the simple fact that you could end up with a loss in case you sell your bond and the interest rates move in the opposite direction.
To sum up
Debt instruments are known to offer stable returns and safety of capital (not to forget peace of mind). However, it is important to avoid the above mistakes investing in debt so that you can achieve the best returns possible on your investments.
A number of investors have learnt that it is wise to invest steadily in the market. However, only a few of them track their investment performance on a regular basis. An appropriate review of your debt funds' performance can assure you stay aligned with your investment objectives. It is a good idea to comb out the funds that are not offering returns as good as their counterparts. However, a crucial point is that investors must provide sizeable amount of time to grow their debt instruments. In theory, a time frame a year and upwards must be given to a debt investment to obtain decent yields.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
In life, you are often presented with two choices in front of you. It can range from something as simple as: should I take the right turn or the left turn. Sometimes, it can be more complicated like: should I continue with my current job or start my own company. You may not always know which option to choose. But with ample information and the pros and cons of each choice, making your decision gets easier. Same is the case with mutual fund investments. Lots of investors are not sure whether to invest through Systematic Investment Plans (SIPs) or in one go. In this article, you can find out which option works best for you.What is SIP investment?Systematic Investment Plan or SIP is a method of investing in mutual funds. Here, you invest a fixed amount of money in a fund on a regular basis. This could be monthly, quarterly or a semi-annual basis. What is lumpsum investment?In a lumpsum strategy, you invest a large sum of money in mutual funds at one go. For instance, if you have an amount of Rs 5 lakh and you invest it all in one go in a mutual fund, this would be a lumpsum investment.Advantages of SIP1) Ideal for beginnersSIP involves investing a fixed amount of money in a fund at regular intervals. So, if you are a novice investor and you wish to gain exposure to the market, this is the best way to do it. This is because you can invest even small amounts (as little as Rs 500) in a fund each month. And as your income grows, you can consider increasing your investment amounts. 2) Rupee cost averagingWhen you invest steadily in a fund each month, you don’t have to worry about timing the market. When the market is high, you buy lower number of units and when the market is low, you buy a larger number of units. This is known as rupee cost averaging. By investing for a longer period of time, you can earn high returns without strategies like market timing. 3) Investment disciplineIn an SIP mutual fund, you have to invest money on a regular basis. This offers you the opportunity to inculcate investment discipline. And the best part is, you can directly give a standing instruction to transfer a fixed amount of money from your bank account to the fund. As a result, you can watch your funds grow right in front of your eyes.Advantage of lump sum investment1) Ideal for large sumsAs the name suggests, this method is ideal for large sums of money. So, in case you have large amounts of money, it is better to invest in a lump sum instead of letting it lie idle. Businessmen, for example, generally have an irregular cash cycle. For these people, it may be better to invest in lumpsum instead of SIPs. 2) ConvenienceWhen you make a lump sum investment, you only do it once or twice a year. As a result, you don’t have to worry about meeting future payments on a regular basis. 3) Potential for high returnsOne of the biggest advantages of lump sum investments is that you have the potential to earn high returns. For instance, when you invest large sums of money when the market is low, you have the potential to earn high returns when the market rises again. However, this is only possible if you are able to correctly time the market. That’s why, this method is more suitable for more experienced investors who have the ability to stomach market volatility. Conclusion: Which is better?Now, which is better: SIPs or lumpsum? Well, that depends. Both of these options are good. However, based on factors like investment amount and experience, you need to decide which type of investment is more suitable for you. You can also use a strategy to use a combination of both SIP and lump sum to maximise your returns.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
When it comes to return on investments, equities have proven one of the best avenues that beat inflation. The stock markets in India have provided double digit returns on investment in some years, compounding investors’ money. As far as equities are concerned, there are three types of stocks that an investor can pick: • Large cap stocks• Mid cap stocks• Small cap stocks Large cap stocks are the top 100 stocks based on market capitalization. Mid cap stocks are stocks ranked between 101 and 250 on the stock market based on their market capitalization. Small cap stocks are any stocks not ranked as above. Investing in large caps is generally considered to be a safe strategy since these are highly stable companies that provide good returns to their investors and conserve capital. On the other hand, small caps are volatile and explosive and can swing in any direction depending on market sentiments, global and national economic cues. The middle ground between these stocks are the mid caps. They are not as volatile as small cap stocks. However, they are not as stable as large caps. They provide stellar returns in case of a bull run, but perform worse than large caps in case of a downturn. But mid caps also provide an opportunity for higher capital appreciation over the long term. Choosing the right stocks can be problematic, since this process requires substantial research into the company’s fundamentals and knowledge about how the industry operates. If you’re looking at investing in mid caps for the near future, one option is to invest in mid cap mutual funds. What is mid-cap mutual fund? Mid cap mutual funds, as the name suggests, are those funds that invest a majority of their resources in mid cap stocks. To revisit mutual funds, a mutual fund is a vehicle that collects or pools resources from different investors and uses those to invest in different assets. These assets may be equities, fixed income debt products, gold etc. Mid cap mutual funds focus their attention on mid cap stocks. Mid cap mutual funds have seen tremendous gains in the last 3 to 5 years. If you go through a list of mid cap mutual funds and check the returns from 2014 to 2019, most funds will show an impressive figure since the mid cap index started booming from late 2016 and early 2017. Since mid cap stocks were largely undervalued before that, investors who put in funds before the boom are still making profits. However, in 2018, all gains on mid caps were erased when the stock market went through a bear phase. Since mid caps are volatile, many mid caps crashed and lost their valuation, pulling down the returns on mutual funds. In such a case, why should one invest in mid cap mutual funds? 1. Superior return:Over the long term, mid caps provide a superior return as compared to large caps. However, this investment is highly risky and generally beginner investors are advised to invest in such mutual funds after they gain a little bit of experience in investing and can stomach a few short term losses for long term gains. Mid cap mutual funds 2019 have slowly turned the corner and are starting to show small gains, which is encouraging. Mid cap funds that invest in quality undervalued shares can provide a good opportunity to grow capital. 2. Compounding:The principle of compounding is the most important thing to learn for an investor. Compounding is when income earned on an investment begins to generate income on its own. In case of mid cap mutual funds, if you opt for the growth option, the dividends are reinvested in the fund in the form of units purchased. This grows capital which earns dividend at a faster rate than the original investment. Using the power of compounding, capital can be grown faster. 3. Portfolio diversification:Investing a small portion of your total funds in mid cap mutual funds can diversify your risks and increase the total returns. This is for conservative investors who want to increase their returns. Who should invest in a mid-cap mutual fund? 1. Long term investors:Investors looking to build their capital over the long term should invest in a mid cap mutual fund. Investing for the short term can be disastrous since mid cap stocks are highly volatile and mirror the movements of the benchmark indices. These stocks can move in any direction which makes short term prediction of fund returns uncertain. If you are considering investment in any one of the top mid cap mutual funds, it is better to have a long term investment horizon of at least 3 to 5 years or longer. This will iron out all the fluctuations in value in the short term and will unlock value for your investments. Investing for the long term also provides the benefit of compounding since more dividends are reinvested as units. 2. Aggressive investors:Mid cap mutual funds are inherently risky since their core asset class of mid cap stocks is volatile. Since the market movements of these stocks can’t be guaranteed, returns on mid cap mutual funds can swing wildly from time to time. In fact, there may even be a loss of capital from a bear phase. That is the reason why these funds are recommended to investors who have a high tolerance for market fluctuations or aggressive investors. If you’re considering making a lump sum or an SIP investment in a mid cap mutual fund, you should make a list of the top performing schemes and analyse the following: • Past performance• Portfolio composition• Expense ratios The mid cap funds that perform the best in these three indicators can be taken up for investment. Here is a table of the best mid cap mutual funds according to the recommendation from the research team at IndiaNivesh Wealth Management: Now that you know all about mid cap stocks and top mid cap mutual funds, you may want to open a demat account with IndiaNivesh and start investing in them. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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