Continued from Part II
Now that we have updated ourselves with the different products available in the debt asset class let’s move on to the next asset class which should also be an important part of any portfolio(but largely overlooked & misunderstood by Indian Investors) - Equity.
This is one asset class where the results of the psychometric test (I feel) matter the most simply because in my experience the volatility of stock markets more often than not touches our nerves the most.
Talking about Equity at a time when Indices are scaling newer high's is really exciting, (some of us might even experience goosebumps) but before you jump the gun it is very important to get your basics right.
Equity - includes investments like Derivatives, Stocks, Portfolio management services and Equity mutual funds. For the sake of simplicity I will address only MF's in this post and will detail the other products at a later stage.
Advantages of an Equity mutual fund:
Diversification - This enables investors to spread out and minimize their risk up to a certain extent instead of buying individual stocks. By investing in a large number of assets, the shortcomings of any particular investment are minimized by gains in others.
Economies of scale - Equity MF's buy and sell large amounts of securities at a time. This helps reduce transaction costs and bring down the average cost of the unit for investors.
Professional management - Equity MF's are managed by thorough professionals. Most investors either don’t have the time or the expertise to manage their own portfolio. Hence, mutual funds are a relatively less expensive way to make and monitor their investments.
Liquidity - Investor always has the choice to easily liquidate his/her holdings.
Simplicity - Investing in a Equity MF is considered to be easier as compared to other available instruments in the market. The minimum investment is also extremely small, where an SIP can be initiated at just Rs.100 per month basis.
Duration or holding period.
This will again purely depend on your financial goal and/or the present/future market conditions.
Example:
If you have a long term goal like retirement, and are a new to investing in mutual funds, start an SIP in a balanced fund. This will help negate volatility and provide consistency return wise too. Once you are accustomed to the conditions you can switch to a higher risk product like a diversified Equity fund
Important tips.
When it comes to selecting an asset class, one should look for a customized portfolio. Your best bet is the right combination of growth, stability and income, keeping your financial goals and risk appetite in mind.
Don't just base your decisions on Past Performances, Invest in what you understand. Have a circle of competence, and stick to it. An investor needs to do very few things right as long as he or she avoids big mistakes, and staying within your circle of competence is one of them.
To invest better, become a student of human psychology. Learn how emotions lead to cognitive errors, so that you can avoid those errors and benefit when others make them.
Ninad Kamat
CERTIFIED FINANCIAL PLANNERCM
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