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7 most frequently asked investment questions... and their answers
How many of you have had doubts at one point or the other when it comes to investing your hard earned money? I would rather bet most of you. In this article we shall focus on some key objections (questions) that I have come across time and again and try to answer these queries once and for all.
In India, just as cricket is a craze the stock markets are also a huge craze. Especially after the market rally from 5,000 points to 21,000 points and again from 8,000 levels to 17,000 levels. In the last few years many of your neighbours, friends and relatives must have made a killing in the stock markets. Hence it comes as no surprise that the first and most common objection features the stock market as a central point.
1. Why are we investing in debt? Can we not incorporate equities as part of my investments? I mean I can make more than 20 per cent in a short span of time rather than 7 to 8 per cent only in debt?
This common objection is raised by many an individuals. Equity and debt both form an important part of an individual's portfolio depending upon her/his goals in life and when he wants to achieve them. When goals are long term, that is, when you require money after 8 to 10 years you can invest in equity since equities in long run (say 8 to 10 years) give an average of 13 to 15 per cent returns compounded annually.
Short-term investments, that is, less than 4 years, calls for investing in debt as equity markets can prove volatile and hence risky. The proportion of asset allocation depends on your goals and time period in which you would like to achieve your goals and not how the stock markets are performing. Do remember short term or long term a constant monitoring of you investments is a must.
As markets are dynamic your prudent investment may not be that prudent going further.
The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com.
2. Aren't equity investments risky?
2. Again we also have risk averse individuals, who the moment you suggest an equity or an equity linked mutual fund as an investment, will promptly say: Aren't equity investments risky? I cannot see my capital depleting.
Again equity is a good option when your financial goals are long term. Long term investments in good funds and stocks return at least between 13 to 15 per cent on an annually compounded basis. Hence, when it comes to long-term investments equity is a good option.
3. Do you think this is the right time to invest?
Timing the markets. If a person can master this then s/he will be richer than Warren Buffet. How many of you can vouch for prices going up when you intend to buy a certain stock and prices falling when you plan to sell?
This is one complaint I keep on hearing from investors. But then what is the right time? It is time when you feel the valuations are right for you to buy or sell.
That is when at a stipulated price if you decide to buy you should buy even if the prices move up marginally.
If you invest your money with adequate research then the extra amount paid should not be an issue. The same applies to selling: You should decide upon your returns and when the price reaches your target you should be ready to sell. Keep your 'greed' at bay and book your profits.
That is the right time.
4. Should we invest in all asset classes?
4. Diversification is the way to go. With diversification our risk becomes zero. Should we invest in all asset classes?
The first thought to strike you after reading this will be: Do not put all your eggs in one basket. This is very true but it does not mean that one should have so many baskets that one can just not handle them.
Asset allocation has to be based on your goals and time in which you would like to achieve them.
Over-diversification does not mean that your risk becomes zero. Over-diversified portfolios become difficult to manage and follow and the whole purpose of minimising risk is not achieved.
Concentration on only one asset class is also not advisable. By having more than 30 scripts in portfolio or 15 mutual funds does not mean diversification. Adequate diversification is to invest in different asset classes to a limit based on your financial situation and future goals to be achieved.
5. Do you think the recent financial crisis will affect my investments? You think there is any reason to panic?
Emotions and investments never go together. A bad combination! There is never a reason to panic. Panic always makes an investor commit rash things such as exiting from an investment invariably for a loss and for no reason.
Hence, keep at bay emotions like fear, panic and greed.
When you are sure of your investment rationale then there is never a reason to panic.
6. Isn't ULIP good as it covers both insurance and investments?
Just as it is said never mix your drinks I would say do not mix the investment and insurance. Insurance is for protection and hence it is always advisable to buy pure protection plans as these plans are for what insurance is meant to be: Secure the lives of dependents in case of an untimely death of the earning member of a family.
7. Investments for retirement NOW. Isn't it too early?
A common objection raised by individuals in the young age bracket of 25 to 35 years. What you need to understand is this: To plan for retirement at a younger age means less amount to save. You can take the best advantage of power of compounding and make your money grow as time passes by.
As you near retirement, the amount you will require to save will be much higher as you have lesser number of years to save.
I am sure investors will always have doubts, questions, objection more that we have discussed here.
To be safe investors should try and clear all their doubts without any hesitation before making their investment decisions. This way they will be completely at peace once they invest their money.