The discussion started with a question relating to the importance of financial planning, why one should start financial planning early in life, and why it is important to have some financial objectives in mind early in working life.
Although Indians are good savers and about Rs 8 lakh crore is saved by Indian households, only 4% of that comes to stocks and mutual funds.Compared to the US, the total corpus invested by Indian in stocks and mutual funds is miniscule. This is because of lack of awareness.
For example if you are investing through the systematic investment planning (SIP) route in which the average annual return is 15%, and when you retire you want to have a corpus of Rs 5 crore, "for this, if you want to invest for 20 years, you need to invest Rs 33,000 per month. However, if you want to invest for 15 years, you need to invest Rs 60,000 per month. So with a gap of five years, your monthly investment (nearly) doubles. That shows the benefit of starting to invest early and also the power of compounding. Stock markets run on cycles, so it's important that one starts investing early in life and also invests regularly.
Now if one misses to start investing early, then how should one approach investing, should they invest in the stock market directly or take the mutual fund route? Mutual funds are vehicles to invest in several asset classes. For example if a person wants to invest in midcap stocks and takes the mutual fund route, he will have the help of professional fund managers, will get access to a host of quality stocks, his money will be managed by professionals, and he can also have a well-diversified portfolio. Mutual fund is a very efficient tool wherein you can access different asset classes. Like we have, apart from equities and debt, gold funds also and in the near term real estate is also going to come into the mutual fund arena. So a common investor, by investing a small amount, can get access to high quality stocks and expect superior return.
The panelist agreed that the key to good investing was diversification, and by investing through the mutual fund route such diversification was easy. So a retail investor should identify a good mutual fund house and the debt or the equity scheme, and go with it.
The next question was relating to SIP and if it was the best method to invest in the market. When an investor is investing through the SIP route, he is buying mutual fund units at every level of the market, that is at low level, medium level and high level. At the end of the day, rupee-cost averaging would be there and also diversification will kick in. While investing in the equity market, one should add the country's GDP growth rate and the rate of inflation. You will easily get about 15% (average annual) return in the medium to long term. On the question of what could be ideal financial product to invest in for people who are in the age bracket of 20-30 years and 30-45 years, Holkar said when one is between 2030 years old, he should go for maximum equity allocation which could include investments in diversified, midcap and smallcap funds. And between 30-45 years, one could go for 70-80% in equity funds and the balance in debt funds, with the latter investment with a horizon of three years or more.
On the question of why people prefer to invest in fixed deposits over equities, and the question of safety versus higher returns, Balasubramaniam said that even within the mutual fund fold there are products which give safety, liquidity and also higher returns than FDs. He compared an FD return of 9% per annum with returns from dynamic bond funds of good fund houses. If 9% is the FD return for three years, if one has invested Rs 1 lakh in FD, he continues to earn 9% year after year.Compared to this, in dynamic bond funds, he could earn about 10-11% per annum, plus the taxation benefits. So the total extra return from mutual funds over the three year period would be about 12-13% more than the FD returns.
The next question was if the thumb rule of investing, that stipulates the percentage of investments in equities should be 100 minus your age, should be followed rigidly. There is Jacob's theory of financial management which says that 15-45 age bracket is the accumulation stage when one has to take risks and invest in equities. Then the 45-55 age bracket is the reaping stage where once should go for a balanced investment approach with debt and equity. And then the 55-60 age bracket is the harvesting stage when one should choose between instruments where the equity exposure is 15-20% and the balance in debt. Accordingly one should plan one's finances and may engage a financial planner.
The `100 minus your age' rule varies from person to person and may not be followed rigidly. This is because one's equity investments also depends on several other factors than just age.
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