Tag: GDP

A Beginners Guide To Investing In Shares

Share markets are either the most favoured or the most hated entity depending on their status. A rising market is characterized by the build up of a herd mentality. If the index goes up continuously for 15 days, there is a sudden spurt in interest in buying. If the market falls drastically, calls from brokers are avoided.

We are going through a similar phase now. There has been an almost 50% depreciation in the broad index, while the drop in the prices of widely traded software stocks has been far more in many cases as high as 90%. It is being said that investors have fled the markets, unlikely to return. But can they afford to stay away? NO and the reasons are not far to seek.

In India, in the absence of worthwhile social security schemes and reliable medical insurance cover, so commonplace in the developed countries, we have to build a nest egg for old age. Savings have to cover daily expenses, long-term family obligations, such as the childrens education or marriage, and medical emergencies. Its no wonder then that Indias saving rate is as high as 25-27% of the GDP, one of the highest in the world.

Whats more, the interest earned on savings has to be higher than the rate of inflation. If not, savings are being devalued over time. The interest rate curve has been falling rapidly. Over the past few years, the rates of interest earned from banks and various government schemes have dropped substantially.

It is in such a scenario that stock markets come to the rescue. Stocks have consistently provided higher returns than fixed income savings avenues. They provide the power to beat inflation.

However, we hear stories all the time about people losing in the stock markets. Where are the gains? Perhaps, one has to question our attitude towards share investments. Do we perceive shares as investments? Or a form of lottery with a jackpot round the corner?

Any investment proposal needs to be evaluated against the returns it will provide over a specific time frame. However, when shares are bought, investors do not target specific levels of returns nor do they consider the risks.

The share market is not the place to look for a windfall. However, over the long term, share markets have normally provided returns averaging around 15% to 20%. Anything more than this should be considered abnormal. There are times when share prices climb even higher but the ones who really benefit are those who cash in on their gains. Dont belittle the 15%- 20% annual gain that shares have been giving. Over time and with compounding it makes a huge difference.

Money can be made on the share markets only if targets are set and a stop loss limit. For example: if an investor wishes to earn a return of 30% annually, the portfolio may be rotated thrice a year, with a 10% target profit each time the investor enters and exits the market. In the same way, if there is a 10% loss, one must exit the share. With such targets, it is difficult to make sizeable losses. One could try this theory out on a mock portfolio. Even if the profits are not targeted, the stop loss must be set, even if the purchases are for delivery. The availability of a Demat facility makes entry and exit extremely easy.

Investors who have speculative tendencies should dabble in the options market, rather then be day traders in the cash market. Options trading helps you to limit your losses since the maximum amount one can lose is the premium on options, and not the entire capital.

The portfolio has to be structured on the basis of how frequently you require the income flows and the capital return. The composition of the portfolio also depends on your age, status in life, other sources of income, risk bearing capacity, etc. Its wise not to put all your eggs in the share market alone, as it can, at times, be a most risky investment. Persons with fewer social obligations can afford to put more money in the share market, whereas a senior citizen could allocate just 5% of his wealth to shares. Every one needs to spend time to build a portfolio that suits their individual needs.

Lastly, a word of caution about the advice given by brokers. Every one actively seeks advice from brokers. However, unless the broker is a registered portfolio advisor, he will not be tracking your portfolio. He will merely give you a view on the market and on the stocks that are the current favorites. The brokers view is essentially a short-term view. He is too close to the market and is affected by short-term price movements and changes in sentiment. In the absence of a full-fledged research department, the broker is unable to do in-depth study and provide a long-term view about different stocks.

In such a situation, it would be advisable to track your own stocks. Do not expect your broker to give you the signals. It is your money that is at stake. You must manage it by setting and sticking to the buy and sell targets. Even if a share has been bought on a brokers advice, it is necessary to dispose it when you have achieved your targeted return. Set small goals, because they are not difficult to achieve.

Please remember the advice about profit and stop loss. Most of the money lost in shares markets is due to greed and the fear of taking a loss. We do not sell because we want to wait for the highest price. But few are able to sell at the top getting the timing exactly right is almost impossible! Similarly, investors are afraid to book a loss that has already occurred. So they let things drag out and then they sell at a much bigger loss. Sometimes, they wait so long that the shares become worthless. Remember that no complex or sophisticated study is needed to operate prudently and successfully in the stock market. Investors must keep their emotions in check. Whats really needed is a lot of common sense.

Invest In Mutual Funds Or Bank Fixed Deposits

I have often seen people planning to Invest in bank Fixed Deposits rather than Equity related Mutual Funds inspite of the growing Indian Economy and rising stock market. Though the times are changing and people have started looking at Equity Investment schemes, but still its only the minority of people savings going into the equity market.

Indians are skeptic about investing in Equities. Reason behind so is lack of knowledge and general awareness of the benefits. One needs to understand that stock markets are the best way to benefit from a country which economy GDP is growing over 8.5% year on year. Stock market basically resembles a Nation’s financial condition which of India is going to get better n better.

Indian Money Is Way Too Conservative

Fact figures suggests that 48% of total American savings goes for investing in schemes related to equities. On the other hand the fact figure for Indian savings money routed to equities stands at a merely small total of just 2%. No wonder, both the Indian Government and leading Indian Stock Exchanges are always keen to generate interest and awareness within the common people indicating towards the benefit of investing in equities for the long term.

Its the lack of Financial Education which keeps Indian savings money away from the Equities, since they are not ever formally introduced to financial planning and Investing. Majority of people believes that small investors cannot earn money from stock market, which absolutely is just a myth and nothing more.

Indian Investors still prefers the traditional way of Investment like Fixed Deposits. In fact Fixed Deposits are so famous and traditional that, during daughters marriage, father often gifts Fixed Deposits!

What Is A Bank Fixed Deposit?

A fixed-income debt security issued by banks. A Fixed Deposit is like loaning the bank your money and in return, they pay you interest which is currently between 8-9.5% p.a.

At this interest rates your money will double approx in 7-8 years. Too less, too late? Read on

Why You Should Not Be Investing In Fixed Deposits?

The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time which is usually 3 years since deposit for any reason.

Changes in the going interest rate may also rise to a point above and beyond the interest rate applied to existing deposits done with the banks. This means account holders are actually earning less interest with fixed deposits than with other types of products.

What is a Mutual Fund?

A Mutual Fund is a investment scheme maintained and run by professional fund managers working under the name of a Financial Institute or a Fund House. Money is being collected from different and many investors and then collectively put in a pool account from where the fund managers makes Buy and Sell trades according to there own group research and investment objectives.

Dalal Street people prefers you thinking that what they do with your money is some rocket science and you are absolutely not the right person to take your own financial decision so that they keep earning fat commissions for themselves you being entrusting them your hard earned money.

Though its a different case that of course you can also invest your money yourself with little bit of research and with the help of expert Indian stock advisory services like Winfromus which generates higher returns than the different Mutual Fund schemes.

But never the less, there are some real good fund managers out there too, doing what they are best at and most of the good names has been successfully generating 13-15% Compounded Annual Growth Returns (CAGR) since the past 5-6 years.

CAGR Projection over the next 3 years from Indian Stock Markets

Conservative projection suggests that the Indian markets can deliver CAGR of 15-18% over the next 3 years and optimistic like me expects 20% CAGR over the next 3 years with the right selected stocks and sectors.

20% CAGR is not just a dream, but it is also fundamentally backed by growing GDP, country’s financial condition and over all economical and business development which is on course and expected to grow at a descent pace.

Fixed Deposits Returns are Guaranteed, Mutual Funds Are Not – What about my money safety?

Well, for a matter of fact nobody can guarantee you returns while investing in equity via any possible way, since it involves risk. But theres a way to cut the risk virtually to Zero levels and still get benefited the most. The secret is Systematic Investment Planning (SIP).

Systematic Investment allows you to stay invested without worrying to time the markets or about the volatility we see in stock market. In fact SIP works out best when markets are volatile. The funda of systematic investing works on a simple formula invented by world’s most genius ever Albert Einstein – Power of Compounding.

While SIP, rupee cost averaging and compounding of returns/interest earned on principle over a period of time compounds together and puts significant impact on wealth creation over the long run and stock market being a cyclical asset, it is very likely that you will see a higher end where you may take profits and then go conservative.

Do you know how much money can be made on investment of just Rs 10,000/- per month at a CAGR of 20%? I have done the maths, here’s the result –

* Rs 10k/month Invested for 5 years at 20% CAGR to become 10 lacs
* Rs 10k/month Invested for 10 years at 20% CAGR to become 35 lacs
* Rs 10k/month Invested for 15 years at 20% CAGR to become 95 lacs
* Rs 10k/month Invested for 20 years at 20% CAGR to become 2.4 crore

Eventually In 25 years 10000/month @ 20% CAGR (compounded annual growth rate) to become 6.1 crores and in 30 years 10000/month @ 20% CAGR to become a whopping 15 crores. The longer you invest, the higher would get your returns.

Think Mature, Aim Higher, Plan and Set A Goal…

Fixed Deposits cannot generate the kind of returns stock markets will and theres no doubt about it. If you are young and want to Invest and grow your money big, equities are the way to go. Don’t be skeptic and look at the brighter side of investing in Stock Market, you don’t get such money making opportunity in a lifetime.

Returns of fixed deposits may not even beat Inflation rates, then whats the use of saving money in them and allowing money to sit idle to generate lesser returns on investment when a simple SIP in equities can do a better performance for your money? Think about it..

Happy Investing!!