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Long-term investment in equities leads to higher wealth creation as it benefits from the power of compounding and is resilient to short-term volatilities in the market

At a time when prices of goods and services keep sky-rocketing, it can become difficult to save enough to turn your dreams into reality. If you dream about higher education, buying a house, having a grand wedding, a vacation or tension-free retirement, but cannot afford these at this point in time, you must consider making your long-term investment plans now. Financial planners recommend long-term investment in equities as it helps investors plot out their future goals in a better way. Long-term investments have historically led to higher wealth creation and given investors a better investment experience. There are myriad benefits in investing for the long term:

Compounding Capital
In long-term investment, your returns are reinvested into your principal amount. Subsequently, your principal amount keeps growing year after year which allows your investment to multiply at a faster pace. The best way to benefit from compounding is to invest for the long term. The longer the tenure of investment, the greater will be the power of compounding.

More Time To Grow
The longer you invest, the more time you give your investment to grow. Investors may find it tempting to book profits when their investments grow or redeem when they are making losses. However, this is against the principle of long-term investing and would negate the benefits that can be accrued through compounded returns. Investors are best advised to stay patient through short-term peaks and troughs of the market to realize the true potential of their investments in the long run.

Resilient to Volatility
The equity market is generally volatile over the short term. However, judicious long-term investment enables investors to reduce the risk of near-term volatility in prices.

Financial Discipline
Long-term investors should ideally have pre-requisite goals in mind and their decisions should be based on building a portfolio that will help them achieve those goals. Often, investors tend to take investment decisions based on market sentiments. Such investments can be susceptible to a higher amount of losses. While a bad year in the market can spell doom for the short-term investor, a long-term investor can reverse losses by investing sensibly in successive years. This investment approach also teaches us to be disciplined in our spending habit. Important life lessons such as patience and the ability to overcome short-term losses can be learned through long-term investments.

A legendary investor once said his favorite investment horizon is ‘forever’ and that one should never make an investment unless one plans to hold it for long-term. Investing over the long term is one of the smart ways to achieve your financial goals and the best time to start is now.

Source: Financial Express

Understanding NAVs and dividends is a basic requirement for making the right mutual fund investments, says Dhirendra Kumar

The basic terminology of mutual funds is needlessly con fusing, even misleading. Therefore, it's best for investors to make a little effort to understand what's going on, rather understand what's going on, rather than making bad decisions later.

The first thing that a new investor learns about funds is that you buy a fund in `units' and the price of each unit is called the NAV. This is the first pitfall. While buying anything else, we always prefer lower prices. So, you are primed to think a fund with a lower NAV is better, since it's cheaper.

This idea is wrong. High or low fund NAV is a completely irrelevant characteristic. There's no reason to decide whether or not to invest in a fund based on it. What matters is what a mutual fund invests in and how the fund manager runs it. A fund with an NAV of Rs. 10, and another with an NAV of Rs. 100 will generate the same returns if their portfolios are the same. The actual NAV and number of units you own are irrelevant. If a fund gains 20%, the Rs. 1 lakh you invested in it is going to grow to Rs. 1.2 lakh. This could be 10,000 units at an NAV of Rs. 12, or 100 units at an NAV of Rs. 1,200, it makes no difference. The only use of the NAV of a mutual fund is to compare it to its own earlier NAV. This is how the returns generated by a fund are calculated. Comparing the NAV of one fund to another can lead you to make random investing decisions.

Then there are dividends. All mutual fund schemes have dividend options and non-dividend options. The former is convenient if you want to withdraw from the fund regularly.

Source: LiveMint
Investors should have proper knowledge of product before investing in these kinds of funds

A six-digit salary is desired by most people since it can land you in the top 1-2% of earners. But, will you remain rich in future as well or be able to maintain the same standard of living for the rest of your life? Well, it totally depends on your money habits. We dream of a happy life like owning a house, car, funds for children’s education and marriages. But, are we taking enough steps to turn it into a reality? If you look at the amount that one will earn over a lifetime and figure out the number of one’s working years, most of us will be millionaires over the working life. However, in reality, very few become millionaires.

One cannot confront the possibility of his or her own demise. However, any person will aim to keep his family debt free, financially strong and independent, in his absence. By proper financial planning, you can definitely improve the economic and financial stability of the family. What changes will take you to the road of prosperity? It’s all about selecting an experienced financial planner, who can understand your current position and life goals, suggesting a customized plan with the right mix of products.

The core idea is to start saving and build a saving behavior. That is, even if one has invested a small amount, once we see progress, we tend to repeat the behavior. For instance, a person can retire with a corpus of Rs 1 crore at the age of 60, if they start investing at the age of 25 in equity mutual funds, with a sum of no more than Rs 1,500 per month.

Over the last decade, the role of an ‘advisor’ has changed to that of a ‘portfolio manager’ and now to a ‘life planner’. Customers have understood that financial planning is not just investing; it’s a process that manages your finances and links it to your goals. Simply buying a financial product will not fulfill any goals. For instance, investing in a fixed deposit at 8% per annum and earning a post-tax return of 7% per annum is not enough, given an inflation of 7.5%. If we do so, we incur a loss of 0.5%. It’s a fact: imagine the same event to continue for the next 25 years! Big wealth is destroyed by that time.

In simple terms, one should start investing and first with mutual funds, which are one of the best ways to start participating in the equity/debt market through various schemes. Customers should closely look at the risk-return perspective while choosing funds. If a customer wants safe investment, he can go ahead with liquid / debt funds or else with equities for higher returns. There are various types of funds that have different levels of risks like sectoral funds, precious metal funds, cross country funds, commodity funds etc. Investors should have proper knowledge of product before investing in these kinds of funds.

For beginners, systematic investment plans (SIPs) are ideal that invest consistently and ride easily through market volatility. By rightly identifying the risk one is willing to take, in conjunction with liquidity requirement and return expectation, one can match a fund to suit their investment objective. Not only are they cost efficient, but are tax efficient as well.

Everyone should start with these kinds of products for their investment needs and migrate slowly and steadily towards other high-end products. Apart from mutual funds, one can invest in a bouquet of products such as structured products, tax-free bonds, etc. It is vital to have the right mix of products in one’s portfolio, to diversify the risk and generate healthy returns. Since direct equity is a high-risk high-return product, investors should look at this product at an advanced stage of investing. It is important to invest in products you understand, and more importantly, to stick to funds that have an established record, experienced professionals and years of presence in the industry.

Source: DNA
Compared to bank deposits or small savings, non-convertible debentures, liquid funds, tax-free bonds and company fixed deposits offer higher returns, albeit with some risks.

At a time when interest rates on bank deposit and small savings are falling, investors can look at other debt financial instruments to earn some higher returns.

Non-convertible debentures

Companies issue non-convertible debentures (NCDs) to raise long-term funds. These debentures cannot be converted into shares or equities and lenders offer a higher rate of return compared to convertible debentures. Non-convertible debentures are of two types —secured and non-secured. The secured ones are backed by assets, wherein if the company is unable to fulfil its obligations, the assets are liquidated to repay the investors.

So, secured non-convertible debentures pay lower coupons than non-secured ones. Companies issuing non-convertible debentures offer higher rates because they carry default risk compared to bank or postal deposits. Investing in NCDs makes sense for those in the 10% to 20% tax brackets, as those in the lowest tax bracket can get post tax returns around 7% for a 120-month tenure. One should invest in non-convertible debentures only if he can hold them till maturity.

Liquid funds

Investors can also look at liquid funds offered by asset management companies for short-term investment for up to a year. The fund will yield marginally higher returns than bank deposits. Moreover, they are as liquid as time and demand deposits as the market regulator has allowed fund houses to offer instant redemption facility of up to Rs 50,000. In fact, one aspect where bank deposits scored over liquid funds or any other money market funds was same day redemption.

Now that has been taken care and investors can manage cash flows better. At the time of investing in debt funds, investors must analyze the credit rating of the bonds in which the fund house invests. While debt funds are not rated, their safety can be analyzed from the portfolio they invest in. Fund managers may sometimes take higher position in bonds with lower rating for higher returns.

Tax-free bonds

As the name suggests, tax-free bonds were issued by state-owned companies such as NHAI, IRFC, HUDCO till March 2016. However, investors can now buy these bonds from the secondary market and can earn up to 2% more than bank fixed deposits after tax. Tax-free bonds are an attractive long-term investment as there is no deduction of tax at source from the interest that accrues to bondholders, irrespective of the interest amount or status of the investor.

These bonds score over fixed deposits or other debt investment as investors do not have to pay tax on the returns. Before investing in tax-free bonds, one must look at the issue size as it may impact liquidity. For instance, NHAI’s Rs 10,000-crore bond issue has the highest traded volume on bourses.

Company fixed deposits

Even by investing in company fixed deposits of top-rated firms, investors can earn up to 150 basis points more than bank fixed deposits. However, investors must exercise utmost caution because while bank deposits provide security for investment up to Rs 1 lakh, this is not the case with corporate fixed deposits.

The tenure of company deposits ranges from one to seven years and one can earn compounding interest by reinvesting the principal amount along with the interest earned. Investors can get direct ECS credit facility for interest payments or advance interest warrants for the year. However, unless one needs income regularly, they should prefer cumulative schemes to regular income options since the interest earned gets reinvested at the same coupon rate, resulting in better yields.

Diversify investment in four to five companies and avoid investing in those companies that mention very high interest rates and whose balance sheets show losses. If one invests in a company that is low on ratings, go for a short tenure, which will enable you to opt out if the company is not performing well.

Source: Business Line
Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to webmaster@saatvikinvestments.com.
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. dishainvestwise.com and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. dishainvestwise.com, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.