Indians are great savers but poor investors.
What are the reasons?
In most cases they are unaware about:
- How much to invest
- How to invest
- When to invest
- Where to invest
- When to exit
As per the World Bank report, India’s gross domestic savings as a percentage of GDP have gone up from 24.9% in 1997 to 29.8% in 2017.
Nearly 80% of Indian adults now have a bank account but not even 5% Indians have demat accounts. Despite strong tailwinds, there are only about 8 crore mutual fund folios, of which 6.7 crore are under equity-oriented schemes.
According to RBI data, financial household savings as a percentage of gross national disposable income were 11.1% in FY 2017-18.
What deters Indians from investing in one of the best asset classes—equity?
Here’re primary reasons:
- Lack of awareness
- Risk aversion (fear of losing money)
- Lack of acumen
- Lack of self-confidence
But keeping money in Fixed Deposits (FDs) offered by banks isn’t an intelligent option either.
If you earn 7.5% interest on bank FDs and the rate of inflation is 5% your post tax returns reduce to barely 2.4%. If you adjust it for applicable income tax rate, returns would be paltry.
Not having adequate money to live a peaceful life post-retirement is also a risk, isn’t it?
Why be so scared of markets then?
“How many millionaires do you know who have become Wealthy by investing in Saving Accounts? I rest my case.” Robert g Allen
There’s a long-held misconception—only experienced and seasoned investors can make money in the stock market. And you really have to be a geek to learn the art of equity and mutual fund investing.
What’s the way out?
Welcome to Do It Yourself (DIY) investing
Step-by-step approach to DIY investing
- Fix a goal
Contemplate about your financial goals—both short-term and long-term.
You may require lump sum amount of funds for your marriage, child’s education, retirement and so on over a period of 5,10, 20 or 30 years. Similarly, you might need funds in near future to meet your short-term needs.
Listing down these goals will help you decide the investment options once you know your time frame and the amount you would require in future.
- Profile yourself
This involves assessment of two important aspects of your personality with respect to investments: –
> Risk appetite – It refers to the amount of money that you can afford to lose without altering your lifestyle. This can be tricky and the best way to do it is by putting yourself in a ‘what if’ situation.
“What if I made losses worth Rs 10 lakhs in 5 years? What if valuation of my portfolio goes down by 35%? Can I take the risk and still meet my financial objectives?”
Doing this exercise will help you rightly analyse the risk that you can take.
> Return expectations – The percentage returns that you expect over a period of time is termed as return expectations.
Like risk appetite, this varies with every individual and it is important that you decide what suits you best.
While working this out, do consider your age, income, responsibility matrix and investment horizon for better outcomes.
For example, if you are 25 years old, haven’t started a family yet and earn reasonably well, you can afford to take higher risk compared to someone who is 40 years old and has a family to support.
Also, ensure that your profile is in line with your monthly savings and long-term goals. For instance, if your monthly savings are low, long-term goals are aggressive but you are averse to risk, you will either have to increase your monthly savings or agree to take more risks to meet your financial goals. If required, revisit the earlier steps and make necessary changes.
Once the risk-return profile is decided and aligned with your goals, you should factor in the tax-related aspect of investing.
The tax bracket you fall under has a direct impact on your returns on investment. For instance, if you fall under a 30% tax bracket and earn 8% interest on your Fixed Deposits, the net investment earnings reduce to just 5.6%. In this case, you should rather switch to an investment tool such as mutual fund that has a higher return potential or consider National Pension System (NPS) or PPF that have provisions for a tax rebate.
You may also consider investing in direct equities and pay just 10% long-term tax on your returns.
- Select an apt investment tools
There are various investment options available to investors, few of which include mutual funds, direct equities, NPS and debt instruments.
Making an appropriate selection is the most delicate part of the entire DIY exercise. To make easy for you, we have segregated the investment purpose in alignment with the tools: –
Of the above, direct equities and mutual funds can generate maximum returns and are excellent tools for wealth creation. However, the purpose can only be achieved through a selection of appropriate fund/stocks. So, let’s learn the technique and list down few ways to choose right:-
> How to select the right mutual fund?
A wide range of online tools can help you select the most promising mutual fund to invest in. You may choose to open one or more of the popular web portals like Ventura MF portal, Value Research or Morning Star and browse through the available list of mutual funds. The size of Asset Under Management (AUM) and a consistent increase in it over past three months along with a deeper glance on the fund’s past returns can be used as indicators of its performance. Once you shortlist the fund, the best way to start is by investing in monthly instalments or start a Systematic Investment Plan (SIP)
> How to select the right stock?
You must develop the understanding about companies, choose the right one and know when to enter and exit. For this, you should cautiously look around yourself. As a layman, first check out the brands that are selling exceptionally well or those that have been enjoying a consistent upward reach.
For instance, let’s take ‘Bata India’. We all know that the company has launched a new trend of shoes and the rise in its number of stores across the country is also quite evident.
With this observation, it is likely that the company is doing well. So, the next step is to find out more by flipping through the company’s balance sheet. Also see if the quarterly sale volumes are going uphill and Profit After Tax (PAT) is improving.
If, the answer to all points in the checklist is an assertive, shortlist the stock. Now, you may cross-check for recommendations from various online reports and call your broker to ensure that you have made the right choice.
“An investment in knowledge pays the best interest”– Benjamin Franklin
- Revisit your portfolio The economic scenario is dynamic and so is the performance of the instrument. Therefore, it is a must to revisit your portfolio periodically, review individual performances against benchmarks and your individual targets. Realign the asset allocation if required.
Start ASAP (As Soon As Possible)
The sooner the better is an old saying which truly pays off when it comes to investing.
If you start investing Rs. 1 lakh p.a in equities today, you would have built a corpus of Rs. 2.7 crores at the end of 30 years (assuming the compounded annualised return of 12%). However, if you start 10 years later, your portfolio valuation would be just Rs. 81 lakh. So is the case with direct equities.
The power of compounding can produce unmatched results.
Hence, don’t waste time. Now is the right time to embark on you DIY investment plan.