Invest based on what you need, not what you like

Often a person’s investment is driven by his risk appetite. Conservative persons cannot stand to lose money and so prefer safe investments like bank deposits. Risk loving persons, on the other hand, avoid safe investments because they like the feeling of risking money to make stupendous returns.

Actually, it is probably a bad idea to choose an investment based on how much risk you like. It is far more intelligent to consider what you want to achieve through the investment. I am sure you would agree that it is intelligent to use a hammer to drive a nail and to use scissors to cut paper. In the world of investments, however, there are many persons who would use a hammer to cut paper because they ‘like’ a hammer.

The safest, simplest instrument is a Bank Fixed Deposit. You put money for a fixed duration of time and get a fixed amount of money at the end of that period. It is useful for short term requirements such as putting aside money for kids’ school fees or even buying that expensive iPhone for Diwali. These deposits provide anywhere from 5% to 9% return depending on interest rates and duration of investment.

The Short Term Debt Mutual Fund offers 5% to 9% returns and is a little riskier than the Bank Fixed Deposit. It is the preferred choice of sophisticated investors such as companies and rich individuals because it is ‘liquid’, which means you can invest and withdraw money from a Short Term Debt Mutual Fund easily at any time, and because these Funds attract lower tax rates if held for three years or more.

So the Fixed Deposit and Short Term Debt Mutual Fund is useful to keep money parked for a year. They are products investors 'like.' Both the Bank Fixed Deposit and the Short Term Debt Mutual Fund are harmful, however, if you want to save for retirement, or for your Children’s college education, or their marriage.

When dealing with investments that have to last for twenty or thirty or forty years, you need to look at Equity Mutual Funds. These are risky but offer great long term returns and they are essential if you want to build wealth for the long term. The Bank Fixed Deposit or Short Term Debt fund are worse than useless for these durations.

A person investing his January Bonus in Equity Mutual Funds so as to buy a Car at Diwali in October is like a person using a hammer to cut paper. Similarly, a person saving in a Bank Fixed Deposit for his retirement is like a person using scissors to drive a nail. Yet, investors often invest only in Bank Fixed Deposits for ALL purposes because they believe that these instruments are safe. Some others put all their savings into share trading in the vain hope that it would mushroom into a massive sum that would make them rich overnight.

A good investor studies all instruments and astutely uses the one that best suits his purpose. The correct application of an investment to a purpose is financial wisdom.

Should you still invest in a fixed deposit?

There is nothing called as investing in a fixed deposit, because those who keep their money in a fixed deposit are not investing it, they are merely parking it. And to park money, Liquid Debt Mutual Funds are much better than Fixed Deposits.

Here are some comparisons between fixed deposits and Liquid Debt Mutual Funds:

1. You cannot withdraw money in a fixed deposit without severe penalties. A Mutual Fund allows you to invest and withdraw at any time without penalties.

2. A fixed deposit return is guaranteed. A Liquid Debt Mutual fund gives you better returns almost all the time, though returns are not guaranteed. There is no TDS on a Liquid Mutual Fund.

3. A Fixed deposit is taxed at your income tax rate. A Liquid Debt Mutual fund is taxed at the same rate, but the tax reduces after three years of holding.

4. In a fixed deposit you are taxed on ALL the money you invest. In a Liquid Debt Mutual Fund you are taxed only on the part you withdraw at any given time.

So would you like to:

1. Pay more taxes,

2. Lock your money,

3. Pay penalties on withdrawing your own money, and

4. Get less interest?

If you do, Fixed deposits are for you. If, on the other hand, you want to make your money work harder, Liquid Debt Mutual Funds are a better option. You can know more here: click here

Write to us to invest better.

Where can I invest for 2-3 years in a Mutual fund?

For a duration of 2 -3 years you can get returns of approximately 8% to 9% through debt/liquid funds as of 2015. These funds are quite safe and deliver returns slightly above FDs. These funds are

taxable. Any interest you earn will be taxed as part of your income.

You can also look to invest in Fixed Maturity Plans, which give higher returns, but these are illiquid. You will not be able to take out your money before maturity.

You can look to invest in Arbitrage Mutual Funds. There give returns similar to Liquid Debt Funds, but the returns in an Equity Mutual Fund are tax free after one year of holding. Even for sales within a year, returns are taxed at approximately 15%.

If you want to run greater risks for higher returns, then you can try Balanced Funds. These could give you-20% to +50% in two years and will be tax free if you hold for more than 1 year.

To make  good choice you need to understand fund objectives, category, house, manager, holdings, yields, expenses, and history among other things. Knowing exactly which funds to pick, and for how long to keep with it requires deep understanding. We are happy to help you with that if you invest through us at SphereGreen.

PPF does poorly even when compared to the least performing Mutual Fund SIPs

The Economic times today did a systematic study that showed something that SphereGreen has know for a long time: returns on Equity Mutual Fund SIP Investments are much better than PPF even in the worst case. And when Equity Markets do well, then Equity Mutual fund Investments grow to four times the size of PPF investments in 15 years. You can see the ET study: click here

The article says that PPF has given a return of about 9% per year over the last 15 years. Mutual Fund SIPs have given a return of 13.7% in the worst case and 26.6% per year in the best case, with an average return of 21.1% per year.

What this information does not show very well is the magnitude of difference these returns generate over a period of 15 years. Here it is: If you invested Rs. 10,000 per month for 15 years, then:

1. In a PPF this money would grow to 36.8 Lakhs

2. In the worst performing Equity Mutual Fund SIP it would grow to 54.9 Lakhs

3. In an average performing Equity Mutual Fund SIP it would grow to 1 Crore 5 lakhs

4. In the best performing Equity Mutual Fund SIP it would grow to 1 Crore 71 lakhs

In other words, those who invested in PPF instead of Equity Mutual Fund SIPs lost as much as Rs. 1 Crore 35 Lakhs in the last 15 years.

It takes fifteen minutes of your time to start a SIP and you can manage it online and stop investments or withdraw money in five minutes. Without these investments you will never be rich.

Write to us now at SphereGreen.Investments@gmail.com, or through this blog, or call us to invest straight away.

What charges do I have to pay on a Mutual fund Investment?

The charges a person pays on a Mutual Fund investment depend on the way one purchases the Mutual fund. Broadly there are three ways:

1. Investing Directly with the AMC (Asset Management Company or Mutual Fund Company) without an Adviser. To do this you need to complete a SEBI KYC and then open a folio with the Mutual fund company and invest in the DIRECT version of the fund. Since you do not have an adviser you are on your own in opening the account and in choosing funds. This is the cheapest route and it is a Do It Yourself Route meant only for those who are very comfortable with Mutual fund investments, such as corporates. Direct equity funds usually have an expense of about 2%.

2. Investing Directly with an AMC with an Advisor. This is the model we follow at SphereGreen. This investment is in a REGULAR Fund and is about 0.5% more expensive than a DIRECT fund, but you get our help in opening folios and choosing funds and in managing your money over a long period of time. This is best suited for new investors in Mutual Funds.

3. Investing through a bank or stock broker. Usually banks or brokers act as advisers but do not provide any advise on funds. Investing through them is the same as investing with an adviser, so you pay for an adviser, in this case the bank, but you do not get much advice. Even more, some banks and brokers put you onto Mutual Funds through their wealth management arms, and that is extremely expensive. Investing through wealth management is the most expensive way to buy Mutual Funds because it can cost as much as 3% more than REGULAR FUNDS, and in our experience it provides little extra benefit.

We believe Investing Directly with an AMC, but in a REGULAR fund with us as an adviser, is the best way to invest in Mutual Funds for a new investor. 

What is an Arbitrage Mutual Fund?

An arbitrage mutual fund is a very specialized Equity Fund that makes money by exploiting tiny differences in the prices of shares in different exchanges or the differences in prices between shares and their derivatives.

These funds are not very risky provided they are managed professionally under a good risk management system and they adhere to rules. Which is why it is critical to be invested with a good fund house in these funds. Overall returns are around the rate of an FD, but, and this is what makes arbitrage funds attractive, capital gains on these funds are tax free after a year of holding. On the other hand, taxes on debt funds comparable to arbitrage funds reduce only after three years of holding to 20% with indexation, and gains from FDs are usually added to your income.

The best use of an arbitrage fund is to park large sums of money for the short term. You can write to us to invest at SphereGreen.Investments@gmail.com, or you can contact us through this blog, or simply call us to invest.

Are there any secure Mutual Funds?

Most certainly.

Debt funds are safer than Equity funds, and the safest Mutual fund would be a Liquid Debt Fund. Other debt funds such as Government Bond Funds, Income funds can be risky because they are extremely sensitive to changes in interest rates.

A Liquid Debt Fund is a great place to park money:

1. It provides slightly above the 6 month Bank Fixed Deposit Rate of return

2. You can invest or withdraw money at any time

3. After three years of holding taxation is very low

4. Interest is NOT taxed until you withdraw

5. Tax is charged only on the money withdrawn

6. There are certain specialized Equity Mutual Funds that give returns similar to a Liquid Fund called the Arbitrage Funds, but these are much more complex.

So a Liquid fund is quite safe, but there are no guaranteed returns in ANY mutual funds.

And then safety is a relative concept. With a Liquid fund you can be around 90% certain of positive returns above an FD rate in a year. So it is safe only for a short duration.

Over a period of ten years, the Liquid fund is very dangerous because you can lose a lot of money due to low returns. If you had put in Rs. 100 in a Liquid fund 10 years ago, you would have about Rs. 200 now. If you had put money ten years ago in some of the 'risky funds', such as diversified equity, the money would have grown to Rs. 900 by now. This is how you can lose Rs. 700 in trying to protect Rs. 100.

What is an SIP, How do I start one?

Systematic Investment Plans, or SIPs are simply a convenient way to invest in Mutual Funds month on month. You select a fund, choose a date, choose an amount to invest, and the period for which you would like to put in money. Once you have selected all of this, you need to fill a few forms and the money will be automatically placed in your mutual fund account from your bank account every month on the date selected by you.

Simple, Powerful. Convenient.

A Systematic Investment Plan is a matter of convenience and not an obligation. you can stop the investment at any time, you can withdraw the invested money at any time, and you can invest more money at any time.

An SIP can also make you very rich. For example a Rs. 5,000 per month SIP for 20 years on the 7th of every month will help you invest Rs. 12 Lakhs (5000 x 12 x 20) in small monthly amounts. And your money will grow because SIPs can be very profitable. An investment of Rs. 5,000 per month over 20 years should give you about Rs. 80 Lakhs (15% annual return). These gains are tax free and uncapped. If I calculate that MF SIPs give you returns similar to what they have done in the last decade and a half, then you should make Rs. 1.5 Crores in 20 years (20% annual return). But there are no guarantees on returns.

To begin an SIP takes 10 minutes. You need to:

1. Complete a KYC

2. Select a fund

3. Open a folio

4. Request an SIP.

Write to us if you want to start an SIP today and we will help you with all four steps.

How do I make Rs. 10 Lakhs in 10 years?

You can generate Rs. 10 Lakhs by simply putting Rs. 5,000 per month in a debt fund for ten years. These are fairly predictable and stable return funds where your money will be at minimal risks. You could end up making Rs. 9 Lakhs or you could end up making Rs. 11 Lakhs based on what interest rates turn out to be in the future.

You can also generate Rs. 10 Lakhs by investing Rs. 3,500 per month in a custom designed mix of ELSS and other Mutual Funds. Returns here are not stable. You could end up with as little as Rs. 7.5 Lakhs, but importantly you could end up with as much as Rs. 18 Lakhs.

For a ten year horizon, it is better to invest in Equity Funds rather than debt funds. Write to us or call to set up the investment.

Want to Invest in the Stock Market?

Investing directly in stocks is one of the fastest ways to lose money. An individual investor is the worst informed, has the slowest IT systems, has the longest chain of brokers to market and has the highest costs. He has zero risk management and holds his losses, often growing them as he seeks to 'average' the price of his holdings. Everybody loves the retail investor, because ultimately, it is he who gives free money to all the other players in the market. No market is truly in a bubble until the retial investor is pumping in money freely and directly.

Fools invest directly in the stock market.

Smart guys invest through Equity Mutual Funds. These funds are tax free after a year of holding, can be used to provide 80C tax benefits, have provided historical returns of over 15% to 17% per year (some have provided more than 23% per year), and are fully liquid - you can put in more money or take out money at any time you want. Most importantly, you get an expert to manage your money.

Where should you invest money?

Suppose you have a Lakh to invest. Your choices are as follows:

1. A bank account will give you 4-5%, which translates to Rs. 104,000 in a year, Rs. 1.21 lakhs in 5 years and Rs. 1.48 lakhs in 10 years. These are guaranteed returns. You will not make any less or any more than this amount.

2. You can invest in National Savings Certificates (NSC). NSC have lock ins for five years at least, and will give you approximately 8.5% per year. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. These are government guaranteed returns. You will not make any less or any more than this amount.

3. Debt Mutual Funds have zero lock ins, which means you can invest and withdrawe money at any time. They give about 8.5% per year, and their returns attract very low tax after three years of holding. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. Returns are NOT guaranteed.

4. Equity Mutual funds have zero lock ins and very high volatility. In a SINGLE year Rs. 1 Lakh may grow to Rs. 3 Lakhs, or it may fall to Rs. 50,000. What actually happens only time will tell. This calculation is based on the historical performance of these products. On an average, however, Mutual Funds should give you 15% to 17%, the best will give you 23%. In ten years, your money should grow to Rs. 4 Lakhs (at 15% returns) upto Rs. 4.8 Lakhs at 17% returns. If markets do very well, and you make 23% returns, you would make close to Rs. 8 Lakhs. Quite a few funds have actually given such returns in the last 10 years. Returns are Tax free after a year of holding and returns are NOT guaranteed.

So:

For money you need within a year use Bank Accounts and FDs

For Money you need between 1 to 3 years use Debt Mutual Funds

For money you need more than 5 years in the future, use Equity Mutual funds.

What are the Sensex and the Nifty? How can I invest in them?

The Sensex is a number based on the average share price of a list of the 30 largest companies in India. To calculate it they took the prices of the top 30 companies in India, calculated an average, set that average at 100 in 1979 and are now measuring changes since that date.

Nifty is similar, but covers 50 companies and started at a different date.

You can invest in Sensex or Nifty through a variety of ways:

1. You can buy Index Futures.

2. You can buy an Index Exchange Traded Fund

3. You can buy an Index Mutual Fund

4. Or the best way - you can buy a Mutual Fund that uses the Sensex or Nifty as its benchmark.

A Mutual Fund that uses the Sensex or Nifty as its benchmark is the simplest, most effective way to invest in the India growth story. It is also the most important part of your personal financial plan because it is responsible for creating up to 90% of your personal wealth.

Write to us at SphereGreen.Investments@gmail.com to invest or to ask any questions regarding your personal investments in Mutual Funds.

Which are the best Tax Saving Mutual funds?

You can get a list of all the top tax savings Mutual Funds in India at ELSS -Value Research Online. There are a few things you should remember on ELSS Funds (as tax saving Mutual Funds are called).

1. They provide tax exemptions under section 80C up to a maximum of Rs. 1.5 Lakhs per year.

2. They have a three year lock in. You cannot take any money out.

3. They give way more than 9% returns. They should give you returns of 17% or more over a ten year period based on historical performance. In any given year, though, your returns could be anywhere from -50% to +200%.

4. Returns are not guaranteed

Interested in investing? Write to us at SphereGreen.Investments@gmail.com 

Why should I Invest in Mutual funds?

They give good returns. They are highly liquid. They are low cost. They have uncapped gains. They are tax efficient. These factors alone make Mutual funds great investment vehicles.

But the real reason you must invest in Mutual funds is because you do not have a choice. Without sizeable equity investments, there is no way you will be able to generate enough wealth to live comfortably. There is simply, mathematically, no way.

The real work, the heavy lifting in wealth creation is done by Equity investments. About 70%-90% of your wealth is generated by equities. Put another way, you can be ten times as wealthy if you invest in equity mutual funds.

Write to us at SphereGreen.Investments@gmail.com to know more. 

Good things in life come to those who are smart about investing