Fortunately for the investor there is usually a barrage of free investment advice at his disposal from many quarters. But unfortunately the quality and nature of advice may not be amongst the best as the quality of advice is a function of the expertise an advisor has.
Fortunately for the investor there is usually a barrage of free investment advice at his disposal from many quarters. But unfortunately the quality and nature of advice may not be amongst the best as the quality of advice is a function of the expertise an advisor has. Thus there arises the need to filter all the advises and carefully select the appropriate advice suiting one’s needs and risk profile in order to take an investment decision. Before zeroing on the true expert advice, you need to be aware of some of the ‘so-called’ experts whose intentions are to help you, but may not necessarily be dishing out the right investment advice for you.
How often have you have heard this, “Son, there is nothing better than a fixed deposit to meet your investment needs. Or Post-office schemes are your best bet.”
To be sure of minimizing risks and protecting the capital invested, our ancestors have grown on an investment diet of fixed deposits and post-office schemes (NSC, KVP (no longer available), PPF). That was when the government and banks were the most popular institutions to mobilise public savings. But post-liberalisation of the financial sector we saw the emergence of new entities like mutual funds, and insurers launching innovative products for the investing community. Thanks to them we now have equity mutual funds, debt mutual funds, balanced mutual funds, single premium insurance plans and Unit-Linked Insurance Plans (ULIPs). Moreover the investment options available have increased by many folds and also they compete well on returns as well as liquidity vis-à-vis the traditional fixed deposits/post-office schemes that our ancestors preferred.
This does not mean that all the different kinds of investment products are suitable for all. While investing please remember there isn’t any ‘one size fits all’ category in which you can blindly invest. Investing in the right avenue matching your goals and risk appetite is imperative.
“This is a great IPO, you should invest in it; Or this fund has an impressive track record and you must own it,” sounds familiar doesn’t it.
Your resourceful neighbourhood broker/mutual fund agent usually has a list of investment options that he believes you must consider urgently or for that matter the agent/distributor has a list of those investment options which will fetch him higher commissions. Most of the options, if not all, suggested by him do not take into account your investment profile, risk profile, goals to be achieved, income earning capacity, etc. In other words, options suggested by your neighbourhood agent may not necessarily be in your best interests’.
Before finalising on the investment avenue, act responsibly and ask questions in order to be clear of the pros and cons related to that avenue. Do not make investment decisions in a hurry or let emotions over power your logical thinking.
“This stock I bought last month is up 20% already; my broker had told me it was a great buy. Or I was watching this business channel last night and I could not understand a word of the technical analysis, but they seemed informed and I think we should look at their tips seriously,” quite often you must have heard your friends and colleagues make these statements.
Unlike the grandfather’s/uncle’s advice, you tend to assume that your friend/colleague has your best investment interest at heart. You can't really find fault in him for dishing out advice like an expert because at the end of the day he is just like you, someone who is trying to learn the ropes and gets a thrill out of making recommendations based on tips from brokers/business channels/websites. But on your part you need to be a lot more cautious and act responsibly because equities and related investments (like equity funds) entail a certain level of risk.
Your investment decision must be based on solid fundamental equity analysis/research as opposed to a flimsy tip doing the rounds on the media.
“Don't disturb your surplus cash let it be in the bank account. Or I tried to be ambitious with my money like you and lost my shirt,” these proclamations really sound like the one made by your cautious relative.
Perhaps nothing serves an investor better than the experience of other investors. It helps him learn from common mistakes made by others so that he can steer clear of them. However, not all advice and experience that come your way are legit. Just because your cautious relative lost a lot of money in equity funds/stocks (mainly based on a flimsy tip) does not necessarily make it a bad investment. The premise on which that investment was made needs to be examined more closely. There is no debate on the fact that equities for instance, have provided the best return possible over the long-term (at least 5 years). So if someone is telling you otherwise, there is obviously a problem at the investor's end rather than with the investment class (equities in this case).
Remember to be a long term investor in equities. This will help you reap the benefits associated with that asset class. However, if direct equity investment is somehow not possible than you may take the indirect route i.e., through diversified equity mutual funds.
Bullish fund manager:
“Markets are 17,000 now, but we think the rally will last till 18,000; Or Markets look really attractive at 16,000 levels and this is a great time to enter the markets,” surely you must not have missed on hearing such statements these days.
That's one lesson we can learn from fund managers how to remain perennially optimistic in life, or in this case, perennially bullish on the markets. Fund managers (say for a few) have an unwritten mandate get fresh investors in the fund and ensure that existing investors remain with the fund. This is linked to a lot of things, most important of them being fund manager fees, which is a percentage of the assets invested in his fund. Fund manager's comments must be considered, but more often than not you need to temper it with a little common sense of your own. Common sense will dictate to you that markets are undervalued at 15,000 levels and you must invest. By the same token it will tell you that at 18,000 you have made a lot of money and you should be getting out because markets appear over-stretched at these fantastic valuations.
Adopt the Systematic Investment Plan (SIP) approach to invest in well performing mutual funds if you are unable to keep a track on the daily stock market activity. This will reduce your burden of buying at low levels and selling at high levels. Moreover, adopting the SIP route will give your investments the power of compounding and the advantage of rupee cost averaging.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.