We have come to the end of another eventful year. In a few days from now, we will begin yet another new year.
And as is customary, we will make another set of New Year resolutions. And as usual, we will again forget these resolutions even before the memories of the New Year party fades away.
But let's be different this time, at least as far as our hard-earned money is concerned. For once let us not only make some resolutions, but also keep them. I am sure that the rewards that you get on Dec 31, 2007 will be great.
1st Resolution: I shall be careful about investing in NFOs
Most of the new funds being launched are just the old wine in a new bottle. And when we invest in these NFOs we pay more - for the new bottle - not for the wine. If instead we invest the same money in an existing fund, we would get more wine. And that is what we should pay for - wine, not the bottle.
So let us resolve that we will not invest in an NFO, unless it has a different wine to offer which will add to our collection.
Moreover, most of the new funds are close-ended ones. This means that we miss out on one of the best risk mitigating measures i.e. Systematic Investment Planning (see resolution 3 below). So close-ended equity NFOs are preferably a no-no.
2nd Resolution: I shall always remember that NAV and share price are different
When we want to buy shares, we look at the share price. That's OK.
When we want to buy MFs, we look at the NAV. That's NOT OK.
The difference is that while share capital i.e. the no. of shares are fixed, unit capital i.e. no. of units change every day depending on purchases/sales.
Therefore, whether we buy Fund A at NAV of Rs.10 or Fund B at NAV of Rs 50 we are buying the units at the book value of scheme as on that date. Hence, the returns from both the funds will be the same (assuming of course that both have same shares in the portfolio), irrespective of the NAV.
But when we compare Share A at Rs 10 and Share B at Rs 50 (and both are in the same business and have the same EPS say Rs 5), then Share B is expensive than Share A - we are paying more price for the same earnings the company expects to earn in the future.
3rd Resolution: I shall NOT TIME the markets
No one, I repeat, no one has made money consistently by timing the markets. One may be lucky a few times to get the timing right, but then that's gambling not investing.
When do you generally buy things? Usually during some sale or discount offer! And if there is no such offer, you still ask for a discount! Then, why do the opposite with equity? At around 20 times PE the market is definitely not cheap.
Sure the long term India story looks goods and consequently one can expect good returns from equity. But at these levels the markets can be very volatile. And even a small fall in growth rate - note the growth rate has fallen not the growth itself - can cause the market to crash.
Should you wait for the correction? No, because correction is a possibility not a certainty. What if India growth story continues and the markets don't fall significantly? You would have then missed the bus.
Therefore at these market levels, it is prudent to invest small amounts regularly. This will reduce the volatility risk and also help you to benefit from the India growth story.
4th Resolution: I shall NOT look at the DIVIDENDS
Just as share price and NAV are different, so are the dividends from equity share and those from a MF.
In a mutual fund, all growth is reflected in the NAV. And when it declares a dividend, it is merely distributing a part of this growth i.e.
pre-dividend NAV minus dividend = post-dividend NAV.
So, in totality nothing changes. Dividend is not something extra.
Shares are different. Dividend is paid by the company out of the profits, whereas share price has technically nothing to do with the company or its' performance. It is mainly an interplay between the buyers and the sellers. So the share price may or may not change with dividend distribution.
5th Resolution: I shall invest according to MY NEEDS
As a financial advisor, I keep getting one query from hundreds of investors across the country - "Which are the best funds?"
I would like to ask these people one thing do you ask your doctor which are the best medicines? No, you don't. You know the consequences of taking the wrong medicine not only does your disease remain and worsen, but you could also develop other complications.
The same thing is true for your investments too. Every fund has a specific purpose and it meets a specific need; just as every medicine is useful only for a particular disease. So by investing in the wrong funds i.e. funds, which do not match your needs or risk appetite, you are likely to lose money.
What is a good fund for your friend or your neighbour, may not be good for you too.
So first choose the 'type' of funds, which suit you the most, allocate your assets across different asset-classes and then choose the best funds from that particular type.
6th Resolution: I shall BALANCE my portfolio
Portfolios that concentrate on only a few investments are likely to give wrong results. A predominantly equity portfolio will be too volatile. A predominantly debt portfolio will not provide adequate returns. A well-balanced portfolio will both be stable and also give good returns.
The issue here is to find the right balance. This depends on your needs and risk appetite. Depending on your financial profile, you must invest preferably in equity to debt ratio between 20:80 to 80:20.
That's one part. The other part is timely rebalancing. Since equity & debt will grow at different rates, with time your initial balance will get distorted. You should restore the balance every 6 months-1 year, depending on how far the balance has got distorted.
7th Resolution: I shall REMEMBER & IMPLEMENT the above resolutions
We have the tendency to forget all the good lessons. Therefore, more often than not we end up making the wrong investments.
It is wrong to believe that investing in equity means high chances of losing money. Most people lose money in equity because they don't follow the above rules.
Make sure that you read the above resolutions before every investment. Try to stay away from these pitfalls. Follow the above rules for 2007 and see the difference for yourself.
Here's wishing you all a very happy and 'profitable' 2007.
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