Unless your parents have set the Thames, Ganges, Kosi, Nile on fire, chances are they have not managed their investments well. They may have done well, but it may not have been their strategy – could be luck!
So here are somethings that your parents / elders / teachers may tell you…and you should…ignore! Let me list 10 of them first:
1. Do something, do not just sit there: at least my mom has told me this a million times! In investing as in playing a sport – leisure/ recovery time is just as important. Like a war – you prepare for 361 days and fight for 4. While investing you invest and then sit tight for long periods of time. You do not ‘have’ to do something. If you do something it has to be as a part of the overall strategy.
2. PPF, LIC, National savings certificate, etc. are safe investments: Well they are the best way for the government to get an unending source of money, nothing else. Post inflation and post tax all these investments WILL SURELY yield a NEGATIVE return. Remember it is the borrower who can decide the rates. Extremely unfair, but that is the truth! These are at best SAVINGS products, not investment products.
3. Maximise your PPF: If you have Rs. 70,000 to invest in a year, only about Rs. 1000 should go to PPF. However if you are investing about Rs. 5-6L a year, max your PPF.
4. If your funds are not doing well, churn: Yes winners rotate, but losers stay at the bottom! …but if there is a well managed fund and it is not performing, do not churn. Look at the fund manager, see if there is a change. Check whether there is a cultural change in the organisation. See the portfolio composition. If there is no change here, stay on in the fund. See why did you like it in the first place. Sadly investment monitoring is a process monitoring not a result monitoring.
5. Read the newspapers, be well informed, and act: The new theory is be well informed, but think for yourself! The media is not a place where you can learn. The standards are not exactly the highest in terms of quality. Also there is too much sensationalism even in the financial news. The best thing is to perhaps not read the pink papers…many have turned yellow.
6. Good things are expensive. The more expensive they are the better the thing. Perhaps true for all products OTHER than funds. The only thing within your control are the expenses that the fund manager charges. Also the way Sebi has structured the charges, as the size of the fund increases costs REDUCE. So a fund with a bigger corpus (say Rs. 9000 crores) equity fund will charge you less than a fund with a smaller corpus of say Rs. 3000 crores.
7. See your funds returns, if it is not good churn: Not to be confused with point no. 4: If your fund is not performing well, learn with what to compare. In a year where the Sensex has given you a return of -4.5% p.a. if your fund has fallen by only 1% – your fund is doing well. People compare previous year return to current year’s return. Learn how to compare, then compare, and then decide what to do.
8. See the fund ratings and invest in 5 star rated funds: The stupidest move! Star ratings are sold for getting ads. Not for the retail investor to use. As the total number of funds increase, the total number of 5* rated funds will keep increasing! Raters say ‘past is not an indicator of the future’ but anchors keep saying ‘buy it, it is a 5* rated fund’. The rating is one of the most cruel jokes on the investor. It means, nothing for investing. Just ignore the ratings. I am seriously considering starting a rating agency – and my lowest rating would be 5…then keep going up to 10! So my WORST fund would be 5* and best would be 10*. How does it matter? So be careful about the rater!!
9. Indexing works in developed markets, not India: If you do not want to worry and make mistakes, stick to an index funds like Templeton India fund (Sensex). It will not give you sleepless nights. Indexing will work in India over the next 10 years for sure.
10. Active management of a fund will help you compete with the best (please buy my news magazine is what they mean!). They also help you beat a recession, etc. Complete bull. Markets are a baby of ups and downs. The best fund managers can and do add value, but it does not mean they can beat the index consistently and avoid a bear run. Normally their performance is compared to the benchmark.
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