| || |
All of us are living longer than our forefathers. It's absolutely essential to have enough money for old age. Due to increase in the cost of health care and longevity - you need more money for long term than in short term. When you are young you will have lesser income and lesser savings. When you reach middle age- you will have higher income and higher savings. As you grow older, you will have perhaps no income and only your savings saved throughout your earning period will come to your rescue.
Your financial needs like educating children, providing for their wedding expenses and keeping sufficient cushion for retirement need substantial money. These needs in a way are your financial liabilities. Against these financial liabilities, you need to steadily save and accumulate assets.
When your liabilities are long term for correct matching, you need to invest in long term assets too. If you do otherwise, your asset matures much earlier than your need and you may loose the rhythm of long term compounded savings that give sizeable money. Long term investments also reduce volatility and enhances risk adjusted returns.
Life insurance like pensions and provident fund locks up your savings like in a bank vault and prevents you from withdrawing for your short term consumption needs. Of course, you need money for short and medium terms also. For those purposes, you need to keep some balance in your bank deposits and some in medium term investments like mutual funds for a balanced life style.
Inflation is the rate at which the general level of prices for goods and services rises. This erodes the purchasing power of your money. This effectively means that with Rs.100 today, you will be able to purchase more goods than with Rs.100 after 10 years.
Longer the time horizon, higher will be the impact of inflation on your outlay. Inflation steadily reduces your effective returns too. If you think your bank deposits are yielding a high return of 8 percent a year, remember that you give up about 5-7% of that to inflation. Your `real' returns, that is, the rate at which your money is actually growing would be just 1-3% a year.
Hence, you need to take inflation into account when you advise your customers on investing their hard earned money. Some portion of your customer's funds should be directed towards financial instruments that provide returns that are higher than inflation.
Therefore, a focus on `real' returns and inflation has a bearing on every aspect of your customer's financial plan.
There are a number of investment options available, with their individual benefits and risks attached. The following table provides us with a broad overview about the same.
| Cash Investments || |
1. You pay a low rate of interest, but they are risky during periods of inflation
2. Examples: Bank deposits such as FDs, certificate of deposits etc
| Debt Securities || |
1. It offers returns in the form of fixed periodic payments and possible increase in the value of your capital at maturity
2. t is a safer and more risk-free investment option than equity. However, the returns are also generally lower than securities
3. Examples: Bonds, National Savings Certificate, etc.
| Stocks || |
1. Buying stocks and equities makes you a part owner of the business and entitles you to a share in the company profits
2. However they are more volatile and riskier than bonds
| Mutual Funds || 1. Mutual Funds are a collection of stocks and bonds and involves paying a professional to select the right securities for you |
2.The prime advantage is that you do not have to bother with tracking the investments
3.They may be bonds, stock or index-based mutual funds
| Insurance || |
1. It is primarily used as a financial protection against possible future losses or damages due to unforeseen events
2. One can buy protection, savings/investments, health and retirement plans from a life insurance company
| Real Estate || |
1. They involve long-term commitment of funds
2. Gains are usually generated through rentals or lease income as well as capital appreciation
3. Includes investment in residential and commercial properties
An asset class is a set of securities/ investment instruments that show similar characteristics and behavior in the market. The group of securities in an asset class is also governed by the same rules and regulations. For example, shares, property, cash, fixed interest assets etc.
Compounding refers to the re-investment of income (plus interest) at the same rate of return, year upon year. The benefit from compounding mainly arises from the fact that the income keeps growing the principal to generate higher returns each year.
For example: Suppose you invest Rs.100 today @ 10% compounded rate every year, you will receive Rs. 110 (Rs. 100 + Rs. 10) next year. Why Rs. 10? Rs.10 is 10% of Rs.100!
Okay so now one year has passed. You have Rs. 110. The next year you will get Rs. 121 (Rs. 110 + Rs. 11.) Why Rs. 11? Because Rs. 11 is 10% of Rs. 110!
So, Rs. 100 you invest today will be equal to Rs. 612 after 20 years at a 10% growth rate! Similarly, Rs. 1 lakh invested today will be Rs. 6.12 lakhs after 20 years at a 10% growth rate!
The benefits of compounding are further enhanced if you were to invest a portion on your money every year. For example: You invest Rs. 1,00,000 every year for the next 20 years, assuming a compounded annual growth rate of 10% per annum. At the end of 20 years, you receive Rs. 63 lakhs against Rs. 20 lakhs invested by you (Rs. 1,00,000 X 20 years).
Rupee Cost Averaging is an effective market timer mechanism that removes the need to time the market. All one has to do is to invest a fixed, pre-decided amount of money on a regular basis over a long period of time. With rupee costs averaging, you do not have to worry about what will be the value of your units the next day or next year or what will be the level of interest rates next quarter. It helps smoothen out the market ups and downs and reduces the risk of market fluctuation. Please note however, it does not guarantee a profit, as unit linked insurance plans are market linked and the returns are based on the funds' performance and factors influencing the markets.
Whether you are a retail or institutional customer, everyone has two basic needs - safety of and return on investments. Both are opposite goals, but can be achieved if balanced well. With rupee costs averaging, you do not have to worry about what will be the value of your units the next day or next year or what will be the level of interest rates next quarter.
How long is the long term? We guess it's above 5 years at least. 10 years and more are better. The only way we can even out market fluctuations and deliver consistent returns is when you choose your investment period correctly and allow us to invest your money accordingly.
Rupee Cost Averaging helps smoothen out the market ups and downs and reduces the risk of market fluctuation. All one has to do is to invest a fixed, pre-decided amount of money on a regular basis over a long period of time.
For example: Let's say you plan to invest Rs. 10,000 in shares of company ABC and the share price was Rs. 20, you will end up buying 500 shares. Instead, if you were to invest Rs. 1,000 every month for 10 months, the total number of shares purchased could be more, since these are bought at different price levels and the average cost of each share comes down.
Rupee Cost Averaging Method
| Time(months) || Fixed Amount Invested(Rs.) || Price per Share(Rs.) || Shares Purchased |
| 1 || 1000 || 20 || 50 |
| 2 || 1000 || 21 || 48 |
| 3 || 1000 || 24 || 42 |
| 4 || 1000 || 19 || 53 |
| 5 || 1000 || 16 || 63 |
| 6 || 1000 || 17 || 59 |
| 7 || 1000 || 16 || 63 |
| 8 || 1000 || 23 || 43 |
| 9 || 1000 || 18 || 56 |
| 10 || 1000 || 22 || 45 |
| Total(Avg) || 10,000 || 19.6 || 520 || |