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Session 4: Building your Wealth with Wise Investing

We are glad to have you with us for our Fourth Session - Building your Wealth with Wise Investing

Alright so now let's get started.

Many of us endeavour to create wealth for ourselves and give the best to our family. Through experience we can say that when everyone wants to make a fast buck, many people often indulge in rampant trading without recognising the risks; which we think can be hazardous to their wealth and health.

You may then wonder how one can create wealth!

Well, as it is said, "Rome wasn't built in a day". It takes a long time and prudence to create something blissful. While all of us desire to become wealthy by the day, it is important to note that wealth creation is a "journey"; involving process and prudence.

You see, in order to create wealth you need to put your money to use, and you can do this by "investing" - and more importantly investing wisely - taking into account a host of aspects which we shall learn in our session today. Remember, even if investing does not seem should be taken seriously.

Now let's get serious and learn the various facets that you need to take into account in the journey of wealth creation with wise investing.

Wise Investing
  • Wise investing refers to a systematic process-and-prudence-driven approach (...unlike investing in an ad-hoc manner where you put your money to use, but without much planning involved.)

  • It is not about timing the market and feeling the excitement ( cannot always get the market timing right. People who do get aroused by the excitement of timing the markets to make quick bucks, have higher chances of getting on the wrong foot)

  • Wise investing is about disciplined investing ( allows you sleep better at night and not worry about whether you've timed the markets well, to make a quick buck)

You see in order to invest wisely and create wealth; a host of facets need to be taken into account, such as...

Facets to be looked into for wise investing:
Let's understand each of these facets in a little more detail.

Investible surplus
  • It refers to the amount of money which you are left with after having defrayed all your expenses & liabilities (...and also after having kept aside some money as contingency fund, to take care of rainy days)

  • It is imperative to take a good look at your finances to elevate your investible surplus

  • Ideally, invest your money first and spend what you have left ?(...this is a much better approach than doing the things other way round; but often people indulge in impulsive buying and then have very little money to invest for it to grow...think about it!)

Investment Objective
  • Investment objective refers to the purpose for which one is investing (...while we all desire to create wealth, we also have to recognise whether preserving capital is also one of the objectives)

  • (So can we say...) Setting an investment objective simply means ascertaining why you would like to invest

  • Knowing the investment objective also helps in planning for your financial goals (...which could be buying a dream home, car, travelling abroad for leisure, children's education needs, their marriage and even one's retirement needs. But through experience we can say that very often investors stumble while defining investment objectives; this in turn brings in turbulence in their journey of wealth creation.)

  • It helps you choose suitable investment instruments for your portfolio (...with a clear investment objective you can identify the investment instruments that are suitable for you and add them to your investment portfolio)

Risk Appetite and Risk Tolerance
  • Risk Appetite refers to one's willingness to take risk (... depending upon one's age, past experience and knowledge)

  • Risk Tolerance implies ability to actually take risk which is measured by:

    • Income (...this is an important determinant to gauge risk tolerance. So, if your income is high enough you will not mind taking higher risks while making investment decisions.)

    • Expenses ( see, your outgoings also influence the risk which you can afford to take while investing. You may have a high income, but if your disposable income is petite, you could be refrained from taking high risk. Hence it is imperative for you to streamline unnecessary expenses, so as to keep your financial health in the pink.)

    • Financial responsibility you are shouldering (...which can take into account the number of dependents and whether your life goals (such as children's education and marriage needs)are to be planned for)

    • Nearness to financial goals ( see, if you have planned for a financial goal, the time left to achieve the goals also determines the risk that you can prudently afford to take while investing. So if you are adequately away in terms of years from meeting your financial goal, you can afford to expose your portfolio to higher risk which might enable you to create more wealth in the long term. But if your financial goal is drawing nearer, it would be more prudent for you to be a risk-averse investor to preclude wealth erosion.)

    • Whether your contingency fund has been built (...meaning have you already saved for a rainy day that can enable you to take risk)

    • Whether you have sufficient insurance coverage (...but mind you, while taking care of your insurance needs it is imperative to separate your insurance needs from investment needs; because buying an insurance cover is for indemnifying risk and not for investment purpose. While buying an insurance cover, you can look fora term plan.)
In order to build wealth wisely following the right asset allocation should not be missed.

Asset Allocation
  • Asset allocation essentially refers to investing your hard earned money in different asset classes such as equity, debt, gold and real estate prudently (...which can enable you to balance your portfolio's risk and reward, keeping in mind)

  • Allocate your assets based on:

    • Risk appetite and risk tolerance;
    • Financial goals; and
    • Investment horizon
Likewise diversification is important too...

  • Diversification refers to spreading your investment in different baskets comprising various asset classes and investment instruments

  • It is one of the basic tenets of investing

  • Diversification helps to reduce the risk to your investment portfolio (...and therefore most investment advisors harp on this word)

  • (But...) Diversification needs to be done wisely (by...)

    • Diversifying across asset classes (...such as equity, debt, gold and real estate, since all assets don't move in the same direction.)

    • Diversifying across investment avenues (...thus, say, while your risk appetite allows you to invest into equities, you need to diversify well between stocks and mutual funds. Moreover, within stocks and mutual fund schemes too, there needs to be optimal diversification, to help you reduce risk as well as create wealth over a period of time.)

    • Diversifying across issuer of securities ( see, while you are building your wealth it is vital to diversify across issuer of securities or else you will be provoking risk concentration to occur. There's no point favouring only one particular issuer as it could elevate risk in your investment portfolio. It is important to keep emotions at bay and invest rationally.)

    • Diversifying across countries (...yes, today, with resident Indians being permitted to invest in assets and securities abroad, your scope for diversification has further widened. But it is important for you to be cognisant about the global economic scenario as well - and specifically the country where you are deploying your hard earned money.)

Calculated as:

Inflation Adjusted Returns = Rate of Return on Investment - Rate of Inflation

Cost of investing
  • Cost of investing refers to expenses associated with investing and holding the investments in your portfolio (...which could be in the form of fees, loads, demat account charges, bank locker charges (in case you are investing in physical gold) or any hidden charges levied by the issuer of respective investment instruments.)

  • Cost of investing should always be low (...this will enable you to earn a better rate of return on your portfolio and prevent blunders like getting into high cost products.)

Tracking & reviewing investments
  • Tracking investments refers to monitoring your investments (...regularly)

  • The frequency could be once a quarter (...and need not be done everyday, if you have adopted prudence while investing.)

  • Reviewing refers to going a step forward and taking an action to make changes to investments held by you (...with regular monitoring and review of your portfolio, you can timely know if and where you are going wrong, and if there needs to be a call to action. You can timely take corrective measures in case any of your investments are going off track.)

Selecting an Unbiased Advisor
  • An unbiased investment advisor can contribute immensely ( your journey of wealth creation)

  • Focus on knowing his attitude and rationalisation ( see, if your investment advisor is focusing on promoting products that earn him high commission and has not assessed the facets which we have just discussed with you; you could be in the wrong hands. He should be transparent and advise you with enough care and prudence as he would adopt while handling his own finances.)

  • Know his educational qualifications (...ascertain whether your investment advisor has the requisite certifications from bona fide institutions. But merely relying on the certifications too isn't enough as one needs to delve a little deeper into the philosophy (attitude and rationalisation) and research process which he adopts while advising clients.)

  • Judge his infrastructure and value added services (...this will help you gauge whether your investment advisor is able to service you better in the future.

Role of Discipline in Wise Investing
  • Discipline in investment is vital in wise investing ( should inculcate discipline in your investing. Adding discipline helps you invest regularly and may not let you deviate from your objective)

  • Systematic Investment Plans (SIPs) can work for you (SIPs offered by mutual funds help you invest regularly)

  • SIPs enforce a disciplined approach towards investing(...which is needed in the journey of wealth creation.)

  • Aids in maintaining regularity in investing (...which is indeed needed to aid compounding of invested amount)

  • Disciplined investment via SIPs offer following benefits: (...such as...)

    • Light on your wallet as it allows you to invest in small specified denominations regularly (...instead of lump sum investing, which some might find heavy.)

    • Makes market timing irrelevant ( fact it helps you manage the integral volatility of the markets better. You see, timing the markets, apart from requiring full time attention, also requires expertise in understanding economic cycles and market scenarios, which you may or may not possess.)

    • Power of compounding ( mentioned earlier, since SIPs facilitate regular investing; it enables your invested money to compound well at a said rate of return.)

    • Rupee cost averaging (...meaning it allows you to buy more units when prices are low and, similarly, buy fewer units when prices are high. This infuses good discipline since it forces you to commit cash at market lows, when other investors around you may bewary and exiting the market. It also enables you to lower the average cost of your investments.)

    • The longer you choose the SIP tenure the better it is (...take a look at the chart here...)

Value of Monthly SIP
(Source: ACE MF, Personal FN Research)
Disclaimer: The figures presented here are for illustration purpose only.
The rate of return is assumed at 12% p.a. and is for illustration purpose only.

Preferably start early- because an early bird always gets a bigger pie!
Here take this example which we explained earlier in our 1st session as well.

Particulars Vijay Ajay Sanjay
Present age (years) 25 30 35
Retirement age (years) 60 60 60
Investment tenure (years) 35 30 25
Monthly investment (Rs) 7,000 7,000 7,000
Returns per annum 10% 10% 10%
Sum accumulated (Rs) 2,65,76,466 1,58,23,415 92,87,834
(Source: PersonalFN Research)
Disclaimer: The names and figures are fictitious and used for example purpose only.
Also, return per annum mentioned above is for illustration purpose only

Here Vijay, Ajay and Sanjay want to retire at the age of 60 years. Vijay being the smarter of the lot, started planning for his retirement at the very young age of 25 years and invested Rs 7,000 per month - Ajay realised the importance of planning for retirement once he was 30, while Sanjay started investing only when he was 35 - and you see what they accumulated when they were on the verge of their retirement.

Investment mistakes you should avoid!

So now that we have recognised what wise investing is all about, here are some common investment mistakes which you should clearly avoid!

  • Investing without a plan (...Remember, wise investing is beyond a 3-step process of getting hold of an investment agent, filling up an application form and signing a cheque. Investing without a plan or an investment objective can be hazardous to your wealth. And mind you, segregating your financial goals into short-term, medium-term and long-term, will help you invest in a systematic way.)

  • Not Diversifying well (...if you disregard this very basic tenet of investing, you could be in for trouble, as you are inviting more risk to your investment portfolio. While you may do well, during a run-up of a specific asset class, your portfolio may get battered during turbulence and downturn of the capital markets. Therefore it is vital that you don't put all your eggs in one basket.)

  • Ignoring related risk ( see, simply investing in an ad-hoc manner because the investment instruments are fetching higher returns or because your friends and families recommend, is not a prudent approach. It is imperative to recognise the risks which respective investment instruments carry and assess them in context to your risk appetite and risk tolerance.)

  • Getting married to your investments (...This is a very common mistake which many people make. It is vital to be objective and review your portfolio at regular intervals to take corrective actions wherever required. Emotional attachment sometimes may not be good for your financial health.)

  • Timing the markets (...While timing the markets is the mantra chanted by many and may sound exciting; it may not always create wealth for you. Remember a trader is only good until his last trade, as you don't know what the future has in store for you - good, bad or ugly. Let us apprise you that trading and timing the markets, can be hazardous to your wealth as well as health.)

Some Key Take Away Points!
  • Do not rush with investing (...undertake thoughtful research by doing a holistic study)

  • Investing is a serious business ( fact it may seem boring and not exciting)

  • Have an investment objective in place (...this will help you clearly define what you expect and thus identify the appropriate investment avenues)

  • Know your risk appetite and risk tolerance and then invest in suitable investment avenues

  • Stick to your asset allocation (...and timely rebalance if required)

  • Do not speculate or time markets ( and timing the markets can be hazardous to your wealth as well as health)

  • Never use contingency funds to invest (...Remember, they are put aside as part of your savings to take care during emergencies)

  • Do not rule out inflation factor while investing (...after all the rate of return you earn on your investment has to outpace the inflation bug)

  • Never invest with borrowed funds (...except in case of investing in real estate and business; but again while investing therein don't go beyond your means)

  • Know your investment product well (...understand how it works and undertake research; recognise the risk-reward relationship the product offers and also the tax implications thereof)

  • Select an unbiased advisor (...whom you can trust while investing your money)

  • Diversify (...Remember, this can help you reduce your risk to your overall investments if you diversify wisely)

  • Track and review your investments ( as to take corrective measures wherever required)

So to end our today's learning exercise we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.

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