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Posted On Wednesday, Jul 02, 2014
The S&P BSE Sensex soared today and closed 324.86 points higher, breaching the 25,800 mark to close at an all-time high at 25,841.21 on Wednesday, 2nd July, 2014. While this might bring some cheer to all the investors who already have invested in the equities, mere savers who stack up their earnings in other asset classes might not be a part of this ‘celebration’.
Saver vs Investor
What makes investors different from savers? Most savers park their money somewhere apart from holding money in cash. But they look for “safety” of principal where they are offered a certain rate of return. In some cases the principal may be insured to some extent too. Thus money in savings account, term deposit, and traditional insurance products is all savings in this sense. Of course these products are not totally risk free but the pre-determined return rate lowers the risk conception.
Investing includes greater risk in the sense that there is a chance that there may be loss of principal. Stocks, mutual funds, bonds, real estate and gold are investment assets as they do not guarantee a fixed return, nor is the principal insured. Rather their values keep moving based on factors that affect their prospects.
As Indians we are traditionally wise savers. We save for long term goals like educating kids, social ceremonies and old-age financial security. However we are not savvy investors as we attempt to meet these long term goals while avoiding those products that are capable of meeting long term goals!
We seem to believe earnestly what we were taught in school, “a penny saved is a penny earned”. However the truth is unless the saved penny is invested we might be saving it only to lose it to inflation over the years. As against this when the penny is invested it begins to earn more pennies for itself.You might wonder well how that can happen. I saved Rs 1000 last year in my savings account and I pretty much have it, with 4% interest right now. How can I ever lose money saved in the safest of places?
The value of money and inflation
The thing is the loss happens passively. Money has value. It buys things for us. However due to the phenomenon of inflation money generally keeps losing value over time. Its capacity to buy an amount of goods/services decreases with every passing year. This means as years pass more amount of money is required to buy the same goods/services.
This makes it very important for savings to earn returns that match the rate of inflation at the very least. And this brings us to a strategy that everyone who wishes to be diligent with their personal or household finances should take seriously.
Experts believe that how effectively this strategy is applied affects a person’s financial wellbeing to a larger extent than individual mutual fund selection or stock selection can ever affect. In fact by paying attention to it individuals would automatically find themselves on the path to being investors if they have been mere savers all their life.
Use the strategy of asset allocation for building wealth
No matter how aggressive an investor you are or how conservative you like to be you cannot afford to have 100% stocks and equity mutual funds or 100% debt in your investment portfolio. The various assets (stocks, bonds, FDs, gold, real asset) perform differently in different economic circumstances because the mechanics that drive them all are not the same. When stocks underperform some other asset may outperform and make up for the slack.
The chart below shows the trend of returns from domestic gold prices, real estate (RBI’s House Price Index), term deposit rates (weighted average) and Sensex from FY 05 – 1HFY 14.
In the high inflation periods post 2009 term deposit rates have been lower than inflation. Real estate return too fell short of inflation once in this period. Although gold and Sensex returns stayed well above inflation in most periods in some periods post 2009 they turned negative. This emphasizes the significance of having a portfolio balanced in terms of all these assets.
Serious investors would try and have appropriate allocation across the asset classes. The “appropriateness” of asset allocation varies for each individual based on factors such as age and investment goal and a balanced fund may or may not do adequate justice to one’s asset allocation needs. For a rough picture of what the appropriate asset allocation could be for you refer to our suggested asset allocation chart.
Mutual funds for equities and gold
Mutual funds not only make it convenient for investors to achieve asset allocation but also suggested as the investment portfolio is spread across numerous individual stocks and they are researched and managed by qualified professionals. You can invest in equities, liquid securities, bonds and gold through mutual funds investing in these. Real estate funds are yet not a reality in India but they would catch up sooner or later. It must be acknowledged that several scams, lack of transparency, mis-selling by brokers, corporate frauds etc have eroded whatever little trust Indians had in stock markets post 2002. However boycotting these assets is not the right approach as we would end up losing again as whatever wealth is created is eroded by inflation. Arm yourself with adequate knowledge and you will have developed the confidence of selecting products matching your goals while verifying whether the suggestions of a broker are truly good for you.
If you are looking for a mutual fund to trust part of your savings with consider Quantum Mutual Fund. We have been a different fund house in many ways; in the way we manage investors’ money by being process driven, reducing expenses to optimize investors’ returns, our philosophy on distributor commissions, educating investors and letting them buy our products instead of haphazard hard selling. Take a glance at Quantum’s offerings in the schemes & NAV. Our schemes are easy to invest in as the entire process can be done online from start to end, paperless, from the comfort of your home or office.
Go on and become an investor if you have been a saver so far and enjoy the market rallies. Consult a financial advisor for assistance.
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