SIP AN EXCELLENT TOOL SUBVERTED BY MEDIA AND MUTUAL FUNDS TO CREATE MISCONCEPTIONS  

Introduction

Above is one example how SIP is wrongly but deliberately marketed with all the right reasons but creating misconception of taking it as a tool provided by and for mutual funds.

A systematic investment plan is an excellent tool for investors to automatically contribute to their investments and spend more time on other priorities in life.Thus they can grow their savings living a life of happiness to achieve their Financial Freedom. These misconceptions need to be removed from your mind before learning the right way of using this great tool. 

SIP Defined

A systematic investment plan, also known as a SIP, a recurring investment plan, or periodic investment plan, is an automatic savings and investing strategy that allows an individual to select a fixed amount and to choose a set frequency of deposit or investment, such as monthly or quarterly. A bank recurring deposit is also a SIP.

Cost Averaging and SIPs

Systematic investing is a key aspect of cost averaging, which is an investment strategy that implements the regular and periodic purchasing of investment with the savings. The strategic value of cost averaging is to reduce the overall cost per share of the investments. Additionally, most cost averaging  strategies are established with an automatic purchasing schedule. This helps in promoting regular savings too. This automation removes the potential for the investor to make poor decisions based upon an emotional reaction to market fluctuations. Absolute market timing is rarely a good idea and often has more negative consequences than good ones. Markets will continue to fluctuate as its their “Dharma” but you don’t need to dance to these fluctuations but learn to benefit irrespective of these fluctuations.

The Psychology of SIPs: Smart Investing Behaviors

Automating your savings and investment plans is an effective means of overcoming your worst enemy as an investor—YOU! The personal finance sub-category, behavioral finance, demonstrates that human behavior (such as the potentially self-destructive emotions of greed, fear, and complacency) can have more impact on an investment portfolio's performance than investment selection.

Investors often make their worst decisions in the presence of extreme emotion. For example, when stock prices are soaring and news headlines herald new records on stock indexes and a seemingly endless environment for profit, investors tend to buy more risky assets, such as stocks and stock mutual funds. The opposite is also true. When stock prices have dramatically fallen for an extended period of time, many investors tend to sell their shares. This "buying high and selling low" habit is in direct contrast to wise investing.

A systematic investment plan removes the emotion from investing by purchasing selected shares for investments periodically, regardless of what is happening in financial markets or what the news media is saying.

SIPS AND MISCONCEPTIONS ABOUT ITS LINKING WITH MUTUAL FUNDS

The SIPs are often related to mutual funds due to the influence of marketing and media hype and are governed by the mutual fund company or brokerage firm's rules for SIPs.

This wrong perception created in the minds of gullible and ignorant investors deliberately makes investors lose sight of a better choice of making their own SIP, managing risk better and keeping control with themselves and not passing it in the hands of mutual fund companies or brokerage firms.

Mutual funds thus gain control over investors’ funds and while investors bear the risk profits are more assured for these companies and brokerage firms whether the markets move up or down.Investors exit mutual funds at a loss when markets crash and enter when markets are high.Thus losing the long term benefits of investing.

By investing in mutual funds investors lose control over their savings, are subjected to rules and regulations which are often not in their favor and still carry all the market risk,and still getting returns only marginally better than the inflation.Investors lose faith in long term benefits of equity investments and lose opportunity to get knowledge and build confidence in their investments and create another choice to spend their time gainfully after retirement. Persistent efforts and time given to this can even enable them to retire early and do what they missed on doing for lack of time.    

MAKING YOUR OWN SIP

This can be done by putting in some efforts to learn selecting stocks for SIP investments. This can be done with some support and help from independent experienced teachers without having to waste your time or focus from your basic work.It is simple but not easily done because of the psyched thinking of masses by vested interests.Learning selecting stocks for SIP and its risk monitoring and control is made to sound as something very complex, time consuming and difficult for common people by the media backed by the vested interests of mutual fund companies or brokerage firms.These are only myths and misconceptions far from reality and truth.

Learning is possible once a right attitude and mind set is developed and all myths and misconceptions removed from the minds. Given the right process and focus the results are much better too.  

ON TRADING !!

Investing and trading are two very different methods of attempting to profit in the financial markets.

Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits.

Before I come to the main subject and my mission instrument of equity investments, it is essential to discuss briefly what is being eliminated and for what reasons and then focus on the chosen method and learn it and master it well. So like mutual funds we discussed in the last blog I will discuss trading and then eliminate it from our focus.

Investment strategy and process has to eliminate this clutter and hype created by marketing and vested interests which may distract many investors from their goals as well as their focus on working for their livelihood. Livelihood of brokers, financial markets, mutual funds and their promoters depends on their continued ability to attract new traders to the market to replace those who burn their fingers in trading leave the market.  

What is Trading ??

Trading, involves more frequent buying and selling of stock, with the goal of generating returns that outperform buy-and-hold investing. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as selling short) to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.Thus making the practice very complex,time consuming and difficult for commoners.

While investors may be content with an annual return,which beats inflation, traders tend to be greedy and seek higher return in short term and very few are successful by trading in the long run. While most traders only hope for this short term profit, reality is different and more people suffer in some form or other besides financial than benefit from it. Very little of empirical evidence is available but it is generally observed as such.

My reasons for eliminating trading as an option for achieving your goals of financial freedom and happiness are:

1. Its speculative as market direction in short term is difficult to predict both for the market as a whole and even for particular stocks.

2. Its much more risky than investing

3. It causes more stress and thus adversely affects happiness.

4. Traders reflect an attitude which is opportunistic, short sighted,greedy and speculative.This is not the right attitude required for generating , retaining and growing wealth along with sustainable happiness in life.

5. Being short term process, traders have to focus on trading and spend a lot more time from normal income generating activity and suffer frequently fluctuating emotions of sadness( more likely?) or happiness (less likely!!). Human behavior and average discipline does not lend itself to this method over a long period in most cases.

6. With the rapid developments in technology like Artificial intelligence, Robotic automatic high speed trading and block chain , traditional traders face a challenging task ahead.

Trading unlike investing does not provide capital for industries and services to generate employment and contribute to the overall economy.

MUTUAL FUNDS

The concept of mutual funds is very simple but is it suitable and the best option for making investments ? The purpose is to grow your savings at a reasonable rate which is above inflation and helps to grow the savings from hard earned income thus serving your best interests. Risk is also to be minimized and the mutual funds  are not useful and beneficial for this purpose.At best it is case of something is better than nothing .

There is an excellent opportunity for large number of educated intelligent investors to get out of the mutual funds and begin their journey to wealth building by making direct investments in equity. Many of these mutual fund investors are capable of making direct investments in equity with a little efforts, education and help.  I would recommend even learning at own cost by making a  beginning taking calculated risk, if you insist on learning after making your own mistakes. Take the plunge with small amount after covering your base . Better will be to take help from independent professionals but avoid brokers, sales people, banks and their advisers who have vested interests.

Here are my reasons: 

1. Firstly mutual funds in India have a legacy of UTI which was a government sponsored fraud and cheated the investors by selling unit 64 units at high prices , suffering losses for investors who also lost faith in equity as an asset class. Chairman Pherwani’s death or government creating a body and paying a small amount to investors and making high profits for itself in the long term  and losses for the investors has not helped. Cross holding and interventions by banks, LIC, financial institutions and PSUs leaves a lot to be desired by way of transparency. Most of the interventions are for political reasons too. Can RBI or SEBI help? I wonder, it will take a while even if it happens.

2. Given the large number of mutual funds and inadequate rating system for measuring quality and performance; marketing agents, promoters of these mutual funds and brokers make the most of it at the cost of investors.

3. Little is known about the fund managers or their competence, credibility, integrity or skill in making investments. Very average performance of mutual funds in general speaks for itself. Most earn for you just a little better than index with no real risk for the promoters.

4.  Most of these mutual funds are run by large business houses,banks  and brokerage firms who trade in shares of their own enterprises and hardly bother for the small investors as such, concern if at all is secondary and basically focused towards retaining customers.

5.How is SEBI to regulate if the fund manager chooses to pass on information of his intended future purchase or sales to a selected few who make use of it for themselves and of course compensate the fund managers in some manner? Possibility cannot be ruled out.Funds can also be used to influence the markets for serving vested interests of the promoters.

6. Last but not the least educated people who take trouble and work hard to earn , are less interested in looking after their savings and investments and growing it by making direct investments in equity. They think equity investments is very complex or risky and choose to hand over control and responsibility to these funds. Money in right hands will help build the nation so why be shy of being rich or wealthy when the means are legal and ethical?

 I am surprised that mutual fund investors don’t see through the reasons why a share of a promoter of mutual fund of Rs.10/- quotes at near 2000 while none of its mutual funds give comparable returns or dividends to its investors.

Why people don’t see why only industrialists who borrow from banks, banks mainly the private sector ones, share brokers, agents and promoters of equity funds keep getting richer while the savings of common people grow only at sub optimal rate.

Do not join the crowd and majority , they are often wrong take my help by enrolling on www.moneymonk.me

BUYING FIRST HOUSE

As soon as one starts earning and s/he must start saving  and take  care of other prerequisites like term insurance and medical insurance, If this is done with discipline and keeping control over expenditure.If expenditure  is more on needs and less on wants and with regular savings, the kitty can grow well especially since most will be single at this stage with less of responsibilities. Often at this stage due to youth and lack of maturity value of maximizing savings is not realized. Let us assume that this is done correctly then the first consideration needs to be to buy a house taking housing loan. Besides tax benefits earlier one gets a shelter for himself and his family better it will be on the journey to wealth and happiness.

What are the points to be noted at this stage

1. First or one house is not an asset when talking of Personal Finance as you will need to live in it the whole life, yet it is very important for the future , to increase your net worth.

2. This is not likely to be your ideal house or retirement house depending on your financial position.

3. It will make it easy for you to buy a bigger one when family size increases with children or either parents becoming dependents and there is a need for more space in the house.

4. If you continue to do well in your service or business this can become an asset if you can afford to buy a bigger much needed house and start earning rent from this one.

5. Even with newly legislated RERA act I will not recommend going in for a proposed house or under construction one . House construction industry in India will take some more time to be reliable, less risky and credible. Risk is high and not affordable in such cases despite some advantages.

6. Better will be to go in for a second or third sale house, where risk is less and basic infra structural facilities and amenities are in place.

7. If in a transferable job select a place where some one from your close family will be able to look after the house, maintenance and rent receipts etc in case you move out station.  This may be the case for those in cities but can only afford a house in smaller towns to begin with.

8. Select an area where rents are better and there is a demand for rental houses.

9. Buying the first house as early as possible is more advantageous for those in jobs where government or job provides housing.In such cases the house rent will itself pay off the loans / mortgage creating an asset for you.

10. Remember to take insurance for the housing loan which does not cost much but covers the risk and the house goes to your near and dear one without any liability in case of an unfortunate death or serious handicap.