The ongoing covid-19 crisis has further highlighted the importance of having an adequate emergency corpus. With so much uncertainty about what could happen in future, you may be wondering if you should hold a portion of your emergency corpus in liquid funds or move the entire sum into safer options such as bank savings accounts, especially because liquid funds have seen greater volatility in net asset values (NAVs) recently, owing to liquidity-led disruptions in the debt markets.
What is a liquid fund?
Debt mutual funds are currently classified based on the maturity of their investments. Liquid funds invest in instruments that have a maturity date of 91 days or less like treasury bills, Government securities, call and notice money. Currently, liquid funds are providing a return higher than traditional savings bank accounts. The redemption procedure in a liquid fund is also very simple. Once the redemption request is submitted, the funds get credited to the investor’s account in one working day.
What is the investment tenure for liquid funds?
Financial planners recommend investing in these funds for periods up to sixmonths. These funds work very well to save for short term goals since they are not susceptible to capital loss. This makes them perfect for goals like school fees or holiday expenses. Liquid funds are also excellent for investment in equity funds using the Systematic Transfer Plan (STP), where a fixed amount gets transferred from the liquid fund to an equity fund, giving return on both types of funds.
What are the risks involved in liquid funds?
AS With every investment, there is a slight element of risk involved. HOwever, liquid funds carry the lowest element of risk among other mutual funds. These funds generally invest in instruments with high credit rating. When it comes to the fund NAV, you can also get the NAV data on the weekends.
What are the tax implications on liquid funds?
If you stay invested in a liquid fund for more than three years, you will be able to claim the benefit of indexation on your capital gains. If you liquidate before 36 months or 3 years, the gains are added to your tax slab and taxed at regular slab rates. When you choose the dividend option, the fund is subject to dividend distribution tax of 29.12%. This means the dividends are tax free in your hands.
Billionaire investor Chamath Palihapitiya says successful investing is all about behavior and psychology and even the best model or analysis in the world is of no use if investors press the panic button during tough times. “The most important thing you can do to maximise the odds of success is figure out what, if any, behavioral advantages you have or can create for yourself,” he says in an interview to a financial website.
Palihapitiya — a Canadian-American billionaire of Sri Lankan origin — founded a California-based venture capital firm named Social Capital in 2011. Although he holds a degree in electrical engineering, Palihapitiya has had an illustrious career in the finance industry over the past two decades. His stock picks and investments as head of Social Capital have outperformed the S&P 500 by more than 1.3 percentage points over the past few years. His firm has a diverse portfolio of investments in healthcare, financial services, education, consumer products, frontier and enterprise sectors.
The investor held important positions at American tech firms AOL and Facebook before becoming a venture capitalist. Now he is on the board of many successful companies and is also a part-owner of the Golden State Warriors NBA team.
In 2020, Palihapitiya started the Social Capital Hedosophia Holdings Corp. V, a special purpose acquisition company (SPAC), that has since facilitated mergers, share exchanges, asset acquisitions and initial public offerings (IPOs) of several businesses. The venture capitalist has gained a huge fan following on social media and has more than a million followers on Twitter and regularly appears on news media to offer opinions on the finance and technology industry.
Invest in the winners
Palihapitiya says he follows a philosophy of putting his money into the winner of an industry as success will then surely follow.
“If you try to outsmart the market, chances are you won’t win. I personally have tried this several times, without much success. Remember, the average buyer makes the simple decision to invest in the category winner. There are reasons why a certain company is the best in its industry. And there’s a reason everyone is investing in this company,” he says.
It is easier to buy the winners of a particular industry and let them grow over time instead of trying to find a company that will be able to outperform the current top company. “You can spend weeks scouring over every financial statement and drawing up theories on why you believe a company will outperform the top company in the industry. Wouldn’t it be simpler and less stressful, and probably financially more rewarding, to just pick the top company?” he asks.
Invest for the long run
Palihapitiya says people should invest for the long term as that is the key to successful investing in stocks. “Whether it’s been my job, my life or my investing, I’ve learned that long-termism is an important key to success. I’ve gotten the most back when I invested my time, vulnerability and money with very few short-term expectations but many long-term ones.”
Prioritise your needs
Investors have to priorities their needs, he stresses. It is very important to set up a proper list of needs and address them wisely so that they can make the most out of these for a better future. There are some things that will not change no matter what the situation is. Investors need to keep their focus up so that their preparation for the good times remains intact and doesn’t get derailed through discouragements and disappointments, says the veteran investor.
Do your homework
All veteran investors say it is important for investors to do their homework well enough before choosing a stock. Palihapitiya says investors will have to see the performance of companies and then decide to invest in the ones that are healthy enough and can last the distance.
Monitor data efficiently
The founder of Social Capital lists monitoring data as a sound way to make an investment. His investing style is not about looking at technical patterns or stock charts but about looking at a business to understand it and then investing in the company concerned.
Maximise the odds of success
There is no one right way to value a company, he agrees. “Most of us have no idea whether investing in an early stage company will lead to outsized returns. As a result, the best way forward is to maximise the odds of success as an investor. It’s not about guaranteeing success, it’s about guaranteeing the best odds of success.”
Palihapitiya says human psychology has a huge impact on the kind of decisions that investors make. Investors have a tendency to repeat what they are most comfortable seeing and doing. “There’s a theme in psychology called repetitive compulsion. That psychological trait actually has incredible insights in business as well, particularly in investing. What it really means is that you have a tendency to be compelled to repeat what you are most comfortable seeing and doing. So, when you have a psychological blindspot, this idea of repetitive compulsion just reiterates those loops over and over. It really takes somebody who can dispassionately, but empathetically, point at those things and say ‘Hey, why are you doing that?’ or ‘why do you believe those things that you do?’ or ‘why did that happen the way that it did?’,” he explains.
But there are some rules that investors can follow to prevent themselves from doing something irrational, he says, especially when everyone else is losing their cool:
1. Don’t trade stocks; buy companies
When investors buy stocks, they should view them as buying companies. Buying a company is like hiring a great CEO to work for investors and their families. “You can rest well knowing that Bezos, Musk, etc, are on the job. That’s not true for all CEOs so decide accordingly,” he says.
2. Try to buy companies that can potentially earn 10x in 10 years
“If I’m not willing to do that, I don’t buy it. This doesn’t mean that I will bat 100% but that isn’t the goal. The goal is to become disciplined in a process, repeat this process and don’t deviate,” he says.
3. Have patience
Once investors have bought a company, the hardest decision is to take no decision and to patiently wait to be right. “If I become too short-term focused, I am my worst enemy and will overthink, overreact and underperform my potential,” he says.
4. Try not to look at prices every day
The market has an amazing way of giving investors great opportunities to see the truth, he says. “You just need to realise that the price and the truth aren’t always the same. Looking at daily prices makes it harder for me to see the difference.”
5. Don’t play with derivatives
Options seem fun but they are like allowing a toddler to play with a loaded gun, warns Palihapitiya. “You can have a few close calls but it eventually catches up with you. In short, I have come to believe that the markets are the summation of everyone’s collective consciousness in any given moment,” he says.
According to Palihapitiya, the market constantly overreacts and under-reacts in any given moment, based on investors’ psychology. But over time, he says, sanity always prevails. Hence, by creating investment rules and living by them, investors give themselves the best chance of not losing momentum in moments of chaos, finding and sticking to their conviction and letting prices catch up, he adds.
Money doesn’t grow on trees, but the right savings and investment plans can help it grow. The pandemic has triggered a great deal of uncertainty and risk aversion in the way we invest our hard-earned money. Many of us want to turn away from high-risk instruments or lower our exposure to them while increasing our low-risk investments. Debt instruments are considered safe and include bonds, debentures, certificates of deposits, debt funds, fixed deposits, etc.
Keeping your money in a bank is safe, but your savings account will give you a mere 3.5% return. One way to diversify your corpus is bank FDs and corporate FDs. Bank FDs offer a return of 5-5.5%, whereas corporate FDs earn higher returns while maintaining low-risk levels. A corporate FD is similar to a bank FD but gives you a better return with low-risk. Since most of the instruments are rated, corporate fixed deposits have a high degree of safety level. Corporates offer returns of 7.5%-8.5% for a 1 year to 5 year deposit and 8-9% on a cumulative basis.
How do you choose the right company to invest in?
You need to consider 3 parameters:
⦁ Ratings: These term deposits are usually rated for their credibility by a few rating agencies, namely ICRA, CARE, CRISIL, etc. Generally, companies with a AA to AAA credit rating indicate a moderate to high safety of interest payment. As you go lower in the rating chart, the degree of safety reduces.
⦁ Parentage: While assessing the quality of the corporate, we need to factor in the likely support from a higher-rated parent in the event of distress. The number of years in existence and corporate governance standards of the Group. A strong parent can lend comfort to the investor.
⦁ Interest rate: The best part about a company FD is the higher interest rate. The rates paid are comparatively much higher than what is paid for an average bank FD. It is important to check and make comparisons for interest rates before opting for one. Certain NBFCs and companies offer higher interest rates when compared to others for the same tenure. The reason for corporates (or more precisely, NBFCs) offering FD rates that are higher than those of banks is because NBFCs get returns from their lending business which are higher than those earned by banks, and are therefore able to pass these on to depositors. At the same time, NBFCs ensure that their lending operations are within specified parameters and that asset quality is maintained.
Some of the key risks, however, to keep in mind while investing must not be ignored. Make sure that the company has been paying regular interest to its shareholders. The balance sheet of the companies has shown a consistent track record of profits at least for 3 years. With the number of start-ups entering the market rising, make sure the company has been in existence for the last 5 years at least. Ensure they are offering realistic returns (2-3% more than a bank FD).
Do not fall prey to those companies which are offering very high returns, where the risk-reward is unrealistic. Make sure these companies are listed on the stock exchange, companies that are listed will be well regulated. Do not place all your eggs in 1 basket, diversify to limit your risk. Do not opt for very long tenures with lock-ins, invest for 1-2 years and take stock of the performance of timely payments annually. Don’t go by misleading ads, always calculate the CAGR and compare it with others.
Finally, is the timing right for your investment? Choosing to invest when interest rates are high means returns of your FD will be the highest, but also account for inflation. Systematically and periodically investing 10% of your income can prove to be a good strategy in the initial stages of your life and gradually increasing this ratio to 40% as you grow older can be a good strategy in the long run. Investing ultimately is laying out your money now, to get more in the future.
A life insurance audit, however, is a comprehensive study of your existing coverage to make sure it still fits your needs.
Back in your parents’ or grandparents’ day, they might have purchased a life insurance policy, put it in a file and only thought about it when the bill came for the annual premium or when the insured passed away. And that was usually fine. Today, however, policies are a more complicated financial tool that needs to be monitored — much the same as any other assets you hold in your portfolio. The goal is for your life insurance policy to be there for your beneficiaries when they need it most. That is not the time you want them to be surprised, so it’s vital to perform a policy audit on an annual basis and take any corrective action that is necessary.
The audit itself is about more than just the policy. This is an annual opportunity to review your plan and identify any gaps in your coverage resulting from any occurrences from the previous year. It allows you to address any lifestyle changes and answer such questions as:
• Is the policy’s original goal still valid?
• What type of policy do you have?
• Are the original beneficiaries still valid?
• Is the ownership structure of the policy still correct?
• Are there any health issues that could have an effect on your policy?
• Do you still need the life insurance policy?
• Do you need to request or review any recommendations from your insurance advisor?
In order to accurately evaluate your policies, you will need to obtain specific information. The audit will depend on the amount — as well as the quality — of the information received. You should have the original policy and illustrations, the most recent annual statement and a current in-force illustration. Provide these to your advisor, and they will review the information gathered and advise you on any gaps in your plan. The audit is done so you can ensure that all of your plans and wishes for your family and estate are being met.
In addition to looking at your policies, this is also a good time to review the performance and financial health of your carrier. This is a crucial step in your audit. Not every insurance company is on equal footing. Your advisor needs to evaluate the financial stability of the company, as well as its ability to pay any future claims, plus its overall investment portfolio and how the company is rated compared to other carriers. The main goal is to make sure your carrier can meet its future obligations.
After the audit is complete, your advisor should be able to provide you with a clear picture of your current coverage and any shortfalls in your plan. If there are any gaps, your advisor should provide you with recommendations to rectify the situation. If it turns out that after the audit that you remain properly covered, then it is time well spent to ensure your peace of mind.
There are many things that we do automatically each year to ensure the safety of our families: regular maintenance on our cars, changing batteries in smoke detectors, etc. We do this to provide safety and wellbeing for our loved ones. Don’t they also deserve the same commitment for their financial future? One afternoon each year with your advisor will provide your family with the financial protection they deserve.
Depreciation in motor insurance often refers to the loss in value of an asset over time due to factors such as age, wear and tear, and obsolescence. Vehicles, in general, are depreciating assets. For example, a new car will cost more than an older one. Similarly, there is a certain depreciation associated with all the materials the car is made up of such as glass, plastic, metal etc. Each of the materials or parts have a different rate of depreciation.
In the event of an accident, if your car is damaged, you may not be able to recover the entire expense incurred on the parts replacement. The general insurance company only pays for the replaced parts after deducting the depreciation amount. The insured person has to pay for the difference between the market value of the new part and the depreciated part of the car.
It is a good idea to avail zero depreciation for car insurance. With the help of it, you get maximum reimbursement during the time of claim and get the most out of your car insurance policy.
What is Zero Depreciation Car Insurance Cover?
A car insurance with zero depreciation cover helps protect your car against all physical damages caused to the car without factoring in the element of depreciation. Although a standard motor insurance policy covers you against losses arising in case your car is damaged or stolen when you file for a claim settlement, the compensation is received after a standard deduction of depreciation.
On the other hand, a car insurance with zero depreciation cover can fetch you the entire compensation amount. A zero depreciation add-on cover can be availed for brand new vehicles and also can be opted for at the time of policy renewal.
In a zero depreciation car insurance policy, the entire claim amount is paid by the Car Insurance Company without considering the depreciation on the value of the car. Obviously, you have to pay slightly more in terms of your premium. However, this add-on feature is highly recommended to everyone considering the fact that it eliminates the possibility of any out-of-pocket expense from the owner.
Benefits Of A Zero Depreciation Car Insurance Cover
• Helps curb out-of-pocket expenses since depreciation cost is not taken into account while filing for a claim settlement
• Most of your claims regarding the insured parts are settled without taking the depreciation amount into consideration.
• It adds more value to the basic automobile insurance coverage and makes your investment almost nil
With this cover, you can be assured of a complete peace of mind. Also, with all major insurers offering this cover, you can save yourself a lot of hassle by purchasing a nil-depreciation cover by paying a little extra premium.
Zero Depreciation Cover Vs Normal Car Cover
Let’s quickly look at how a zero depreciation cover varies from a normal car insurance cover:
Value consideration at the time of Claim Settlement: Depreciation does not affect the claim settlement and the full compensation is given to the insured in case of zero depreciation cover. On the other hand, in case of a normal car insurance cover, the claim amount is received after a standard deduction of depreciation.
Premium: The premiums to be paid for a zero depreciation cover are higher than those for a normal car insurance cover.
Repairing Costs: The repairing costs of fiber, glass, rubber, and plastic parts are borne by the insurer in case of zero depreciation cover whereas, in case of a normal car insurance cover, these repairing costs have to be borne by the insured.
Age of the car: A zero depreciation cover is meant for new cars whereas a normal car insurance cover can be taken for cars older than 3 years.
Factors to Consider before Opting for Zero Depreciation Cover
The following are a few important points to consider while opting for car insurance with zero depreciation policy:
• Consider the age of your car. The car insurance zero depreciation policy is applicable to cars under the age limit of 3 years. So in other words, only new cars are eligible for 0 depreciation car insurance.
• As compared to a regular car insurance policy, zero depreciation car insurance will be slightly more expensive in terms of premium. It is not advisable to pay high premiums for cars older than 3 years. Although, if you own a luxury car or live in a high-risk area, you should consider opting for zero depreciation cover add-on. A zero depreciation policy premium depends on 3 main factors:
a) Age of the car
b) Model of the car
c) Your location
• You can make only a certain number of claims under the 0 depreciation car insurance. This is to limit the customers from making claims about every small dent in their car.
Remember that in case you make a claim, with a basic car insurance policy, the insurer only reimburses the depreciated value of the car parts replaced. As per the Insurance Regulatory and Development Authority of India (IRDA), the following rate of depreciation for the car parts has been defined:
• On rubber, nylon and plastic parts, and batteries – 50% depreciation be deducted,
• On fiberglass components – 30% depreciation be deducted
• On wooden parts – depreciation be deducted as per the age of car (such as 5% in the first year, 10% in the second year, and so on)
Who Should Buy Zero Depreciation Cover?
In order to protect your brand new car from any unforeseen events, it is advisable to opt for a zero depreciation cover. Buying a zero depreciation car insurance in India can also prove to be beneficial to:
• People with new cars
• People with luxury cars
• New / Inexperienced drivers
• People living in accident-prone areas
• If you worry about small bumps and dents
• If you have a car with expensive spare parts
It is a general belief that zero depreciation car insurance policy is apt for new or inexperienced car drivers as they are more prone to get the car damaged. However, this cannot be considered as a rule of thumb because there have been numerous cases where the most experienced drivers were caught in unfortunate events due to the fault of other drivers.
Most of us purchase health insurance policies as a financial backup to afford medical treatments at any point in our life. Moreover, our sedentary and changing lifestyle has led to a rise in several diseases like diabetes, cancer, heart attack, etc which requires long-term treatment and hence a regular drain to our financial resources at a time when medical treatments are becoming more and more expensive due to medical inflation.
Health insurance not only protects your hard-earned savings by covering the expenses but also enables you to avail best medical treatment and care with peace of mind as we don’t have to worry about hefty hospital bills. But are you satisfied with the health insurance policy you are currently having? Sometimes a big no, when we find that the current insurer is charging more premium and providing less services than its competitor. So can we port our health insurance policy to that competitor without being in any disadvantage just like we port our mobile numbers?
Yes. The Insurance Regulatory and Development Authority (IRDA) provisions, introduced in 2011, allow you to port your individual/family floater health insurance policies, and you don’t have to lose the benefits you have accumulated like in past when such a move resulted in your losing benefits like the waiting period for covering “pre-existing diseases.”
The insurance regulator protects you by giving you the right to port your policy to any other insurer of your choice. It not only “allows for credit gained by the insured for pre-existing condition(s) in terms of waiting period” but also protects your credit when you move from one plan to another with the same insurer. Please keep in mind that the new insurer is not duty-bound to insure you, this totally depends on his underwriting criteria.
What can you port?
The IRDA provisions say you can port credits on time-bound exclusions and no-claim bonus. The new insurer is bound to give you the credit relating to the waiting period for pre-existing conditions that you have gained with the old insurer, if he accepts your proposal. Do keep in mind that the features of your existing policy are not portable.
You can port only to the extent of the sum insured (including no-claim bonus) with the previous insurer. He will have to insure you at least up to the sum insured under the old policy. For example, if you have medical insurance of ₹5 lakh, but while porting to a new insurer, you want to enhance the sum insured to ₹10 lakh, the porting benefits will apply for only ₹5 lakh plus bonuses, if any.
How to port the policy
Notifying the insurer. You will have to apply for portability at least 45 days before the expiry of the current policy (and not before 60 days).
Specify the insurer (company) to which you want to shift the policy.
Fill up the portability form with existing insurance details, including the name and age of the insured.
Fill up the proposal form with complete details for the new insurer.
Submit the essential documents.
The essential data will be furnished on the IRDAI web portal. The new insurer will have to inform you within 15 days so that if he rejects your proposal, you still have time to renew your existing policy (there is a 30 day grace period if porting is under process). If the new insurer fails to inform you within time, he will be bound to accept the application.
We all worry about money. It is easy to understand why one would be worried about having little or no money. But, we also worry when we have money. This is especially true if our money is invested in the stock market and there is a market crash. In 2020, during the 1st wave of the COVID-19 pandemic, stock markets crashed dramatically and caught most investors unawares.
While a crash in stock markets or a market correction is impossible to predict, there are various strategies that investors can utilize to minimize its impact on their investment portfolio.
In this blog, we will discuss strategies that investors can utilize to minimize the impact of a stock market crash on their investments.
During market corrections, selling off your investments might seem like a good idea. Negative news such as a pandemic, an asset bubble that’s about to burst, scams being revealed, etc., can influence any investor.
Moreover, in 10 years out of the 20 years, the gap between the best and worst performance days of the NIFTY 50 was less than a month.
This is the key reason why the strategy of timing the market does not work well for most regular investors. The key thing to remember is that fear leads to panic, especially among amateur investors. This panic often makes investor sell their investments at low prices during a stock market crash.
But historically, markets have always recovered from a crash and instead of selling in a panic, you should just stay calm and allow your Systematic Investment Plans (SIPs) to continue. If you manage to continue investing irrespective of market conditions, you will reap the rewards when the markets recover at a later date.
Resist The Urge To Make Panic Buys
Similar to making panic sales during a market crash, it is also important that you do not make panic buys during a market crash. Panic buying can be described as a state of mind that pushes you to make investments indiscriminately, which can become an obstacle to reaching your current investment goals.
After all, when markets are down, it often seems the best time to invest at reasonable valuations. In such cases, investors often invest in Bluechip stocks or purchase Index Funds.
However, many investors forget one key aspect of Equity investing in such cases – their risk appetite. The buying frenzy when markets tank can lead investors to invest in Equities well beyond their actual risk appetite.
So instead of panic buying, you should plan for these investments before markets actually tank. But to do this, you need to know how high or low your risk tolerance is. Only then will you be able to accurately decide how much of your existing portfolio can be moved from low-risk assets such as Debt Mutual Funds and Fixed Deposits to higher-risk assets such as Equity Mutual Funds.
Keep Your Portfolio Rebalanced
Portfolio rebalancing is a strategy that helps in reducing the overall risk in your investment portfolio to provide better risk-adjusted returns on your investments. This strategy involves buying and selling investments periodically so that the weight of each asset class is maintained as per your targeted allocation.
So, the first step in rebalancing your portfolio is to have an asset allocation strategy in place. If you don’t have an asset allocation plan in place already, a stock market crash offers you the perfect opportunity to take stock of your current investments. Some key factors to consider when assessing your current investments are:
• What am I invested in – Mutual Funds, Stocks, Bonds, Gold, etc.
• What is the value of my investments?
• What are my financial goals?
• What do I focus on when building my investment portfolio – consistent returns, growth of capital, etc.
Once you have answered these questions and have a target allocation in place for different asset classes, you can accurately figure out your current situation. Then you can decide which investments you need to buy or sell to reach your asset allocation target.
If done right, rebalancing your portfolio will not only help you stay on course to reach your financial goals but also help manage overall portfolio risk when markets are volatile. That said, it might not be a good idea to rebalance your portfolio in the middle of a stock market crash. You should instead consider letting markets settle down a bit before rebalancing your investment portfolio.
Take Advantage Of Tax Laws
The profits generated by selling Mutual Funds or stocks are called Capital Gains, and these are subject to Capital Gains taxation rules. A fall in the stock markets can be an ideal opportunity to increase the post-tax returns on your investment by using a technique called tax-loss harvesting.
Tax-loss harvesting involves selling your Mutual Funds or stocks at a loss so that you can accumulate a capital loss. This capital loss can then be offset against capital gains from other investments to reduce your tax burden and increase the post-tax returns from your investments.
The tax loss harvesting technique is commonly used by investors towards the end of the Financial Year, i.e., in the months of February and March. But this is not a hard and fast rule, so that the technique can be used at any time during a financial year. A market crash offers the perfect opportunity to book a capital loss by offloading some of the poorly performing Mutual Funds or stocks in your portfolio and replacing them with potentially better performing investments.
Investors can also take the advantage of tax-loss harvesting when they are rebalancing their investment portfolio. This can significantly reduce your annual tax liability while simultaneously improving the asset allocation mix of your investment portfolio.
Protect Your Personal Finances
A stock market crash impacts a lot more than just the value of your investment portfolio. In fact, financial markets can also affect employment, the Real Estate Market, consumption of goods, inflation, and much more. Thus stock market turmoil can have a different impact on different individuals, but there are a few things that you can do to minimize this impact.
• Create a Personal Cashflow Statement
A cash flow statement is a record of all the money that is coming in and going out on a daily basis. By maintaining a personal cash flow statement, you can organize your finances better so that a stock market crash does not impact your ability to take of essential expenses such as utility bills, rent, tuition fees, etc.
Moreover, accurately tracking your expenses can also help reduce extravagant and often unnecessary expenses such as expensive dinners, unused gym memberships, spa treatments, etc.
• Create an Emergency Fund
Another way to protect yourself financially in case of an emergency is to create an emergency fund. In case you do not have an emergency fund yet, you should start one immediately. If you have an emergency fund already, a stock market crash is an ideal trigger to consider topping up the fund with an additional amount of up to 2 to 3 months’ expenses.
• Manage Your Debt
As a rule of thumb, a stock market crash is not the best time for taking on additional debt. If you do so, you run the risk of becoming caught in a critical economic situation. Moreover, a correction in markets might also be an excellent time to refinance existing debt such as a Home Loan, Personal Loan, or Credit Card, especially if you have a good credit score and have paid your EMIs on time to date.
Invest in Equities But Choose Carefully
While Equities are cheaper when stock markets tank, it is essential to be careful when making these investments. One way to benefit from the lower cost of Equities is to change the allocation in long-term investments such as National Pension System (NPS) and Unit Linked Insurance Plans (ULIPs). Both NPS and ULIPs are long-term investments with multi-year lock-in periods.
A stock market crash provides you the perfect opportunity to increase your Equity allocation at a reasonable cost and allows you to switch to a more aggressive asset allocation from a comparatively conservative allocation. This is because Equity investments, especially when purchased at low valuations, have an unmatched ability to boost your investment returns for long-term goals such as retirement.
You can also consider purchasing Equity Mutual Funds and stocks when valuations are low during a market crash. That way, you might be able to generate significantly high returns when markets recover at a later date. For example, if you consider the broad-based NIFTY 500 Index, you will see that this index has gone up by 75% in the previous year, which is substantial. But you must make sure you do sufficient research when selecting individual stocks to invest in.
This is because, when markets recover from a crash, not all stocks give good returns. In fact after the market crash of 2020, many popular names such as Yes Bank, United Spirits, Abbott India, and Bharti Airtel have given negative returns till date.
So, if you plan to make Equity investments during a market correction, make sure you do adequate research. But, if you do not know how to value stocks or don’t have the time to research investment options, it might be a better idea to invest in professionally managed diversified Equity Mutual Funds as compared to investing in individual stocks.
Focus on Making Long-Term Investments
When stock markets tank, a few questions come up every time:
• Will the stock market go down to zero?
• Will the economy recover?
• Can stock prices increase from here?
Every time the answers are the same – the stock market does not go down to zero, the economy always recovers, and stock prices go up, reaching new all-time highs.
While short-term volatility is inevitable when you are investing in Equities, how this volatility affects you depends solely on you. If you are investing for the long-term, these ups and downs in the stock market should not bother you.
So if you are investing for the long-term, you should keep a level head and not pay too much attention to market movements. Instead, focus on your behavior by doing the following:
• Resist the urge to engage in panic buying and selling
• Make sure your portfolio is rebalanced, and you are taking advantage of tax laws
• Protect your cash flows
• Understand that volatility is an integral part of the investment process, and there will be many more market corrections in the future
Bottom Line
A stock market crash offers investors a unique opportunity to grow their wealth. But to take advantage of this crash, you must have a plan in place before the crash happens. The 7 strategies discussed above are designed to help you not only weather a market crash better but also make sure that you can grow your wealth significantly when markets recover at a later date.
Your early twenties is a phase when you are just a year or two old in your career and slowly beginning to understand the importance of savings and investment. Hence, many youngsters like you are eager to have financial freedom and are looking for ways to use their money smartly. The agenda is to make money work for you and thereby increase your savings and earnings.
Mutual Funds are often the most sought-after option. A simple investment vehicle, mutual fund schemes allow amateur investors to choose among different varieties to create wealth. Besides, looking at the current market trend, mutual funds are one of the best investment routes for young and new investors. Since there is no one-size-fits-all rule when it comes to investment strategies, the earlier you start, the better you’ll learn to manage money.
Let’s discuss why Mutual Funds will prove to be a beneficial investment option for young investors like you:
Simplicity
Investors in their 20’s are only novices in their careers. Hence you may not have enough knowledge and expertise to make large-cap investments. Having said this, it is not that young people are incapable of handling complex financial decisions. Still, Mutual Funds are an easy-to-understand investment vehicle even for those who are starting with the ABC of savings. Because of easy access and fairly comprehensive terms, mutual funds are the best choice for first-time investors.
Diversification
Mutual Funds hold plenty of securities, like stocks and bonds, under its purview to enable an investor to diversify their investment risk. As a young investor, not only can you enhance your financial portfolio by investing in more than one fund, but you can also lower the risk of your overall investment. In case of an unpleasant economic event, dividing your savings into something as low as even one or two funds will defend your money against a financial crisis. And if the value of your stock falls and the value of your bonds rises, it offsets losses that could otherwise wipe out an entire portfolio in financially tumultuous situations. Since Mutual Funds have a broad market exposure, they are the most advisable investment option for young investors.
Accessibility
When you begin your investment journey, you neither have the money nor the financial skills to take risks. But there are quite a few investment options under mutual funds that require very little money and can be bought without the help of a broker. As a beginner, you can easily open an account within minutes with HDFC Bank via InstaAccount and begin your investment journey with HDFC Bank Mutual Funds. You can create a portfolio with options that best meet your investment goals. Choose between wealth creation, children’s fund, and retirement planning to meet long term goals, while tax-saving and regular income is best to meet short-term requirements.
With HDFC Bank, you can opt for Equity Funds, Debt Funds or SIP (Systematic Investment Plans). Or by opening an Investment Services Account, you can easily carry out transactions and have complete control over your Mutual Funds via NetBanking.
Tax Saving
Before blindly investing in a Mutual Fund, learn about your fund. Every category has its own risks and rewards that will help you decide whether or not it meets your saving goals. For instance, as a young investor who is just starting out in the professional space, tax-saving investments are a sensible choice. If the mutual fund you are investing in is an ELSS fund, you will reap tax benefits under section 80C. ELSS funds have a lock-in period of 3 years and are ideal to meet short-term goals. These investments offer the dual advantage of tax saving and better returns than traditional investment tools.
Bottom Line
Mutual Funds are a smart investment choice for all those are ready to go beyond Fixed Deposits and Recurring Deposits to increase their savings. Relatively simple to understand, Mutual Funds are a safe investment option because SEBI regulates it. However, mutual fund schemes are subject to market risk so always read the documents thoroughly before making a decision.
Setting aside a part of your monthly income can be an interesting way to invest money when you know the scheme will safeguard your investment and build wealth to achieve your financial goals. So, if you are looking for a similar investment option, Systematic Investment Plan (SIP) and Recurring Deposit (RD) are the two most popular options that let you invest a fixed amount every month for long-term wealth creation.
An SIP is a provision to make an investment in mutual funds by setting aside a small amount of money monthly or quarterly rather than investing in a lump sum. On the other hand, an RD is an investment tool wherein you can deposit a fixed amount each month for a fixed interest rate and predefined duration. This article elucidates everything about these two investment options so that you can make an informed investment decision.
What is an SIP?
A Systematic Investment Plan (SIP) is an investment tool that lets you invest a small sum of money in mutual funds on a daily, weekly, monthly, and quarterly basis. It is a systematic approach to managing your investments. Depending upon the mutual fund scheme you choose, your invested money will be allocated in debt and/or equity. You can start an SIP with a minimum of Rs 500 a month. With a standing instruction, the SIP amount will get deducted from your registered bank account on a predefined date. You do not have to worry about market volatility and timing the market as you make small investments periodically, typically for the long term. With increased awareness about mutual funds, this disciplined manner of investment has been gaining popularity in India.
What is a Recurring Deposit?
A Recurring Deposit (RD) is a type of term deposit offered by banks. It lets you make regular deposits and earn interest on the investment. Due to the regular deposit factor and fixed interest rate, RD is one of the preferred saving-cum-investment instruments in India. Most banks in India offer RDs for a term that ranges between 6 months to 10 years. You can choose the term in accordance with your financial goal. The RD amount gets automatically deducted from your Savings Bank Account and is transferred to your RD account. The interest rate remains the same throughout the term and does not get affected by market volatility. On maturity, you receive the lump sum amount that includes your investment plus the interest earned. Most major banks in India offer to invest in RDs with as little as Rs 1,000. Since the rate of interest offered on RDs is equivalent to the rate of interest offered on Fixed Deposits, it earns you a decent amount on maturity.
Which is a better investment option?
Now that we have understood the basics of these two investment tools, let’s compare them on certain parameters to decide which option works the best for you.
1. Type of Investment:
SIP is a route offered by mutual funds to invest a fixed amount in a mutual fund scheme at regular intervals. You can choose between debt, equity, or hybrid mutual fund schemes depending on your risk capacity.
Whereas, in an RD, an investor contributes a fixed amount every month for a fixed rate of return. Unlike SIPs, RDs offer an interest rate that remains unchanged until maturity. That said, it neither takes advantage of the market conditions nor does it get affected by market volatility.
2. Risk Involved:
Depending upon the market conditions, the SIPs offer variable returns. Hence, it does involve the risk of returns and capital. However, the carefully chosen and long hold SIPs have consistently given good returns compared to the traditional methods of investment.
Since RDs offer a fixed interest rate, they are considered one of the safest investments for conservative investors who do not want to risk their capital and do not expect high returns.
3. Investment Frequency:
SIP lets you invest periodically, such as daily, monthly, weekly, and quarterly.
You can invest in an RD on a monthly basis.
4. Returns:
Returns on SIPs are based on the type of schemes you choose, such as debt or equity. Also, the fund you choose makes a huge difference in the returns.
The RDs offer fixed returns. However, the bank you choose for an RD makes the difference in the returns as the interest rates vary from bank to bank.
5. Tenure:
There is no fixed tenure for an SIP, but the minimum period is 6 months.
Most banks offer to choose RD tenure between 6 months to 10 years.
6. Liquidity:
In terms of liquidity, an SIP is a better option as it allows you to withdraw funds whenever you need without any charges.
Although RDs allow premature withdrawals, you will be charged a penalty for it.
7. Taxation:
The SIP investments and returns are exempted from the tax only if they are Equity Linked Saving Scheme (ELSS) funds.
Resident individuals below the age of 60 years with an annual income above Rs 5 Lakhs have to pay 10% TDS if the interest earned is more than Rs 10,000.
8. Investment Goal:
Depending on the fund and investment frequency you choose, an SIP can help you build wealth over a period. It can assist you in achieving long-term as well as short-term investment goals.
Since the interest rates offered on RDs are considerably lower, they cannot help you create wealth or achieve long-term investment goals.
To Conclude:
When choosing between SIP and RD, it is advisable to consider your income slab, risk appetite, investment tenure, and investment goal. A combination of carefully chosen SIPs can prove as a beneficial investment if you are open to taking relatively higher risks and ready for a longer investment horizon. However, if you want to minimise the risk, you should consider debt SIPs. If you do not want to risk your capital at all and not looking for high returns, you can consider investing in an RD. For your money to grow in a decent and interesting way, it is advisable to make an investment plan, based on your risk appetite, that includes SIPs as well as RDs.
SIP is a systematic investment plan which not only helps to bring discipline in investment, but also helps to chalk out the short term market fluctuations. Mutual funds offer SIPs of various durations.
Mutual funds offer the facility of investing in mutual funds through the systematic investment plan or SIP. You may invest in mutual funds through (I) Lump-sum investments (ii) Systematic investment plan (SIP)
Are you confused about the interval of SIPs one should opt for? Please read on for the clarity.
Understanding the meaning of SIP
SIP is a systematic investment plan that brings discipline to your investments. SIP is a facility offered by mutual funds that allow the investor to invest a fixed amount of money periodically in a mutual fund scheme.
SIP is usually a better investment option than a lump-sum investment as it utilises market volatility to average out the cost of the investment. SIP would help you stagger your investment over intervals which makes them safer than lump-sum investments. SIP will enable the investor to buy more mutual fund units when the stock market corrects or crashes and lesser units when markets rise.
It helps you average out the cost of purchase of the mutual fund units over some time. This method has become widely popular as it uses the technique of ‘rupee cost averaging’ to maximise returns with time. Also, by consistently investing in equity funds through SIPs, you get the benefit of power of compounding, which gives a return on your returns. The discipline that SIP brings and maximising return would help the investor build a large corpus in the long-run, even with a small investment.
SIP is a systematic investment plan that brings discipline to your investments. SIP is a facility offered by mutual funds that allow the investor to invest a fixed amount of money periodically in a mutual fund scheme.
SIP is usually a better investment option than a lump-sum investment as it utilises market volatility to average out the cost of the investment. SIP would help you stagger your investment over intervals which makes them safer than lump-sum investments. SIP will enable the investor to buy more mutual fund units when the stock market corrects or crashes and lesser units when markets rise.
It helps you average out the cost of purchase of the mutual fund units over some time. This method has become widely popular as it uses the technique of ‘rupee cost averaging’ to maximise returns with time. Also, by consistently investing in equity funds through SIPs, you get the power of compounding benefit, which gives a return on your returns. The discipline that SIP brings and maximising return would help the investor build a large corpus in the long-run, even with a small investment.
SIPs are available for different durations as mentioned below.
Types of SIPs based on tenure
SIPs can be classified based on their tenure; generally, monthly and weekly SIPs are popular modes of investments.
Monthly SIP: A fixed sum is invested monthly in the mutual fund. These are the most commonly used types of SIPs.
Weekly SIP: A fixed sum is deducted every week and put in the mutual fund scheme.
Daily SIPs: A fixed sum is invested daily in the mutual fund.
Which type of SIP would be beneficial for you?
Studies have shown that SIP frequency, be it daily, weekly or monthly, has no major impact on returns. For instance, the difference in return between daily, weekly or monthly SIPs is negligible over time. However, you could struggle to monitor your investment if you opt for the daily SIP over the monthly SIP. You would be better off going for monthly SIPs over daily SIPs if you get a fixed salary each month. You could opt for SIP dates close to your salary date for convenience.
You may focus on selecting the right mutual fund over the best fund to achieve your investment objectives depending on your risk tolerance. You could consider SIP as a tool for investing in mutual funds. You must look at picking the right equity fund and investing through daily or monthly SIP (as per convenience) to maximise return over a period. However, you could opt for daily SIP if you earn daily wages.
Points to be considered before choosing SIP type:
1- Daily SIPs would get impacted for the funds that have invested in mid-cap and small-cap stocks. Usually, small-cap funds are considered volatile, and day-to-day investing through SIP in small-cap funds would lead to higher volatility than monthly SIPs. Accordingly, if your daily SIPs are getting invested when the market is rising, you may observe higher returns. If the market is declining, then the daily SIPs would give you lower returns compared to monthly SIPs. However, you can expect stable returns when investing in Large-cap funds through daily SIPs.
2-The growth prospects of daily SIPs are usually dependent on the efficiency of fund management. Hence, before investing in the daily SIPs, one should consider the particular mutual fund’s credibility and strategy.
3-Daily SIPs can limit the losses as the investment is made in granular portions; however, as the risk is minimised, the returns are lower than the return offered by monthly SIPs.
4- Daily SIPs are better for individuals who are into business or any profession that earns daily wages. Whereas for people earning a monthly salary, monthly SIP is a better option. The SIP date should be selected closer to the date of salary credit for salaried employees as you have a sufficient balance in your bank account. If the SIP instalment doesn’t go through for three consecutive months, then the AMC cancels the SIP, and the bank can penalise you.
5- Daily SIPs will diversify the investment. Although, you should opt for diversifying your entire financial portfolio. The returns will be average if the purchase price is averaged. But, if the fund is not volatile, the returns of monthly SIPs will be high as compared to daily SIPs.
6- Monthly SIPs offer better investment planning opportunities, as you can monitor the investment in a better way. However, you could struggle to monitor investments if you put money in mutual funds through the daily SIP.
7- Daily SIPs make it very tedious to track investments and returns. Also, you will have multiple entries of purchase of the SIPs in your account, making it difficult to track all assets in one go.
