It is your life, it is your money, learn to take charge of it by becoming involved in it. Have a good relationship with your money, writes VIVEK lAW. Excerpt:
The question often asked is, how many schemes or products should you have in your portfolioIJ There is no formula for this, but my own sense from listening to numerous financial planners is that you need no more than two to three schemes in each category you choose. Of course, this depends on the amount of money you are putting aside every month. If you are investing Rs5,000 per month in an equity fund, then you should at best be looking at two schemes and no more. This doesn’t mean that if you are investing Rs20,000 per month, you should invest in eight. At no point should you be in more than three to four schemes per product category, which is the upper limit.
If you are picking a diversified equity fund scheme, then two schemes from different fund houses are fine. But if you are picking a diversified, large-cap, midcap, thematic, liquid, and income fund as your portfolio, the combined number of schemes should at best be seven to eight and no more. If your financial planner is taking you beyond the optimal number of schemes, then something is not right and you should look for another adviser.
Dhirendra Kumar, one of India’s leading mutual fund experts, says, “Investing has a large baggage of useless complexity which investors have no need to bother about. One example that I come up against repeatedly is that of investors trying to choose mutual funds on the basis of the arcane measures of portfolio theory. Whether you are choosing a mobile phone, a car, a TV or even a pair of running shoes, you are likely to be set upon by self-declared experts whose basic goal seems to be to show off their superior knowledge, even if the knowledge is useless and/or self-invented. This can generally be done only by pretending that the more complex inputs mean better decisions. In reality, nothing could be further from the truth. It is possible to choose a mutual fund with nothing more than a little common sense. All you need to do is to roughly compare the returns that various funds of a type have generated over somewhat long time periods. You can also look at the ratings given to funds on ValueResearchOnline.com and some other websites, and that’s about it. Nothing more is actually needed to make a reasonable choice.
Of course, this won’t make you choose funds that will have the very best returns in the future. What it will do is to allow you to avoid the duds, and if you can do just that much, you will be fine.” Once you have picked your schemes, you need to stop monitoring them on a daily basis. Stop looking at the stock ticker on business news channels, and repeatedly calling your financial planner on the basis of how the stock market moved in a day or week. A good financial planner will probably send you a monthly update on how your money is doing. And if there is a dramatic change in the markets-a massive surge in stock prices or a crash-he/she will call you and tell you if there is a need to shift gears or make changes to your portfolio.
Ideally, any changes to your portfolio should be considered on a six-monthly basis, unless of course, there are some dramatic events that necessitate a more urgent look at your portfolio. Too many frequent changes to a portfolio prevent your money from deriving the best benefit from the asset class it is invested in.
Markets will always go up and down, and within the wider stock market, there will always be some stocks doing well and some not so well. And sooner rather than later, a cycle will turn. There will be some good runs and some not-so-good runs, but if you allow your money to stay invested, you are likely to benefit from riding the upturn in a cycle more frequently, than if you were to pull out your money periodically.
Similarly, there is no merit in buying 10 different insurance policies. If you are buying term insurance, you should stick to one product which can always be topped up since most companies offer that option now. The same holds true for health insurance.
Again, adding more and more products across categories only means you will have a tougher time monitoring them, and of course, you will be lining the pockets of the sellers by contributing to their commissions. In fact, the biggest myth is that if you are managing your money well, you must have a dozen or more products in your portfolio. In this case, let me assure you less is better. In fact, having too unwieldy a portfolio is a sign of bad financial management. The aim of any portfolio is to generate good returns while keeping the risk as low as possible. As long as your portfolio fulfils that basic requirement, you are on the right track.
While we are on the topic of investing right, a key factor is not to mimic your friend’s portfolio. You are two different individuals, and have different goals, different lives to lead. So even though you may like the same dish at a restaurant, and may enjoy the same drink, remember, your money and your friend’s money is not the same. I am saying this because almost 90 per cent of the investors I have had the good fortune of interacting with over the years, have told me it was advice from friends that drove their investment decisions. Nothing can be more dangerous than this.
Investing is is not a shortcut to success either. You need to work towards it. You need to ask yourself the right questions and find your own answers. Then you need to identify a good financial planner, and ask him/her the right questions. Then you need to ensure that you make some effort in trying to understand the product you are investing in. If you simply choose to buy products your friends have bought and recommended to you, then I am afraid, my experience compels me to tell you this: You will fail with your investment. It is your life, it is your money, learn to take charge of it by becoming involved in it.
Give it what it needs and you won’t regret it when you see your wallet filling up. From a pure investment perspective, mutual funds are the most cost-effective as well as liquid platform for investing in both equity and debt. There are thousands of schemes in the market being offered by more than two dozen mutual fund houses. I would strongly recommend you to allow your financial planner to choose these schemes for you, but if you would prefer to go it alone, there are a few points you should keep in mind before selecting your mutual fund scheme. There are several credible mutual fund research organisations in the country that offer their research through the internet as well. Once you decide on the categories you want to invest in, you can visit some of these websites and see the rankings they have given to the schemes across various categories. They usually have the top five schemes across various categories, and also give you their returns.
Excerpted from The Money Book, Rupa Publications, Rs395