Why is investing better than saving?
Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.
While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.
Similarly, in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.
At the same time, in the cricket analogy, in order to stay at the crease as well as score runs, one must take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.
So while saving is necessary, investing is very important to achieve long term goals
What is the ideal amount to start investing in a mutual fund?
Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture or shares of companies?
A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.
Think of it this way. When you go to a restaurant, you have a choice to order a la carte or buffet/thali or a full meal.
Compare the full thali or the meal with a Mutual Fund, whereas individual items you order are the stocks, bonds, etc. A thali makes the choice easy, saves time and also some money.
The important thing is to start investment early, even if small, and gradually add on to your investments as your earnings increase. This gives you better prospects of better returns in the long run.
What is the benefit of staying invested in the long term?
Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in case of certain Mutual Funds – such as equity and balanced funds.
Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for long term?
Consider your Mutual Fund investment as a good quality batsman. Every good quality batsman has a certain style of batting. However, each good quality batsman would be able to accumulate lots of runs, if he continues to play for years.
We are talking about the record of a “good quality” batsman. Every good batsman would go through some good and poor performances. On average the record would be impressive.
Similarly, a good Mutual Fund would also go through some ups and downs – often due to factors beyond the control of the fund manager. An investor would benefit if one stays invested through these funds for long periods of time.
So, as long as you can afford, stay invested for long periods of time – especially in equity and balanced funds.Are there particular funds that help create wealth over the long term?
What is wealth? What purpose does it serve?
Many answer these questions as “living a life of one’s dreams”, or “not having to worry about money”, or “having financial freedom”. Being wealthy means having enough money to spend for one’s responsibilities and dreams.
However, for all the long term expenses, one must never forget one major factor – “Inflation”. As the name suggests, inflation is a phenomena that inflates the cost that you will incur to fulfil your life goal when the time arrives to fulfil it.
Diversified equity funds offer the opportunity to create wealth over the long term at reasonable levels of risk. The risk associated with equities gets controlled with equity Mutual Funds due to three factors
· The expertise of the professional fund manager who manages the fund
· Diversification of risks due to the investments made in a basket of securities
· Investing for the long term which lowers the impact of short term volatility
Although it’s true that equities as an asset class offer investors the opportunity to create wealth, it is important to keep in mind that equities as an asset class is volatile over shorter time frames. Therefore, you need to invest for the long term.
What are the various types of funds?
Various types of Mutual Funds exist to cater to different needs of different people. Largely, they are of three types.
1. Equity or Growth Funds
· These invest predominantly in equities i.e. shares of companies
· The primary objective is wealth creation or capital appreciation.
· They have the potential to generate higher return and are best for long term investments.
· Examples would be
· “Large Cap” funds which invest predominantly in companies that run large established business
· “Mid Cap” funds which invest in mid-sized companies.
· “Small Cap” funds that invest in small sized companies
· “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
· “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
· “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
· Tax-Saving Funds
2. Income or Bond or Fixed Income Funds
· These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
· These are relatively safer investments and are suitable for Income Generation.
· Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3. Hybrid Funds
· These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
· Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.
Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.
While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.
Similarly, in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.
At the same time, in the cricket analogy, in order to stay at the crease as well as score runs, one must take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.
So while saving is necessary, investing is very important to achieve long term goals
What is the ideal amount to start investing in a mutual fund?
Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture or shares of companies?
A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.
Think of it this way. When you go to a restaurant, you have a choice to order a la carte or buffet/thali or a full meal.
Compare the full thali or the meal with a Mutual Fund, whereas individual items you order are the stocks, bonds, etc. A thali makes the choice easy, saves time and also some money.
The important thing is to start investment early, even if small, and gradually add on to your investments as your earnings increase. This gives you better prospects of better returns in the long run.
What is the benefit of staying invested in the long term?
Invest for long term – an advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in case of certain Mutual Funds – such as equity and balanced funds.
Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for long term?
Consider your Mutual Fund investment as a good quality batsman. Every good quality batsman has a certain style of batting. However, each good quality batsman would be able to accumulate lots of runs, if he continues to play for years.
We are talking about the record of a “good quality” batsman. Every good batsman would go through some good and poor performances. On average the record would be impressive.
Similarly, a good Mutual Fund would also go through some ups and downs – often due to factors beyond the control of the fund manager. An investor would benefit if one stays invested through these funds for long periods of time.
So, as long as you can afford, stay invested for long periods of time – especially in equity and balanced funds.Are there particular funds that help create wealth over the long term?
What is wealth? What purpose does it serve?
Many answer these questions as “living a life of one’s dreams”, or “not having to worry about money”, or “having financial freedom”. Being wealthy means having enough money to spend for one’s responsibilities and dreams.
However, for all the long term expenses, one must never forget one major factor – “Inflation”. As the name suggests, inflation is a phenomena that inflates the cost that you will incur to fulfil your life goal when the time arrives to fulfil it.
Diversified equity funds offer the opportunity to create wealth over the long term at reasonable levels of risk. The risk associated with equities gets controlled with equity Mutual Funds due to three factors
· The expertise of the professional fund manager who manages the fund
· Diversification of risks due to the investments made in a basket of securities
· Investing for the long term which lowers the impact of short term volatility
Although it’s true that equities as an asset class offer investors the opportunity to create wealth, it is important to keep in mind that equities as an asset class is volatile over shorter time frames. Therefore, you need to invest for the long term.
What are the various types of funds?
Various types of Mutual Funds exist to cater to different needs of different people. Largely, they are of three types.
1. Equity or Growth Funds
· These invest predominantly in equities i.e. shares of companies
· The primary objective is wealth creation or capital appreciation.
· They have the potential to generate higher return and are best for long term investments.
· Examples would be
· “Large Cap” funds which invest predominantly in companies that run large established business
· “Mid Cap” funds which invest in mid-sized companies.
· “Small Cap” funds that invest in small sized companies
· “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
· “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
· “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
· Tax-Saving Funds
2. Income or Bond or Fixed Income Funds
· These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
· These are relatively safer investments and are suitable for Income Generation.
· Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3. Hybrid Funds
· These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
· Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc.
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