Not everybody is born rich. And not everybody goes from rags to riches in a matter of weeks or months. A handful of people seem to turn everything they touch into gold. Most others are either barely comfortable or spend their lifetime struggling. Many want to become rich or financially free, but never achieve that state, although we all have the potential to do so. It is necessary to control and fulfill your financial destiny by planning well and executing the plan even better.
As soon as you realise this, you must prepare an action plan that conforms to the tested mantras of the modern day. Broadly, only two mantras are needed to help us control our financial destiny.
Diversification: Invest In All Asset Classes
Investment in equities is meant to give a high-growth booster to your portfolio. The investor must realise that the equities market in the short run tends to be volatile, but its long-term return potential remains high.
Thus, the equities asset class is considered as a viable medium for investors wishing to build a large corpus over the long term. For example, an equity investor who would have invested . 10,000 in January 1980 in the BSE Sensex at 100 points would have built a corpus of 16.45 lakh by the end of March 2011, at an average CAGR of 17.73% per annum.
Gold investments are profitable in the long run and are the closest hedging tool to inflation. If you observe the price movement of gold over the past years, you will see a continuous uptrend. So, investors have benefited greatly by holding gold for a longer term. The price of gold was . 1, 607 per 10 gms in March 1981, and it has grown to . 20,800 in March 2011, at an average CAGR of 8.79% per annum.
Debt investments mainly consist of fixed deposits, corporate bonds, government securities and bank certificates of deposit, etc. These generate stable returns and generally carry much lower price risk than equities and commodities like gold. Over the last 10 years, fixed income, on an average, has given a 7.5% return.
During extreme market volatility, investing in only one of the above asset classes may not yield the best result. The best way to achieve an above-par, risk-adjusted return is to invest in a combination of correlated and inversely correlated products. Investors need to find out mutual fund schemes that have a judicious mix of all the three asset classes — debt, equity and gold — in varying proportions depending on their risk profiles.
Strategy: Invest Systematically And Regularly
The fact remains that whenever the western world sneezes, the world catches a cold. Investors seeking long-term aggressive returns and possessing the appetite to stomach volatility considered technology funds during 1990s. Funds from this sector emerged as a category to reckon with and enjoyed tremendous growth in the years that followed, but their subsequent decline in the year 2000-01 due to the IT bubble burst has kept the risk-averse investor away.
The next biggest turmoil in the history of stock markets in the year 2008 was due to the subprime crisis. Equity and balanced mutual funds generated negative returns during both these turmoil periods. However, one could ride such turmoil periods also smoothly. Let's take an example that clearly shows that investing through systematic investment plans (SIP) by keeping a long-term perspective in any market conditions is fruitful, vis-a-vis investing in lump sum — even if the investment is in sectors badly affected during such market crisis. In the financial year 2000-01, the technology sector funds, on an average, returned about (-) 64.36%. The NAVs of some of these funds were ruling at around 60-80% below par levels. A lump-sum investment sometime before the technology bubble burst would have eroded its value by 60%-80% after the market crash in 2000-01. Most of us would have exited seeing the loss. Even for some of the bravehearts who stayed on, a lump sum investment would have yielded only 6% per annum till date. Whereas, the SIP option would have generated more than 10.4% per annum.
Therefore, investing a fixed amount every month (popularly known as SIP) is a safer way of investment because nobody can afford to invest his/her entire savings one day and lose it the next (in the event of a crash). Investing all at once can be extremely profitable if the market moves up, but most people who don't want to spend much time studying the market should endeavor to enjoy the benefit of cost averaging by choosing the SIP option.
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Also, know how to buy mutual funds online:
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