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INVESTMENT FUNDAMENTALS

Its time to change your investment advisor if ...

Investors often fail to appreciate the rote played by an investment advisor in the process of financial planning. The advisor is responsible.: for bridging, the: gap between investors and their financial goals. The advisor's role assumes significant importance in an exuberant scenario like the present one, when it is easy for investors to lose track of their objectives and make wrong investment decisions.

Conversely, an association with the wrong investment advisor can spell disaster for investors. We present a few pointers which will help investors gauge if they are with the wrong investment advisor.

1. The advisor only recommends the 'season's flavour'
The mutual fund industry has witnessed a number of trends in the recent past. Monthly Income Plans (MIP’s), mid cap funds, flexi cap funds among others have all enjoyed their moments of glory (some still continue to do so, but then it is anybody's guess how long this will last!). Fund houses have fallen prey to herd mentality and launched similar offerings in quick succession; investment advisors have played their partby indiscreetly pushing these products.

If your investment advisor only recommends the season's flavour, disregarding your investment objectives , and risk appetite, there's a fair chance he is more interested in his commission earnings vis-À-vis you financial goals. Steer clear of such advisors.


2. The advisor convinces you that a Rs 10 NAV is cheaper

Investment advisors have ridden the mutual fund IPO (now referred to as New Fund Offer) wave by convincing investors that its cheaper to invest during the IP0 stage. Nothing could, be farther from the truth. By likening mutual fund IPOs with stock IPOs, distributors have only done a huge disservice to their investors.

A good advisor will only recommend a new fund if it adds value to the investor's portfolio or is a unique investment proposition. Any advisor worth his salt will vouch for an existing scheme which is time tested and proven vis-a-vis a similar scheme in its IPO stage.


3. The advisor's USP is `commission offered'

A widely prevalent practice (despite, being explicitly prohibited) among investment advisors is to rebate a part of commission earned, back to investors i.e.. the investor is `rewarded' for getting invested. Investors on their part should also shoulder the blame for demanding and accepting such commission. What investors, fail to realise is that the commission offered by the advisor could be a ploy to disguise his inefficiencies. Wealth creation for investors should come fromthe investments made and notcommissions. Select an advisor for his ability to recommend the right investment avenues and manage your investments rather than his willingness to refund commission.


4. Lump sum investing is the consistent advice offered

If your investment advisor has not initiated you to the practice of making investments using the systematic investment plan (SIP) route and continues to endorse lump sum investing, its time to start looking at other options. An investment advisor who fails to promote the SIP form of investing when markets have touched record highs is either driven by his earnings or fails to understand the nuances of market-related investments. In either case. the same could be detrimental to the investor's cause.


5. Advisor's role is restricted to delivery and pick up of forms

Oddly for a bulk of the investment advisors, the service offered is restricted to delivery and pick up of application forms; the 'advice' component is sorely missing. An investment advisor's primary role includes creating a portfolio for the investor based on his needs, risk profile and successfully managing the same. While maintaining high service standards is pertinent, it shouldn't gain precedence over the advice part.

Investment Strategy

Finding the right investment has become quite a challenge. Most of us fall prey to buying the latest top performers and accumulating a few shares of this and that without really considering our financial goals, timeframe and tolerance for risk.

Whether you are planning for your individual retirement, investing to meet the expenses of your child's higher education, or simply building cash reserves, it is important to match your financial goals with a mix of assets that may help you meet those goals.

To build a successful investment strategy you should carefully structure your plan to achieve your goals without taking more risk than you can afford or are comfortable with. You also need to consider how much time you have to reach your various goals.

What financial goals do you want to achieve?

The first step is to define your financial goals. Your choice of investments should always be driven by what you want your money to do for you. and when. You may want your investments to fill specific needs such as buying a house or a car, paying children's education costs or simply building a comfortable retirement nest egg. Your goals may be more general-like building cash reserves or accumulating wealth. Either way, spending time to determine your financial goals will help you choose the most appropriate investments.

When, do you hope to reach them?

The next step is to identify the approximate time frame within which you wish to achieve the goals you have listed. For example, do you aim to buy a house in five years, or retire in the next twenty years? Setting time frames for your goals is critical.

Different time frames require different investment strategies. The sooner you need to spend the money now invested, the greater is the need to invest for principal stability and liquidity. Conversely, the longer you can leave your money invested, the less you need to worry about short-term price fluctuations and the more you can focus on earning a high return overtime.

Risk, return and timing are all related. Generally, the riskier an investment, the higher its potential return over time and the more suitable it is for an investor with a long time frame.

How much money will you need to invest to achieve your goal ?

Most of us fail to take into account inflation and taxes. Therefore, it would be advisable to spend some time and take into consideration, the future cost of the goal. Can you achieve your goals with amounts that you have already invested?

How much risk can you afford to take ?

Each and every individual has a personal tolerance for risk and in order to set an investment course that you will be comfortable with-and will not abandon prematurely-you need to think about your willingness to accept fluctuations in the value of your investments.

As you assess your risk tolerance, you will need to consider how soon you need, to reach every investment goal. Longer-term goals allow you to pursue more aggressive and potentially more rewarding strategies because the investment has time to recover from market setbacks.

Financial goals that need to be met sooner rather than later call for lower or moderate risk approaches. Whatever the investment profile may be, one of the best ways to reduce overall risk is to diversify your investments.

Do you need to rethink your investments periodically?

No single asset class (stocks, bonds, or money market instruments) is appropriate for all of your goals. At any given point in your life, you will probably want to keep part of your money secure and accessible, part invested for income and part invested for growth. But the proportions will change as you prepare for and achieve successive investment objectives.

It is a good idea to review your goals and investments once a year, keeping in mind the objectives each time a new investment is made. As your circumstances change, so will your investing strategy.

Common Investment Mistakes

Are you investing wisely ? Knowing about some common investment mistakes, can help prevent them from happening to YOU.

  1. Investing without a clear plan of action. Many people neglect to take the time to think about their needs and long-term financial goals before investing. Unfortunately, this often results in their falling short of their expectations. You should decide whether you are interested in price stability, growth, or a combination of these. Determine your investment goals. Then, depending on your timeframe and your tolerance for risk, select mutual funds with objectives similar to yours.
  2. Meddling with your account too often. You should have a clear understanding of your investments so that you are comfortable with their behaviour. If you keep transferring investments in response to downturns in prices, you may miss the, upturns as well. Even in the investment field, the "tortoise" who is more patient, may win over the "hare". While past performance does not necessarily guarantee future performance, your understanding of the behaviour of various investments over time can help prevent you from becoming shortsighted about your long-term goals.
  3. Losing sight of inflation. While you may be aware of the fact that the cost of goods and services is rising, people tend to forget the impact inflation will have on investments in the long-term. You have to keep in mind that inflation-will eat into your savings faster than you can imagine.
  4. Investing too little too-late. People do not "pay themselves first". Most people these days have too many monthly bills to pay, and planning for their future often takes a backseat. Regardless of age or income, if you do not place long-term investing among your top priorities, you may not be able to meet your financial goals. The sooner you start, the less you have to save every month to reach your financial goals.
  5. Putting all your eggs in one basket. When it comes to investing, most of us do not appreciate the importance of diversification. While we know that we should not "put all our eggs in one basket", we often do not relate this concept to stocks and bonds. Take the time to discuss the importance of diversifying your investments among different asset categories and industries with your financial advisor. When you diversify, you do not have to rely on the success of just one investment.
  6. Investing too conservatively. Because they are fearful of losing money, many people tend to rely heavily on fixed-income investments such as bank fixed deposits and company deposits. By doing this, however, you expose yourself to the risk of inflation. Consider diversifying with a combination of investments. Include stock funds, which may be more volatile, but have the potential to produce higher returns over the long term.
PARABLE OF THE PENCIL

The Pencil Maker took the pencil aside, just before putting him into the box.

There are 5 things you need to know, he told the pencil, before I send you out into the world. Always remember them and never forget, and you will become the best pencil you can be.

One: You will be able to do many great things, but only if you allow yourself to be guided by Someone's hand.

Two: You will experience a painful sharpening from time to time, but you'll need it to become a better pencil.

Three: You will be able to correct any mistakes you might make.

Four: The most important part of you will always be what's inside.

And Five: On every surface you are used on, you must leave your mark. No matter what the condition, you must continue to write.

The pencil understood and promised to remember, and went into the box with purpose in its heart.

Now put your self in the place of the pencil. Always remember these five things and never forget, and you will become the best person you can be.