Personal Finance
|
July 22, 2022
How Much Should I Invest and When?
Read More
We're really excited to announce our newest team member at Mintd - Srikanth Chellaboina
Worried about how to get starting with investing? Take a look at how our community helped Gurnehmat make the right choice
Just like any first-time investor who doesn’t know much about markets and long-term wealth creation, I had a lot of questions that I wanted to be answered before I took the plunge. I was worried if my approach would be right or not, whether I’ll be able to pick up the right asset classes or if I should even be investing when the markets were supposedly “in a bad state”.
I joined the Mintd community sometime around June but anxiety usually got the best of me and I stopped just short of asking my queries a few times. But sometime around the end of July, a fellow member asked about how other people think of exit strategies regarding their investments. I saw my chance there and posted a question about the first step in getting started off with investments.
Within minutes, I received amazing inputs from the community regarding how should I start my investment journey. Here is what I learned:
As a beginner (or at any stage for that matter) you should never narrow the focus just on investments. It's always necessary to take a broader look and create a personal finance checklist. To start off, analyze the risks to your investment and understand how you can cover them. The first step should always be setting up an emergency fund for yourself. It's highly important that you set aside 3-6 months' expenses in an emergency fund (using an FD or high-interest savings account). The second major risk is your life, go ahead and secure that corner with a good term insurance. Before moving ahead, take into account any liability you have (i.e. loans). The third risk is the money you might have to spend on urgent health-related matters like hospitalization so make sure you have a good health insurance and actually understand what the terms are rather than just skimming through it like a formality. Now, if you have life goals then plan for them. Set a timeline if you can, a target that you need to achieve, understand your risk profile, and put this together to work out an investment strategy.
In case you're not sure about your life goals but want to build a habit of investing while keeping your spending habits in check, SIPs are the way to go. The "best" strategy is to be early and consistent. Set aside a fixed amount a month to SIP so that you are not beholden to market moves and don't try to 'time the market' (it's almost impossible).
Say goodbye to jargon-filled financial content. Get your monthly dose of personal finance frameworks, delivered right to your inbox.
Learn the ABCs of Index funds and how they can help you build long-term wealth in a (relatively) safe manner.
What is an index fund?
An index fund is a mutual fund or an exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover.
Can they be better than active funds?
A significant amount of research has been published that shows active funds not only underperform the market, but those that outperform in one period are unlikely to outperform in subsequent periods (i.e. their returns are due to luck). In fact, over the last five years, 90% of Indian large-cap active funds have underperformed the benchmark index. The simple and clear-cut reason for this is that stock picking is an extremely tough way of building wealth and works on the notion that the market is inherently wrong. But evidence suggests that the market is highly, though not perfectly, efficient as available information is digested rapidly and reflected in market prices and hence stock pickers can’t identify underpriced stocks with regularity.
What are some other advantages of index funds?
Keep an eye on tracking error
Tracking error is defined as the annualized standard deviation of the difference in returns between the Index fund and its target index. To simply put it, tracking error basically lets you know how well the fund mimicked its underlying index. Lower tracking error means the fund did a good job of replicating its index and vice versa. Always check for tracking error before investing in an Index fund. Market regulator SEBI introduced a 2% cap on tracking error (TE) for passive funds via a circular earlier this year.
So there you go, you've now learned ABCs of Index Funds. As Index funds track portfolios composed of many stocks, investors benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk. While any individual stock may see its price drop steeply, if it is just a relatively small component of a larger index, it would not be as damaging.
.png)
Take a quick look at how asset classes across India and the globe fared.
Rampant inflation, higher commodity prices, geopolitical tensions, and worries about an impending recession drove global markets lower in the first half of 2022. However, July has bucked that trend, both in India and globally. In India, almost all sectors regained momentum; banks, metals, and consumer stocks witnessed the largest gains.
Equities: Come Back of the Bulls
The Nifty 50, an index of the 50 largest Indian stocks by market cap and a broad gauge of the market, recorded its best July in over 20years. More than half the stocks in the index rose by over 10% in the month. The Nifty 50 itself gained 8.73%. Mid- and small-cap stocks also did well in July. In fact, mid-caps were the best performing segment by cap size, returning~11.5%.
Positive global cues, healthy earnings results, softening commodity prices, and net purchases by Foreign Portfolio Investors (FPIs –these are non-resident investors, including individuals and institutions) boosted markets in India during the month. Net FPI inflows amounted to $618 million inequities – a shift after consecutive months of net sales.
Globally, markets reacted positively to the US Federal Reserve’s eagerly awaited statement on July 2nd. The Fed hiked interest rates another 75bps to keep inflation under tabs, but quelled any fears of a more aggressive than expected hiking schedule. They also noted that they are keeping tabs on how the hikes are impacting the economy and the markets – an indication that they will keep policy flexible to accommodate markets as they work to rein in inflation. US equities, represented by the S&P 500, ended the month up more than 9%.
Debt: Turnaround of Foreign Investments
In July, high-rated corporate debt and government bonds performed well, as investors started pricing in a less aggressive rate hike schedule in both India and the US. In fact, Indian government bonds witnessed their highest monthly purchase by foreign banks in 2.5 years at around $1.87billion.
As we look to the rest of Q2, investors will continue to keep an eye out for: indications on inflation, commodity prices, global economic growth, global monetary policy, and the ever-evolving geopolitical landscape. In India specifically, we still have the remainder of Q1 earnings reports also to come in August.
