Strategies of wealth management are some basic fundamentals that everyone should be aware of. The power of intelligent investment in the creation and multiplication of wealth is indisputable. However, many of us are not aware of some basic flaws that every investor might fall prey to. We often treat terms associated with investment strategies as financial jargons meant only for the erudite. But, working knowledge of investment is not hard to gather. Armed with this basic knowledge, we shall be equipped to make sure that we are not losing our hard-earned money.
In this article, we shall explore 8 common mistakes that investors have been making over the years and which should be avoided in order to facilitate long term wealth accumulation.
1. Ignoring Insurance
We cannot emphasize how important it is to have a well-suited insurance policy in place. Insurance policies make sure that the well-being of you and your loved ones are safe-guarded in case of any unforeseen circumstances. It provides you the knowledge that your family will be taken care of, your children will be provided for and all your financial commitments will be honoured even in your absence.
However, I have met many youngsters in their 20s who believe that they are invincible and thus above the purview of insurance policies. They forget that it is when you are young that the policies are cheapest and as you grow older, the policies keep getting more expensive. Hence, chances are that by the time you realise the indispensability of insurance policies, you will not be eligible for many of them.
Moreover, as the money in terms of periodic premiums keeps accumulating, you are privy to a bank of forced savings that have very low-risk factors associated with them. Moreover, insurance premiums are also eligible for tax benefits. Thus, when the insurance term matures, you have access to funds that will supplement your retirement plans.
2. Confusing Between Investing and Trading
Although these terms are often used interchangeably by young investors, there is a world of difference between investing and trading. If one is not completely aware of the ropes of the market, chances are they expose themselves to financial losses by trading with the wrong stocks. However, a diversified portfolio with equities that have a proven track record will help grow your savings in the long run at a moderate risk quotient.
3. Basing Investments On Ups and Downs Of Stock Market
If there is anything you should know about the stock market, then you should know that it is volatile. Stocks performing big on the first hour of the day might end up losing big as well as the day progresses. Thus, gambling your money away on the ups and downs of the Sensex arrow is never advisable. It is much more prudent to invest in healthy stocks with a proven 5-10 years track that will appreciate your wealth slowly but steadily.
4. Too Short Of Time Horizon
The golden rule of investment states that the longer your money stays invested, the greater are your returns. Such is the beauty of compounding interest. Thus, if you constantly keep taking out money from your investments, you will never be able to accumulate enough interest. It is due to this reason that most investment vehicles like fixed deposits, provident funds and ELSS mutual funds have a certain minimum lock-in period.
5. Not Starting Early Enough
The old proverb goes-“The early bird catches the worm”. Indeed, it is never too early to start investing. In fact, the earlier you start investing, the higher you end up gaining in terms of returns due to the magic of compound interest. Let us illustrate this phenomenon with an example.
Mr. A starts investing at the age of 20. He invests Rs X in a scheme that doubles his principal amount in 10 years. Thus at the age of 30, his investment grows to 2X, at the age of 40, it grows to 4X. At the age of 50, he has 8X and he has 16X when he is ready for retirement.
Now, let us consider B starts investing when he is 30. He invests Rs X in the same scheme as A. But when he turns 60, he ends up with only 8X amount. He has lost eight times his initial investment by starting 10 years later. You get the picture, right?
6. Not Having A Systematic Investment Plan
By investing small amounts regularly in a SIP, you gain the following advantages:
- Since you do not have to come up with a lump sum amount to invest, you don’t feel a financial burden or the inability to honour prior commitments
- You become a more disciplined investor
Trust us when we say that if you do not have a Systematic Investment Plan, you are losing out on your money.
7. Complicating Things
Many investors have the habit of dabbling in different equities every year. This makes it all the more difficult to stay top on your portfolio and make informed decisions. Instead, a well-chosen basket of consistent stocks in your portfolio serves the purpose of wealth multiplication quite well. And it keeps things simple.
8. Working With the Wrong Advisor
Of all the investment blunders that you might perform, this is perhaps the gravest. A wrong investment advisor will result in more than just financial losses. Thus it is very important to study the past performance of a financial advisor before choosing one. Moreover, keeping an eye on your portfolio is advised and with good reason.
Investment strategies might be a dime a dozen. The onus of choosing one that works for you lies with no one else. However, with a little amount of research and determination, carving out the path to glory is not that difficult as long as you are avoiding the pitfalls that we have outlined above. Start early, keep investing small amounts in regular intervals and watch your wealth grow. You may download the Fintoo app to start your investment now.
There are a few things you should know about before investing in any mutual funds. AUM, which stands for Assets Under Management, is one of those things. AUM is one of those key points that you should look into before investing in a mutual fund by any finance-based establishment apart from the expense ratio, their overall reputation and other basic requirements.
Say you are planning to invest in some specific mutual fund. There will always be other people who have invested money in it as well. When all the money invested by everybody is added up, the number you arrive at will be the Assets Under Management. This article will walk you through all the aspects of AUM to make you choose wisely if you are planning to invest in mutual funds.
Assets Under Management
Assets Under Management are equal to the complete value of capital or assets in the market that the mutual fund has. The manager of the fund is responsible for managing the assets and taking wise investment decisions on behalf of the investors. It is a measure of the expanse and professional credibility of the establishment.
AUMs can also be used as a measure of comparison while choosing a mutual fund to invest in. You can easily look up the AUM through various timelines to compare different fund houses and their mutual funds. It also includes returns gained through the mutual funds themselves. Based on the investment mandate, the fund manager can choose to invest further, or distribute the dividends among the investors.
The AUM value depends a lot on market fluctuations. The value is proportionally based on the profits gained and losses incurred, which also determines the mutual fund fee. Lesser the value, lower the fees. Different fund houses generally use various methods to fix the value of the fund fee.
Importance Of Considering AUMs Before Investing
Most people often look at the mutual fund company’s AUM before they consider making an investment in a mutual fund. Needless to say, a higher value attracts more investors. This comes from the sense of having more people put their money and trust in the specific mutual fund. However, apart from the AUM value a few other things should be looked into as well. These are the expense ratio, flexibility and security of the investment mandate and the reputation of the person managing the fund. AUM value is viewed differently when applied to different kinds of funds. Let’s try and understand how that happens.
- EQUITY FUNDS:- More than AUM, what matters here is the fund house’s compliance with the investment mandate and the overall returns. There should be a certain benchmark through any high or low phase in the market. So we see that it all comes down to the fund manager’s skill to gain profitable returns rather than size or popularity.
- a) SMALL-CAP & MID- CAP FUNDS:- Here, you should mostly stick to Systematic Investment Plans (SIPs) and avoid lump-sum investments. This happens because the fund itself becomes a priority shareholder in that company if the AUM grows beyond certain limits. This also limits funds from trading its shares during a market fluctuation.
- b) LARGE-CAP FUNDS:- Investors depend a lot on AUM when it comes to large-cap investment funds. People normally compare the AUM value between two companies offering similar kinds of mutual funds. Other than that, the growth consistency is also compared.
- DEBT FUNDS:- AUM is of utmost importance here. A debt fund that has more capital value can invest through more securities. This can increase fund returns since it reduces the expense ratio. At the same time, having more assets can help the company discuss more reasonable rates with the debt issuers.
Effects of Having High AUM Value on Mutual Funds
Many theories comment differently on the AUM values having positive or ill effects on the mutual fund and the company. A higher AUM value does not ensure a good or a bad performance by the fund. The onus is on the fund manager. If the manager is wise and makes the right investment decisions based on the market trend or situation, he/she might be able to take quick calls on behalf of the investors. Comparing the overall performance of the fund over time is important before you invest.
As mentioned before, different fund houses have various ways of calculating their AUM. A consistency in gains will always ensure a rise in investment. Positive performances attract more investors and newer assets, which leads to a higher AUM, just as a lesser market value will dip the value of the assets. Similarly, if an investor wishes to redeem their share or the fund closes unexpectedly, the AUM will decrease.
AUM and Expense Ratio
Generally, the mutual fund fee depends on the size of the fund in consideration. It is also known as the management fee. It is normally calculated based on the portions of units held by the investors. However, the mutual fund performance bears no direct effect on the fund fees. It mainly includes the charges of the administration and the fund manager’s compensation based on his efforts. The overall annual costs needed to operate mutual funds, is known as the Total Expense Ratio (TER). The Security and Exchange Board of India (SEBI) has instructed that AUMs must always be higher than the TER.
In short, AUM is one of the key points you should look into based on the kind of mutual fund you are planning on investing in. The AUM value says a lot about the mutual fund and the reputation of the company.