December 2022 – welcome to happyness factory

All You Wanted To Know About Mutual Funds

A year back Mutual Funds only brought one thought to peoples’ minds ‘Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Over the past year, Mutual Funds hold much more meaning than the advertisements rattling off the statutory disclaimer. Mutual Funds Sahi Hai! With so much information and mis-selling around us, we need to filter out the noise and understand what Mutual Funds are and the basics of investing in Mutual Funds.

So here is a Beginner’s Guide To Mutual Funds –

At Happyness Factory we help you understand your goals, place them on a timeline and then create a plan to save and invest toward these goals. We also help you evaluate the various investment avenues you can invest your money in depending on your risk appetite and investment horizon.

Planning to retire early? Here are a few tips.

Growing up, college seemed like the ultimate dream. But when we eventually got there, we realized how wrong the movies had it because having to attend lectures religiously and curtailing expenses wasn’t part of that dream! The next dream had us envisioning ourselves as working adults. And why not? All they had to do was go to work and get paid for it. Unfortunately, this bubble burst pretty soon as well because work was hard, hours were long and savings were hard to create. Next came an early retirement dream to enjoy the results of your hard work in the prior years.

Now, retiring as early as 45 seems like an appealing idea but with the ever-rising inflation rates and the unimaginable demands of future generations, is retirement actually as comfortable and fun as we imagine it to be? Or is there a catch or a reality check that we fail to comprehend?

It’s important to remember that the grass is always greener on the other side but, only when one makes an effort to water it. This concept holds extremely true when it comes to retiring early. Many might think it to be a trivial thing to consider but, it is only with a purpose that a plan can become successful. So, once the purpose has been envisioned clearly, the next step towards an early retirement would be to strategize about how to get there.

The first step should be deciding upon the MAGICAL NUMBER, the one that will unbind you from all work-related obligations to let you breathe freely, without compromising on your current lifestyle or aspirations. It should also provide for any contingency in equal measure so as to empower you to leave behind a legacy for your loved ones.

Following the below-mentioned practices can help you set yourself up well for retirement.

1. Setting aside 25 % of your gross income every year

While this amount might seem quite less in the initial years, as your career advances and you reach your retirement age, the small amounts add up considerably. As you will progress in your career and reach your age of retirement, these savings could not only add comfort to your early retirement but, also come in very handy in paying off any sudden liability or unplanned requirement. This doesn’t mean that weekend trips and impulsive buys should stop completely. A few smart choices there as well will award you with inspirational financial freedom. This practice would also serve as a good lesson in planning for your future for the coming generations.

2. House yourself in a budget

There truly would be no point in early retirement if one had to worry about repaying a staggering amount of loans as opposed to having their basic needs like having a roof over their head fulfilled. Thus, it is very important to start EMI planning at the earliest. It is best advised to set aside a minimum of 30% of net income for EMI towards housing loans.

3. Invest in equity from the start, NOT debt

During the start of one’s career, one can afford to take a little risk, be aggressive in investments and opt for the equity option when building an investment portfolio. Of course, when nearing the age of retirement, one could move towards debt. But placing debt strongly before equity without having a profitable investment build-up would mean loads of interest payments being made from day one. thus, This would make early retirement almost impossible to achieve.

4. Prudently monitor all expenses

Human nature is such that it takes very little time to become habituated to a luxury which in turn becomes a necessity. A very apt example here would be the mobile phone. Earlier, it was a luxury before but now, it’s an absolute necessity. One cannot cut back on expenses when they become a necessity. Thus, savings become dependent on one’s growing needs. So, closely monitoring lifestyle choices and chalking out a monthly expenditure plan is imperative to retiring early and leading a comfortable retired life.

5. Invest any inherited asset cautiously

An inherited asset is always a valuable heritage. Thus, if one becomes fortunate enough to receive such an inheritance, prudent investment of it will double the asset value in no time. Hence, instead of blowing up the inheritance, it is always advised to do a quick financial check of it with respect to its market rate and inflation prospects.

What Is The Right Time To Exit Your Mutual Fund Investments?

Investors’ thought process and behaviour while choosing a Mutual Fund to invest in usually mirrors their behaviour while exiting the investment as well. If you have chosen a Mutual Fund because it was doing well in the past few months, then you’ll probably feel like selling it if it under-performs for few months. You will then move to another fund that is currently performing well and continue this vicious circle.

In reality, continuously worrying about market conditions and obsessively tracking your returns is futile. When the market is falling, most investors panic and want to exit their investments to ‘mitigate’ their losses. The trap of wanting to invest in a ‘better performing’ investment avenue is always very tempting but very harmful.

Before panicking in times when the markets aren’t doing well, you must realise that Mutual Funds are actually a portfolio of financial instruments like stocks and bonds. Thus, as they are diverse portfolios with instruments having varying risks and characteristics, a decline in one or a few of the stocks can be offset by other assets within the portfolio that are either steady or increasing in value.

So, while you may want to avoid worrying about market ups and downs, there are few circumstances when you may have to exit your investments due to some pressing needs. These are a few situations in which you should exit your Mutual Fund investment –

When you need the money for a goal: Most of us have tangible goals like buying a house, funding a dream vacation or providing for our child’s education, for which we save money. At least 6-12 months before you need money for a goal you should sell your equity investments and move the funds into a fixed deposit or floating rate fund. If the market is down at this point of time, see if you can utilize any other source of funds for your goal or check whether you can wait for an additional period of time. This decision on whether to ride the downturn a few months before you need money is completely based on your risk tolerance and varies from person to person.
When you need money for a personal emergency: There might be a time when a personal emergency warrants far more money than the money you have saved in your Contingency Fund. At such times when Bonds, PPF and Post Office instruments might have a lock-in, you can look at selling your Mutual Fund investment which is not performing.
When your investment has gone sour: There are periods where your investment will under-perform the broader market. Should you immediately sell at this point? We generally give any fund manager a couple of quarters of under-performance especially if he has a consistent track record of delivering risk-adjusted returns. Check out the reason for under-performance whether it’s due to high concentration to few sectors, or a fund manager change or bad market timing etc. Generally, when a fund does too well, there is a lot of money that flows into it and hence you might see some under-performance in the funds’ performance due to excess cash in its portfolio. However, if there is a change in the fundamental attribute of the scheme and it does not match the reason you invested in the fund, you could consider exiting it in consultation with your Financial Coach.
When you need to re-balance your portfolio: Asset Allocation is one of the key decisions that you must make when it comes to your money and studies have proved that Asset Allocation accounts for almost 91% of your investment performance. Suppose you decide on an exposure of 60% Equity and 40% Debt, but because of the bullish market conditions, your equity exposure has gone up to 80%, then to bring back the portfolio to its original allocation, you would need to sell Equity and buy Debt. In such cases you can shift from an Equity Mutual Fund to a Debt Mutual Fund also.

This is where consulting a good Financial Coach will help and they will not only help you with your ideal Asset Allocation but will also review your portfolio at least once a year, to ensure it is on track with your goals and matches your risk profile.

Thus, as you can see above there are situations where you must exit your investment irrespective of how the market is performing. However, continuously panicking when the markets go down and trying to continuously time the market is futile. At Happyness Factory, we believe “It’s not about timing the market, but about your time IN the market”. When you stay invested for a long period of time and focus on achieving your financial goals, these phases of bad performance will not matter.