Personal finance isn't the most interesting topic to most people but it should be one of the most important ones. To anyone working a job in the private sector in India, your retirement corpus is more or less your responsibility, and that's where an understanding of investments, asset classes, risk and return is important.
There's a few principles for building an investment corpus
- Risk Appetite
- Age Appropriateness
Diversification is all about not putting ones eggs in one basket. Different asset classes behave differently - the stock market might fall one year but bonds might be up and investments within an asset class can also vary in their respective performance - For might go up in a year that Apple goes down. Since none of us is omniscient, we need to diversify or investment portfolio over a variety of asset classes and assets
Risk appetite is all about how much one is willing to risk of their capital in pursuit of superior returns. The higher the returns you seek, the higher the risk you must be willing to take. Risk just means how volatile your returns can be - how much they are expected to move positively or negatively using historical precedent.
Age appropriateness is about skewing ones portfolio towards more risky assets when young and slowly increasing the proportion of safer assets as one ages.
When I was younger, I bought stocks. I like researching them, picking winners, watching my portfolio grow and all that, but in truth I was an average stock picker at best. These days, I primarily invest in equity mutual funds. I have a long term horizon and am willing to take the risk that comes with the stock market, and things have worked out well so far.
In sum, I thought I knew what I was doing, and I've been doing that for a while.
But I was wrong.
In India, the are two ways of investing in mutual funds - directly from the AMC or through a broker. I'd been using the latter assuming that there's an upfront incentive I'd lose out on but gain the ability to buy across fund houses and track my portfolio in one place. I'm trading away a small upfront amount for the convenience, and this was ok by me.
So I was really surprised when a good friend pointed out that the broker also gets around 1% of the investment value every year, which is an insane amount of money to give away when looking at a long term horizon. Over a period of time, the compounding of this additional fees means a hell of lot of money being thrown away for zero benefit beyond the convenience.
How do we make sure this is the case? Thankfully, the government helps. Financial reforms and transparency have been moving forward slowly and steadily over the years here, and its one of those small steps that does the job. The two depositories NSDL and CSDL send out consolidated account statements (CAS) that neatly list out what you own, where you own it, how your corpus has been growing or shrinking, etc. They do it across brokers, across asset classes, across demat accounts and even track non-dematerialized assets such as mutual funds or post office deposits. Lately, they've also been listing out the fees that you pay out on your assets. If you haven't opened your CAS in a while, do so, and be in for a nasty surprise.
Once I saw this, I've been on a mad rush to convert all my non-direct purchases to direct purchases. In India, Equity funds have zero capital gains tax when held longer than a year, so I'm using that to lock in my profits, switch out of underperforming funds and plan out my portfolio allocation. Basically, I'm doing a lot of highly overdue spring cleaning at the same time as ensuring I save a decent chunk of money.