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  • The Biggest Investment Mistake You Need To Avoid

    There are so many investment mistakes. But which is THE BIGGEST investment mistake one need to avoid? Lack of diversification, looking for instant results, not having a plan, not assessing risk level, timing the market, following the crowd…… Though there are many common mistakes investors around the world make, there is one mistake which is the father of all other mistakes.

    As far as investment is considered there are some investment principles and there are some investment techniques. What is the difference

    between principles and techniques?

    Principles are very basic and will never change. Principles are guidelines. Principles are simple at the same time very authentic. The more closely investment plans are aligned with investment principles, the more accurate and functional they will be.

    Principles are not techniques. A technique that works in one circumstance will not necessarily work in another. While investment techniques are situational specific, investment principles are deep, fundamental truths that have universal application. When these principles are internalized into habits, they empower investors to create a wide variety of investment techniques to deal with different situations. Techniques will enhance the results of the principle.

    But always remember a technique or tool need to be in line with the basic principles. If we use a technique which overlooks a basic principle, then definitely we will have a very bad hit. So THE BIGGEST investment mistake would be falling prey for cheap investment techniques which are not in alignment with the basic investment principles.

    Communication is a powerful technique. Accounting is a good tool. But if we use these techniques and tools as a short cut and not in line with the basic principles, what will happen? We know what happened to Nithyananda and Satyam Computers. You may seem to succeed, but eventually it is not possible to sustain that success forever.

    Similarly investors need to be very careful about cheap investment techniques which are not in line with the investment principles.. They seem to be attractive, flashy, trendy, sexy but not authentic. They all look like the "get rich quick" scheme promising "wealth without work." These kinds of investment techniques are all illusory and deceptive.

    Take for example the Risk-Return Tradeoff Principle. This is a very basic and profound investment principle. Low level of risk is associated with low potential returns, whereas high level of risk is associated with high potential returns. So as to generate high returns one need to tolerate high risks. If you are comfortable only with low risks, you can expect only low returns.

    No one can defy this basic principle. A scheme cannot deliver high returns with low risk. There were no such schemes in the past. There are no such schemes in the present. There will not be such schemes in the future too.

    Finance company deposits which assured high interest rates have defaulted. One of the latest examples would be the
    ponzi scheme by Madoff.

    Whenever you hear about such schemes with low risks and high returns, you understand it is an illusion. It is better to ask more questions and get it clarified, instead of making assumptions.

    So the biggest investment mistake is to mindlessly following a technique which is against an investment principle. To avoid this biggest investment mistake whenever we come across a scheme or technique, consciously check up whether this scheme or technique is violating any basic investment principle or not.

    The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Plannerof Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

    Jul 03 8:22 AM | Link | Comment!
  • Portfolio Management Scheme: A Unique Investment Opportunity

    What is Portfolio Management Scheme?

    Portfolio management scheme popularly known as PMS are specialized investment vehicle for lump sum investments. The portfolio manager invests the money in shares and other securities and manages the portfolio on behalf of the client.

    One can invest fresh money in Portfolio Management Scheme and the portfolio manager will construct a portfolio by deploying that money. Also one can transfer his existing share portfolio to the Portfolio Management Scheme provider. In that case, the portfolio manager will revamp the portfolio in sync with his investment philosophy and strategy.

    Once the Portfolio Management Scheme account is opened, the client will be given with a web access to his portfolio. The client can look at where the portfolio manager is investing client's money. Also one will be able to generate reports like Investment Summary, Portfolio Transaction List, Performance Analysis, Portfolio Statement and Quarterly capital gain report.

    As a result, Portfolio Management Scheme relieves investors from all the administrative hassles of investments.

    Portfolio Management Scheme Vs Direct Stock Market investment:

    One can directly invest in stock market. Then what is the advantage of investing in the stock market through a Portfolio Management Scheme. Investing in share market demands knowledge, right mindset, time, and continuous monitoring. It is difficult for an individual investor to meet all these demands. But a Portfolio Management Scheme meets these demands easily. The Portfolio Management Scheme will be managed by an experienced professional. It saves the time and effort of the individual investors. Hence it is advisable to outsource the stock market investment to a sound Portfolio Management Scheme operator instead of managing it on our own.

    Portfolio Management Scheme VS Mutual Funds:

    Mutual fund is also a good investment vehicle. It should also form part of your total equity investment. But mutual funds are mass products. So they will be conservative by nature. As per SEBI regulation, mutual funds have some investment restrictions. There is a maximum limit on the percentage of amount invested in an individual stock. Also there is some maximum cap on the exposure in a particular sector.

    Once the fund manager reaches the maximum limit prescribed by SEBI, he is forced to invest in some other stock or some other sector. That is why we see a large number of stocks in a mutual fund portfolio. Where as a Portfolio Management Scheme will invest in 15 to 20 stocks. This concentration makes it more attractive and aggressive. Managing a 25 lakhs Portfolio Management Scheme portfolio will be more flexible when compared to managing a 2000 crores mutual fund portfolio.

    Portfolio Management Schemes relatively have more flexibility to move in and out of cash as and when required depending on the stock market outlook.

    Basically the conservative portion of your equity investment can go into mutual funds. The aggressive portion can go into Portfolio Management Scheme.

    The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://holisticinvestment.in/Best-Portfolio-Management-Scheme) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

    Jul 02 12:50 AM | Link | Comment!
  • Real Estate Investments Made Simple:

    Gold and Real estate are very traditional investment avenues. Gold has evolved from its traditional investing and found its place in the modern sophisticated investment world via Gold ETFs. Similarly Real estate is also emerging as an investor friendly avenue with less hassle via PMS route or private equity route. Have you ever thought of investing in real estate will one day be as simple as investing in mutual funds? If no please read on….

    Real Estate as an Investment:

    Buying a dream house or flat to reside ourselves is basically not a real estate investment. Buying real estate with a view to generate income and capital appreciation is considered as Real Estate investments. Real Estate investments can be further classified into residential, farm house, commercial, retail, leisure. Leisure is a relaxation place where one can spend their free time or vacation.

    Depends upon his/her risk tolerance and time horizon one can invest in real estate at different risk levels. It can be at the time of converting a rural land to urban land, or at the time of building development stage or in already developed city area.

    Real Estate and Risk:

    Most often investors assume real estate prices will not fall down and they only go up year after year. It is not so. During the mid 2009 some of the real estate investments were quoting below 30% to 40% from their 2007 prices. Real Estate investments are also prone for price fluctuations.

    Real estate Vs Stock market:

    Real Estate is a complex and complicated investment when compared to stock market.

    Non-transparent: There is no transparency in the price. It is not easy for a buyer or seller of real estate to identify the last transacted price in the same locality. There is no price discovery mechanism.

    Illiquid Asset: Selling a real estate is a time consuming process. It is not liquidable easily. There is no organized market for the buyers and sellers to meet.

    Impact Cost: Stamp duty and registration charges are really very heavy when compared to the other investment products.

    No Regulator: There is no regulator for the real estate participants and intermediaries. Anyone can become a builder. Technical qualification is not mandatory. Also anyone can become a real estate intermediary or advisor. There is no certification or training to be completed before practicing. As there is no qualification requirement for participants as well as the intermediaries, it is very difficult to see best business practices.

    Real Estate hassles:

    The other hassles with reference to real estate investment are documentation, maintaining the asset without any encumbrances, and genuineness of the title deed.

    There are some practical problems with diversification. Normally an investor invests in a real estate in his own locality. It is very rare to find someone in Chennai investing in the real estate properties located at Mumbai, Delhi or Kolkata. Affordability also limits diversification. An investor may not be able to diversify his investments across various cities with Rs.25 lacs or 50 lacs.

    It may not be possible for an individual investor to buy a land and develop a viable project in that land and sell it in the market. Managing the project development need some kind of expertise. Even if an individual is able to do it, he will be doing it in his limited ways and means.

    Is there a solution for this? Of late yes.

    There are some collective investment vehicles. These investment vehicles will be promoted by an investment management company. The investment management companies collect money from investors. Being professionals, they will identify good projects and do joint venture with the project developers. They will be able to diversify across various cities as well as various types of real estate investments such as housing, commercial, hospitality and the like. These investment management companies charge a reasonable management fees.

    At times they collect money via PMS route and at times via private equity route. The minimum investment ranges from 10 lacs to 25 lacs. This amount needs to be invested over a period of 3 years. That is they will collect money from investors in 4 or 5 installments. After 3rd year whenever they exit from a project they will repay the principal employed in the project as well as the profit generated out of that project. End of 6th year or 7th year, the investment management company will exit from all the projects.

    The advantages of this collective investment vehicle are

    · One can invest into real estate without any hassles. All the hassles will be managed by the professional investment management companies.

    · One can invest in various real estate projects at a time.

    · One can geographically diversify his investments across India.

    · One will be able to apportion his total investment into small sums in large projects like township development, Technology Park, industrial estate, health city…

    · Cost advantage because of economies of large scale operation

    This is really an investor friendly investment vehicle. Apart from the regular stocks, mutual funds and fixed deposit investments investors can consider investing in these real estate products also. This will give better diversification to your overall portfolio. Also Investors need to be careful in choosing such investment options. Background of the investment management company and their transparency levels are more important. Investors can seek the advice of the professional financial planners before investing.

    This investment vehicle is in its primitive form only. It still needs to go a long way. As of now there are only a very few companies in India which specializes in promoting collective real estate investment products. But in a few years time these kinds of products will be available from various investment management companies and in different varieties like our present mutual fund schemes.

    The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (http://holisticinvestment.in/resale-property) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

    Jul 02 12:48 AM | Link | Comment!
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