5 things keep in Mind Before Investing

Draw a Personal Financial Roadmap
    The first step to investing is to take a honest look of your finances & figuring out your goals for the future.

Evaluate Comfort zone on taking Risks
    All investment involve some kind of risk. It important to read all the offer documents carefully.

Consider an Appropriate Mix of Investments
    Choosing to invest in diverse asset  categories reduces your risk of losing money in your overall portfolio.

Create Emergency Funds
    Smart Investors also put enough money in saving products to cover any emergencies like medial or unemployment.

Avoid Circumstances that leads to Frauds
    Scams are inevitable. Always speak to trusted expert, friends & family members before investing under any scheme.

How to Calculate Return on Investment (RoI)?

After looking at the pros and cons of the investment plan, we finally decide to go ahead with “investing” and start to have an annual chart to ensure we are on the “right track of our smart investment plan”. But after all this, do we really know to calculate the returns on our investment? I mean the “correct way”? 

Before getting into the calculation methods and formulae, let us first understand the meaning of investment returns.

What is “Returns on investment”?
Returns on Investment (ROI) is the loss or gain of the investment asset for a particular period of time which is usually calculated in percentage. “More risk, greater the potential for higher return or loss”.
Two basic Components in ROI are:
1. Appreciation / Depreciation (increase/decrease in the investment value)
2. Interests and Dividends (generated income by the investment)

Is it important to know how to find the ROI?
Yes. It is very much important for you to know how to find the ROI for the following reasons:
          You need to “determine the ROI” to be sure that you are on the right track and make the required adjustments (when necessary)
You need to “estimate the ROI” to help you choose the right investment plans (more than one)

Different types of returns
There are different types of returns on investment which are mostly categorized by the term period.
1. Absolute return
2. Simple annualized return
3. Average Annual return (AAR)
4. Compound Annual growth rate (CAGR)

1. Absolute return

• It is the percentage increase or decrease an investment achieves over a period of time.

Absolute return = ((gain in investment – cost in investment) / (cost in investment))*100

Example: If your investment on an asset in May 2013 is $25,000  and you sold the same in July 2016 at the cost of Rs. $56,000, then your absolute returns in this case would be:

Absolute returns = ((56,000-25,000)/25,000)*100 = 124%.

This is the simplest method to calculate returns. But this does not consider the time period of the investment.

2. Simple Annualized Return

• It is the percentage increase or decrease an investment achieves for a year or more (specific period).

Simple Annualized Return = Absolute returns / time period

Example: You have made an investment for $2,00,000 which has become $2,50,000 over three years, then your simple annualized return would be:
Absolute return = ((2,50,000-2,00,000)/2,00,00)*100= 25%

Simple annualized return = 25 / 3 = 8.33%

3. Average Annual Return

• The arithmetic mean of a series of ‘ROI returns’ forms the ‘average annual return’ in percentage.

Average Annual Return = (Return in period 1 + Return in period 2 +.....+Return in Nth period) / Number of period (n)

Example: Let us assume you have investment records from 2016 – 2019 as follows:
Year       Annual return
2016               25%
2017               20%
2018               15%
2019               28%

Average Annual Return (2016-2019) = (25+20+15+28)/4 = 22%

This is used for determine the ROI but cannot be considered as common formula for analysis.

4. Compound Annual Growth Rate (CAGR)

• It is the growth rate of the investment year over year for a specified period of time. This helps determine the annual growth rate on an investment whose value has fluctuated from one time period to the next.

Compound Annual Growth Rate = ((End Value / Start Value)^(1/Periods)-1)

Example: Let us assume that your investment of 10,000 in May 2011 became $ 25,000 by May 2018 and by May 2019, it became $15,000; then your CAGR would be:

CAGR = ((15,000/10,000)^(1/2))-1= 22.47%

Investors usually compare the CAGR to evaluate how well ones’ stocks or mutual funds have performed against other stocks in peer group or against the market index.

There are many more detailed ways of calculating the ROI such as IRR, XIRR, rolling returns etc.

Worst mistakes to avoid while investing

The basic purpose of the investment is that you gain something from it. Ideally, every time you invest in some seemingly lucrative scheme, you get a good margin of profit. However, this is not possible unless you take the right steps and precautions. Some mistakes can be the reason for you to lose your capital amount.

No proper plan
If you don’t have a proper plan, your investment might go all wrong. You can’t randomly choose investment plans without doing the proper research. First decide on what your goals are for the investment. Then depending on your situation, choose a plan that best suits you and will help you get what you want.

Looking for bargains
While investing in stocks, don’t try to buy a lot of shares whose price has fallen and you expect that you will earn a lot once the price rises. There is usually a reason for stock prices declining and you need to find out about that company’s history and analyze the price movement. You might end up losing a lot of money if the prices drop further.

Not updating your portfolio
While investing in the stock market it is important to keep a constant tab on all your stocks. You need to re-balance your portfolio while doing so. If some stocks have low performance for a long time, sell them off and add more shares from a company that has given you profit. If you put in this effort, you have more to gain. Improper management of your assets will end in you having dud stock. Keep everything in check according to your plan and ultimate goal.

Following unfounded tips
You might hear some people say that a particular scheme, stock, etc. has given them a lot of profit when they invested. Word of mouth is not enough for you to rush into investing your money in such schemes. While it might have worked for them, it is not necessarily the right plan for you. Don’t rely on unreliable sources for tips on something that will affect your finances.

Not starting Early
Some people wait for a long time till they start saving and investing their money. You might think that you can start when you reach a particular age or so. However, a clear study will show that you have the most to gain if you start early. It does not matter how small the amount is to begin with, over time it will grow and you can invest more as you earn more as well.

Looking for quick schemes
Being greedy rarely works out well for anyone. Think carefully before you invest money anywhere. For instance in stocks, trading too much and too often won’t get you faster returns but might work to your disadvantage.

If you avoid these kinds of mistakes, you will see good returns on your investments.

4 mistakes of Retirement Planning

Retirement Planning is not just about how much one needs to save for retirement and where it should be invested. Mistakes in dealing with other related areas can in fact derail otherwise careful retirement planning.

Here are four mistakes that you should avoid while planning your retirement. Some of these relate to other financial goals and working after retirement.

Ignoring other goals

While planning for retirement is critical, do not ignore planning for other goals. “Along with retirement planning, one should also plan for any pending expenses such as kid’s higher education, wedding, etc.
If you do not plan for such goals, you may jeopardize your retirement. “If you don’t plan for other critical goals, you may end up dipping into your retirement corpus to meet them.

Not planning for regular income

Generating regular Income is essential to securing one’s retirement. Gradually withdrawing money from the accumulated corpus may not be the most suitable option. Investing in an annuity can help you earn a regular income. But their annual return is low—around 6.5%—and they are also taxable. However, experts advise people to invest a part of their retirement corpus in an annuity.

No post-retirement planning

Experts say that retirement planning should not stop at the age of retirement. It should include planning for the period after retirement as well. “Planning for the post-retirement phase is critical. Financial requirement is like the three stumps in a game of cricket—liquidity (for contingencies), regular income, and growth of the remaining corpus (so that it lasts longer).

Retreating from all work

Keeping oneself engaged in some activity after retirement is critical. The chance of falling sick is higher, if you suddenly shift to a sedentary lifestyle, say experts. Fighting boredom during retirement can be tough and lead to stress. “Though opportunities are less for senior citizens in India, you can still find some work, and retired people should take it up,