Goodwill Investors’ Education initiative! Goodwill’s Eagle Eyes!

Markets are going up…But are you making money?

You may be literate and even highly educated ! But have you learnt the art ; Science of making money, more money?It’s time to be a “financial-literate”person. Take a free course at Goodwill!

Financial literacy is the understanding and acquiring the necessary skills in metrics to apply financial components like budgeting, investing, borrowing, taxation and personal financial management in everyday life. A person may be highly educated, holding even a Ph.D in arts and science, engineering etc., and get huge salary per month. Does he possess the necessary knowledge and financial acumen to retain and multiply it?

Financial literacy is the understanding and acquiring the necessary skills  to multiply money by applying  financial tools  like budgeting, investing, borrowing, taxation and personal financial management in everyday life.

In India, especially, it is assumed that if a person is “literate,” they automatically are financially literate. Unfortunately, that is not the case. Many adults who earn do not know how to spend their resources efficiently. It is essential to understand how to spend to maintain stability in the longer run.

Financial literacy enables individuals to better their decision-making skills. Often we are told that debt is bad. However, it can be beneficial in some instances. If it can generate an asset that will yield high returns, it is beneficial. Financial literacy covers how to manage personal borrowings efficiently. Some loans like home loans and education loans can be considered good loans. Not paying credit card dues on time and taking loans to live a lifestyle that is not affordable are deemed to be bad loans.

It also helps in reducing stress and anxiety caused by uncertainty. Financial planning is a necessary skill to have in the current times. Setting short-term goals, long-term goals and an emergency corpus in times of need help allocate funds in a structured manner, decreasing stress in unforeseen and unfortunate circumstances.

Setting up financial objectives and goals can also help one understand how to manage their expenses accordingly, thus setting a habit of keeping a check on expenditures. This practice can reduce unnecessary spending. It also provides clarity on how you prioritise your financial goals, which will help optimise your budget in a way that suits your needs with maximum efficiency.

An efficient financial plan can provide stability in the long run. Based on the stage of life, different permutations and combinations of savings and investments can help secure a retirement fund, children’s higher education, marriage, owning a house, and other important life events. Risk-averse people can invest in fixed deposits with banks that offer higher interest rates, debt funds, high-interest savings accounts, etc. For people with higher risk tolerance, invest in equity, stocks, etc.

The lack of this knowledge makes a person “financially illiterate”. The downside of being financially illiterate is the higher probability of making ill-informed decisions. The consequences of these decisions can lead to anywhere from simply losing out on opportunities to becoming victims to predatory loans or spiralling down a debt trap.

It is not difficult to become financially literate, and it is never too late to start. People can learn financial literacy from a young age as well. Involving them in day to day household expenses can imbibe the value of money. Giving pocket money on a weekly or a monthly basis can demonstrate the importance of budgeting.

For adults, it is advisable to begin by referring to different resources exploring topics like money management, savings, and investing for short-term and long-term needs. Besides these, it is also essential to take care of things such as the effective use of credit cards. It is worth exploring financial instruments, as different instruments cater to various long-term and short-term financial goals.

Various newspaper publications cover personal finance. It is a great way to keep track of new investment options and any opportunities. When it comes to financial planning, many financial management apps and financial advisors curate investment plans. The best way to learn financial management and to invest is by doing. Implement the learnings to realise which methods fit best for your ultimate financial objectives

 Mutual funds: Why invest in multi-cap funds now?

Investors fear that the bullish momentum in mid-and small-cap funds could see a reversal for a longer period.

Individuals are increasingly investing in multi-cap funds of mutual funds because of the volatility in the market. Data from Association of Mutual Funds of India (Amfi) show net inflows in multi-cap funds touched Rs 3,569 crore in the month of September, the highest in the equity funds category.

Multi-cap funds invest in diversified stocks of large-cap, mid-cap and small-cap across sectors. These funds capitalize on the opportunities across market caps and generate optimal returns for investors. Last year, the markets regulator changed the guidelines of investments in which multi-cap funds have to invest minimum 25% each in large-cap, mid-cap and small-cap stocks.

This was done to ensure multi-cap schemes hold a diversified portfolio across large-cap, mid-cap, and small-cap companies and make the funds more diversified. Fund houses had to align their portfolios to these new limits by January 31, 2021. Before the new rules kicked in, fund managers of multi-cap funds invested a higher proportion in large-cap funds.

The Securities and Exchange Board of India (Sebi) had also introduced a new category called flexi-cap which has the flexibility in allocation across market caps and there is no restricted limit. This helped fund managers to avoid reshuffling of the multi-cap portfolio and many existing multi-cap funds switched to flexi-cap category. At present, most flexi-cap funds have a higher allocation to large-cap stocks.

Why multi-cap funds now?
Experts say that investors fear that the bullish momentum in mid-and small-cap funds could see a reversal for a longer period. Moreover, most new investors who have started investing in equities in the last 15 months have not seen a meaningful correction in the markets. In fact, since March 24, 2020, when the stock market hit a bottom because of the Covid-19 pandemic, the BSE Mid-cap Index has gained 166% and the BSE Small-cap Index has gained 223%. The 30-share Sensex is up 134% during the same period.

Investors are looking at multi-cap funds because they provide the stability and low volatility of large- cap stocks and higher returns of mid caps and small caps, albeit high volatility. The funds are actively managed and whenever fund managers spot an investment opportunity in mid-cap and small cap segments, the allocation towards them is increased making the funds a high-risk high-return investment proposition. Experts say as multi-cap funds will face higher volatility in the short-term, investors must stay invested for a period of five years and above to gain significant returns.

Should you invest?
In multi-cap funds, fund managers maintain the allocation mandated by Sebi and the rest 25% is dynamically allocated as per the fund house’s proprietary investment model to optimise overweight of large-caps, mid-caps, and small-caps. Typically, the fund managers evaluate the business environment of the company, valuation of the company based on fundamentals and the capability of the management to execute and scale up the business.

Typically, during a bull market multi-cap funds perform well as mid-cap and small-cap stocks generally soar higher than large-cap stocks. However, experts suggest that the decision on investing in a multi-cap fund should be based on the investor’s risk profile, financial goals and investment horizon.

Remember, investors have to pay capital gains tax as the investment will be treated as equity investments. The short-term capital gains tax will be 15% of the gains for a holding period less than one year and 10% for more than a year if gains are more than Rs 1 lakh in a financial year.

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