Loan EMI vs SIP

You all must be paying home loan EMI for your dream home. It pinches a lot. Ever thought of a way to get all the principal and interest back.
Is it possible. 

Home loan - EMI 

How?

If interested, read on...

Invest 10% extra of your Home Loan's EMI in mutual fund Equity SIP and all your home loan principal and interest will recovered with profit in 20 years.

Example: For Home Loan of 20 Lac for 20 Years with ROI 10.50%EMI will be Rs. 19,968.

In 20 Years one will pay total towards HL Rs. 47,92,930.
Interest: 27,92,930 &
Principal: 20 Lac

For SIP of 2000 for 20 Years with 20.4% expected return, Fund Value will be 67,18,375

(SENSEX has given avg return 20.4% in Last 36 years from 1979 to 2015)

Thus you get back all your principal and interest back and plus earn a cool profit of Rs. 19,25,455.

Risk & Return

At least 10 types of investment risk exist, and there's no way to eliminate all of them. Playing it safe can be risky too, however. So the question isn't whether to take a risk, but what kind to take.

Risk tolerance varies from person to person and can change over time with changes in your personal and financial circumstances. You need to assess your risk profile by evaluating whether you consider yourself to be conservative, moderate or aggressive in your approach to investing.

Types of investment risk

Of the many kinds of investment risk, most investors only worry about one: the risk of losing money. With all the media hype about financial markets and the ease of checking on your returns, it's easy to see why investors can become fixated on market swings.

Market risk.Market risk is the risk of losing money when the financial markets go down. When investors think of losing money, they're thinking about volatility. Volatility can be especially uncomfortable when prices fall steeply or remain down for a long time.

There are 3 strategies for combatting market risk: diversification, asset allocation and rupee-cost averaging.

Inflation risk. Inflation is a loss in the value of what a rupee will buy. And the fact that you can't see inflation eroding your principal makes it all the more dangerous.

For long-term goals such as retirement or your child's college education, your biggest risk may be inflation. If your money doesn't grow enough, you won t be able to stay ahead of inflation. If you are conservative and solely select investments whose primary objective is to preserve rather than grow capital, you are especially at risk.

The main strategy for combatting inflation risk is to include stocks in your portfolio, which means accepting some volatility. Growth and volatility go hand in hand—you can't have one without the other. Falling short of your target for a long-term goal can be worse than living through market ups and downs.

Financial professionals see risk differently

Mutual fund managers, on the other hand, look at risk more broadly. To them, risk is more about the factors that contribute to volatility, such as:

Business risk. Anything that can harm a company's profitability, from poor management to obsolete products, can be called a business risk.

Credit risk. When bond issuers fail to make their promised interest payments or don't repay principal when it comes due, investors are experiencing credit risk.

Interest rate risk. Rising interest rates are bad news for fixed-income investments. Interest rate risk measures how sensitive an investment's price is to interest rate fluctuations.

Currency risk. The possibility that international investments will suffer because the rupee (or dollar depending on the fund) gains strength against the currencies of other countries is known as currency risk.

Country risk. Political instability, financial woes and other problems that weaken a country's economy can spell trouble for money managers who invest there.

Why do people take investment risks?

Often called the risk-return tradeoff, investors accept greater investment risk because they are seeking higher returns. If you wish to reduce risk, you must be willing to accept lower returns. You just can't get a high return from a low-risk investment.

How much risk can you accept?

The amount of investment risk you can tolerate is a personal matter. If investment risk worries won't let you get a good night's sleep, you may have taken on more risk than you can live with.

Your investment advisor can help you develop realistic expectations of risk-adjusted returns by discussing with you the risks and rewards of each of your investments while matching your goals and objectives with appropriate mutual funds.

Mutual funds can help you reduce risk

Mutual funds have experienced and skilled professionals who determine and monitor risks on an ongoing basis. In addition, various bodies evaluate mutual fund returns by the risks they carry.

Diversification is one of the risk-reducing strategies mentioned above. Mutual funds are an excellent way to diversify your portfolio. Each fund invests in more companies and industries than you could probably own by yourself. The fund managers carefully research the individual companies and industries before adding them to the fund's holdings.

Investment Strategy

Finding the right investment has become quite a challenge. Most of us fall prey to buying the latest top performers and accumulating a few shares of this and that without really considering our financial goals, time frame and tolerance for risk.

Whether you are planning for your individual retirement, investing to meet the expenses of your child's higher education, or simply building cash reserves, it is important to match your financial goals with a mix of assets that may help you meet those goals.

To build a successful investment strategy you should carefully structure your plan to achieve your goals without taking more risk than you can afford or are comfortable with. You also need to consider how much time you have to reach your various goals.

What financial goals do you want to achieve?

The first step is to define your financial goals. Your choice of investments should always be driven by what you want your money to do for you, and when. You may want your investments to fill specific needs such as buying a house or a car, paying children's education costs or simply building a comfortable retirement nest egg. Your goals may be more general—like building cash reserves or accumulating wealth. Either way, spending time to determine your financial goals will help you choose the most appropriate investments.

When do you hope to reach them?

The next step is to identify the approximate time frame within which you wish to achieve the goals you have listed. For example, do you aim to buy a house in five years, or retire in the next twenty years? Setting time frames for your goals is critical.

Different time frames require different investment strategies. The sooner you need to spend the money now invested, the greater is the need to invest for principal stability and liquidity. Conversely, the longer you can leave your money invested, the less you need to worry about short-term price fluctuations and the more you can focus on earning a high return over time.

Risk, return and timing are all related. Generally, the riskier an investment, the higher its potential return over time and the more suitable it is for an investor with a long time frame.

How much money will you need to invest to achieve your goal?

Most of us fail to take into account inflation and taxes. Therefore, it would be advisable to spend some time and take into consideration, the future cost of the goal. Can you achieve your goals with amounts that you have already invested?

How much risk can you afford to take?

Each and every individual has a personal tolerance for risk and in order to set an investment course that you will be comfortable with—and will not abandon prematurely—you need to think about your willingness to accept fluctuations in the value of your investments.

As you assess your risk tolerance, you will need to consider how soon you need to reach every investment goal. Longer-term goals allow you to pursue more aggressive and potentially more rewarding strategies because the investment has time to recover from market setbacks.

Financial goals that need to be met sooner rather than later call for lower or moderate risk approaches. Whatever the investment profile may be, one of the best ways to reduce overall risk is to diversify your investments.

Do you need to rethink your investments periodically?

No single asset class (stocks, bonds, or money market instruments) is appropriate for all of your goals. At any given point in your life, you will probably want to keep part of your money secure and accessible, part invested for income and part invested for growth. But the proportions will change as you prepare for and achieve successive investment objectives.

It is a good idea to review your goals and investments once a year, keeping in mind the objectives each time a new investment is made. As your circumstances change, so will your investing strategy.

Choosing Investments

Before you choose your investments, consider your financial goals. You may have a long-term goal in mind like retirement, or you may have something near-term in mind, like buying a new car.

What are your investment options?

Mutual funds invest primarily in three types of securities: stocks, bonds and cash-like securities. Each has a place in your investment portfolio. You'll use more of one and less of another depending on your financial goal and your answers to 3 questions:

• Is the date you need the money flexible or fixed?
• Will you invest a lump sum or save periodically?
• How much volatility can you handle?

Let's look at what stocks, bonds and cash-like securities are, and how they can fit into your portfolio,

Stocks and stock funds

When a company needs to grow or expand, it may sell part of its ownership to the public in the form of shares (stock). In exchange for the money received from the sale, the company gives shareholders a portion of its future profits, as well as a measure of its decision-making power. When a mutual fund buys stocks, the fund's shareholders become part owners of the companies that issued those stocks.

Stock prices can change greatly from day to day, depending on the supply and demand for the stock. If many investors want to buy the stock, the price may go up. If fewer investors are interested in buying the stock, the price may go down.

Not all stock funds are alike. A stock fund's risk and return depend on the types of companies it buys. Pure growth funds buy companies that are expected to grow rapidly. These companies tend to use their profits to finance future growth rather than paying them out as dividends. Other stock funds invest more conservatively, favouring large, established companies that pay reliable dividends which provide income that can reduce the fund's volatility.

Benefits of investing for growth. People invest in stock funds because they hope their investment will have grown substantially when they finally sell it. Over the long term, stock funds have outperformed bond funds and money market funds and have been the best hedge against inflation.

In order to enjoy the benefits of investing in stock funds, you should maintain a long-term view. While stocks have produced the greatest returns over time, stock prices fluctuate, sometimes widely.

Do stock funds make sense for you? That depends on your answers to the 3 questions we posed before. If your time frame is flexible, you might be able to wait out any temporary downward price movements in the value of your stock fund. On the other hand, if your time frame is fixed, and especially if it's short, volatile investments such as stock funds can be risky.

While volatility is not of great concern to the average long term, buy-and-hold investor, it can be worrisome to people who check fund prices daily and can't get a good night's sleep when a stock fund is losing value. Using rupee-cost averaging rather than a lump-sum approach to buying and selling investments helps ameliorate the average person's discomfort.

Bonds and fixed-income funds

A bond is a negotiable IOU, or debt security, issued by a corporation, government or government agency. When investors buy a bond, they're lending a certain sum of money (principal) to the bond issuer for a specified time period (term).

In return, the issuer promises to:

• Make regular interest payments during the term at a rate set when the bond is issued.
• Repay the face value of the bond on the maturity date.

About maturity. A bond's maturity indicates when its issuer is required to repay the principal. Bonds are classified in 3 general maturity ranges:

• Short-term—usually less than 3 years
• Intermediate-term—between 3 and 10 years
• Long-term—greater than 10 years

In general, the longer the maturity, the higher the bond's interest rate. This is to compensate you for the risk of tying up your money at a fixed-interest rate for a longer period of time.

How interest rates affect prices. Between the time you buy a bond or bond fund and the time you sell it the value of your principal will fluctuate. Generally, when interest rates go up, bond prices move lower-and when they move down, bond prices move higher. As you might expect, the best time to invest in bonds generally is when interest rates are declining. Typically, the longer a bond's maturity, the higher the interest-rate risk, or the more sensitive its price will be to interest rate changes.

Can you lose money investing in bonds? People mistakenly assume that the word "fixed-income" means they can't lose money owning a bond. But, the interest rate that the issuer pays is the only part of the investment that is "fixed." The value of your principal, on the other hand, has the ability to increase or decrease depending on whether interests rates move up or down.

It's different with bond funds. The fund typically doesn't hold all the bonds until they mature. When you buy a bond fund, you get diversification because the fund owns many bonds, not just one. This diversification helps protect you from credit risk—the risk that the issuer fails to make timely interest payments or to repay principal. However, this means that the income you receive from the fund fluctuates along with your principal, as the fund buys and sells bonds paying different rates of interest.

Types of bonds. There are many types of fixed-income securities to choose from. Funds will often emphasize one type or another to help investors meet their investment objectives.

• Government securities issued by the Indian government are considered the most credit worthy of all debt instruments-since they are backed by the full faith and credit of the government. Treasury bonds, bills and notes have a wide range of maturities.
• Corporate bonds are issued by companies in order to finance projects ranging from building a new plant to modernising at a current location. Risk and return vary, depending on the financial strength of a corporation. Bonds issued by corporations with lower credit quality generally pay a higher rate of interest to compensate investors for the higher repayment risk.
• State government bonds are issued by local governments in order to finance a variety of projects, ranging from water systems and public schools, to hospitals and police protection. State government bonds are generally considered to be relatively low risk investments, second only to securities issued by the federal government and its agencies. However, within state government bonds themselves, there is a wide range of credit quality.

These bonds are exempt from federal taxes and, in the state of issue, often free of state and local income tax as well. Before choosing a tax-free fund, you should consider the equivalent taxable yield-what a taxable investment would have to yield before taxes to equal the tax-free yield of a particular tax-free bond investment.

Do bond funds make sense for you. Nearly all investors can benefit from having a portion of their portfolio allocated to bonds. Even for investors whose primary objective is long-term growth, bonds can play an important role in building a well-diversified portfolio.

Let's go back to the questions we posed earlier. First is your time frame. Bond funds offer greater potential return than cash-equivalent investments such as money market funds, But they can be riskier than money market funds for people with very short time frames and for those who need to withdraw all their money on a fixed date.

Bond funds provide diversification and can be a key element in your asset allocation strategy to combat the volatility of stocks, While bond prices and returns can fluctuate, over the long haul bond funds have been less volatile than stock funds, For people who are very risk averse, while bond funds lag behind stock funds as an inflation fighter, they are better than cash-equivalent investments are at preserving your purchasing power.

Cash-equivalent investments and money market funds

In many respects, most money market instruments are just short-term versions of bonds. They are short-term, high-quality, fixed-income securities, such as Treasury bills, short-term bank certificates of deposit (CDs), and commercial paper issued by corporations. The average maturity of a money fund's portfolio must be 90 days or less to help protect against interest rate risk. The income money funds provide is generally determined by short-term interest rates.

Do money market funds make sense for you? Money funds provide you with current income and seek to preserve your principal. Because of their stability, money funds are often used for emergency cash reserves or for a very short-term financial goal.

Cash-equivalent investments and money market funds are the least volatile of the investment types we discussed and are therefore ideal for people with extremely low risk tolerance. However, the income from this type of investment is only slightly higher than interest rates offered by banks on savings accounts making them poor choices to combat the damage inflation inflicts on your purchasing power.

Risk and reward go hand-in-hand

When choosing investments, remember the tradeoff between risk and return. The higher the return you seek, the more risk you'll need to accept. There's no such thing as a low risk-high return investment.

As always, you will want to consult your financial advisor about how fixed income funds could play a role your investment strategy.

   

Importance of An Advisor

With the variety of investment options available today, we suggest that you seek guidance from a financial advisor. Nearly every investment entails special risks that should be discussed with an experienced professional. Your investment goals are unique, and an advisor can help you find the right fund to match your needs.

When taking a full-service approach to investing, you put a professional's training, knowledge, expertise and resources to work for you. Consider these benefits:

• Potential access to important investment news when it is most valuable
• Professional advice that may help improve your investment results
• Expert help in determining the best way to allocate your assets
• A trained and objective professional who can help you avoid panic selling

You may be thinking that the Internet and financial planning software can cater to all these needs, but although they are convenient tools, they cannot equal the personal attention and experience of a professional. He or she can make that difference in helping you manage your financial future.

What to Expect From a Financial Advisor

The key for mutual fund investors is to define and recognise the value of professional financial services, and then insist on getting that value. When you pay a sales charge or a fee, what can you expect a professional to do for you? Your advisor should at least:

• Understand your needs and help you formulate long-term investment goals and objectives.
  Before making specific recommendations, your advisor should try to gain a whole picture of your past experience, lifestyle and goals, as well as your other investments and current financial situation. When are you planning to retire, for example? Do you have life insurance? Do you own real estate? How secure is your job?



• Help you develop realistic expectations by discussing the risks and rewards of each investment.Every investment choice has its strengths and weaknesses, and you should never feel less than fully informed. When you ask questions, or have doubts, you should expect your financial advisor to answer honestly, and help you develop a strategy that is both realistic and comfortable for you.



• Match your goals and objectives with appropriate mutual funds.
  You should expect your advisor to make clear and specific recommendations, and explain the reasons behind them in terms you can understand. Of course, the advisor should be confident and well informed about the management and portfolio strategies of any mutual funds recommended.



• Continually monitor your portfolio and help you interpret performance.
  Your advisor cannot influence or predict a fund's results. However, he or she should discuss results with you and help you judge your progress. You should feel that you can always ask your advisor, "How am I doing?"



• Conduct regular reviews to ensure that your strategy continues to provide optimal results for you.
  One of the most valuable services your advisor can provide is to help you "stay on course" with your investment program. But "staying on course" long term does not necessarily mean staying put. Expect your financial advisor to work with you to adjust your portfolio in response to any significant change in your lifestyle, priorities, assets or responsibilities.

These are the basic services that investors should expect from their financial advisors. Beyond the basics, many investors could use even more specialised assistance, like advice on retirement plan distribution options, setting up and servicing retirement plans for small businesses and self-employed individuals, developing tax-advantaged strategies for children's college education, insurance, estate, and trust planning; and year-end mutual fund tax advice. If you need specialised services, there are many financial advisors who can help you obtain the help you need.