Value Averaging in Investing

It has been a long time since I have revisited any financial planning concept. So time for rehashing some basic investment  fundas!

How many really take an active interest in managing their portfolios? People tend to leave it to the fund manager to manage money in case of mutual funds and tend to put any spare cash in the latest fund that is "in" or as chosen by a "financial adviser", else choose a "safe" inflation beating instrument. The more judicious squirrel away a little bit systematically in "safe investments" and do a bit of active portfolio management while the experts look for gains in the stock market.

But there are some easy to use personal finances tools out there which actually make our money work well with a modest financial planning. However, due to ignorance, overconfidence or maybe simple laziness we tend to ignore them. Value Averaging is one such tool. Its an unbelievably simple financial planning tool that anyone with even the most rudimentary knowledge about investments can use to good effect.

Simple Definition

In value averaging one puts/withdraws a certain amount of money into/from investments so that the value of the investment remains the same.

Here's a way to make it work well and work with one's portfolio.

Choose two asset classes - preferably diversified equity and a steady liquid asset. Lets say one has a portfolio of $100,000. You put 75000 into the equity portfolio and 25000 in the liquid asset. On a fixed date every month (or quarter) review the portfolio. If say the equity portfolio has gone up by $3000, book that profit and shift the money to the liquid, low risk portfolio. And if the equity portfolio has fallen, shift money from the liquid asset into equity, so that the value of the equity portfolio remains constant either way.

Advantages

The advantages are obvious. One has kept booking profits and shifted it to a safe investment at every opportunity and rise in equity markets. Also one has invested in equity when at low, unlike dollar cost averaging where one blindly puts in a fixed amount into equity every month, whether high or low.

The trick in value cost averaging is to maintain discipline over a longish period. Its truly a golden way to beat the bears.

After all, you spend so much time earning, shouldn't you spend a little time to make your hard earned money work best...its not really rocket science.

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Socially Responsible Mutual Funds

Socially Responsible, "Green" Mutual Funds or simply "Do Good" Mutual Funds seem to have caught the popular imagination. With everyone from Al Gore to top companies "doing good" to save the World, Md. Yunus winning the nobel prize for his work in micro-credit, being ""socially reponsible" while catering to investment needs has gone mainstream. While previously preferred only by a few, they have entered the social consciousness of an average investor.

So what is a "socially responsible" fund? In a nutshell, its a scheme of a mutual fund that invests only in companies based on their social ethics, the environment policies followed by them, their corporate governance and business ethics. These schemes are researched and rated on the above basis and then their balance sheet and market performance is taken into account. Maybe the investor will get 5% or so lower return than the best diversified fund but the satisfaction will be there that the investor's return is not adulterated by greed!

Check out this article for more on these funds.

http://finance.yahoo.com/focus-retirement/article/104001/The-New-Do-Gooders?mod=retirement-IRA

Mutual Funds And SIPs - Basics

You dont need to have a lot of money to start investing. Thats a pretty erronous belief. The answer I often come across on investment queries is "I dont have money" to invest. This answer often is the start of your investment needs. You dont have money - so you need to make whatever you have work.

Take for example you save Rs 100 every month. That makes it 1200 every year. Lets say, you are putting it in an instrument/bank/deposit that gives 5% annually. At the end of 5 years you are getting something like Rs 6830. Suppose there was an instrument that gave you 15%? You know the amount you will make? Rs 8970! A cool disposable income of Rs 2000!!!

The next question is - who will give that kind of money/return. Mutual Funds, well researched stocks have given that kind of return and more. Do you know that markets in Brazil, India, China have given returns in excess of 40% (conservative) in the last year. And its not a single year episode. These kind of returns have been seen for the past 4-5 years. To ride these growth markets, a plethora of country specific mutual fund schemes have arisen. So investing is a global phenomena! And if you are from these nations, your choice becomes wider! Even certain sectoral funds/aggressive funds have maintained a high rate of return.

So how do you jump unto the bandwagon - so to say... You don't happen have too much idea of stocks, returns, markets, etc and naturally you don't want too many risks. So mutual funds become your natural choice. Mutual Funds diversify your risk (puts your money in many companies, eggs in many baskets, so to say), you can invest small, you get the benefits of professional research (every stock that a mutual fund puts its money in is researched by a team of professional fund managers) and professional fund management services; its mostly liquid, ie, you can put your hands on your money whenever you want it.

The best way to start investing in a mutual fund is through a Systematic Investment Plan (SIP). It means just that! You invest small amounts systematically in a fund/scheme of your choice. Its tailor made for a small investor and follows a concept called rupee cost averaging (or dollar cost averaging!)

Here are some easy steps to start investing.

1. Decide how much you can save in a month...Even if you "don't have money to invest" you must be saving something.

2. Find a financial advisor. She/he will guide you on the schemes.

3. Research on the scheme suggested on the internet. Follow some basic principles - see the pedigree of the fund house, see the pedigree of the scheme like last 3-5 yrs performance, see the other schemes the fund manager is managing, the corpus of the scheme (ie the total amount of money in that scheme)

4. Stick to your small investment amount till you are comfortable investing, ie don't let the advisor sweet talk you into putting in more!

5. See the liquidity of the scheme, ie whether you can withdraw your money whenever you want and if any cost/load involved.

6. Bingo you can start your SIP (systematic investment plan) and be on your way to investment riches!. Remember SIPs in equity mutual funds are your first tentative steps into the stock market (and eventual unimaginable riches :-))

Please dont treat this as a comprehensive investment compendium - its just a small nudge towards making your savings more effective!