How SIP take care of Present Bias?

How SIP take care of Present Bias?

You must have heard about the Systematic Investment Plan and the importance of setting up a SIP. But what is the reason behind Systematic Investment Plan or automating your savings and investments?

This blog post will talk about how automation of investments can take care of Present Bias.

What is automation?

As the name suggests, automation is the process where you put things to run on auto-pilot. We can automate different parts of our lives, such as bill payments, paperwork and even investments. There are several benefits of automation, especially with investment.

When we automate our investments, a part of our income gets automatically diverted to an investment account. It is much easier to save or invest an amount of our income through automation.

But deciding on investing a sum of money every month isn’t easy for many people, especially for people who haven’t invested consistently.  

What is SIP?

A Systematic Investment Plan (SIP) is a way to automate mutual fund investments. After setting up a SIP, a pre-determined amount of money is debited to your mutual fund investment amount from your bank account.

SIP is essential for many investors as it can help save or invest more money. But why does this take place?

It is because SIP helps us to overcome Present bias. Present bias is our tendency to overvalue immediate rewards at the expense of long-term goals. It is the inclination to prefer a smaller present reward than a larger later reward. However, the preference is reversed when both rewards are equally delayed.

Present Bias in Everyday Life

Present bias is not just an investing behaviour. It shows up all the time. Some examples of present bias in everyday life are delaying preparing for a meeting until the last moments or ditching your plan to clean your wardrobe to binge-watch.

So, we can see that binge-watching feels better than cleaning our wardrobe. This is even though we know that cleaning our wardrobe is important than binge-watching.

How does Present Bias impacts investment decisions?

Present bias may have devastating consequences when it comes to financial decisions. Overspending or expecting a future windfall might make it challenging to save now and hinder long-term investing performance.

Take, for example, retirement. When you’re young, unmarried, and just starting in your job, saving for retirement may seem insignificant compared to enjoyable holidays or extravagant purchases. However, the strategy of “I’ll get to it later” might result in a higher hill to climb the longer you wait. That lack of long-term planning and saving might eventually have an enormous influence on your retirement preparation.

If the money was in your account, you might be able to persuade yourself to spend it.

How SIP removes present bias?

You can’t spend money you don’t have. You can only spend money when it is in your account. Placing it out of sight serves as a reminder that it has been set aside for other use.

Paying yourself first allows you to put the money you need for savings and expenses “out of sight, out of mind.” When confronted with an appealing purchase, this makes it much simpler to resist temptation.

You might feel the pinch in the first few months. You may not be able to buy everything that you want. But slowly, it will become a part of your life, and you will design a fulfilling life around it. SIP is a simple yet powerful way to achieve your goals.

Conclusion: Present bias is a common bias. Besides our day-to-day lives, present bias also influences our investment decisions. Because of the bias, we postpone our investments and focus on activities and things that make us feel good in the present situation. Automation is the best way to overcome present bias in our investment decisions. You can carry out automation in different investment options. If you invest in mutual funds, SIP is a facility that allows you to automate your investments and achieve your financial goals.  

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Raja 

https://www.investmentjunctions.com/

 

How can I invest in a mutual fund in the name of my minor child?

If you are a parent or going to be a parent, then it is obvious that you want your kids to have the best of everything. So, you need to plan for your child’s education if you want your kids to get the education of their dreams.

Mutual funds can be a great investment tool to help you plan for your child’s future. You may want them to become familiar with investments from a very tender age and let them manage money when they go to college.

However, your kids can’t invest in mutual funds before they turn 18. But, the minor's legal guardian or parent can make investments on their behalf. You need to know that a minor's mutual fund investment cannot be held jointly. Your child’s name should be on the account.

When your child is young to make the right financial decisions, you can invest in a mutual fund as a parent or a guardian on your minor’s behalf. You can make a one-time lump sum investment or set up systematic investment plans to help you plan for your child's future.

Documents required to invest in a mutual fund on behalf of our children

The first document that you will need is a birth certificate for the passport that is issued by the government to verify the child's age and date of birth. If you are a parent, your name on one of the documents is enough.

What will happen when your child turns 18?

When your child turns 18, you will not be able to continue investing as a parent or a guardian on their behalf. The mutual fund house will send you a letter informing the situation and the steps to take so that your child can continue investing in the same mutual fund.

You also have to upgrade their savings account from minor to major status. the Same process needs to be repeated for the mutual fund account as well. Your kid can invest in the same folios when the fund house converts the account to an individual account.

Advantages of investing in a mutual fund in your minor's name

Become more committed: When you invest on your child's behalf, you are more likely to be committed to your child's financial needs. You will not be tempted to use the money that you are saving for your other purposes such as repaying your home loan or any other purpose. As a result, you will be disciplined and this, in turn, will help your child to achieve their higher education dreams.

 

Install good money habits when they are young: Having a separate mutual fund investment account under their name can help children become interested in saving and investment. They will also learn the benefits of saving and investing and the impact of every investment.

Nudging them to save the money that they receive from family elders during festivals and birthdays in the mutual fund will go a long way in helping them become financially savvy individuals.

Save tax

You can save money on taxes by investing in your child's name. Any capital gains from mutual fund investments are taxable in your hands until the kid reaches the age of majority. But, after the child turns 18, any tax on capital gains will be taxed only in the child's hands. As your child may not have a large income, the tax incidence on your child will be much lower than if you had invested under your name.

The Drawbacks of Investing in Mutual Funds in the Name of a Minor

Additional paperwork: You'll need to change the single account holder's status from Minor to Major when your child reaches 18. Till the process is completed, the fund house will stop all transactions. So, a drawback of investing in mutual funds in your minor’s name is that you will need to fill out additional documentation.

Your child may not be financially mature at 18: When your child turns 18, the entire responsibility of managing the fund will fall on their shoulders. Moreover, they may not be mature to make the best decision with the accumulated corpus.

Conclusion:

Investing in a mutual fund on your children's behalf can be a great method to invest in their future education. This will help kids learn the value of compounding and investing at a young age.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all schemes related documents carefully.

Raja Bhattacharjee

Email:  investment.junctions@gmail.com

 Phone: 09830146206

 Office : 09681518774   /  7449858289

 

website: https://www.investmentjunctions.com

 

3 Asset Allocation Strategies That You Need to Know

3 Asset Allocation Strategies That You Need to Know

Most of us want to reduce the risk and get a better outcome in our investment portfolio or other areas of life. And, one of the ways to improve investment returns is through asset allocation. Asset allocation is an investment strategy that involves investing in a variety of asset classes to optimize risk and return.

Historical data have shown that the various asset classes, such as equity, fixed income or debt, and gold, indicate a low or negative association. As a result, diversification across asset classes can significantly lower risk while potentially generating higher long-term returns.

There are three main ways to carry out asset allocation: strategic asset allocation, tactical asset allocation and dynamic asset allocation.

Strategic Asset Allocation

If a mutual fund has a static asset allocation mix, then we can say that it follows a strategic asset allocation. The static asset allocation mix is usually in a range, and the fund managers can invest in the investment instruments within that range.

For example, if the asset allocation of a fund mentions that 65-80% of its assets need to be in equity instruments, then the fund manager has to invest 65-80% of the portfolio in equities at all times. In this case, the state of the market and economy doesn’t influence the fund’s asset allocation.

The fund’s asset allocation may change as the price of various investment options such as stocks fluctuates regularly. So, the fund manager may need to rebalance the fund’s portfolio from time to time to maintain the asset allocation breakup of the fund.

Let us consider the previous example where the fund maintains an equity allocation within 65-80% of the portfolio. The fund’s equity allocation may cross the maximum limit if the equity market rises more than the other assets. In this scenario, the equity allocation of the fund may become 90%. So, the fund manager has to sell stocks and/or buy the other asset class instruments such as debt securities to bring the asset allocation back to the intended asset allocation.      

Tactical Asset Allocation

You may feel that strategic asset allocation is too rigid. However, market conditions may generate additional returns from time to time that a static asset allocation strategy may be unable to take advantage of. Tactical Asset Allocation is a variation of Strategic Asset Allocation in which the fund managers may deviate a little from the strict asset allocation to take advantage of the market opportunities and earn extra returns for the investors. 

To carry out tactical asset allocation, one needs to know market timing and in-depth market and investment knowledge. For instance, if the strategic asset allocation calls for 70% in equity and 30% in debt and the fund manager believes that equities in the short run can provide attractive returns, then they might hike up the equity allocation to 75% to take advantage of the possible upswing in the equity markets. And after the window of opportunity closes, they can revert it to the original asset allocation.

Dynamic Asset Allocation

The counter-cyclical asset allocation method is the most prevalent dynamic asset allocation method implemented by mutual funds. In this asset allocation method, you regularly modify your asset allocation mix based on market conditions. When stock valuations fall, i.e., the stock prices become cheaper, these funds increase their equity allocation and reduce debt allocations. This is also known as a counter-strategy because it is based on the investment principle of buying low and selling high. For dynamic asset allocation, different fund managers utilize different valuation criteria. The most commonly used valuation metrics are the P/E and P/B ratios. In a dynamic asset allocation strategy, some fund managers employ multi-factor asset allocation models, which integrate two or more components, such as P/E, P/B, Dividend Yield, and so on.

Conclusion: There are different asset allocation strategies that investors and fund managers use. Strategic asset allocation, tactical asset allocation, and dynamic asset allocation are the three common asset allocation strategies.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme related documents carefully.

Raja Bhattacharjee

https://www.investmentjunctions.com

 

A Message For the Youth

 A Message For the Youth

The Difference between Entrepreneur Mindset and Non Entrepreneur Mindset 

While the country gets affluent and opportunities grow, that does not mean life is getting easier for the youth or that you can take your future for granted 

The days of stable jobs that promise you a career have been are over. Don't look at your father and expect that yours will be a similar journey. This is the cardinal truth that the youth have to face and this is by no means a figment of my imagination

 Careers have started shrinking and Retiring Early is becoming a trend. How much the Retirement Age will shrink is anybody's guess

 Entrepreneurship is on the rise which actually means the attitude of working together for each other's benefit is going to become extremely important

 The "Being First in Class" and "Being Best at Work" mindset is no longer relevant and can actually come to haunt you by becoming a challenge to your growth 

If you are on a Salary or you Run an individual Practice, there's a shift that you must have to consider over your life span

A Shift into Entrepreneurship Mindset. Starting an Enterprise or becoming a part of an Enterprise in the capacity of an owner worker is the shift that will have to be considered 

An Entrepreneurship Mindset is in itself a philosophy that needs to be studied in greater detail and then adopted with passion

 An Entrepreneur always is inspired by a Vision of Solving A Bigger Problem for which he needs resources. This sets him apart from the others who wish to have a much easier start without limitation of resources; where money becomes the means as well as the ultimate end; where money and purchasing power alone defines joy and purpose of life. They are  being driven by high salaries / Incomes & just cannot Quit the Rat Race .

The Salaried / Practioner Work for someone else or even themselves until they are tired or retired. An Entrepreneur at best will work a few years, gain the skill and move on to be a part of a larger Vision

 The Salaried and Practice (S & P) mindset focuses on Spending, Borrowing, and living a Life of EMIs that leaves them with very little to invest. An Entrepreneur mindset focuses on Higher Saving, Higher Investing,  Higher Wealth Creation, and living a life of measured Spending that provides meaningful happiness but not one-upmanship demonstration. For example Narayan and Sudha Murthy, Ratan Tata, etc

The Salaried Practitioner often live up to  the expectation of others while the Entrepreneur lives up to his own expectations of fulfilling his/ her  larger Purpose 

The Non Entrepreneurs depend on a Single Income Salary, Overtime & Perks. The Entrepreneur depends upon multiple sources of income such as  Rent, Dividend, Revenue Sharing, Asset Growth, Royalty, and Salary

The Non Entrepreneur mindset spends more on Entertainment (Social Media, Movies, and Holidays) while the Entrepreneur mindset spends more on Education ( Self Growth, workshops, Books, and Courses ).

Raja Bhattacharjee

The Story of a Brilliant Railway Engine.

 The Story of a Brilliant Railway Engine.

 Imagine a Modern Railway Engine chugging along and getting disengaged from the rest of the train, it continues to chug along without even bothering that the rest of the coaches have been left behind. This Engine is the modern state-of-the-art contraption and one of the best in the world, but what use of this latest technology miracle if the Engine does not take the Coaches along with it & continues to march alone. Most Professionals are like this Engine, they themselves are brilliant, capable, intelligent, and hardworking, but what use is their individual brilliance of  Vision, Mission, and Business if they march along all alone, what use it will be to mankind and the ecosystem if they don't take their organization, the team along, what use of their Brilliance if they choose to keep all their skills to themselves and not pass it on to others, how will they Build the Valuation of their Company if they don't focus on Sustenance.

 Therefore it is important to stop focusing on individual brilliance although it was taught to us in school that "beta sabse aage rehna, awwal number laana" , as one gets established it becomes more important to build a Sustainable System that Produces Brilliance without the Individual playing a role, a Great Surgeon should ensure Great Surgeries are performed under the Guidance of his System but not by him personally.

 In the beginning, it is Great to be a Brilliant Engine.

But thereafter if the focus continues to be on the Self then like the Engine we will move ahead leaving our organization behind to languish and fail.

We will generate a lot of Cash Flow but will completely fail to build an asset, cash flows serve a single generation whereas Assets serve multiple generations.

Cash Flow Makes you Rich whereas Asset Makes you Wealthy by helping you leave behind a legacy 

 Jamshedjee Tata could have made money and died a rich man but he chose to leave behind a legacy called Tatas that flourishes even today. 

we all can remember the great dialog from SARKAR movies " ADMI MAR SAKTA HAI, MAGAR USKI SOCH NAHI ", we will die but I believe our thought and our ideology should not die.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

Raja Bhattacharjee

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