Dental practitioners today, face severe crisis in managing their financial goals.Every dentist should have some knowledge on passive investing.
Don’t save
your money. It’s better to invest it.
There is a
big difference in saving money and investing money. Let me explain with a
simple example. Let us think of a candy which costs Rs10 today. What would be
the cost of this same candy after 10 years? Do you expect it to be the same Rs10
or will it be much higher than it? Definitely, it will be much higher than Rs10.
This is called INFLATION.
In most
countries the expected inflation is around 7-8%. It means, the price of everything
is rising by 7-8% every year. It is much less in developed countries and is
more in under developed countries.
TO BEAT INFLATION, ONE SHOULD INVEST MONEY RATHER THAN SAVING IT.
Dental practitioners
today, face severe crisis in managing their financial goals. The main reason is
they always try to save money. But investing is a wiser option compared to
saving. Every dentist should have some knowledge on these options. This can
drive them to FINANCIAL FREEDOM.
INVESTING FOR LONG TERM
Investing
is something you have to do for long term. Short term investing is highly
volatile and the returns may not reach your expectations.
So here is
the road map for better investing, that every dental practitioner should know:
SIP IN INDEX FUNDS
Investing in
stock markets is much riskier than expected. It should be done only after
taking the help of your financial advisors. Timing markets perfectly is something
which we cannot do regularly. Hence mutual funds are best options for dentists.
In mutual
funds your amount is looked after by an experienced manager, who invests them
wisely for better results. Even in mutual funds, investing in index funds is
less risky than in direct equity funds.
The best
alternative for investing in equity is INDEX FUNDS. Index funds are mutual
funds that invest only in big companies that run the index. For example NIFTY
is an index which contains top 50 companies in INDIA. These companies are
usually better running with good financial backgrounds. Hence risk in investing
in these companies is less when compared to others.
A systematic
investment planning [sip] in these funds provide higher returns when compared
to bank fixed deposits. Let me explain with an example.
HDFC INDEX
FUND SENSEX PLAN is an index mutual fund which invests in NSE NIFTY FIFTY. Its returns
since inception were 14.87% per annum. It is almost more than double, of your
regular bank fixed deposit interest rates.
If you
invest in this mutual fund for a period of 10 years with a SIP of 10000 rupees
every month, the present return of it on 17th may 2019 would be as
follows [**the past performance may not guarantee the future returns. Hence this
calculation is only based on the past performance]
TOTAL
AMOUNT INVESTED = Rs121000
FINAL
AMOUNT ON 17th MAY 2019: Rs2142320
INTEREST
GAINED =Rs932320
PERCENTAGE
GAIN = 43.51% GAIN
WHY SHOULD I CHOOSE INDEX FUNDS?
Investing funds
require less expertise or market knowledge, to invest. Equity investments
[share market investments] will have returns on the higher ends than
conventional saving methods. But timing markets is very important to have
higher returns.
As dentists
we lack such expertise. Hence there are only 2 options.
You have to
consult a financial planner or a mutual fund expert to do your investments.
The second
option is investing in index funds. To know
more about INDEX FUNDS [read this]
WHY SHOULD I CHOOSE SIP?
I think
bulk investing is a bad option to go with. Bulk investing never gives good
returns unless you time these markets.
SIP OR
SYSTEMATIC INVESTMENT PLANNING WORKS ON THE PRINCIPLE OF COMPOUNDING. It usually
produces higher returns than bulk investing.
To know more
about power of compounding in mutual fund investments [read this].
WHAT IS PASSIVE INVESTING?
Investing in
index mutual funds is a way of passive investing. Here the mutual fund
performance is completely dependent on that specific index. There will be less
exchange of shares in these mutual funds, by the fund managers. In other words
the fund managers simply invest your money into an index, where all the
companies in that index will be bought at same percentages.
They always
have returns equal to their bench mark index and will never outperform them.
Passive investing is a better investing strategy to reduce they equity risk.
WHICH INDEX FUND IS BETTER?
This is the
beauty of index funds. All mutual funds running on one index will produce same
returns irrespective of the fund houses.
Investing
in large cap index funds like SENSEX INDEX FUND OR NIFTY INDEX FUNDS is much
wiser as they have less volatility when compared to sectorial index funds.
CAN I LOSE MONEY IN INDEX FUNDS?
Yes! If the
markets are not performing well, then you will definitely lose money. But the
risk of losing money is moderately less when compared to regular equity mutual
funds. To have a better risk profile, it is wiser to SIP THE INVESTMENTS,
rather INVESTING BULK AMOUNTS.
The goal
should be long term investment, if you are planning to invest in mutual funds. Then
only they provide returns which rank upto your expectations.
CAN I DIRECTLY BUY THESE INDEX FUNDS?
Yes! Every mutual
fund has a plan called DIRECT PLAN. You can search them online and can invest
by following the steps given in their website.
DO I NEED A FINANCIAL ADVISOR TO DO THESE INVESTMENTS?
Yes! Having
a financial advisor is really a better choice if you have nil knowledge about
equity investments, share markets and mutual funds. A financial advisor will
help you in diverging, your investments into various investment platforms, thus
helping you in getting higher returns.
But if you
are not interested to have a financial advisor and hope to do your own
research, then you can have your own investing strategy. But remember, it will
definitely carry higher risk when compared to the above scenario.
WHICH ONE IS BETTER, INDIVIDUAL STOCKS OR MUTUAL FUNDS?
Definitely,
my answer is mutual funds. We are dentists, not a stock broker or market
analyst. Hence our understanding of share markets is inferior when compared to
theirs.
Timing the
markets is something that a stock broker or an analyst will always struggle to
do for gaining better returns. During their journey, they may have victories
during some sessions and may also face failure sometimes.
If a
specific stock is not performing as you expected, then your investment has more
chance to have a decline. But in mutual funds, you will be investing the same
amount in multiple stocks, hence even though some stocks are not performing
well, other stocks have good chances of improvement which can average or even
nullify your loses.
Hence for
non-experts in stock markets mutual funds are better alternatives for stock
investing.
DISCLAIMER:
This article
is written by a dentist, after his own experience in equity investing all these
years. He is not a market analyst or a stock broker. He is already investing in
HDFC index fund. Hence the same was given as an example in this post.
Readers are
requested to consult your financial advisor before taking any decision in
invesing.
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