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Q: New to Investing?
Difference between investments and savings
Saving and investing often are used interchangeably, but there is a difference.
- Saving is setting aside money you don’t spend now for emergencies or for a future purchase. It’s money you want to be able to access quickly, with little or no risk, and with the least amount of taxes. Financial institutions offer a number of different savings options.
- Investing is buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will make money for you. Investments usually are selected to achieve long-term goals. Generally speaking, investments can be categorized as income investments or growth investments.
Importance of financial planning
- Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
Understanding Asset classes
An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Equities (stocks), fixed Income (bonds), cash and cash equivalents, real estate, commodities, futures and other financial derivatives are examples of asset classes.
Importance of asset allocation
Asset allocation helps investors reduce risk through diversification. Historically, the returns of stocks, bonds, and cash haven't moved in unison. Market conditions that lead to one asset class outperforming during a given timeframe might cause another to underperform.
Consequence of delay in investment
From a financial investment perspective, a delay in making an investment can lead to a loss. The accrued interest on the investment for the duration of the delay can have a significant effect on the net returns.
Inflation and staying ahead of it
One strategy you can use in an effort to beat inflation is to increase the amount you're saving for retirement each pay period. Another strategy to help your savings stay ahead of inflation is to invest a larger portion of your money in assets that have the potential to earn inflation-beating returns.
Herd instinct is a mentality that is distinguished by a lack of individual decision-making or introspection, causing people to think and behave in similar fashion to those around them. In finance, a herd instinct relates to instances in which investors gravitate toward the same or similar investments based almost solely on the fact that many others are buying the securities. The fear of missing out on a profitable investment idea is often the driving force behind herd instinct.
The availability bias is the human tendency to think that examples of things that come readily to mind are more representative than is actually the case. The psychological phenomenon is just one of a number of cognitive biases that hamper critical thinking and, as a result, the validity of our decisions
Q: New to Mutual Funds?
- What is mutual fund
A mutual fund is defined in simple terms as a kind of investment that uses money from investors to invest in stocks, bonds or other types of investment. A fund manager decides how to invest the money, and for this purpose he is paid a fee, which comes from the asset under management in the fund.
- NAV Demystified
Net asset value of a mutual fund scheme is the price that is paid per unit by an investor to purchase units of the scheme. Since the market value of the assets held in the scheme changes every day, the NAV also changes each day and is disclosed by the fund on a daily basis. It is important to know the NAV of the fund mainly to gauge the performance of the scheme over a period of time.
- Benefits of investing in mutual funds
- Risk diversification
- Smaller capital outlay
- Investment expertise
- Economies of scale in transaction costs
- Variety of products
- Variety of modes of investments
- Types of Mutual Funds
- Money market funds
A money market fund is an open ended mutual fund that invests in short term debt securities such as Treasury bills and Pakistan Investment Bond. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield.
- Fixed income funds
Fixed income funds are simply mutual funds that own fixed income securities such as Treasury Bills, Pakistan Investment Bond, Term Deposit Receipts and Term Finance Certificates. These fixed income funds come in many shapes and styles.
- Equity funds
An equity fund is a mutual fund that invests principally in stocks. It can be actively or passively managed.
- Balanced funds
A balanced fund is a mutual fund that contains a stock component, a bond component and sometimes a money market component in a single portfolio.Their holdings are balanced between equity and fixed income with their objective between growth and income.
- Index funds
Index funds are mutual funds that are designed to track the performance of a particular index. When an investor purchases a share of an index fund, he or she is purchasing a share of a portfolio that contains the securities in an underlying index.
- Specialty funds
Specialty funds are a type of mutual fund that focuses their equity investing within a specific industry or sector of the economy. Some specialty funds cover broad sectors and the rest direct their investments on an industry group within a sector.
A fund of funds also known as a pooled investment fund that invests in other types of funds. In other words, its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly in fixed income, equity and other types of securities.
- Money market funds
- Planning for Retirement
- How to save for retirement?
If an individual have an investment horizon of at least 20 to 30 years and want to make mutual funds the start of your retirement plan, then Systematic investment plan will help you accumulate and compound wealth in an affordable manner.
- Importance of retirement planning
A mutual fund pools money from different investors and then invests that money in various equity stocks, debt and money market instruments. At retirement in the long run, mutual funds offer excellent returns and help build a corpus for your post-retirement needs.
- Successfully planning your retirement
A good retirement portfolio should include both equity and fixed income and maybe a little cash. Therefore, if you decide to do your investing via mutual funds, you need funds that invest in all of those asset classes.
- A plan to retire younger
Mutual funds allow you to invest in stocks without the risk that comes with single stock investing. A good fund consistently outperforms others in the same category, covers multiple business sectors, and has an experienced fund manager taking care of your investment.
- Managing investments during retirement
To manage expenses and make your money last, you will likely have a combination of income producing and growth investments. Income-producing investments such as mutual funds both equity which pay dividends and fixed income are important in retirement because once you stop working you typically need this money to live on.
- How to save for retirement?