Precautions to be taken while Investing

What is the investment?
Investment means wealth creation. If you invest in shares or mutual funds or any other investment plan for a long time, which will give you good returns in your future. Investing in more than one investment plan also gives fruitful returns to your next generation.

What type of investments we have to choose?  

  • Choose good return plans where you can get regular returns
  • Your investments should use for your future needs
  • Within one or two weeks your investment should get liquidate
  • Your investments should be flexible whenever you want to withdraw 

Why should we invest?

  • For better future
  • To achieve our financial needs
  • For your children future
  • For a unique name in the society

How to invest?
First, you’ve to recognize your financial needs according to that you can choose your investments, it fully depends on your knowledge and needs. You have to analyze yourself as per your future needs and risk-bearing capacity then you can start investing in good plans as early as possible. You must decide the particular amount that you want to invest and improve in future according to your financial goals. 

Where can we invest?
You can invest in

  • Bank Savings, fixed, recurring and cash depositories
  • Real estate (Home/Land)
  • Insurance§  Shares
  • Mutual funds
  • Bonds
  • Commodities
  • Chit funds
  • Post office plans
  • Schemes         

What precautions should we take before investing in any investment plan?
First of all, you’ve to ask a question yourself that why you are investing? Next, choose your suitable investment plan like Shares, Mutual Funds, and Bonds etc. If you are investing in shares then you must read particular company past, present financial status and future affairs also or if you want to invest in bank fixed deposits, post office savings plans, you should see how returns will be on your real money. It is advisable to contact the investor information if someone has already invested in advance of your plans. Before investing, you must read your investment scheme related documents carefully. An investor should take care of above-given details and then go for investments.

What is the best time to invest?
The best time to invest is to invest as early as possible, starting at a younger age as it gives you good returns. Most of the shares and mutual funds are expected to invest in; you must aware of particular company’s financial status and past, present and future affairs also.

Best age to invest?
As we discussed earlier, it’s good to start investments as early as possible. Some people start investments when they make earnings, some starts settling well at the job, some will start investments when they settled in their business. Depending on their convenience, they’ll start investments.

What is your financial status?
You have to look into your financial situations at least 4 times in a year, according to that you’ve to manage your investments. You should have a sense of your future needs to develop your financial status.

How risk bearable you are?
A good investor always calculates risk percentage before investing in any investment plan, then only he invests if he thinks he’ll get more lose than what he expects in the future he’ll transfer to another investment plan or withdraw the funds. Risk depends on investor financial status also.

How to allocate investment percentage for various investment plans?
It all depends on your financial status. However, it is better to invest 10 percent or more of the earnings, and then the rest of the earnings should be spent on other needs. Those who want to invest should primarily invest in the following.

  • Life insurance
  • Health Insurance
  • Real Estate (Land/Home)
  • Shares/Mutual Funds
  • Bonds
  • Commodities
  • Chit Funds etc.

While investing in any investment plan how risk bearable you are?

  • Primarily, have a look and evaluate the financial position.
  • Take an advice from professional for successful investing figuring out the goals.
  • Investments involve some degree of risk. If you intend to purchase securities – such as stocks, bonds, or mutual funds – it’s important that you understand before you invest that you could lose some or all of your money.
  • Consider an appropriate mix of investments because the same markets move up and down.
  • Create and maintain an emergency fund. Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment.
  • Returns and payable with respect to investment and debt.
  • Re-balancing of portfolio regularly
  • Avoid circumstances that can lead to fraud.

What type of charges applicable when you are investing in any investment plan?
The charges will be changed from plan to plan, investment to investment, category to category. There is no uniqueness for charges in all investments.

For example:

  • In case of insurance, charges will differ from category to category like health insurance, life insurance, term plans, senior citizen plans for processing, etc.,
  • In case of banks, charges will differ from types of account to account like a savings account, current account, loans and advances, deposits, etc.,
  • In case of Mutual funds, charges will differ from the type of fund to fund like Equity linked funds, indexed funds, etc.,
  • In case of real estate charges will differ from place to place (metro/urban/rural) like stamp charges, taxation (value of the property), etc.,
  • In case of shares, commodities and bonds charges will differ from the type of share, type of market, types of bonds like security transaction tax, brokerage etc.,
  • In case of Chits charges will differ from the type of fund, the number of members in participation and company norms.

What are the risk factors to invest all the money in one investment plan?
There are more chances of a block of funds at one place. One may not able to convert their investment into liquid whenever they want. There might be a risk also as follows:

  • Market risk: Risk of investments declining in value because of economic developments or other events that affect the entire market. The main types of market risk are equity risk, interest rate risk, and currency risk.
  • Liquidity risk: Risk of being unable to sell your investment at a fair price and get your money out when you want to.
  • Concentration risk: Diversify your investment – Risk over different types of investments, industries, and geographic locations.
  • Credit risk: Risk that the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity.
  • Reinvestment risk: The risk of loss from reinvesting principal or income at a lower interest rate.
  • Inflation risk: Risk of a loss in your purchasing power because the value of your investments does not keep up with inflation
  • Longevity risk: Risk is particularly relevant for people who are retired or nearing retirement.
  • Foreign investment risk: Risk of loss when investing in foreign countries – a risk of nationalization.

If you want to get good returns how long you’ve to maintain funds in investment plans?
One should look at several parameters before considering it as a high return investment option.

  • Depends on Tenure: Investment option can vary like time, plan and investment.
  • Depends on risk appetite: One should check whether it fits his or her risk appetite. High return investment option of investing in Stocks may not always fit for everyone.
  • Liquidity: If you are investing your emergency money or short-term investment, liquidity should be a high priority.
  • Taxation: Investment in bank FD Vs investment in tax saving FD schemes would depend whether you are looking for taxation point of view.

How can we create wealth?

  • It is an ideal way to creating long-term value and fulfilling the financial goals.
  • Discovery of a good investment can increase the ability and chances to grow well viz., blue-chip companies.
  • If you have time in favor and there is a chance of compounding, may create eight wonder which works best for long period of time.
  • Continue investing through SIP, increase your SIP amount whenever you can and wait for a long period without disturbing your SIP or your investment.
  • You will be happily surprised by the wealth you would create in the end.

How to invest your money in any investment plan and what are the safety precautions you have to take before investing any plan?
One has to look the specification to invest as follows:

  • Fund sponsor, style, background with integrity
  • Experience of team management
  • Investment objectives like process, strategies followed by fund houses.
  • Returns and respective plans
  • Risk-adjusted returns achieved by the fund
  • Portfolio churning
  • Expense ratio
  • Transparency
  • Tax implications

What is your financial plan or what is your approach to financial planning?

  • It is a comprehensive term of evaluation of one’s current pay and future financial ability by using current known variables to predict future income, asset values and withdrawal plans.
  • Establishing and defining the client-planner relationship
  • Gathering client data including goals
  • Analyzing and evaluating the client’s current financial status.
  • Has to prepare a projected expenditure for the term which you want to invest or approximately.
  • Break-even analysis, liquidity
  • Cash inflow with respect to outflow.
  • Projection of income.
  • Time to maturity.

How to improve your knowledge of investments?
A great place to begin is to decide how much time you want to spend learning about money.

  • Understanding – What you are looking for? Why do you want to invest in that plan which you want to invest?
  • Analysis – from historical data.
  • Regular reading daily or weekly updates on overall market conditions is important.
  • The discipline necessary to make it happen.
  • Analyse your performance on a timely basis. This is essential to succeed in the long-run.

What is the importance of emergency fund?

  • An investment is to be like a pyramid i.e., a very strong base is required.
  • Emergency fund – It is an account for funds set aside in case of the event of a personal financial dilemma.
  • Purpose – Fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses
  • A strong base is fundamentally important to support the levels of risk an investor bears as securities with varying levels of volatility.
  • An individual has to create sufficient liquid capital on which to rely in the event of income loss
  • Suggestion for an emergency fund is to have saved the equivalent of at least three months’ worth of living expenses.

As an Investor what are the best qualities you must have?

  • Patience                          
  • Ideology 
  • Forecasting
  • Control on emotions          
  • Strong Analysis Skills
  • Risk Management Skills 

What are the types of investors are there in the market?
An investor is any person who commits capital with the expectation of financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.

Simply provide funds in exchange for an ownership stake or future return with an infusion of cash.

  • Individual/Personal/Retail/ investors.
  • Angel investors.
  • Peer-to-peer lenders.
  • Anchor investors.
  • Venture capitalists.
  • Banks

Who is a Personal/Retail/Individual Investor and how they manage their investments?

  • A person who invests their own money in financial markets and is not working for a financial institution or as a professional investor. A retail investor is an individual who purchases securities for his or her own personal account rather than for an organization
  • Investors should take time for introspection before deciding to manage their own investments. Here are four questions to ask yourself: Do I have

(1) the desire
Having the time and ability to manage your own money effectively is of no use if you lack the desire. There is no better incentive than the cost savings potential. Before you start spending this new-found money, recognize that your desire to manage your own portfolio should be sustainable. 

(2) the time
How much time, depends on your prior level of knowledge and experience, along with the complexity of your chosen investment approach. Whether or not you can find someone to help you develop a strategy may be another factor. Be prepared to invest a significant amount of time upfront and be patient through the process.

(3) the knowledge
Successful investing does not require a degree in finance. What is most relevant to an investor’s knowledge level is aligning your investment approach with your knowledge level.  Many day traders during the internet bubble quit their day jobs to invest full time through their discount broker.

(4) and the temperament to do it
Temperament to control the urges that get other people into trouble in investing. Success in investing doesn’t correlate with I.Q. Investors are habitually their own worst enemies. If you have a history of reacting emotionally to market volatility, then you may not have the temperament to manage your own portfolio.

Who is Anchor Investor and how they manage their investments?

  • Anchor investor is experienced and has a better understanding of the fundamentals and other details scenario of the company than the retail investors, they are also the first investors and are qualified institutional buyers.
  • Therefore, anchor investment in an IPO firm can attract investors to public offers before they hit the market and infuse confidence.
  • Anchor allotment is done a day before an IPO opens.
  • Roping in anchor investors gives a lot of comfort to the issuer and banker, as nearly a third of the IPO gets covered even before the opening day.
  • A healthy anchor book also gives a lot of comfort to small investors as it indicates the faith shown by institutional investors.
  • Anchor investors cannot sell their shares for a period of 30 days from the date of allotment as against IPO investors who are allowed to sell on listing day.
  • An issuer can now allot up to 60% of shares reserved for qualified institutional buyers (QIBs) to anchor investors. As typically, the QIB portion in an IPO is 50%, anchor investors can buy up to 30% of an IPO.

Who is Peer to Peer Lenders/ P2P Lenders and how they manage their investments?

  • It is the practice of lending money to individuals or businesses through online services that match lenders with borrowers.
  • Since peer-to-peer lending companies offering these services generally operate online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions.
  • As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates.
  • The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower’s credit.

Who are Angel Investors and how they manage their investments?
With an aim to encourage entrepreneurship in the country by financing small start-ups.

  • The provision of capital by the investors or to invest in small startups or entrepreneurs or good strategical business ideology.
  • The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. Often, angel investors are from an entrepreneur’s family and friends.
  • Angel investors must meet the Securities Exchange Board of India (SEBI) standards for accredited investors.
  • Angel funds can make investments only in those companies which are incorporated in India. These funds need to be invested in a firm for at least three years, can invest in companies not older than 3 years.
  • Further, Investee Company needs to be unlisted and with a maximum turnover of Rs. 25 crores and this firm may not be related to a group with a revenue of more than Rs. 300 crore.
  • Angel funds are required to have a corpus of at least Rs. 10 crore and minimum investment by an investor should be Rs 25 lakh.

Who is Venture Capitalists and how they manage their investments?
An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets.

  • Venture capital funds are typically very large institutions such as pension funds, financial firms, insurance companies, and university endowments—all of which put a small percentage of their total funds into high-risk investments.
  • They are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.
  • Venture capitalists also experience major losses when their picks fail, but these investors are typically wealthy enough that they can afford to take the risks associated with funding young, unproven companies that appear to have a great idea and a great management team. 

Who are DIIs and FIIs how they manage their investments?
In the context of India, DII refers to the Domestic Institutional Investor i.e., Indian institutional investors who are investing in the financial markets of India and Foreign Institutional Investors or FII refers to investors that are from other countries and that are investing in the Indian financial market.

  • Influenced by various domestic economic as well as political trends.
  • Both must be approved by SEBI.
Investment did by institutions or organizations such as banks, insurance companies, mutual fund houses Investors most notably include hedge funds, insurance companies, pension funds and mutual funds.
Great presence in cash markets. Great presence in the Futures market
Intra-day not possible e.g. short sell not possible Intra-day possible e.g. short sell possible
Authority to trade in equity only Authority to trade in index future and option as well as stock option
Compared with FIIs, DIIs range is narrow Compared with DIIs, FIIS range is wide.

FII +QFI = FPI. How?


FDI (Foreign Direct Investment): Is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. FII (Foreign Institutional Investor): Is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds
FDIs are allowed to make an investment in productive assets i.e., a fixed investment like plant and machinery, Insurance, Telecom etc., FIIs are made an investment in financial assets like shares, bonds, stocks and mutual funds etc.,
FDI is of long-term and stable in approach FII are of short-term and not-stable in approach
Having both ownership and management rights and participates in decision making Having only ownership rights
RBI is the regulatory authority SEBI is the regulatory authority
The investment made by the FDI >= to 10% of paid-up capital in a listed company. The investment made by the FDI < 10% of paid-up capital in a listed company.
Over SEBI rules:
  • Minimum of 1-year operational experience
  • Net worth requirements.
  • KYC
  • Must provide the details that
  • where the funds got by the investor like subaccount.
  • Have to assess the fee to SEBI for every 3 years to operate as FII in India.
  (To comply all these rules, it is a very big task to the Subaccount).

For this FII go through:

SUB ACCOUNT: some sub-accounts are clubbed and invest through FII in the markets.

India is also not an exception in 2008 global crisis and looks into foreign investments in our country.

Then SEBI, RBI, and the government introduced the concept of QFI.

QFI (Qualified Foreign Investor)
(QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).

  • QFI scheme was introduced by Government of India in consultation with RBI and SEBI in the year 2011.
  • The objective of enabling QFIs is to deepen and infuse more foreign funds in the Indian capital market and to reduce market volatility.
  • QFIs are allowed to make investments in the following instruments by opening a D-Mat account in any of the SEBI approved Qualified Depository Participant (QDP)
  • Equity and Debt schemes of Indian mutual funds,
  • Equity shares listed on recognized stock exchanges,
  • Equity shares offered through public offers
  • Corporate bonds listed/to be listed on recognized stock exchanges
  • G-Securities, T-Bills and Commercial Papers
  • QFIs do not include FII/Sub accounts/Foreign Venture Capital Investor (FVCI)
  • Present Status of QFIs

QFIs, have now been merged into Foreign Portfolio Investors (FPI) when the FPI regulations were introduced in 2014.

In other words, no sub account is eligible to invest in India directly apart from FII. Now as QFI is eligible to trade directly after satisfying a minimum procedure.

  • KYC
  • Depository participant: Intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. For example, Zerodha a broking company is a Depository Participant with CDSL
Under FII earlier Under QFI Now
10% of paid-up capital for single participant in one company 10% + 5% additional 

i.e., 10% as FII and 5% as QFI

24% of paid-up capital for all participants in one company 24% + 10% additional

i.e., 24% as FII and 10% as QFI

Note:1. In PSU’s cannot be allowed to buy more than 20% and if FII wants to purchase more than holding then SEBI, RBI and government permissions are must.

FPI (Foreign Portfolio Investment)
Any company (foreign company) want to invest money in any other (other than their own country) country which incorporated in their or another country. It may either fully hold or subsidiary or joint venture). From the context of India, any foreign company may invest in India which incorporated outside India.

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