Investing in Cryptocurrency vs Investing in Stocks

People who are not entirely sure about investing in the stock market may look for other investment options - such as cryptocurrencies like Bitcoin, Litecoin and Ethereum. While taking cryptocurrencies into consideration, however, make it a point to calculate your investment goals and risk tolerance as well.

Take the time to learn about investing in cryptocurrencies, such that you know for sure whether having a cryptocurrency in your portfolio will be beneficial or not.

Cryptocurrency Risk vs. Stock Risk

To mention the obvious, investments come with risk. The market could end up crashing for reasons beyond casual comprehension. Companies going bankrupt is not a novelty. On the other hand, a particular stock could shoot up at any time, or even grow gradually. Assessing these risk and gain factors is essential when deciding on the assets to be added to your portfolio.

Although there are risks common to most investments, stocks differ in that to some extent you can be guided to gain some understanding of how prices may change. Things like the ratio of stock price and earnings provide a good understanding of a company’s financial health.

It is this particular indicator that cryptocurrencies lack, when compared to stocks. As it is entirely based on supply and demand, cryptocurrency is speculative in nature. To some degree, all currencies get their value from the willingness of people to pay for it, but this does not necessarily hold true for a cryptocurrency. As it operates in a much smaller market, certain big swings can influence it as a whole.

All said and done, cryptocurrencies are a relatively new development that has not yet been widely adopted. This adds an altogether new level of risk as it is possible that they could get replaced by other efficient alternatives, or could even be banned due to regulations!

Cryptocurrency History vs. Stock History

While past performance is certainly not a surefire indicator of the future, it can help assess how well investments have done over a period of time. For convenience, let’s take the case of the most prominent cryptocurrency out there itself - Bitcoin.

Bitcoin price was seen fluctuating between ₹15000 and ₹40000 per coin in 2015. Come 2017, and the value shot up, to a high of nearly ₹1450000. However, it dropped down to below ₹255000 in December 2018! In 2020 itself, the prime cryptocurrency’s value has shuttled ₹280000 and ₹660000. So no matter how high the price of any cryptocurrency stands right now, an abrupt drop is all but to be expected.

On the other hand, stock growth spurts and drops are not nearly as dramatic, and have been quite stable. The S&P 500 index, which was at $2,000 in early 2015, grew steadily to around $3,100 mid 2020, although it did go through some ups and downs along the way. Similarly The Dow Jones Industrial Average (DJIA)  also grew from $17,000-18,000 to around $25,000 during the same period.

Historically, stocks have given more or less 10% returns annually (6-7% considering inflation). However, in the case of Bitcoin and cryptocurrencies, this is far from being true.

Who Is a Good Fit for Cryptocurrencies?

People in search of some serious diversity in their portfolio can definitely do with some Bitcoin or Ethereum, as they provide a potent alternative to more traditional assets. They also help if you want assets which are not denominated in terms of regular currency.

Generally, even if you gravitate towards having a lot of cryptocurrencies in your portfolio, it ideally shouldn’t be the primary focus of your investment drive. The extent of it must depend on how your risk-tolerance, i.e., you should be comfortable losing the amount you invest in cryptocurrencies. If nothing else, try to keep it to 1-5% of your portfolio.

Who Is a Good Fit for the Stock Market?

Most investors tend to keep stock options as a majority of their portfolio, and experts agree that that is the way to go as well. Thanks to its base characteristics, it is a more stable and reliable investment that you can account for in terms of profits over time. Even in the face of short-term irregularities, it is safe to assume that most companies will continue to exist, if not flourish, hence providing a decent amount of stability. Broad-based index funds & exchange-traded funds (ETFs) constituted by stocks, chances are that your investments will hold up well long-term.

Is It Still Worth Investing in Cryptocurrencies?

Affording even a whole unit of a certain cryptocurrency is quite a feat these days - that is to say the prices have gone up really high. Considering this fact, and combining the idea that even such a large investment is not a safe bet, you’d be forgiven for wondering if it is already too late to invest in cryptocurrency.

Here, again, it has to be said that the call is yours. If you believe in the concept of blockchain technology and cryptocurrency, certainly devote whatever you can spare to have them as a small share of your investment portfolio. If you are still doubtful, it is better to not invest in cryptocurrencies at all.

How To Save or Invest Money - Savings or Investing?

Even seasoned investors sometimes have trouble deciding where to put their money: in Savings or in Investing. The thing is that these two fulfil different functions and fulfil different needs. For instance, if you want to grow your wealth, investing may seem like the better option. And if you want to save your money, going for a Savings account is certainly your best bet.

Why people get confused

Basically, it is all easy to understand, and yet many people still get confused. One of the reasons for this is that either way, people are parting with their money, even if for a short time. This makes many people indecisive, something which is important especially if you want to go down the Investing path.

These are the common questions people have about Savings and Investments.

What is investment?

What is savings?

Where should one invest?

Where should one save?

The problem is that there is no one answer for everyone. It all depends on your individual needs and financial plans for the future.

In this article, we shall be giving you a basic know-how of both savings and investments, what their differences and benefits are, and how you can use them.

First, let us learn about Savings.

What is Savings?

Basically, saving is not spending your money, or rather the money you do not have any desire to spend. Now, this has many benefits. For instance, if you have saved enough, you will be able to deal with healthcare and other situational crises better than those who don’t save. Saving can also enable you to splurge now and then. While you may not be able to buy a car with just your savings, you may be able to splurge on pretty big purchases from time to time.

What is Investing?

Investing refers to the processing of earning money or building wealth through buying assets. This can be for the short-term as well as for the long-term. Investing is far more risky than saving money yourself, but the rewards are greater as well. There is always risk when you are investing, but know that the best investment instruments come with a certain safety margin, generally as assets. The best options for investment are stocks, real estate, bonds, mutual funds, and others.

Benefits of investing

There are several benefits in Investing, despite its obvious risks. And look, even saving has some risks, although such risks are different. For instance, you may believe what you have saved up is enough, but during moments of need you may find your savings is not enough at all. Now, let us see the benefit of investing.

• Your money creates money: When you invest your money, the same money earns you even more money! Isn’t that magical? This happens due to the increase in price or value of stocks, mutual funds or other instruments you own. Thus, you earn a profit when an instrument you own can be sold at a higher price than what you bought it for.

• You save tax: When you invest for the long haul, you save on taxes.
  
  
• You benefit with compound interest: Compounding is said to be one of the wonders of the modern world. Rightly so, because it allows your invested money to keep growing in mathematical progression. This gives you a big profit over time. Compounding creates wealth for you, and doubles it in much less time.
  
  
• You stay ahead of your personal finance yardsticks: If you are new to investing, it shall allow you to buy things others cannot. Besides, your investments work as a safety net during unforeseen emergencies.

The Real Difference between Savings & Investment

Saving only preserves your money, but there is no growth to that. Investment makes your money grow over time. Thus, your money works for you, and that is a huge benefit! Yes, there is little risk in Savings and there is considerable risk in Investment, but it all matters what your financial goals and plans are and what your risk tolerance level is. Investing gives you higher returns over time, which savings does not. Savings is for a shorter time while investment is for a longer period of time.

Should you be Investing in the Stock Market in 2021?

Trading in the stock market has always required iron fortitude. Bring in the pandemic of 2020, and you get economic upheaval, changes in societal norms, and considerable hardship when it comes to trading on the stock market. Why was it so bad? Well for one, it took exactly 33 days to make the benchmark S&P 500 to drop by more than 1/3rd of its value.

Since March 2020, we have seen a mostly downward spiral to the bottom. Yes the S&P did finish last year with 16% and even started 2021 on a very positive note.  As of 3rd February 2021, the index was yet higher by 2%.

However, if you ask whether or not it is a good time to start investing in the stock market, experts shall tell you that you must still tread with caution.
The looming 20% stock market crash

Now, this data is of the US stock market, but as you know when it comes to the stock market, everything is connected. The S&P is one of the most followed market indices in the USA and the world. Thus, any ups and downs there can signal ramifications for the global stock market, India included.

What should make investors concerned is the Shiller price-to-earnings ratio for S&P 500. IT is different from the standard P/E ratio as it is based on average inflation-adjusted earnings from the last 10 years, and not on the earnings from one year.

If you look at the last 150 years of S&P, you’ll see that it got 16.78 Shiller P/E on average. Additionally, the same ratio has been quite high for the last 25 years. On the 3rd of February 2021, the ratio for S&P was almost 35, which was double of its long-term average. Now, don’t get too happy on seeing the high numbers or rise from 16.78 to 35-ish. And here’s why: in the whole history of the Shiller P/E ratio, there have only been two times it went beyond 30- during the Great Depression and during the dot com bubble. During these two events, the ratio went beyond 30 and remained there during the bull market condition. During the last three years, there have been two other events, which resulted in fall in the S&P by 20% and 34% respectively.

Thus, every time the ratio goes beyond 30 in a bull market, it has resulted in or heralded a minimum market decline of 20%.

Another thing to worry about which can bring a global recession

In many countries, USA and India Included, vaccination drives have only just started. More than half of the population does not want to get vaccinated. According to medical experts, it takes 78% to 805 to reach mass immunity or herd immunity. As you can see, the pandemic is not over at all.

Additionally, governments are not adding a lot of social security measures to help the common citizens during these trying times. Many have faced furloughs and job losses. This limits their buying power, which in turn fuels the GDP of a country mainly. Without this, GDP shall fall further, hastening in the advent of a recession in 2021.

Is this a good time to invest in the stock market?

If you are a beginner, it is probably not a good idea. If you are experienced and have stocks, your best bet can be to stay the course of events and even add onto whatever holdings you have.

Hedge Funds - Should you be investing in Hedge Funds?

Hedge funds are not as well-known as mutual funds, and truth be told, these are still in their initial phase. While like mutual funds, these also pool their resources from various investors, they use a number of complex strategies to deliver high returns by “hedging” risk. In India, more and more people are coming to know about hedge funds and are investing in it.

What are hedge funds?

In the context of investing, hedging means to safeguard or to protect against risks. Hedge funds use money collected from insurance firms, banks, high net worth individuals and families, pension funds and endowments. Hedge Funds don’t have to register with SEBI or to be disclosing their NAV like other mutual funds.

A portfolio of a hedge fund consists of equities, derivatives, currencies, bonds and convertible securities. Thus, these are also seen as alternative investments. Hedge funds require aggressive management since they try to hedge or safeguard investor’s money from market risks and fluctuations. Hedge funds employ considerable leverage as well, unlike mutual funds, and hold both long and short term positions on the market.

Should you be investing in Hedge Funds?

Hedge funds are not handled directly by the investors like you. These are instead handled by designated managers who are experts in this field. Due to this reason, these are costlier than mutual funds. As you can understand, you can get hedge funds if you are financially well-off. This in turn is because trading in hedge funds requires an aggressive trader who can handle risks and has surplus funds.

The more structural complexity there is in these funds, the more the risks shall be. The manager needs to buy and sell at dizzying speed just to keep up with the market fluctuations, which is why his fee is as high as 15% to 20% of your returns.

If you’re a first-time investor, it is better to stay away from hedge funds for now. You can always come back to them later when you have more experience.
What are the Features and benefits of Hedge Funds?

Hedge funds were allowed from 2012 when SEBI allowed investment in alternative funds Hedge Funds have features such as:

• High net-worth investors: You can invest in hedge funds only if you are an accredited or qualified individual. Investors here mainly include banks, insurance companies, pension funds, endowments, high net worth families and individuals.
• Diverse portfolio: Hedge funds are ruled by the concept that the investors’ money needs to be safeguarded from market fluctuations as much as possible. This is why hedge fund managers invest in a comprehensive portfolio including stocks, equities, currencies, derivatives, real estate and bonds.
• Higher fees: In hedge funds, there is a concept of expense ratio and management fee. In India, the management fee can be below 2% and even below 1%. The profit sharing falls between 10% and 15%.
• Higher risks: The risks are higher since investment strategies can give huge risks to hedge funds. Besides, there is a long lock-in period when you can’t access your funds.
• Taxation: Income from hedge funds is taxable at your investment fund level.

As you have seen, these funds have higher risks, but also give you a potentially higher reward when compared to mutual funds. However, you should still choose a fund carefully, and a fund manager with even more care.

Spend and Invest on Yourself Without Guilt - What do you Need to Spend and invest on yourself

Your investment decisions depend on the risk you're willing to take to gain a quantum of return. If you wish to get higher returns, you need to take greater risks.

The time you take for learning about individual companies is crucial for investing in the stock market. Learning about mutual funds usually takes lesser time. Unless you are a seasoned investor or are prepared to put in a substantial amount of time and effort needed to become one, it isn't beneficial to invest in equities/stocks directly.

Stocks Versus Mutual Funds

The Risk Factor

Stocks are more exposed to market-induced risks than mutual funds. Funds pool stocks under a stock fund or bonds under a bond fund. This streamlines the returns and reduces risk due to two reasons:

• If one of the companies in the fund has a poor manager, a doomed strategy, or is simply performing miserably, the loss incurred from that company is neutralized by the companies which perform well.
• Investing in mutual funds is less time-consuming and takes less effort.

From the fund manager's perspective, it takes time to research about the mutual funds, which could pose a major challenge. Fund managers keep updating the companies listed in your kitty; hence, it's sometimes difficult to understand the composition of your fund.

You can look at the past performance of your fund, but when your manager changes the companies listed under your fund, the performance can change dramatically as well. Additionally, mutual funds impose annual management fees, while stocks only bear an initial outlay cost.

Risk-Return Tradeoff

Mutual funds reduce investment risk by pooling stocks or bonds under various types of funds. Diversification in the investor's portfolio substantially reduces the risk; poor performance of a few companies is counterweighted by the good performance of other companies/businesses.

Investing in stocks can be time-consuming

Learning how to invest in stocks can be time-consuming. You need to conduct extensive market research and understand the direction of movement of the stocks and the reason behind such trends. Only then can you determine the most suitable investment option.

For investing efficiently, you'll need to study the financial reports extensively to know the profitability of the company and the strategies that can be employed to increase returns from investments.

To choose mutual funds, you don't need to learn how every company that you have invested in is performing; that's the mutual fund manager's job. However, you'll be required to research the historical performance of the mutual funds. Apart from that, you also need to find out the most promising sector.

Investing in both the financial instruments needs extensive knowledge of the market and the economy as a whole

Tax Liability

All equity portfolios need the investor to relentlessly update his/her portfolio by buying and selling shares as the desirability of the stocks keeps varying. When you're trading shares by yourself, you will be attracting tax liability.

However, in an equity mutual fund, such trading is done by the fund manager and you don't incur a tax liability because the transactions aren't made by you. Using the tax multiplier, you can calculate the amount of tax that can be saved. This might seem like a small amount, but it makes a huge difference in the long run.

70-30 Investing - Why Use the 70-30 Principle when Investing?

When it comes to equity investing, most traders in India tend to absorb losses when the prices of stocks fall, and then book stocks again when prices rise. Sadly, this strategy rarely works in the realm of equity investments.

Right now the economic scenario is unprecedented. The market is facing a threat which it had not faced in at least a 100 years. The pandemic has hit the global economy pretty hard. This has led investors wondering where to park their money in stocks and find safety. However, we wonder when the market condition returns to normal or when the market next time shows a boom period, will people buy more stocks or will they sell their current stocks to get a profit?

Right now, it may be tough to determine which stocks to buy since many stocks trade somewhat above their historical average valuations.

Trading market veterans say that it helps to follow a 3-point checklist. It is for investors who want to take informed buying decisions when the market shows inflated prices.

Earnings

Expect an economic revival after two to three quarters of the coming year.

The reason for this slow growth can be several.

First of all, the Indian GDP is considerably affected by the pandemic and its resultant lockdown. And by that, we do mean the economy is severely affected. As you may know, several industry sectors are crippled. Some are affected considerably, but are bouncing back. Others are thriving even in this situation! India’s net profit growth has gone down as well.

The next few quarters may not be a good-enough time for many industries, and therefore for many investors. Some companies will have to de-stock, especially in the domestic sector.

The good news? Some industries and even companies are showing aggressive growth.

To buy or sell

It is advised that you use the 70-30 principle.

It is also called the 80-20 principle. According to this, you spend 20% to 30% of your portfolio money on opportunistic investments only and for trading purposes. For instance, let’s say that you are choosing a stock and you know that it will likely double or triple its growth, may want to buy and hold such a stock.

At the same time, use 20 or 30 percent of your investment positions to actually trade since the market is volatile. Don’t be scared of market volatility. Volatility is not your enemy if you know how to use it. For instance, if you notice that a stock is showing a good run-up for a good period of time, pair down 20% of your positions even if it is for a core holding. Then wait for the stock price to come back before buying it again.

How Does Money Grow In Mutual Funds? - Benefits of Mutual Funds

Have you often come across mutual funds advertisements and wondered what they are? Do you want to learn more about mutual funds but don't know where to start? Are you frustrated with the lower dividend rates of traditional investment options? Do you want to invest your money in mutual funds but are apprehensive of the risks? mymoneykarma is here at your rescue.

mymoneykarma breaks down the seemingly difficult concept of mutual funds for you and lets you embrace investing in mutual funds. Let's get started.

What are Mutual Funds?

A mutual fund is built by collecting capital from different investors and invested in company shares, stocks, or bonds. A mutual fund is handled collectively to earn the highest returns.

Is It Risky to Invest in Mutual Funds?

Contrary to popular belief, investing in mutual funds is not similar to giving away your savings to a thief. Mutual funds provide you choices with different levels of risk and returns. You can choose the fund depending on your investment objective and goals. If you want capital appreciation, you can opt for equity mutual funds from a long-term horizon. But if your aim is a low-risk investment and returns that are higher than bank deposits, you can look at debt funds. You must consult an advisor who can help you understand your risk appetite.

Benefits of Mutual Funds

Mutual funds can provide you schemes that can meet your different financial goals. The key benefits of investing in mutual funds are given below.

Safety: Mutual funds offer you a wide choice of schemes that suit your financial objectives and risk appetite.

Liquidity: Mutual funds are almost as liquid as your bank deposits. You can withdraw and get the money from your account in only a few days.

Returns: There are many types of mutual funds schemes in which you can invest. These have characteristically higher returns than other investment options of their league.

Diversification: Mutual funds allow you to participate in schemes across investment class and also across various companies and institutions. This spreads the risk, and you can enjoy the benefits of diversifying.

Convenience: On opening an account, that account becomes synonymous with your identity in the mutual funds market. They also allow you to invest at your convenience, withdraw, or make payments directly through your bank.

Outsourcing of fund management: By investing in mutual funds, you can outsource fund management expertise at a very nominal expense ratio of 2.25% to 1.05% for equity funds and 2.00% to 0.80% for debt funds.

Types of Mutual Funds Schemes

There are many types of mutual funds schemes in which you can invest. We have described them in brief below.

Open-ended Schemes

An open-ended fund or scheme is continuously available for subscription and repurchase. Such schemes do not have a fixed maturity period. You can conveniently buy and sell units at the Net Asset Value (NAV) prices, which are declared daily. The essential feature of the open-end schemes is liquidity.

Close-ended Fund / Schemes

Close-ended funds or schemes have fixed maturity periods. They are open for subscription only for a specific period at the time of launch of the scheme. You can invest in the scheme at the time of the initial public issue and either purchase or sell units of the scheme on the stock exchanges where the schemes are listed. Some schemes also provide an option of selling back the units to the mutual fund via regular repurchase at NAV-related prices to provide an exit route.

Growth / Equity Oriented Schemes

Growth funds aim to provide capital appreciation over the medium to long- term. Such schemes usually invest a significant part of their funds in equities. Equity-oriented funds have higher risks as compared to other funds. Such schemes provide varied options to investors such as dividend option and capital appreciation, and the investors may choose an option according to their preferences.

Income / Debt Oriented Schemes

Income funds aim to provide a steady income to investors. These schemes usually invest in fixed income securities such as bonds, government securities, corporate debentures, and money market instruments. These funds are less risky compared to other equity schemes. Such funds are not affected because of fluctuations in equity markets. Opportunities for capital appreciation are also limited in debt-oriented funds. The NAVs of these funds are affected by changes in interest rates.

Balanced Funds

Balanced funds aim to provide both growth and regular source of income as these schemes invest in both equities and fixed income securities. The proportion of investment is indicated in the offer documents. These funds are suitable for people seeking moderate growth. These people usually invest 40-60% in equity and debt instruments. Balanced funds are affected by fluctuations in share prices.

Money Market or Liquid Funds

These funds are also income funds, and they aim to provide fund liquidity, capital preservation, and moderate income. Liquid funds invest exclusively in safer shorter investment instruments like treasury bills, commercial paper, and inter-bank call money, certificates of deposit, government securities, etc. Returns on these schemes tend to fluctuate much less as compared to other funds. These funds are suitable for corporate and individual investors as a means of investing their surplus money for short periods.

Gilt Funds

Gilt funds exclusively invest in government securities. Government securities usually don't have any default risks. The NAVs of these schemes tend to fluctuate with changes in interest rates and other economic factors similar to the income or debt oriented schemes.

Index Funds

Index funds mimic the portfolio of particular indexes such as the BSE Sensitive index and S&P NSE 50 index (Nifty). The schemes invest in the securities in the same weight comprising of an index. NAVs of such plans would rise or fall with the rise or fall in the index. Essential disclosures in this regard are hence made in the offer document of the mutual fund scheme. There are also exchange-traded index funds launched by the mutual funds which are traded on the stock exchanges.

4 Beginner Investing Mistakes You should Avoid

 To build wealth, it is a good idea to put your money in the stock market, although it is not without risk. There is good news, though. You can easily decrease this risk by staying out of the way of some common investing mistakes. Here are the 4 moves which you need to stay away from.
Investing money that you can’t afford to lose

You do not NEED to buy stocks and compete in the stocks market, especially if money is dear to you. If the money you are risking is too important for you, do not use it for speculative purposes. Don’t get a loan for market speculation either.

There are so many things that can go wrong. You may decide in desperation that you need to sell after a market crash to recover your losses, or you may want to buy when prices are rising to get some momentum. The problem is that if you follow both these urges, you won’t make money. These can even lead you to a risky situation. If you take the above two steps, you are gambling instead of investing.

It is easier to keep calm, think ahead and make logical decisions, especially when you do not need to invest in funds immediately. The rule of thumb is you should not invest money that you plan to use in the next 5 years.
Going for a quick profit

Everyone wants a quick win, but that is not the way to go in stock trading. Yes, you can lock into a profit by selling high. However, once you sell, you have the money that can and needs to be invested by someone else. This results in a risky buying and selling cycle. The more you do this, the more risk there is of making a wrong move and a big loss.

It is far better to get quality positions and then hold them for the long term. Seek out older, large and mature companies which are stable and growing for years. One good choice is reliable dividend players as they give immediate income along with an adequate chance to grow in the future.

You may also want to try large-cap, low-cost ETFs, S&P index funds for portfolio diversification immediately. This shall bring your portfolio to a near-market level performance, and thus can expect a 7% growth long-term.
Investing in companies and securities you don’t understand

Even famous investors like Warren Buffet have advised new investors not to make this mistake. However, this problem is all too common. In their hunger to get a quick win in the stock market, new players dabble in penny stocks or in businesses they have no knowledge about. They invest in companies whose products and services do not affect their lives.

The problem is that if you are not knowledgeable about companies, you cannot evaluate its future potential, nor can you know when conditions change. The same advice is for your securities. Go for stock shares and mutual funds instead of futures contracts, IPOs and options.
Buying on margin

This means buying from brokerage for investing in stocks. You pay interest on loan, and the brokerage uses the positions in your account as their collateral. If the collateral’s value decreases significantly, you have to give more funds to cover the loss. The loan is repaid by liquidating your position, and the firm pays you back the loan first, and then whatever is remaining for you.

Buying on margin gives you more buying power, but there are problems too. You can still lose all you invest. If you are a beginner investor, this is what you should not do.
It pays to invest slowly and rationally

Playing the stock market game is not a sprint. It is an ultramarathon. You do not need to win early on, just the discipline to play the long term game. That’s where all the winners are.