Friday, August 12, 2016

What Is a Portfolio?

A nice, fundamental question, “What is a “Portfolio’?”.
The dictionary meaning of the word is in two parts as follows:
  1. A large, thin, flat case for loose sheets of paper such as drawings or maps.
  2. A range of investments held by a person or organisation.
The second meaning, derived from the first actually, is relevant for us. It is a bouquet of various investments. You can a portfolio comprising of various types of investments like stocks, bonds, gold, currencies, etc. In some cases it may be separate for a single class of assets like equity shares. The ‘Portfolio 2K15’ which I use for teaching purposes comprises only of equity shares listed on the Indian stock exchanges.
Your stock broker usually will display on the website how your portfolio is faring. You can monitor the growth or decline in the market value of the portfolio, which in turn is the sum of the growth or decline in the market value of the constituents.
The most important lesson you must learn while investing is that in the short term, you should not be alarmed by the decline in the market value of your portfolio or unduly elated by its growth. Only after a very long time, say over 20–50 years, after the law of ‘Miracle of Compounding’ had an opportunity to do its job, you will be pleasantly surprised to find that your portfolio has grown enormously and you have become a very rich man.

Happy Investing!

Is there a Special Benefit in Being Invested For a Long Time in a Debt Fund?

A very important and useful question, indeed.
In the case of investment in a debt fund is concerned there is no special advantage in being invested for a very long time because in debt fund the interest is paid out and there is no reinvestment and no scope for capital appreciation. One will get the interest as long as one holds the investment. The quantum of returns depend on the prevailing interest rates in the market.
On the contrary, in the case of an ‘Equity Fund’, the prices of the shares that are constituents of the fund will increase many folds in the long run on the back of two important factors as follows:
  1. Natural growth of revenues and profits of the companies in an environment of general prosperity.
  2. Operation of the law of ‘Miracle of Compounding’ propounded by Albert Einstein, in favour of the investor and consequent wealth creation in the long term.
To conclude, there is no special benefit in remaining invested in a debt fund for a long time. However, long time is the most essential ingredient of wealth creation in the case of an equity fund.

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

Is it Possible to Regularly Update Recommended Stocks To Buy or Sell?

It is a very good idea. I have posted a few good stocks at ‘Portfolio 2K15’, but to undertake to update it regularly is an onerous responsibility that is impossible for anybody.

Good stocks are generally good for lifetimes but one has to certainly review them every quarter. Any short term under performance or deviation from established long term behaviour may be ignored but such actions like management change, merger with an undesirable company, etc., which have the potential to affect long term prospects should be recognised and stock may have to be sold in deserving circumstances.

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

What Is The Difference Between Dividend and Growth Fund. Which Is Better?

A very useful question. Before going to the question of which of the two is better, let us first understand both briefly.
Dividend Funds:
They pay regular dividends to subscribers. Dividend is the reward paid by a company to its shareholders for investing with the company. Mutual funds borrowed this concept and have started paying the unit holders dividends at regular intervals. The dividends are supposed to be paid out of profits, however in the absence of adequate profits, many of the mutual funds follow the undesirable and obnoxious practice of paying dividends out of capital invested, thereby diminishing the actual money invested.
Growth Funds:
Growth funds on the other hand do not pay any dividends. They plow back the profits for purchasing more shares and thereby increase the price or market value of the units. Since the market value of the units are supposed to grow more. Because of reinvesting the profits instead of paying them as dividends, such funds are called growth funds.
Coming back to your question which kind of SIP is better, I will recommend the Growth SIP Fund for two reasons, as follows:
  1. In long term investing, all incomes earned must necessarily be reinvested. Though the investor has the choice of reinvesting the dividends received herself, she may be tempted to spend the income, instead. It is better for the fund itself to reinvest the profits on behalf of retail investors.
  2. In the light of the highly undesirable practice of paying dividends out of capital, it is advisable to invest in the growth fund where the question of paying dividends does not arise at all.
I hope I have answered your question adequately, Happy Investing!

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also and therefore posted here.