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Month: April 2023

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5 powers that will make money for you while you rest

1. Power of compounding

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

What is compounding?

Compounding is the ability of an investment to generate earnings that are reinvested to generate even more earnings over time.

Compounding is a powerful force because as the investment grows, the amount of interest or returns generated also grows, and over time, the growth can become significant. The longer the investment is left to compound, the greater the potential for growth becomes.

Compounding can be used to build wealth over the long term, as even small investments can grow into substantial sums of money over time. A Rs. 2000 SIP in one of the oldest midcap fund, Nippon India Growth Fund, since inception would have created a corpus of Rs. 2.5 crore (investment Rs. 6.5 lacs only)

It’s the most time consuming to achieve the first crore. Subsequently, power of compounding works in investors favor to reach subsequent crores.

2.Power of starting early

As evident from the below picture, even though Savita is making 74% less investment during her journey, yet she is able to create a 113% higher corpus than Kavita just by starting early.

Cost of delaying is very high in the investment journey:

3.Power of patience

We all know that equity markets do not give a linear return like a fixed deposit. Volatility is the price an investor has to pay to get that ‘extra return’.

Black swan events like COVID or 9/11 or Russia Ukraine war can have an immediate impact on the markets. However, investors who have patiently held their investments, have created huge wealth for themselves.

Equity Markets witness 10-20% temporary declines almost every year. Despite an intra year decline of more than 10% almost every year, 3 out of 4 years ended with positive returns!

Despite several intermittent crises, Indian Equities have gone up over the long run mirroring earnings growth

4.Power of diversification: 

Diversification is the practice of spreading your investments across different asset classes, sectors, and geographies. It helps reduce risk by ensuring that a single event or market downturn doesn’t wipe out your entire portfolio.

No asset class is able to consistently give linear returns. Therefore, it is important to diversify portfolio across various asset classes:

Within equity as well, it is prudent to diversify as no category works every year: 

5.Power of discipline:

Discipline is essential to avoid emotional decision-making, such as panic selling during market downturns or chasing after hot stocks. It involves sticking to a long-term investment strategy, maintaining a well-diversified portfolio, and avoiding impulsive investment decisions.

Do you know the major difference between a successful and unsuccessful investor? Successful investors are disciplined! Their investment decisions are not driven by greed, fear, and emotions. They know how to react when the market turns volatile.

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Chat GPT (Artificial-Intelligence Chatbot) Answers Common Financial Queries

What is Chat GPT?

 

ChatGPT is a powerful artificial-intelligence chatbot developed by OpenAI and launched in November 2022. It garnered attention for its detailed responses and articulate answers across many domains of knowledge. It is capable of understanding human speech and producing in-depth writing that is easily understood by humans. Microsoft has planned a $10 billion investment in ChatGPT.

 

It can be accessed at https://chat.openai.com

 

We asked ChatGPT ten common financial queries and here’s what ChatGPT said:

Q.1 Why equity generates higher return in the long run?

 

ChatGPT’s response: Equity investments can generate higher returns in the long run due to several reasons:

  1. Ownership in the company: When an investor buys a stock, they are effectively buying a share of ownership in the underlying company. This means that as the company grows and becomes more profitable, the value of the stock can increase, leading to higher returns for the investor.

  2. Dividends: Many companies pay out a portion of their profits in the form of dividends to shareholders. Over the long run, reinvesting these dividends can result in significant gains for investors, especially if the dividends are reinvested in additional shares of the company’s stock.

  3. Economic growth: Equity investments are often tied to economic growth, as a growing economy can lead to increased company profits and higher stock prices. Over the long run, as economies grow and expand, equity investments can benefit from this growth and generate higher returns.

  4. Compounding returns: Equity investments have the potential to generate compounding returns, which means that returns earned on an investment are reinvested back into the investment, leading to exponential growth over time. This can result in significant gains for investors over the long run.

     

It’s important to note that equity investments also carry higher risks, as stock prices can be volatile and can fluctuate significantly in the short term. However, over the long run, equity investments can generate higher returns than other asset classes such as bonds or cash equivalents, making them a potentially valuable addition to a well-diversified investment portfolio.

Q.2 Why should one invest in equity in India

 

ChatGPT’s response: There are several reasons why investing in equity in India can be a good choice for some investors:

  1. Growth potential: India is one of the fastest-growing economies in the world, with a large and growing middle class, increasing urbanization, and a young population. This can create opportunities for companies to grow and generate higher returns for investors.

  2. Diversification: Investing in Indian equities can provide diversification benefits for a global portfolio, as the Indian stock market has a different composition of companies and industries than other markets.

  3. Demographic dividend: India has a large and young population, which is expected to drive consumption and economic growth in the coming years. This can benefit companies in sectors such as consumer goods, healthcare, and education, among others.

  4. Structural reforms: The Indian government has implemented several structural reforms in recent years, such as the Goods and Services Tax (GST), bankruptcy code, and foreign direct investment (FDI) liberalization, among others. These reforms can improve the ease of doing business and create a more favorable investment climate for companies.

  5. Access to emerging markets: India is geographically well-positioned to access other emerging markets in Asia and Africa, which can create opportunities for companies to expand their operations and generate higher returns.

     

It’s important to note that investing in Indian equities also carries risks, including political and regulatory risks, currency fluctuations, and market volatility. It’s important to consider one’s own risk tolerance and investment goals before making any investment decisions, and to seek the advice of a professional financial advisor.

Q.3 What should be reasonable expectation when investing in the Indian equity markets

 

ChatGPT’s response: When investing in Indian equity markets, it’s important to have reasonable expectations about potential returns and risks. Here are some factors to consider when setting expectations:

  1. Historical returns: Over the long run, Indian equity markets have generated attractive returns for investors, with the BSE Sensex and NSE Nifty indices averaging annualized returns of around 12-15% over the past few decades. However, it’s important to note that past performance is not a guarantee of future returns.

  2. Market volatility: Indian equity markets can be volatile and subject to short-term fluctuations due to various factors such as economic growth, geopolitical events, and global market trends. As such, investors should be prepared for short-term market volatility and be willing to take a long-term view when investing in Indian equities.

  3. Diversification: It’s important to diversify investments across different sectors and asset classes to manage risks and potentially enhance returns. This can help reduce the impact of market volatility and specific risks associated with individual stocks or sectors.

  4. Investment horizon: The investment horizon is a key factor in determining potential returns. Equity investments are generally considered suitable for long-term investors who have a time horizon of 5-10 years or more. Investors should have a realistic investment horizon and not expect to generate significant returns in the short term.

     

Overall, it’s reasonable to expect that investing in Indian equity markets can potentially generate attractive returns over the long run, but investors should also be prepared for short-term volatility and manage risks through diversification and a long-term investment horizon. It’s important for investors to do their own research, consult with a financial advisor, and make informed investment decisions based on their financial goals and risk tolerance.

Q.4 Whether to speculate or invest?

 

ChatGPT’s response: Speculation and investing are two different approaches to the financial markets, and each has its own benefits and risks.

 

Speculation involves making bets on the short-term price movements of securities or other assets, with the goal of profiting from price fluctuations. Speculators often use leverage and take on higher levels of risk in the hopes of earning high returns quickly. However, speculation can also lead to significant losses if the market moves against the speculator’s position.

 

Investing, on the other hand, involves buying and holding securities or other assets for the long-term, with the goal of generating returns through a combination of income and capital appreciation. Investors typically focus on the underlying fundamentals of the assets they invest in, such as earnings, dividends, and growth prospects, and aim to build diversified portfolios that can weather short-term market volatility.

 

While speculation can generate higher returns in the short-term, investing is generally considered to be a more prudent approach over the long-term. By focusing on the underlying value of assets and holding them for the long-term, investors can potentially generate steady, reliable returns while avoiding the risks associated with short-term speculation.

 

Ultimately, whether to speculate or invest depends on an individual’s risk tolerance, investment goals, and time horizon. It is important to carefully consider the risks and benefits of each approach and seek the advice of a professional financial advisor before making any investment decisions.

Q.5 Direct equity or mutual fund for a retail investor

 

ChatGPT’s response: Whether to invest in direct equity or mutual funds depends on an individual’s investment goals, risk tolerance, and level of investment expertise.

 

Direct equity investing involves buying individual stocks and managing one’s own portfolio. This approach requires a high level of investment expertise, as it involves researching individual companies, analyzing financial statements, and making informed decisions about when to buy and sell stocks. Direct equity investing can potentially generate higher returns than mutual funds, but it also carries higher risks and requires a significant amount of time and effort.

 

Mutual funds, on the other hand, are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. This approach provides investors with instant diversification and access to a wide range of securities without requiring individual research or management. Mutual funds also offer various investment.

 

For retail investors with limited investment expertise or time, mutual funds may be a more suitable option as they offer instant diversification and professional management. However, for those with a higher level of investment expertise and a willingness to actively manage their own portfolio, direct equity investing may be a viable option.

 

Regardless of the investment approach chosen, it is important for investors to carefully consider their investment goals, risk tolerance, and investment time horizon, and seek the advice of a professional financial advisor before making any investment decisions.

Q.6 How can I create wealth through mutual funds?

 

ChatGPT’s response: Creating wealth through mutual funds can be achieved by following these steps:

  1. Determine your financial goals: Identify your financial goals and the investment horizon for each goal. This will help you select mutual funds that align with your investment objectives.

  2. Choose the right mutual funds: Look for mutual funds that have a track record of generating attractive returns over the long run. Consider factors such as fund performance, expense ratio, investment style, and risk level when selecting mutual funds.

  3. Invest regularly through systematic investment plans (SIPs): Investing regularly through SIPs can help you take advantage of the power of compounding and potentially generate attractive returns over the long run. Set up a SIP to invest a fixed amount in mutual funds at regular intervals.

  4. Rebalance your portfolio periodically: Rebalancing your mutual fund portfolio involves adjusting your investments to maintain your desired asset allocation. This can help you manage risk and potentially enhance returns over the long run.

  5. Stay invested for the long term: Mutual funds are suitable for long-term investing, and investors should have a long-term investment horizon of at least five years or more. Avoid making frequent changes to your mutual fund portfolio based on short-term market trends.

  6. Review your portfolio regularly: Review your mutual fund portfolio periodically to ensure that it remains aligned with your financial goals and risk tolerance. Make adjustments as needed to stay on track.

     

By following these steps, you can potentially create wealth through mutual funds over the long run. However, it’s important to remember that mutual fund investments are subject to market risks, and past performance is not a guarantee of future returns. It’s important to do your own research, seek the guidance of a financial advisor, and make informed investment decisions based on your financial goals and risk tolerance.

Q.7 Why systematic investment plan (SIP) is a good investment option

 

ChatGPT’s response: Systematic Investment Plan (SIP) is a good investment option for several reasons:

  1. Disciplined approach to investing: SIP allows investors to invest a fixed amount of money at regular intervals (monthly, quarterly, etc.), which promotes a disciplined approach to investing. By investing a fixed amount regularly, investors can avoid the temptation to time the market and invest based on short-term market fluctuations.

  2. Rupee cost averaging: SIP involves investing a fixed amount at regular intervals, regardless of whether the market is up or down. This can result in rupee cost averaging, where investors end up buying more shares when prices are low and fewer shares when prices are high. Over time, this can result in lower average purchase costs and higher returns.

  3. Potential for higher returns: SIPs can potentially generate higher returns over the long term, as equity investments can generate higher returns than other asset classes such as bonds or cash equivalents. Additionally, the power of compounding can help generate significant gains over time.

  4. Convenience and flexibility: SIPs are convenient and flexible, as investors can choose the amount they want to invest and the frequency of their investments based on their financial goals and investment objectives. Additionally, SIPs are available for a wide range of investment products, including mutual funds, stocks, and exchange-traded funds (ETFs).

     

Overall, SIP is a good investment option for investors looking to start investing in the stock market with a disciplined approach and without timing the market. It is important for investors to carefully consider their investment goals, risk tolerance, and investment time horizon, and seek the advice of a professional financial advisor before making any investment decisions.

Q.8 Value of a financial advice in investing

 

ChatGPT’s response: Financial advice can be invaluable when it comes to investing, especially for individuals who are new to investing or lack the time or expertise to make informed investment decisions on their own. Here are some of the benefits of seeking financial advice:

  1. Expertise and knowledge: Financial advisors have the expertise and knowledge to analyze market trends, evaluate investment products, and make informed investment decisions. They can help investors identify investment opportunities and provide guidance on creating a well-diversified investment portfolio that aligns with their financial goals and risk tolerance.

  2. Risk management: Financial advisors can help investors manage risk by recommending investment products that are appropriate for their risk tolerance and investment objectives. They can also help investors rebalance their portfolios periodically to ensure that their investments remain aligned with their goals and risk tolerance.

  3. Financial planning: Financial advisors can help investors with financial planning, including retirement planning, tax planning, and estate planning. They can provide guidance on saving and investing for specific financial goals and help investors make informed decisions about managing their wealth.

  4. Behavioral coaching: Financial advisors can provide behavioral coaching to help investors avoid common investing mistakes, such as reacting to short-term market fluctuations or making impulsive investment decisions. They can help investors stay disciplined and focused on their long-term investment objectives.

     

Overall, financial advice can provide investors with the expertise, knowledge, and guidance they need to make informed investment decisions and achieve their financial goals. It is important to seek out a reputable financial advisor who is qualified and licensed to provide investment advice and who has a fiduciary duty to act in their clients’ best interests.

Q.9 Why many investors lose money in equities

 

ChatGPT’s response: There are several reasons why investors may lose money in equities:

  1. Lack of knowledge and research: Many investors may lack the knowledge and research needed to make informed investment decisions. They may invest in stocks based on rumors, tips, or short-term market trends without understanding the underlying fundamentals of the companies they are investing in.

  2. Emotional investing: Emotional investing can lead to poor investment decisions, such as buying high and selling low, or reacting to short-term market fluctuations. This can result in investors buying and selling stocks at the wrong time and missing out on long-term investment opportunities.

  3. Lack of diversification: Investing in only a few stocks or sectors can lead to concentrated risk, where a decline in the performance of one stock or sector can significantly impact the overall portfolio. Diversification across different sectors and asset classes can help manage risk and potentially enhance returns.

  4. Market volatility: Equity markets can be volatile and subject to short-term fluctuations due to various factors such as economic growth, geopolitical events, and global market trends. Investors who are not prepared for short-term market volatility may panic and sell their investments during market downturns, locking in losses.

  5. Timing the market: Timing the market involves trying to buy and sell stocks based on short-term market trends. This is extremely difficult to do successfully, and investors who try to time the market may end up buying stocks at high prices and selling at low prices, resulting in losses.

     

Overall, investors may lose money in equities due to a variety of factors related to lack of knowledge, research, emotional investing, lack of diversification, and market volatility. To avoid these pitfalls, it’s important for investors to do their own research, diversify their investments, have a long-term investment horizon, and seek the guidance of a financial advisor.

Q.10 Make a stock portfolio for me to beat nifty 50

 

ChatGPT’s response: I’m sorry, as an AI language model, I am not authorized to create personalized investment recommendations or portfolios. Building an investment portfolio is a complex and personalized process that requires a thorough understanding of your financial goals, risk tolerance, investment horizon, and other personal circumstances.

 

It is always recommended to seek the guidance of a financial advisor who can evaluate your personal financial situation, assess your investment goals and risk tolerance, and recommend a customized investment portfolio that is tailored to your needs.

 

Additionally, beating the Nifty 50 index over the long-term is not easy and requires a lot of research, analysis, and risk-taking. While some investors have been able to beat the index, many others have failed to do so. Therefore, it’s important to approach investing with a long-term perspective, diversify your portfolio across different asset classes, and avoid taking excessive risks that could jeopardize your financial goals.

Onesta Capital Ventures is a Multi Family Office based out of Gurugram (India). We aim to provide tailored independent wealth management and other family governance solutions to individuals and corporates.

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