Beginner Archives - fisdom
Mutual Fund Investment

Are you a Bazigar Investor?

Well, it’s 10.30 pm and I am travelling back to my home. I am super exhausted and had a
rough day. And guess what, I just received a WhatsApp text from my boss. No, he is not cribbing.
It’s a motivational video which shows when our Big B was bankrupt after his successful carrier,
when our master blaster had a tennis injury after proving his worth and when our prime minister
was a tea seller. The cherry on the cake, Radio Mirchi just advertised the dialogue, “Haar ke jitney
walle ko bazigar kahte hai”. It made me wonder, we do have ups and downs in our life, but there
is always a silver lining in the end. One must never quit.

The same philosophy applies to investment market as well. There are days when your
portfolio is all green; there are days when it’s all red. It’s just like monsoon which is never
predictable, but what follows is the spring, which is always followed by it. Allow me to refresh
your memory, when market fall in 2008, in 2016. But we have always seen it grow bigger and
better after every fall. Though the recent fall is a minor one, we do have a very optimistic view in
the future.

Amount invested for yearsPercentage appreciationPercentage depreciation
1 year67%32%
3 years87%13%
5 years93%7%
7 years99%1%
10 years100%0%
Analysis based on the performance of Nifty index from Nov 2016 to Feb 2018

 

Numbers never lie. Had it been the scenario, if you would have invested your hard earned
money for a span of years mentioned, you could have earned stated appreciation in your money.
You can also see depreciation as well. But wait and watch. The market never disappoints. 10 years
and boom, no depreciation at all. It’s all green.
I am a firm believer of the proverb, “In every adversity, there lies a seed of opportunity”.
The proverb applies to equity market as well. Does it mean, the market downturn is a good sign
for investors? Of course, it is. Consider a scenario, where you have to purchase gold and your
budget is fixed. It has come to your knowledge that price of gold is going to fall in the next month.
A wise man will wait for a month to purchase gold so that he can get more grams of gold unless
his Highness has got no chill. Jokes apart, the same goes around with mutual funds. The price of
each unit of the mutual fund goes down during the market downturn, enabling the investor to

get more number of units, on the same amount invested in prior months. This helps him in
acquiring more units. When the market rises again, he can sell those units at a higher price and
gain profits.
Warren Buffett once said that as an investor it is wise to be “Fearful when others are
greedy and greedy when others are fearful.” As you can see, the second half of the saying is
applicable now. The market is down and there is a wave of panic amongst investors. It’s the right
time to invest and hold on to your existing portfolio to reap the benefits in the future. Leverage
the downfall and witness the benefits of a systematic investment plan. In a nutshell, remain calm and
be patient. Stay invested.

Happy Investing !!

 

fixed-income debt fund mean

Know your fund: what does your fixed-income/debt fund mean?

Yesterday I celebrated the birthday of my four-year-old. His grandpa gifted him 1,000
rupees. Being four year old, he had no idea what to do with this money. But he is a smart kid. He
handed over this amount to me and told me that he will take this money on his next birthday but
on one condition that, I will have to give him his favourite chocolate every month. Well played
Kiddo must say.

Having done my post-graduation in finance, I realized my kid just sold me a fixed income
security.

What is fixed income security?

A fixed income security is a type of investment that gives a return in the form of fixed
periodic payments and then eventually hands over your principal amount at the maturity. In this
type of investment, the investor has the idea about the amount of periodic payments he will be
receiving. It is fixed before the investor hands over his money to the issuer. Can it get any safer?

Types of fixed income security

FIXED INCOME SECURITYISSUED BYMATURITY
FIXED MATURITY PLAN CORPORATES30 Days - 5 years
FIXED DEPOSITS BANK OR NBFCS7 days - 10 years
PUBLIC PROVIDENT FUNDSBANKS 15 years
COMMERCIAL PAPERSCORPORATES3 months - 1 year
CERTIFICATE OF DEPOSITS BANKS3 months - 1 year
T BILLSGOVERNMENT 91 days - 364 days
BONDSGOVERNMENT/CORPORATES3 months-30 years
NATIONAL SAVING CERTIFICATEPOST OFFICE (GOVERNMENT)5 years - 10 years
POST OFFICE MONTHLY INCOME SCHEMEPOST OFFICE (GOVERNMENT) 1 years - 5 years

Pros and Cons of investing in fixed income

The best reason for investing in fixed income security is your principal amount is safe
along with a steady and predictable source of income. Worried about retirement? not anymore.
Along with this, you get to diversify your portfolio. Worried about market volatility? not
anymore. There isn’t any need for constant monitoring as well.

All these reliefs come with a cost. Yes, the rate of interest for fixed income securities is
comparatively lesser than other investment avenues. Interest rate risk i.e. price of fixed income
security goes down when interest rate rises is also of concern. As a matter of fact, the interest rate for
short term investment is lesser than that of long term investments. So, it is not a good option
if you are looking for quick money. The other risk arises when the issuing company isn’t
performing well and is unable to pay back your principal amount. This is called Credit risk. Analysis
of company is very important to ensure such risk does not arise.

Current scenario and outlook

RBI has increased the repo rate to 6.25%, to keep the inflation under control. Due to rise
in interest rate, the price of the fixed income security which was issued at a lesser rate previously
decreases. This, in turn, pushes down the returns of the investor. But it’s a good sign for investors
planning to invest their wealth now, as the rise in interest rate can be seen (which is 6.5 percent
to 7.5 percent recently).

Conclusion

Fixed income investments are an important part of portfolios and will always be, even if
interest rates go up. Various asset classes give unpredictable returns, unlike fixed income
securities. And as they say, one must never put all his eggs in the same basket. It is important to
have your amount of corpus in fixed income depending on your risk appetite, time horizon of
investment & return expectation. Future of fixed income is anything but fixed.

Happy Investing!

SIP Mutual Funds

One stone to hit physical & financial wealth right on point.

Let us assume that we enrol at a gym very enthusiastically to cause dramatic changes in our physical well being. Showing up at the at the gym at 7 am every morning which itself might be a noteworthy feat for many and is working out.

What is the purpose of going to the gym every day? Lose weight? Gain weight? Just remain fit? Build a better mental wellbeing? Socialising? Unless we define the objective of going to the gym, we won’t be able to fit the right work out for ourselves and might become slaves to peer pressure or whatever we are told to do or watch and do.

Much like our physical well being, financial wellbeing is also treated the same way, where we make ad hoc investments with the purpose of keeping the money away, however, without a plan around it.

Like all fitness enthusiasts would vouch, no effort can manifest into success unless there’s a goal attached to it. Investing without a goal is like running in circles without really reaching any place. However, goal-setting is the easy bit – all of us have and can think of a goal.

Here’s the tricky bit, the key to progress is discipline, to revisit this plan often enough to know If we are headed in the right direction and make all possible efforts to keep going.

The stone here is – Discipline

Successful investing is hard. Not complicated, just hard. It’s hard because for the most part, we are wired to keep shifting focus on the next shiny object and react to minor events & news. It is important to stay the course. However, that comes into the picture only after we have set the foundation. To repeatedly do the right thing towards your investments is bound to yield successful results.

“One of those lessons is that you aren’t in charge of everything. Do what you can, and then relax.”

― Carl Richards, The Behavior Gap

Carl Richards couldn’t have said it better, to just consistently build your savings and relax.

There is no rocket science involved in the investment below, just the simplicity of defining a goal, choosing a systematic investment as plan to invest and repeating this over the next 20 years.

No. of years to retirement25

SIP invested/month (INR)
₹ 10,000
Total Amount Invested(INR)₹ 30,00,000
Value of investment at the end (INR)168,62,065

A disciplined investment of at least INR 10,000 per month can yield you a mini-fortune when you need it the most. Sure, it may be difficult now, but with your income increased year over year, the amount you commit now will continue to diminish as a fraction of your income.

With real determination, if you step-up your investment in line with income increments, the result is bound to astonish you.

You are the master of your investments and should certainly ensure that you sail them through all the storms that might arise.

SIP for child's education

Are you ready to educate your child?

“The cost of college education today is so high that many young people are giving up their dream of going to college, while many others are graduating deeply in debt. “  – Bernie Sanders

While quoted in the context of education in the West, this is too true close home as well. Often, at family gatherings or with friends, we are caught reminiscing about how wonderful school and college days were, while there was not a care in the world and everything was so inexpensive.

We talk about how school fees in a good school were about Rs 11,000 15 years ago which is now about Rs 2L a year in the same school for a standard  12 education. Which makes that a growth of over 10x in 15 years.

As advisors, we always tell individuals that education inflation is always in double digit numbers while purchasing power parity increases by 6-8% every year.

According to the ‘Q3 2017 Salary Budget Planning Report’ released by Willis Towers Watson, Salaries in India are projected to rise at 10 per cent in 2018, same as actual increase in 2017. At the same time, education costs have been observed to increase by 12% on an average across grades.

Below is a simple illustration of how far education costs can go in the time to come in a 5-year spread timeline if costs continue to rise at 12% every year. Also, for the sake of perspective, education costs for five years back have been computed at the same rate; this makes the numbers relatable.

Education/Years 2013 2018 2023 2028
Under-graduate
₹ 1,41,857
₹ 2,50,000
₹ 4,40,585
₹ 7,76,462
Post-Graduate ₹ 11,34,854
₹ 20,00,000
₹ 35,24,683
₹ 62,11,696
Higher Education A-tier (abroad)₹ 28,37,134
₹ 50,00,000
₹ 88,11,708₹ 155,29,241
Ivy League Higher Education₹ 45,39,415
₹ 80,00,000
₹ 140,98,733
₹ 248,46,786

Now, you may notice that as years pass, the cost would only go up. The unfortunate part is that it is highly unlikely that your salary would increase at the same pace. Also, the above figures are exclusive of gadget, gizmo and extra-curricular costs that tag along with regular education expenses.

It is important to note here while school expenses could be met by saving small amounts between 5-10% of monthly income, the larger expenses for post-graduation could easily eat up to 40 %of one’s monthly salary.

While we have been talking about tuition expenses, this does not include the standard of living that one has to maintain at schools. They come with their own higher expenses of gadgets, books, social activities for the child that costs money.  Children are enrolled to extra classes, other activities such as sports coaching etc, none of which come cheap.

An often ignored part here is insurance. No, we are not referring to ULIPs/ Children’s education plans.

Let’s take an example, related to the illustration above, the parent has to eventually save Rs 65L for his/ her child’s higher education. Which simply means that Rs 65L should be covered by a term plan, should any eventuality arise, the education goal will not be compromised. This policy for a healthy adult of the age of say 32 would come at a premium of ~Rs 5000 annually. Let us not look at immediate gains causing ourselves long term pains.

A combination of SIP + Term Insurance = a good education plan.

Yeh Khel Hai Sher-Jawaano Ka: Watch out for these five things this IPL season.

Where cricket is religion and the once-naive become legends, India is the pitch where challenges are yorkers, uncertainty is review and cover-drive is the victory.  While the ritual of watching matches are sacrosanct and the Indian Premier League is no less than a celebration of the religion, are we religious enough to not just watch, but also learn?

Here are a few pointers that can help you take your financial goals across the boundary with the finesse of a straight-drive.

Renowned franchises like Mumbai Indians are cautious about their horizon. Are you?

Mumbai Indians is perhaps among the most popular teams in the renowned Indian Premier League franchise. Notably, for the team, there has been a significant churn in its players – ten-year-old names like Malinga and Harbhajan have been replaced by the likes of Ishan Kishan, Suryakumar Yadav, Pradeep Sangwan and similar.

When asked about the decision to not retain legacy players, the comment received was that they were looking to build a team with a longer-term perspective, perhaps three years or more instead of a quick-fix.

This is a sheer reflection of how the big boys of India Inc. like Mr. Ambani think. If they can think long-term and beyond the obvious with their investments, why can’t you?

Everything has a cost and a value. Planning is important

Though exciting as a spectator, the IPL auctions are a real test for franchise owners’ value-picking skills. For every decision, there are millions at stake – literally.

The entire setup of having a budget, different requirements and the need to fill every spot on the team is no less than our regular financial life where we need to provide for everything and there are a few spots which can’t be compromised while the available budget is rigid as a rock.

So, what to the big boys of IPL do? Simple, they plan ahead. They think about the kind of players they want, the kind of money they are willing to put behind those spots, do their research for players across categories and then bid in line with the requirements.

This is exactly the same process one can learn about their personal finance and investments. Point number one is that you have a fixed budget, what’s next? Define your goals, decide how much money you would need for it, in how much time and then decide on how much money you must park in what places and for how long to achieve everything on your goal-list.

Discipline and patience is an indispensable virtue of the successful

The IPL of 2015 was a memorable one. Any IPL-loyalist would remember the way Mumbai Indians were beaten up in their first four matches and their name flashing at the bottom of the league table sent a shiver down the spine of every MI-fan then. What followed next was an exemplary display of enthusiasm and form while not losing the golden virtues of patience and discipline. We all know what happened next – the trophy was swinging on the waves of blue jerseys.

Though anecdotal, it has quite a lesson for everyone out there trying to manage their personal finances. In the short run, there can be volatility – stomach-lurching volatility; but once you manage to sit tight and focus on the game with continued patience and discipline you will realize that the knot in your stomach was actually nothing but the feeling you get just when the plane takes off the runway. It may be uncomfortable in the beginning but proceeding with patience and discipline will take your flight to the skies.

The old folks’ tale might be true: Excess of anything is not good.

Just a brief look at the history of IPL seasons would reveal that the winning teams emerged victorious not because of any lone-star, but because of coordinated and collaborative efforts from the entire team. The episode of Sunrisers Hyderabad in the season of 2016 when a not-so-flamboyant, but the prudently constructed team picked the trophy was a glaring reminder of how a concoction of different skill-sets outperforms a heavy yet single skill.

Likewise, for the victory of your investments, it is very important to split your investments across asset categories and funds in line with your goals and expectations. Only when every penny invested has a goal for itself will the entire portfolio move towards achieving your larger financial goal.

Power Play: Get a headstart, while you can.

It is quite typical of every team to try and get the maximum possible headstart during the first six overs of power play. These are perhaps the most important six overs for any team in the twenty-over match– the team is fresh, brimming with energy and have lower obstacles. This is the opportunity to mark the team’s territory farther off in the match.

Similarly, when you are young – having the appetite to invest, the energy and understanding along with low responsibilities and deterrents, it is your power-play period in your quest to financial success. Your early years should be leveraged to gain a headstart in your chase towards the bigger financial success.

Cheat sheet to utilizing your bonus in the best way possible

April is that time of the year that is largely ignored. I say so, because for various reasons it is usually an uneventful month, with no major events, festivals or work pressure that calls for stress.

Although, something pleasant or for some unpleasant happens in the months of April and May, the annual/ bi-annual bonus is declared. For a moment, I am going to stay away from how happy or unhappy we might be with that number, truth being told, we all look forward to this amount reflecting in our bank accounts.

I often see myself discussing with my friends, how they / I am going to use the bonus to take a holiday, buy a new gadget, and buy some jewellery and some such. However, seldom is the discussion point “How will I invest my bonus”.  I try to steer that conversation in that direction a few times, and at times make progress.

We are all victims of the bane called “instant gratification”, a moment of impulsive decision making, often financial that leads to feel happy for a very short period. This short period often involves large expenses.

What I am going to give you now, is a bonus cheat sheet, smart ways that you could use this money to make it work better for you.

1.Reduce your debt

The most unexciting part of money, bringing down liabilities, however it makes most sense to bring down those credit card/ personal loan amounts with huge interest portions.  We can very rarely find investments that earn us the interest that we pay on credit cards.

2.Create an emergency fund

I cannot emphasise enough the need for such a fund, and almost sound preachy when I say it, but yes! You do need an emergency fund, should this be 3 months or 6 months of your monthly expenses is a number I shall leave for you to decide, and the best instrument for this would probably be, a liquid mutual fund. This puts your money aside and also makes it accessible when you need it, out of sight, out of mind they say! The urge to spend that money will come down.

3.Plan for your goals

Perhaps you have been lagging all this while in terms of achieving your financial goals. The bonus is a good windfall for you to make an extra contribution to your financial goal. This financial goal can be anything from a short-term goal of a vacation or a long-term one like retirement. A part of your bonus should definitely go towards your financial goal.

4.Start your tax saving investments

Tax saving investments is typically made, at the end of the year, in a rush when the we have the date of submission of documents hanging on our head.

A smart thing to do , is to make a start in that direction, this also gives you enough time to analyse and choose the right ELSS product/ Term insurance/ Health Insurance and critical illness policies.

5.Now spend your money

Should you have taken care of one through three, what left of it can be uses to make some purchases that could give you the kick of instant gratification?

It is only by creating a disciplined and consistent pattern of investing that we can expect for our money to multiply many fold.

Like any other behavioral habit, if investing is not practiced well, the outcome may not be what we expect.

SIP your way through falling markets

“There could be no better time to stay invested in your funds;

Now, may not be a good time to withdraw your money;

The next few months could be great to invest money systematically. “

None of these comments are those that anyone would give you while having conversations about the market and money.

James Montier, in The Little Book of Behavioural Investing ( a much-recommended read for any investor), says, “How do we as investors prevent ourselves from emotional time travel pitfalls? “, One answer is to prepare the pre-commit.

When we commit to a SIP, we commit to letting that investment continues in a systematic manner until it’s tenure/ unless something goes wrong at the fund level. Assuming that you have already taken care of any emergency funds and kept them in a liquid fund.  The markets are much like our emotions and trigger our emotions too.  What’s happening around us affects our behavior reactions and actions. More often than not, when emotions are high, we make decisions that we often regret. A good thing to do is to postpone the reaction because the cost of that reaction could be very high.

Sir John Templeton, the legendary investor and mutual fund pioneer says,“The time of maximum pessimism is the best time to buy, and the time to maximum optimism is the best time to sell.” Few would disagree with such a sentiment. However, as investors our biggest hurdle is myopia, an overt focus on the short term.

While we make SIP investments and commit them to long-term goals and promise to stick to them till the goal is achieved, when the markets turn a bit chaotic, we get all sweaty and hit the redeem instead of the investor hold button.

There cannot be a better time than a falling market to invest because all your investments will help you enter the markets at much lower levels than you would otherwise with equity SIP.

The next time you hear/ read that the markets have fallen 5%, you should enjoy the thought that you possibly got your SIP entry at a similar discount, and holding your emotions through this period and staying invested will only lead to monumental gains.

3 Rules To Successful Financial Planning

This article has been published in “The financial express” on 11th August, 2016

leading a financially successful life is a lot easier than you think, no matter how much you earn. You just need to ensure you save adequately, and make sure the saved money works for you over a long period of time.

 For those in India’s vast and growing middle class, it seems to be a lifetime balancing game between the ever-increasing financial goals (and associated expenses) and income. Many have ambitions of owning a nice home, a fancy car and the latest gadgets – but wonder if it’s possible with their income.

Our years of experience with money and wealth management suggest that this is very much possible – if one adheres to 3 simple rules:

Rule 1: Lead an ‘appropriate’ lifestyle

Needless to say, wealth can be managed, only if surplus money is created in the first place! This needs an ‘appropriate’ lifestyle – but what is appropriate?

A few thumb-rules can help you decide if the lifestyle you lead is appropriate or not.

-Save adequately

  • If you are single/have no dependents, save at least 30 per cent of your income
  • If you are married or have dependents, save at least 15 per cent

-Keep track of (major) expenses – it’s easier to budget and cut down, only if you know where the money is going in the first place
-Avoid credit cards or EMIs – they encourage you to spend more than you can afford
-Avoid loans, except for assets like home and education. Avoid personal loans, auto loans or loans for buying electronics

Rule 2: Prepare for uncertainties
Everyone faces uncertainties in life. But there are simple things you can do to make sure your financial boat isn’t sunk by one of them:

Take a (term) life insurance
The ‘term’ insurance policy is the only useful policy there is – it has a very low premium. All other ‘endowments’ or ULIPs or whole-life plans only enrich the broker, not you!

-Ensure you have a life cover 8-10 times your annual income, if you have dependents
– Take a life cover only on the earning member(s) of the family – not on children or the retired
-Take a family medical policy
-Use the ‘family floater’ medical insurance to cover all members of the family in a single policy
-A cover of between Rs 3 lakh to 5 lakh is usually appropriate
-Ensure money equal to 6 months of expenses is kept in a place that’s easy to take out when needed

Rule 3: Beat inflation
You may save a large amount of money, but you grow wealthy only when the money works for you. This happens when money earns for you, more than what inflation (price-rise) eats away.

The only products that beat inflation over a long period of time are equity (or equity mutual funds), real estate and gold. Everything else – from bank deposits, PPF, post office schemes to insurance policies – returns less than inflation and hence destroys your wealth over a period of time.

Of these, equity is the best place – it allows you to start small and invest regularly, has the lowest tax rate and also makes withdrawal very easy. But given the risk involved, you need to take care of a few things:

Invest only for the long term (>5-7 years), never trade

  • Use the mutual fund route to invest, to take advantage of the experts
  • Put money every month, rather than lump-sum. There is something called ‘Systematic Investment Plan’ (SIP) to facilitate this
  • Bank fixed deposits are useful, but only if you want to park money for the short term (<5 years). Over longer periods, their returns are less than inflation and hence your money loses value. Insurance policies give even poorer returns, and carry a longer lock-in.

Summary
In summary, leading a financially successful life is a lot easier than you think, no matter how much you earn. You just need to ensure you save adequately, and make sure the saved money works for you over a long period of time.

To give an example, say you had invested Rs 10,000 every month from Jan 2001 till end of 2015 (i.e. Rs 18 Lakh in all over 15 years). Your money in any good mutual fund today would have been worth over Rs 1.2 crore! In contrast, it would be only a third of that amount in PPF or in a fixed deposit.

Not yet thought about building wealth? Start your SIP now at as low as Rs.500. Yes. Rs.500.

Who doesn’t want to build a tidy sum of wealth over the years? But you probably are unsure where and when to start.

The simplest product gives the highest return
It’s easy to get confused in the din out there – ULIPs, ‘child plans’, ‘pension plans’, chit funds and even the neighbourhood ‘aunt’ peddling an LIC policy. These complex products are poor investments.

There is no better wealth creation engine than the equity market. Equity markets give 15%-18% annual returns over the long term. And a mutual fund is the best vehicle to invest, for those who don’t understand the markets.

A monthly automatic investment in a mutual fund (called SIP) ensures you put away money regularly for the future. You can start as low as Rs 500 per month. Technology allows you to provide a bank mandate and automatically transfer money on a fixed date every month. The money, should you need it, can be withdrawn online at a day’s notice.

The time to start is now!
If you had invested Rs 5K every month starting 2001 right through 2015, you would have invested Rs 9L in all. Can you guess what this would be worth today – Rs 75L – that’s over 8X growth!

If you had delayed starting by just a couple of years (2003 instead of 2001), your wealth would be less than Rs 35L. In other words, the punishment for starting late is severe.

 

Does fixed deposit give you the best returns?

Does fixed deposit give you the best returns?

Usually, no! FDs are the best only if you fall in the lowest tax bracket or are a retiree.

While bank fixed deposits are undoubtedly safe, their returns are poor. In fact, over a long period of time, they tend to return lower than inflation – so your purchasing power actually reduces if your money is stored in fixed deposits over long periods of time. Fixed deposits are useful only if you need the money within the next three years.

Over the long term, there is no alternative to equity if you want to stay ahead of inflation. You can either directly invest in stocks, or, if you lack the time & expertise, take the mutual fund route.

 Conclusion

Fixed deposits give assured returns. So, traditional investors have parked their savings in FDs. However, three things which need to be considered:

  • Fixed deposit returns are lower than inflation. Your money loses value over time.
  • Breaking fixed deposit or premature withdrawals always comes with a cost. It will be an inconvenience when money is required during an emergency.

At present, interest rates on fixed deposits are between 6% to 8%,depending on the time period of investment.Retirees, persons in the lower tax bracket or those needing money within 3 years can opt for fixed deposits.

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