How to plan and Invest In a Smart Way
Indo American Society has arranged an Investor Guidance Programme at Maharashtra Chambers of Commerce and Agriculture Kala Godha last week.
The programme started with Bharat Dave's market perspective, since he works for Bombay Stock Exchange so his talk was like hand holding for the first time investor.
But the real juice come from a well reasoned talk by Gajendra Kothari, who had been a personal financial planner and guide and run his own company etiga.
I give you some of the highlight of his talk.
He said that whenever you go through brochure of Share, Debt instrument, LIC Policy, Mutual Fund Schemes you will find a rider “ The investment is subjected to market risk.” There are hundred and thousand investors remain stay with fixed deposits of banks. But in the following paragraphs you will find that if planned in a proper way, you may earn handsomely from the market.
Indo American Society has arranged an Investor Guidance Programme at Maharashtra Chambers of Commerce and Agriculture Kala Godha last week.
The programme started with Bharat Dave's market perspective, since he works for Bombay Stock Exchange so his talk was like hand holding for the first time investor.
But the real juice come from a well reasoned talk by Gajendra Kothari, who had been a personal financial planner and guide and run his own company etiga.
I give you some of the highlight of his talk.
He said that whenever you go through brochure of Share, Debt instrument, LIC Policy, Mutual Fund Schemes you will find a rider “ The investment is subjected to market risk.” There are hundred and thousand investors remain stay with fixed deposits of banks. But in the following paragraphs you will find that if planned in a proper way, you may earn handsomely from the market.
To reach the finishing line, you must first know where the race begins. As any financial planner will tell you, figuring out your net worth is the first step towards formulating a successful financial plan. The best way to do this is by drawing up a list of your assets and liabilities. Use the table on the right to calculate your net worth.
It will also give you a broad idea of your current asset allocation. Taking stock of your current status is necessary to help you make informed financial decisions. The slowdown may have affected your annual increment. Volatility in the stock market may have prompted you to stay out. Before you plan to invest, sit down and take a fresh look at your financial situation. Once you have figured out where you stand, find out your attitude towards investing. Your ability to take risks determines the investments you should opt for. If your stomach churns whenever the Sensex goes into a free fall, equity is not for you.
Stick to the safety of debt options or take exposure to stocks through mutual funds. On the other hand, if a 20-25% fall in value doesn't upset you, equity can be a great way to build wealth. Another important trait is the keenness to conduct research before investing. Some people love nothing more than digging into financial statements and crunching numbers, while others might not have the time or inclination to plough through prospectuses and product brochures.
SIP Vs Banks's Saving Bank Account
Have you been idling large sums in your savings bank account just to provide for any unforeseen need? If so, you could have managed 5-6 percentage points more by setting aside at least a part of your money in liquid funds and still have liquidity.
Yes, liquid funds, offered by mutual fund houses, invest in short-term money market instruments such as government securities, treasury bills and commercial paper. In a way, they park your money in instruments not too different from the way banks do and hence are reasonably secure. On the flip side, they cannot provide you fixed returns the way savings bank accounts do. They do not also offer a deposit insurance of up to Rs 1 lakh that your balance in savings and deposit accounts enjoy.
And yet, their returns, as the table below suggests, have been far superior to savings bank rate. Although saving bank rates have been deregulated by the RBI, only couple of banks offer 6% to 7%. The rest give you only 4% currently.
Features of liquid funds
• Invest in short-term government securities and certificate of deposits, making them reasonably secure
• Provide flexibility to invest or withdraw any time without any exit load or penalty.
• Some mutual fund houses even offer an ATM card to withdraw the funds
• Tax efficient schemes
• Have historically provided higher returns than savings bank interest rate
When to use
• To create an emergency fund which can be withdrawn any time
• To temporarily park any lump sum you may have received
• To save for short-term goals such as saving for an impending vacation or for short-term obligations
• To park money and systematically invest in other high yielding schemes such as equity funds
How to plan
Segregate the money in your savings account into two: one, the sum that you need for your day-to-day operational cash flows and the rest for contingencies or for a short-term goal. Let the first part remain in your savings account as you need this for your daily expenditure. Shift the rest to a liquid fund. If you have a time frame of over 3 months then you can consider ultra-short-term funds as well. This can give you slightly higher returns than liquid funds.
Being tax efficient
Did you know that you need to pay tax on the interest that your savings account balance fetches? Yes, such interest income is taxed at the tax slab in which you fall – 10%, 20% or 30%. Liquid funds too, are taxed (as capital gains) in the same rate if held for less than one year (indexation benefits are available for holdings greater than one year).
For For Heaven’s sake don't invest in a product you don't understand...
Most of the people who seek financial advice have investments they don't understand. They are likely to know every random feature of their Rs 8,000 cell phone, but will be clueless about their insurance policies that are worth lakhs of rupees. Before you invest, you must fully understand how the product works and how you will gain from it.
There are several products (especially insurance plans) that promise the moon and have complex features. Avoid these sophisticated products if you don't understand them. Investing in something that you do not understand is gambling with your money. Instead of the structured products being sold in the market, the humble PPF can also help build enormous wealth in the long term. Increase the investment by just 1% every year and you will have a comfortable retirement
But Gajendra feels that Mutual Funds is an better option than PPF.
Don't skew your portfolio in favour of one asset
The above-mentioned investment rule does not imply that you concentrate your investments in one or two asset classes. You may not understand equity, but this should not stop you from investing in equity mutual funds. As long as you understand that the fund manager will deploy your money in the stock market and your investment will move with the market, it is good enough. There are investors who buy nothing but gold, or invest only in bank deposits.
Some invest only in real estate having been conditioned into believing it is the safest asset. The biggest problem with a concentrated portfolio is that a single crash can make you bite the dust. We saw this happen in 2008 when the equity market crashed. As the chart below shows, a diversified portfolio cushions the risk and generates stable returns. So opt for diversification.
Do not invest and forget
Don't think your work is done after you make an investment. In fact, it has just begun. You need to monitor and review your investments and take corrective measures if they go off the track. At least once a year, you should subject your portfolio to the financial equivalent of a CT scan. The outcome may not be very palatable, but some tough decisions are needed to keep the portfolio healthy.
The first thing to check in your portfolio is asset allocation. It could have changed because of the market conditions and, perhaps, needs to be rebalanced. For instance, you may have wanted to allocate 60% of the corpus to stocks, 30% to debt and 10% to gold and other investments, but due to a fall in the equity market and rise in gold prices, the portfolio now has 45% in stocks, 40% in debt and 15% in gold. You need to increase your allocation to equity by buying some more and reduce the investment in debt and gold. The next thing to consider is the performance of individual investments.
Take help from brokerage reports, news reports and expert comments when you size up the stocks in your portfolio. For mutual funds, compare the scheme's performance with that of its peers and benchmark. If you find it difficult to analyse your portfolio, or if your investments are too disparate, take the help of an online portfolio tracker or money manager websites. Besides, you need to keep your goals in mind when you review your portfolio. The exposure to volatile assets should come down as you draw closer to a goal.
Review portfolio in case of special situations
Don't think your work is done after you make an investment. In fact, it has just begun. You need to monitor and review your investments and take corrective measures if they go off the track. At least once a year, you should subject your portfolio to the financial equivalent of a CT scan. The outcome may not be very palatable, but some tough decisions are needed to keep the portfolio healthy.
The first thing to check in your portfolio is asset allocation. It could have changed because of the market conditions and, perhaps, needs to be rebalanced. For instance, you may have wanted to allocate 60% of the corpus to stocks, 30% to debt and 10% to gold and other investments, but due to a fall in the equity market and rise in gold prices, the portfolio now has 45% in stocks, 40% in debt and 15% in gold. You need to increase your allocation to equity by buying some more and reduce the investment in debt and gold. The next thing to consider is the performance of individual investments.
Take help from brokerage reports, news reports and expert comments when you size up the stocks in your portfolio. For mutual funds, compare the scheme's performance with that of its peers and benchmark. If you find it difficult to analyse your portfolio, or if your investments are too disparate, take the help of an online portfolio tracker or money manager websites. Besides, you need to keep your goals in mind when you review your portfolio. The exposure to volatile assets should come down as you draw closer to a goal.
Review portfolio in case of special situations
Keep on review your investments once a year. However, some extraordinary circumstances may require you to rejig it even earlier. Here are a few such special situations:
Marriage
Wedding bells mean new goals, higher expenses and a change in risk profile. Your investments need to be overhauled. If your spouse also works, your investible surplus will go up. Chalk out a combined list of goals and plan your investments to reach them.
Birth of a child
The entry of a new member in the family means additional responsibilities and expenses. You will add new goals to your list and, therefore, need to change your investment pattern. This may also require you to increase your life insurance cover and establish an emergency medical kitty.
Salary hike
When your income goes up, your investible surplus rises. Ideally, you should distribute the excess amount across different asset classes in the same proportion as your investment mix. You can increase the SIP amount in your investments. You may also want to add a financial goal to your list.
Windfall
Wedding bells mean new goals, higher expenses and a change in risk profile. Your investments need to be overhauled. If your spouse also works, your investible surplus will go up. Chalk out a combined list of goals and plan your investments to reach them.
Birth of a child
The entry of a new member in the family means additional responsibilities and expenses. You will add new goals to your list and, therefore, need to change your investment pattern. This may also require you to increase your life insurance cover and establish an emergency medical kitty.
Salary hike
When your income goes up, your investible surplus rises. Ideally, you should distribute the excess amount across different asset classes in the same proportion as your investment mix. You can increase the SIP amount in your investments. You may also want to add a financial goal to your list.
Windfall
Any unexpected income or an annual bonus coming your way is another reason to change your investment portfolio. If the money comes to you as a lump sum, put it in a debt fund and start a systematic transfer plan to an equity fund.
Loans
If you have taken a loan, put off some of your investments to account for the EMI outgo. Rejig your investments by putting the non-essential goals on the backburner till the loan is repaid. When you repay a loan, you will have a bigger surplus to deploy.
Black swan situations
A sudden movement in the stock market, such as the crash of 2008, may warrant a change in your investment portfolio.
You may need to rejig your asset allocation before a year to adjust to the change in the market sentiment.
If you are not a disciplined spender and have a fat bank balance, it's quite likely that you will give in to temptation and spend on discretionary items. Apart from the emergency fund, there is no need to have more than 5-10% of your entire investing portfolio in cash. Financial planners say this extra cash should be put to work. A mix of short-term investments can help you retain liquidity as well as earn better returns. Depending on one's personal situation, one can park the remaining amount in a short-term avenue, which is almost as liquid as a bank account. For instance, debt fund redemptions reach your bank account the next working day.
Give precedence to retirement savings
One of the biggest challenges for tomorrow's retirees is to ensure that they don't outlive their savings. This is a distinct possibility because of two factors: the rising cost of living and an increase in life expectancy.
However, for many Indians, retirement is not as crucial as saving for their children. Whether it is for their education or marriage, or even to provide them with a comfortable life, children are the biggest motivators of savings in the country.
This can be a problem because your retirement is going to be very different from that of the previous generation.
Guaranteed pension, assured return from government schemes, relatively low inflation and the security of a joint family - the four pillars on which the previous generation's retirement planning rested - have either gone or will disappear soon. What's more, you will live longer, thus heightening the risk of outliving your money.
Before you pour money into a child plan, make sure your retirement savings target has been met. Retirement planning should be your first and most important financial goal.
By this we don't mean you should neglect your child's needs, but you can borrow for almost all other goals, such as child's education, marriage or going on a holiday.
No one will lend you for your retirement expenses though. The early birds, who start putting away small amounts from the day they start working, have a distinct advantage over lazy grasshoppers, who think of retirement planning only after the first grey hair makes an appearance in their 40s (see graphic).
It is also important that you don't dip into your corpus before you retire. Withdrawing money from your PPF account or missing the premium of a pension plan can lead to a shortfall in your corpus.
If you want a dignified retirement, resist the temptation to withdraw from the investments earmarked for your sunset years.
Gajendra says that in case of an individual that too the first timer it is not advisable to play himself in the stock market, rather buy plan as per your goal from a Mutual Fund Company. In a mutual Fund Company seasoned planners research and then invest in the market. Their basket of investment is too large so if few shares do not earn the others will mitigate the overall risk.
Loans
If you have taken a loan, put off some of your investments to account for the EMI outgo. Rejig your investments by putting the non-essential goals on the backburner till the loan is repaid. When you repay a loan, you will have a bigger surplus to deploy.
Black swan situations
A sudden movement in the stock market, such as the crash of 2008, may warrant a change in your investment portfolio.
You may need to rejig your asset allocation before a year to adjust to the change in the market sentiment.
If you are not a disciplined spender and have a fat bank balance, it's quite likely that you will give in to temptation and spend on discretionary items. Apart from the emergency fund, there is no need to have more than 5-10% of your entire investing portfolio in cash. Financial planners say this extra cash should be put to work. A mix of short-term investments can help you retain liquidity as well as earn better returns. Depending on one's personal situation, one can park the remaining amount in a short-term avenue, which is almost as liquid as a bank account. For instance, debt fund redemptions reach your bank account the next working day.
Give precedence to retirement savings
One of the biggest challenges for tomorrow's retirees is to ensure that they don't outlive their savings. This is a distinct possibility because of two factors: the rising cost of living and an increase in life expectancy.
However, for many Indians, retirement is not as crucial as saving for their children. Whether it is for their education or marriage, or even to provide them with a comfortable life, children are the biggest motivators of savings in the country.
This can be a problem because your retirement is going to be very different from that of the previous generation.
Guaranteed pension, assured return from government schemes, relatively low inflation and the security of a joint family - the four pillars on which the previous generation's retirement planning rested - have either gone or will disappear soon. What's more, you will live longer, thus heightening the risk of outliving your money.
Before you pour money into a child plan, make sure your retirement savings target has been met. Retirement planning should be your first and most important financial goal.
By this we don't mean you should neglect your child's needs, but you can borrow for almost all other goals, such as child's education, marriage or going on a holiday.
No one will lend you for your retirement expenses though. The early birds, who start putting away small amounts from the day they start working, have a distinct advantage over lazy grasshoppers, who think of retirement planning only after the first grey hair makes an appearance in their 40s (see graphic).
It is also important that you don't dip into your corpus before you retire. Withdrawing money from your PPF account or missing the premium of a pension plan can lead to a shortfall in your corpus.
If you want a dignified retirement, resist the temptation to withdraw from the investments earmarked for your sunset years.
Gajendra says that in case of an individual that too the first timer it is not advisable to play himself in the stock market, rather buy plan as per your goal from a Mutual Fund Company. In a mutual Fund Company seasoned planners research and then invest in the market. Their basket of investment is too large so if few shares do not earn the others will mitigate the overall risk.
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