7 mistakes to avoid when investing!

Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

We all make mistakes, don’t we? Some mistakes are minor that you get a second chance to make amends. But there are some mistakes that will prove to be very, very costly and cannot be easily amended! Investment is one such tricky area where you just cannot afford to go wrong! So, what should you do before making an investment? Or do you know what are the most common mistakes that you should avoid when making an investment? Well, here’s a list of the seven common investing mistakes that you should avoid at any cost!

Confusing between trading and investing :


This is perhaps the most basic confusion that you should get cleared of lest you will make big losses and lose confidence to try again: the confusion between trading and investing. Trading is something that you do without much planning or research that is you are said to be trading when you buy and sell stocks and mutual funds at will. Frankly speaking, trading might not help you build long-term wealth but could bring good money to your broker! So it is important to understand the basic differences between trading and investing before taking the plunge.

Investing takes a lot more research and well-thought planning in the different avenues of the investment. Your investment amount, your investment goal, your risk appetite, the present market conditions and some basic studies about the future of the markets and many other factors go into making the best investment strategy for you.

Taking a very conservative stand :

Most people prefer to take a very conservative stand and invest in traditional products like bank deposits, public provident fund (PPF) and so on. Their argument is that the traditional products ensure guaranteed returns though they are comparatively lower than returns from stocks or mutual funds or equities. However, a good investment is not only about guaranteed returns but about real returns. Real returns are returns post inflation. And it is always better to calculate these real returns with an expert’s help considering the complexities involved in today’s economic scenario especially inflation.

Taking a very aggressive stand :

Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

Holding on to the dud stocks :

This is one of the most common mistakes some investors make, holding on to the dud stocks! A dud stocks need not necessarily mean only non-performing stocks; it could also mean purchasing stocks of unheard companies. Never buy stocks of unheard companies even if they are doing well while you are planning to buy them. It could well be just a short term stint because these unheard companies never have in them the thing to perform well on a long term and their stocks might soon turn to be duds. There are many instances of such companies and their stocks turning dud over a period of time.

Hence, it is important to invest in performing stocks, and at the same time have a backing from a good fund manager. For example, you could invest regularly in small amounts through Systematic Investment Plans (SIP) and make money by holding on to them for a long term.

Asset allocation holds the key :

Your investment basket should be filled with the right type of assets for good long term returns. And remember to fine tune the basket at regular intervals depending on how the market behaves and in line with your risk appetite and financial goals. Improper asset allocation like investing in too much of debt for the long term or irregular investments in equity for the coming quarters could put you in an awkward position and leave you with no or little returns.

Timing the market :

This is one area where even the experts fumble. Markets are highly unpredictable even in the short to medium terms. Though there are some parameters to predict the market like the changes to the country’s socio, economic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events. Hence, it is advisable to stay away from reading too much into such parameters while timing the markets. Instead, you could go in for a closely controlled investment strategy that could help you make money in the long term.

Overconfidence :

Ask the long term players in the markets and they will perhaps warn you against being overconfident with recent successes. There is nothing wrong in hoping for the best times but overconfidence is something an investor should do away with. It is important to understand that your recent successes in the markets could have been due to many ‘hidden’ factors that might have escaped your attention. Overconfidence in your so called ‘perfect management of portfolio’ might spell trouble and you might end up losing money!
Avoid these common mistakes at any cost. After all, a good beginning is half the battle
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Source :bankbazar

5 investment tips by investors, for investors, of investors

Over-diversification can erode performance of your portfolio

Though we've extolled the virtues of diversification often enough, its importance cannot be over-emphasised. The exercise helps mitigate the risk associated with individual investments by spreading these across several securities that bear little correlation to one another.

Instead of putting a large chunk of money in one asset and bearing a sizeable loss when its value plummets, it's better to spread the capital across various assets. If one of the these underperforms, the negative impact on the portfolio will be muted as the other holdings will, hopefully, do well. In case of stocks, you should invest in companies varying in size, industry and even geography.

But no matter how widely diversified a portfolio, the risk can never be eliminated entirely. So don't hoard investments blindly in the hope that you will tide over the market's uncertainties. At times, too much of a good thing can yield undesirable results; piling a large number of stocks and mutual funds may do more harm to your portfolio than good.

Says Vetri Subramaniam, head , equity funds, Religare Mutual Fund: "Diversification is a desirable goal for an investor. However, as you diversify, you not only reduce risk, but also the returns. So investors must keep this trade-off in mind." Here is how over-diversification can erode the performance of your portfolio.

Low impact of outperforming investments

If you have too many stocks in a portfolio, your more profitable investments will not create a meaningful value for you. As your capital is spread out thinly among the different investments, the impact of a healthy upside in one investment will turn out to be marginal. So, by over-diversifying, you are robbing yourself off the gains from the good investments.

Suppose you have 50 stocks in your portfolio. A 20% jump in one stock will only influence the overall portfolio performance by 2%. Sandip Sabharwal, CEO, portfolio management services, Prabhudas Lilladher, says, "For an investment to make a sizeable impact on your overall returns, it should form a reasonable part of your portfolio.

This should be judiciously concentrated, otherwise you will end up with average returns." Ajit Dayal, director, Quantum Mutual Fund, also believes in putting some weight behind his stock picks.

"In a fund, we try to have 25-40 stocks. If we like a stock and are convinced about its future performance, we support this conviction by buying enough of it to comprise 2% of the total corpus of the fund. However, many funds own nearly 100 stocks. We don't see any justification for this," he says. If you diversify too much, you won't lose heavily, but at the same time, you will not gain much.


Problem of plenty

It is cumbersome to maintain a huge portfolio and keep track of various investments. If you cannot monitor your investments regularly and need too much time to do it, you have clearly spread out thinly. In such a scenario, you may fail to notice a shift in the fundamentals of one or more of your investments. You may realise this too late, by which time the asset value could have eroded substantially.

No incremental benefit

There is a misplaced belief that with every additional security in the portfolio, the overall risk gets reduced to that extent. This isn't true. Studies have proved that diversification can help reduce the risk only to a certain extent. Beyond this, there is no incremental benefit.

Edwin J. Elton and Martin J. Gruber, in their book Modern Portfolio Theory and Investment Analysis, analysed that the average standard deviation (which is indicative of risk) of a portfolio holding just one stock was 49.2%. Increasing its size to 20 stocks brought down the risk to around 20%, thus reducing it by 29.2%. However, any addition in the number of stocks beyond 20 further reduced the risk by only 0.8%.

Paying more for the same

Investors often make the same mistake while purchasing mutual funds. All diversified equity funds have a basket of stocks, with the holdings spread across companies and sectors. Despite this, some investors choose to buy more and more such funds, each having at least 50-60 stocks in their kitty.

They end up paying more money for funds which are picking the same set of stocks. So they are duplicating their holdings without adding any value to the portfolio.
Hemant Rustagi, CEO, Wiseinvest Advisors, says, "Investors often buy funds blindly without giving a thought to individual fund strategy and objectives.

These funds mostly behave in the same manner when the market moves up or down." Dayal concurs. "Owning too many mutual funds does not necessarily give you the underlying diversification if all the schemes own the same kind of stocks. Many mutual funds tend to own the bigger, popular stocks, such as Reliance Industries and ICICI Bank ," he says.

If an investor were to invest in the top 10 equity diversified schemes, he would end up owning a portfolio comprising 136 stocks, with only 58 unique stock picks between them, while the rest of the stocks would overlap. As many as 10 stocks repeat themselves in more than 80% of the fund portfolios.


What's the optimum size for a portfolio?

The most essential question is, how much diversification is enough to achieve its intended goal and when does it start to become a burden? As Warren Buffett puts it, "Wide diversification is only required when investors do not understand what they are doing."

The extent of diversification varies depending on the investor's risk appetite, return expectations and understanding of the stock markets . According to Avinash Nahata, head, fundamental desk, equity research, Aditya Birla Money, the portfolio for an average investor should not have more than 20 stocks. Sabharwal agrees, "Empirically, it has been observed that 15-20 stocks lend optimum diversification to a portfolio. Beyond this, a portfolio becomes too stretched."

In the case of mutual funds, investors unknowingly and often fall into the trap of over-diversification. Subramaniam says, "If an investor owns 4-5 funds and 10-20 stocks, his total portfolio will probably exceed more than 100-120 stocks. This is the threshold level of desirable diversification. Beyond this, it is likely that the aggregate return on the entire equity holding (stocks and mutual funds) will mimic the market averages."

Experts agree that 4-5 diversified equity funds that have mid-cap and large-cap stocks should be enough. Sumeet Vaid, founder, Ffreedom Financial Planners says, "When investors buy more funds, the number of unique stocks becomes larger, sometimes numbering more than 90 stocks. The portfolio then starts to resemble the overall index, yielding sub-optimal returns. Instead, investors should diversify within the combination of 3-5 equity funds covering a range of stocks according to the company size."

If you have an unwieldy portfolio, it's time you pruned it and brought it back into shape. A nip here and a tuck there can help you streamline your investments, making them more manageable. But don't start getting rid of your holdings blindly. Here are the things you should keep in mind while consolidating the portfolio.

Don't sell the winners

The investors who have a difficult time keeping track of too many investments often end up selling their winning stocks while trimming their portfolios. Legendary investor Peter Lynch described this as "cutting the flowers and watering the weeds". However, this strategy of booking profits on winners is not always healthy, suggests Nahata.

"It is important to stay with winners for some time. To rebalance the portfolio, reduce those positions where your exposure is less, that is, low-value stocks. This will not only reduce the number of stocks but also make the portfolio more focused," he says.

Says Sabharwal: "If you get rid of your winners early, your portfolio will not be able to outperform. Instead, you should sell the smaller holdings."


Get rid of similar investments

Rustagi advises cutting down on funds with similar themes and 'flavour of the season' stocks. "Investors should identify and remove the funds and stocks that are similar to other existing holdings as they do not lend any diversification benefit.

Also, do not get carried away by betting big on stocks and funds that are currently the hot favourites," he says. For instance, it does not make sense to have a bunch of mid-cap-oriented equity funds. These will move largely in tandem with each other.

Be mindful of costs

Keep in mind that cutting down your portfolio to size will entail some costs. Every time you sell shares of a company or units in a mutual fund, you will incur a transaction cost. You must also be mindful of the possible impact of taxes and exit loads at the time of offloading these investments. It is advisable to stay invested for a reasonable time frame not only to avoid such costs, but also from the perspective of long-term returns.

Though portfolio consolidation will carry some unavoidable costs, the benefits of having a leaner portfolio will outweigh the cost of achieving it. "If portfolio consolidation is done in the right manner, what you get is optimised returns. Ultimately, the costs won't matter as much," believes Rustagi.
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Source : ET

Saving has little to do with income and more to do with one’s willingness

If you find it hard to save, there are some simple ways to help you do so

ONE OF the quickest ways to improve your finances is to reduce your expenses and find more ways to save money. However, in this age of soaring prices amid rising household expenditures and galloping human aspirations, it is becoming increasingly difficult for the common man to sustain a living and also save more for a secure financial future.

Particularly since the onset of the economic meltdown, a growing number of people have been resorting to various ways to curb spending, save more and boost their income, such as cutting food costs, doing household chores on their own, enhancing skills, starting a parallel business and even driving less, among others. However, there are still many people around who find it difficult to save for various reasons, most of the times putting the blame on their 'insufficient' income. But this is simply an excuse as various studies have already proved that how much you save has little to do with how much you make.

But if you are one of those who think they have exhausted all avenues for saving a buck, you can still try these innovative and sure-shot ways which can help you save more and also increase your cash flow in line with your goals.

The best way to save more perhaps is 'paying yourself first', a phrase originally coined by George S Clason in his book Richest Man in Babylon. Although many of us might have heard of it, only a few actually do it. For those who are still not aware of this concept, paying yourself first means the first bill you pay each month should be to yourself, simply because you have worked for it and deserve it the most. Thus, before you pay your monthly bills, before you buy groceries, before you do anything else, set aside a portion of your paycheck or income to save—say, 5 percent or 10 percent, or whatever you decide. As we say, one have to save 30% of their income. Then deposit the amount into a savings account before paying your monthly bills. A great way to do this is to set up a savings, investment or retirement account that will directly route it from your salary account every month.

Financial experts say if you spend money and save what's left, you will have little left to save. But if you first save money and then spend what's left, you have no difficulty meeting your financial needs even with the smaller amount of money. In fact, this habit, if developed early, can help you build tremendous wealth.

Another radical way to save money is sticking to the monthly budget and resorting to forced savings. Like the former, this system also works, regardless of the kind of job you have or your income. Giving an example, segregates her monthly expenses in envelopes, for example, for groceries, eating out, fuel costs for two wheelers, etc. If the family decides to go out at the end of the month, the venue is dependent on what amount is left in the 'eating out' envelope. Similarly, the children may resort to travelling by bus if the 'fuel costs' have run out. This way they are able to budget their expenses and save as per their goals.

Similarly, one of the best ways to help with saving money and keeping a quality budget is 'spending freezes'. You can, for instance, take a 'no buy' day or week. This means for the entire time of the 'no buy' break, you aren't allowed to buy anything new or to go shopping. Exceptions to the 'no buy' time might include paying for medicines, food, and emergencies that come up like a car breaking down. Save the money you would have normally spent during the day or week and invest it by the end of the month.

Thus, it is important to ensure some forced savings by way of systematic investment plans, so the temptation to spend a big chunk of your salary at the start of the month is reduced.

You should also try your best to avoid impulsive spending, which is a very serious problem for many people. The urge to spend frivolously is massive, especially in today's society, fuelled by the growth and popularity of plastic money. Some people, who struggle with this issue, even characterise their shopping habits as an addiction that is slowly driving them into serious debt. Therefore, learning how to avoid impulse spending can be a great way to significantly increase your savings. Although the ability to resist impulse spending takes a lot of time, practice and patience, one of the easiest ways to do it is making an effort to have a moment of reflection before buying anything. For instance, If you see something you would like to buy, try waiting a day before actually committing yourself to buying. If you really want it, you will come back. If not, you will never. This also gives you the chance to find other things that may be better.

There are many other ways which may look of little value but can surely help you save big bucks over time. For instance, you can cut out junk food from your diet, as it is expensive and eliminating it can save a lot of money. Similarly, if you are a smoker and are looking to quit, then you should keep aside the money for every cigarette that you do not smoke. If one cigarette costs 5, then keep aside 10 as a reward for not smoking. If you usually smoke a pack a day, then you would effectively set aside 6,000 a month if you successfully manage to quit smoking completely. You will feel really good about yourself when you see the amount that you have saved by not smoking.

You can also end up with a substantial chunk of extra cash every month just by paying your bills, particularly credit card bills, on time. To take an example, if you have six credits cards and you are delaying their payments, then you may have to fork out close to 5,000 every month in late fees alone. However, if you save 5,000 every month and invest it in an absolutely safe instrument, which gives 8% return compounded annually, you will amass over 1 crore in just 35 years.

But while doing all this, it is also important not to keep your money idle or park all your savings in just bank savings accounts. It is, in fact, no secret that savings accounts have a fairly low interest rate. You can, therefore, use sweep accounts or take money beyond what is your 'target' minimum to fixed deposits or investments. Compare bank interest rates on fixed deposits and recurring deposits and get the best deal for your money.

Thus, if you have the willingness, curbing your spending and saving more for a secure future can't be a distant dream!

SAVE FOR...

1 Save money on transportation

2 Don't waste electricity & pay more

3 Look for bargain deals & discounts

4 Get your mortgage costs down

5 Bring your lunch to work

6 Lower your phone & utility bills

7 Watch movies at home

8 Exercise at home

9 Restrict usage of plastic money

10 Recycle all items that can be recycled
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Source :prajnacapital

When Do You Need Expert Advice?

Investors often face this dilemma – should they invest in equity directly or should they opt for the mutual fund (MF) route. One of the ways to decide is looking at the cost involved in both the avenues.

If you compare the two investment vehicles on various costs associated, you will find that they are more or less even.

Brokerage costs: A person does not need to pay any brokerage while buying or selling MF units like in case of direct equity investment. However, the brokerage cost is more or less offset by the exit loads and fund house's fees.


Securities transaction tax: STT is levied at the rate of 0.125 per cent of the transaction amount while buying as well as selling equities. It is not charged while investing in MFs. However, while selling the units, it is levied at a rate of 0.25 per cent.

Dividend distribution tax: An investor does not need to pay this tax, which is otherwise charged at 12.5 per cent. But don't not get lured by this. DDT is charged directly to the mutual fund when it receives dividends on the shares it owns in the portfolio. Charging DDT to you when you receive the dividend from the MFs would only be double taxation.

The costs come down to be almost the same in both the cases. So, what does an investor do? Investing in either does not really depend on the expense or the tax structure. The choice of investment depends on you.

There are more than 5,000 stocks listed on the Indian exchanges, of which around 2,500 are actively traded. If you know any of these 2,500 stocks in detail - that is if you understand the business dynamics and the prospects of any industry and the companies within that industry – then you should invest directly.

For example, Ritish Anand works in a pharmaceutical company. He has had decades of experience within the industry and knows the positives and negatives of most players within pharma fairly well. He would be a fool to waste such knowledge and, appropriately, most of his stock investments are in the pharma sector. The returns on his portfolio beat any pharma fund hollow. However, for exposure to the rest of the industries in the economy, he opts for the MF route. Needless to add, his portfolio is thriving.

Similarly, one may be working in the auto, cement, engineering or even information technology sectors. Use such domain expertise of your industry to invest well. On the other hand, if you are going to buy a stock based on a colleague's recommendation or something that you overheard during the office commute or, worse still, what you read in a broker report, you may as well kiss your money goodbye.

The last point, about the broker reports requires elucidation. Brokers make money based on the number of times you actually trade. The more frequently you trade, the more is the broking income. If they (the brokers) actually knew, which stock is going to multiply many times over, they would be busy buying the same instead of buying it for you. Bottom line - if you ever buy a stock directly, let it be based on your own homework and not because of some glossy report generated by a glossier broking company.

Also, look at it another way. When you have a health problem, you go to a doctor. Similarly, a legal problem is solved by the help of a lawyer. These are domain experts in their own field and one recognises them as such and uses their professional guidance. Similarly, MFs and their fund managers are domain experts as far as the stock market is concerned. Just as you won't self-medicate or fight your own case in court, do not try to do the fund manager's job yourself. It is the fund manager's business to understand other businesses and you should take advantage of the same.You should contact us for your advice.

When it comes to the stock market, never trust anyone but yourself. Never, depend upon tips and hunches. Do not self-medicate. Otherwise, you will neither be a bull nor a bear, but you definitely will be a bakra
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Source : prajnacapital

Why you should not stop your SIP when market corrects

You have been investing in a mutual fund (MF) scheme through a Systematic Investment Plan (SIP).
Now that the share market has crashed, you are wondering if you should cancel this SIP. Should you?

In “Do you have an SIP? Don’t stop it!”, we saw that it doesn’t really make sense to terminate an SIP when the stock market is down.

We understood how the principle of cost averaging would work in times like these.
But it was all theory – now, let’s run some numbers and see how your investment would fare.

The two possibilities
We are considering two cases:

1. You stop your SIP now, when the equity market is undergoing a correction. Then, when the market recovers, you sell your units.

2. You keep the principle of long term investment and cost averaging in mind, and continue to invest in your SIP. Again, at a later stage when the market recovers, you sell your units.

Let’s see what the outcome of both these would be.

Example
Let’s say you started to invest in a mutual fund (MF) scheme in July 2007. At that time, you did your research, and found that “HDFC Tax Saver Fund” would be the best option for you.

You also decided that you would invest in the Growth option, and not the dividend option.

You invest Rs. 3,000 per month in this MF scheme through the SIP.

The price data
Since we are considering the price movements from the past and the future, we need to make some assumptions.

The price data from the past – July 2007 till October 2008 – is the actual price of the HDFC Tax Saver Fund – Growth Option units.

The price data from November 2008 onwards is hypothetical – here’s the assumption:

The stock market crashes some more during end 2008, and remains low for the whole of 2009. It starts picking up from early 2010, and reaches the level seen in May – June 2008 during September 2010.

In my opinion, this represents a valid scenario considering the current situation of the markets the world over.

The analysis

1. Stop SIP now, sell units when market recovers

You started in July 2007, and invested Rs. 3,000 per month till Oct 2008. Thus, you invested for 16 months, and you total investment is Rs. 48,000.

Over the months, you have acquired a total of 307.03 units.

In Oct 2008, the Net Asset Value (NAV) of each unit is Rs. 117, and the value of your units is Rs. 35,922.

You wait for the markets to correct, and sell in Sep 2010. At that time, the NAV of each unit is Rs. 149, and the value of your units is Rs. 45,747.

You make a loss of Rs. 2,253, or -4.69%, on your investment.

That is, even when the NAV of the units goes up by 27% (from Rs. 117 in Oct 2008 to Rs. 149 in Sep 2010), you are not able to fully recover your money.

2. Continue SIP, sell units when market recovers

You started in July 2007, and have invested Rs. 3,000 per month till Oct 2008. You continue making this investment till Sep 2010. Thus, you invest for 39 months, and your total investment would be Rs. 1,17,000.

Over all these months, you acquire a total of 916.78 units.

You sell in Sep 2010. At that time, the NAV of each unit is Rs. 149, and the value of your units is Rs. 1,36,600.

You make a profit of Rs. 19,600, or 16.75%, on your investment.

Quick Comparison

	Stop SIP now, sell units when market recovers	Continue SIP, sell units when market recovers
Investment per month	Rs. 3,000	Rs. 3,000
Months	16	39
Total Investment	Rs. 48,000	Rs. 1,17,000
No. of units bought	307.03	916.78
Average price per unit	Rs. 156.34	Rs. 127.62
Value of units	Rs. 45,747	Rs. 1,36,600
Profit / Loss	Loss Rs. 2,253	Profit Rs. 19,600
Profit / Loss %	-4.69%	16.75%

Conclusion

The results are quite apparent – it pays to keep investing in an SIP, irrespective of the market conditions.
And that’s the basic philosophy behind an SIP investment: In times when the prices are subdued, you get to buy more units with the same amount of money, thus lowering your overall per-unit cost!
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By : .raagvamdatt

Do you have an SIP.? Don’t stop it!

Many people are considering the option of stopping their Systematic Investment Plan (SIP).

Is it a wise decision? 
Should you stop your SIP? 
Is it good for your finances?

This article finds that out for you!

You started a Systematic Investment Plan (SIP) in a good mutual fund (MF) scheme a year ago.

(To know all about Systematic Investment Plan, please read SIP: AN EARNING MEMBER )

Initially, the market was going up, and so was the unit price of your MF scheme.

But then, came the crash (or correction) in the equity market, and the unit price of your MF scheme units started going down.

You continue to invest in the MF scheme through the SIP. But you see that the market is not moving up at all – in fact, there is a probability that it would go down even further.

And you are thinking of stopping this Systematic Investment Plan. You are wondering – is it a good idea to continue the SIP, or would it be better to stop it and cut your losses?

The underlying principle behind Systematic Investment Plan (SIP)

What is the theory behind SIP? SIP is a tool to implement the strategy of Cost Averaging.

In short, cost averaging is a method using which you can overcome the short term volatility of the stock market by investing in stages.

You also forget the biggest worry that most investors face: Timing the market.

Application of the principle of Cost Averaging

You practice the philosophy of cost averaging through an SIP.

You invest a fixed amount every month, irrespective of the level of the market. Thus, when the market is up, you get less units, and when the market is down, you get more units for the same amount invested.

What this does is that over time, it reduces the Average Cost of Acquisition of the units for you.

With the understanding of these benefits, you started the SIP in the first place. You invested when the market was going up, and you invested also when the market tanked.

Now you are worried, and are considering the option of stopping the SIP.

But has anything really changed to change your decision of investing through an SIP?

A golden opportunity

Nope! Nothing has changed!

In fact, you are currently facing a golden opportunity to drastically reduce the cost of acquisition of your units!

Remember what’s the principle behind an SIP? When the price of the unit is low, you get more number of units for the same total investment, thereby reducing the average per unit cost of purchase.

With the markets corrected so much, surely the price of your units would have also gone down. And that’s exactly why you should not stop the SIP – continue the SIP, so that you get more and more units of your MF scheme for a lesser per unit cost.

Isn’t that why you started investment through SIPs in the first place instead of making a lump sum investment?

Long term outlook for the market

Remember, stock investment is not for the traders or for people who invest for the short term. Investment in equities gives the best returns only in the long term.

(Read “Stocks - The winning bet for the long term” for more details on this)

And although we have a correction today, the long term fundamentals of Indian companies remain very strong. The companies are growing, and are growing very fast.

And even if this growth slows down a little due to the economic turmoil going on today, Indian companies would continue to grow much faster than the companies in most other companies.

Therefore, it makes even more sense to continue the SIP – in the long run, the markets would invariably move up, and at that time, you would end up making a lot more profit because you lowered your purchase cost today!

Conclusion

By continuing the SIP in a subdued stock market, you are reducing the per-unit cost of your MF units, and are therefore creating the platform for a higher profit in the future when the equity market goes up.

So, the message is clear: Do not stop that Systematic Investment Plan (SIP)!

(Want to see this analysis through real-life data? Please read "Why you should not stop your SIP when market corrects")
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By : raagvamdatt

Saving enough is not enough........Effect of Inflation on Savings :

You must have heard some elderly person saying "Hamare zamaane mein ghee 3 rupye kilo milta tha" (Translated, it means "In our young days, Ghee used to cost Rs. 3 per kilogram").

Currently, it costs more than 30 times that much!

In general too, we observe that the prices of all goods and services keep increasing. Take anything - sugar, petrol, cost of postage - anything you take, you would see that its price has increased manifold over years.

This is Inflation that we always keep hearing about. And it can have a disastrous impact on your savings and investments. Reason enough to understand it better?

What is Inflation?

Inflation means reduction in the purchasing power of the currency. Simply put, it means that the same amount of currency would be able to get you less goods (and services) over time.

For example, say today, rice costs Rs. 20 per kg. After a year, its price goes up to Rs. 25 per kg. This means that its price has gone up by 25%, or that the inflation is 25%.

This means that for Rs. 100, you can buy 5 kilos of rice today. But after a year, you would be able to buy only 4 kilos of rice for the same amount.

Thus, the purchasing power of Rs. 100 has reduced, or, generally saying, the purchasing power of the currency has reduced. This is inflation.

(Note: In practice, inflation is derived from the price movements of a very large basket of goods and services. In the example, for simplicity's sake, we considered only Rice).

This means that the value of a Rupee today is not the same as its value at a later time. This brings us to another interesting concept.

Time Value of Money

Through the example, we saw that the value of the Rupee keeps decreasing over time. The value is highest today, and becomes less and less as time goes by. Although the unit (the Rupee) remains the same, its purchasing power decreases over time due to inflation.

Therefore, you can not compare an amount today with an amount at a later date without considering the time.

Say you lend someone Rs. 1000 today, and he returns Rs. 1000 after a year. Are you at par? No - because the value of Rs. 1000 after a year is not the same as its value today. (You can invest the Rs. 1000 today at the rate of 7%, and can get Rs. 1070 after a year!)

How Inflation and Time Value of Money impacts your finances?

Now, we come to the crucial discussion!

The fact that inflation reduces the purchasing power of Rupees over time has very significant impact on your savings.

Suppose, a post graduate degree costs Rs. 2,00,000 today. You are planning for your daughter's education, and want to save for it today when she is 10 years old. She would need the money after around 11 years.

How much should you plan to have at that time? Rs. 2,00,000? No! It is not enough to save that much, because this amount would have lost considerable purchasing power in all those years!

You would need to have a lot more at that time, because due to inflation, the same service (post graduate education) would cost a lot more at that time.

So, how much should you actually plan to have at that time? For finding that, we use the concept of compounding.

The article "Goal Based Investing" has a step-by-step explanation of how to save for a long term goal, taking into consideration the impact of inflation.
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By : raagvamdatt

Stocks - The winning bet for the long term :

This article talks about the importance of holding stocks for the long term. It also discusses how stocks give the best returns in the long term.

"Invest in stocks for the long term".
"Stocks give the best return in the long term".
"Return from equities outpaces return from all other asset classes in the long term."

Sounds familiar? I am sure it does! You would have heard this many times before, from many people, including me!!

And that is because it is true! Let's examine why.

We all know about volatility of the stock markets. One day, the market would move up by a couple of percentage points, and on the next day, it would fall! All of us have seen this, right?

Does this mean that stock markets are unpredictable? Well, in the short term, yes. No one can predict where the market would be the next day or week. (Not even the futile exercise of technical analysis - please read "An introduction to Technical Analysis" for more details.)

But we can predict where the market would be after a couple of years, and with a fair amount of accuracy. To understand why, we need to look at the factors determining the price of a stock.

How is the price of a stock determined?

Of course, a simple answer is - it depends on the demand for the stock. If there is more demand for a stock, its price would go up. And if there is less demand for a stock, its price would go down.

But how is this demand determined?

On a day-to-day basis, the demand gets affected by short term factors like news flow, politics, price movements of other tradable goods like commodities and crude oil, etc. Any change in these factors causes a fluctuation of demand, and thus causes a fluctuation of the prices of stocks.

But in the long run, the demand, and thus the price of a stock, depends on the overall state of the economy, its growth rate, and the growth rate of individual companies.

Let's understand this in detail :

Most companies make a profit, and this profit, expressed per share, is its Earning Per Share or EPS. When people invest in a company, they are willing to pay a certain multiple of this EPS as the price. This multiple is called the PE Ratio.

Now, in general, companies grow over years. Their sales grow, and their profits grow too. (At the least, we should consider only those companies for investment that are growing, or have a potential to grow)

This means that their EPS would also grow over years. Now, even if investors are willing to pay the same PE multiple for the company, the price of the stock would increase because its EPS has increased.

Example
Say a company has an EPS of Rs. 10, and is trading with a PE of 12. Thus, its stock price is Rs. 120.
After two years, if its EPS is Rs. 15, and if it would trade at a PE of 12, its price would be Rs. 180.

(The PE for a company also changes over time depending on the growth rate of the company and its future prospects.).

Thus, a company's stock price would naturally, and certainly, go up in the long run by virtue of growth in its profit.

And therefore, investment in stocks for the long term always makes money.

Of course, the challenge is to invest in companies that are growing, and would keep growing. Discovering such companies requires considerable expertise and time. Therefore, it is wise to invest in stock markets using mutual funds, which would do all the hard work for you!

Even from income tax point of view, stocks present a favourable picture - long term capital gains from stocks is exempt from income tax! Even more reason to invest in stocks, and for the long term.

How long is Long-Term?

How do we define this "long term"? I believe that long-term for stocks means at least 5 years. This is a reasonable time to remove the impact of all short term fluctuations from stock prices. In my opinion, this is the minimum time in which the true change in value of a company would be reflected.

Evidence
Let's look at hard numbers and see if they support what I have said!

Investment In	5 Year Returns	10 Year Returns	15 Year Returns
Equity	35%	16%	17%
Gold	10%	7%	13%
PPF	9.5%	12%	12%
Bank FDs	8.5%	12.5%	13%
Real Estate	30%	14%	11%

So, we see that stocks do beat other asset classes in the long term! (Although the difference in return between stocks and some other asset classes seems minor - for example, Real Estate - in the long run, it can have a huge impact on the overall growth of your investment.
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By :raagvamdat

Senior Citizens and stock market – Why to invest, how to invest

This article looks at the importance of stock markets when it comes to investment by senior citizens. It explains why seniors should invest in stocks, how they can do this, and how much should they invest.

Take a scenario where you are 55 years old, and are approaching retirement. What does common investment wisdom tell you? You should shift all your investments to safe – preferably government – investment avenues.

Or, say you just retired, and have received a large lump-sum amount through provident fund (PF), gratuity, etc. Where do you invest this? Again, common investment wisdom tells you to invest everything in safe investment avenues.

Most asset allocation strategies also ask you to shift assets from riskier asset classes (like equities) to safe investments (like debt or FDs) as your age increases.

Bottomline – It is very commonly believed that equities or shares should not be a part of your investment portfolio if you are a senior citizen.

This can not be any further from truth!

Returns from “safe” investment avenues can be inadequate

Let’s face it: All safe investment avenues give extremely low return on investment – the return can hardly beat inflation. This means that every successive year, you can buy lesser and lesser things using the interest you earn through such investments.

Even schemes tailored for elders – like Senior Citizens Savings Scheme (SCSS) – provides for just 9% return. Subtract income tax, and this too reduces to a very unattractive level.

Remember: The higher the return, the longer your retirement corpus can sustain you. Consequently, the higher the return, the lesser is the retirement corpus required for you.

Let’s understand this using an example.

Example

Let’s say you are 60 years old, and are retiring today. Your monthly expenditure today is20,000. You expect to live till the age of 85 years, and the average rate of inflation is 5%.

The golden question: How much money would be enough to provide for you till the age of 85 years? What should be your retirement corpus?

Well, as you would have guessed, it depends on the return you can generate from your investments.

If the rate of return is 7%, the corpus needed would be47 Lakhs. Whereas if the return is 8%, the corpus needed would be42 Lakhs.

That is, if you can increase the rate of return by 1%, your required retirement corpus would reduce by 10.5%!

Why senior citizens should invest in equities?

And how do you increase your returns by 1%? By investing some of your money in equities!

Stocks have returned about 17% (compounded) in the last 15 years. And this has been the trend – stocks return anywhere from 15% to 18% when an investment is made for a long term.

Thus, stocks provide a return way better than various safe investment avenues like bank fixed deposits (FDs), SCSS, National Savings Certificate (NSC), Kisan Vikas Patra (KVP), Post Office Monthly Income Scheme (MIS), etc.

So investing just a small proportion of your corpus in stocks can give a boost to your overall returns!

How much should a senior citizen invest in equities?

Does it mean that you invest half your money in safe avenues, and the other half in shares? No!

Remember, stability of returns is very important when you do not have any other source of income, and this is what should dictate the choice of investment avenues for most of your corpus.

Only a small proportion of your money should be invested in equities, so that it gives some boost to your overall returns while not causing any instability in your portfolio.

How much exactly you should invest depends on your particular situation. However, as a ballpark, equity investment should form 10% to 20% of your investment corpus if you are a senior citizen.

Where should the money be invested?

Ok, now that we know how much should be invested, the next question is – where should this investment be made?

Should you invest it directly in stocks? If yes, which type of stocks? If not, through what kind of mutual funds?

You should avoid direct investment in shares – you should do it only if you think you have the time, inclination, patience and talent to choose the right stocks.

If at all you invest in stocks directly, you should avoid mid-cap and small-cap shares. These tend to give very high returns during bullish times, but their price also falls very quickly during bearish phases. Thus, they should be avoided due to their volatility.

As far as possible, try to invest in equities using mutual funds. (Check out “Direct investment in Stocks versus Mutual Funds (MFs)?” for more)

You should invest in diversified equity funds having most of their investment in large cap stocks (or, in market terms, diversified equity funds with a “large cap bias”).

Please refrain from investing in equity funds that focus on mid cap or small cap stocks, or sector specific funds – these tend to be quite volatile, and should be avoided by senior citizens.

How should you invest in stocks?

This brings us to the final question: How should you invest in these funds? Should it be in one go, or should the investment be spread out?

Investing a large lump sum in equities in one go is never a good idea. Volatility is an inherent trait of equities, and we should exploit it to lower our cost. Thus, you should spread out your investment over a period of time – at least a year.

But the problem is: you have a large sum to invest immediately! Should you keep it in a bank account and invest from it every month?

No, there is an easy (and more efficient!) way out. You can invest the amount in debt mutual funds (which are very good for short term investments, and give good, safe returns). And you should transfer a fixed amount from this debt MF to your chosen equity MF every month using a Systematic Transfer Plan (STP).

This way, you would not have to worry about investing every month, but at the same time, you would be investing systematically. Not to mention that you would be earning a healthy return in the mean time!

Still not convinced about equity investment?

We saw why investment in equities is a must for senior citizens. However, you might not be convinced, or might still be worried about the risk. If this is the case, there is a good (and safe!) middle path as well.

You can invest a portion of your retirement corpus in bank fixed deposits (FD), and choose a monthly interest option. Using this interest that you get every month, you can start a Systematic Investment Plan (SIP) in an equity MF.

This way, you would be investing in equities and gaining from the higher returns. But at the same time, you would be keeping your corpus (principal) safe. The returns would not be as good as investing the amount directly in equity MFs – but it is definitely better than not investing in equities at all!

A note about “share trading” and genuine performance evaluation

Long term investment doesn’t mean you invest and forget – you do need to evaluate the performance of your investments from time to time, and switch from one MF scheme to another if needed.

But this need not be done one a daily or weekly basis – evaluating performance of your investments versus other schemes every 6 months is adequate.

If you buy and sell more frequently, it is just short term trading, and is not desirable. Please remember that small investors like you and me should only invest in stocks for the long term.

Many people get involved in short term trading in shares – even intra-day transactions. It can be out of genuine desire to earn good returns through “tips”, to compare returns with their friends’ returns, or simply to pass time.

However, short term trading can generate profits only if you enter into very large (and frequent) transactions, and have access to up-to-the-minute market data and news – something that only professional traders can have.

Therefore, “trading” in shares should be avoided by all retail investors, including senior citizens.
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By : raagvamdat

The basic principles of investing :

Investing means, making more money on your money towards increasing your wealth.

An investment is anything you purchase for future income or benefit.
In other words, anything not consumed today and saved for future use can be considered an investment.

Income earned from your investments and any appreciation in the value of your investments increases your wealth. Before we take a look at the different financial products, it is important to know the basic principles of investing!

Investment refers to a placement of funds in some assets that will be held over some period of time with the expectation that the funds will grow. Each one of us has assets of some kind, ranging from physical assets to financial assets. For our purposes, investment will mean a measurable asset retained in order to increase one's personal wealth.

The prime motive behind investing is that we want to improve our future welfare. Sources of funds may be from assets already owned, savings or foregone consumption or borrowed money. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors.

The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.

Three rules of investment:

* Invest early
* Invest regularly
* Invest for long term and not short term

* Invest Early: The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning.

* Invest Regularly: Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario.

* Invest for Long Term and Not Short Term: If you decide that your money can work for you over a long period of time, then better compounding works. Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the 10th year, Rs.507 in the 25th year, and Rs.1,609 in the 40th year -- returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000.

The proper choice of investment instrument can actually make it almost simple to realize your goals. In other words, right choice of investment will improve your present life and let you look ahead to the future too. It allows you to understand how today's financial decision affects other areas of your finances. For example, buying a particular investment product might help you pay off your housing loan faster or it helps to support your retirement significantly. One must view each financial decision as part of a whole and also consider its short and long-term effects on your financial objectives. Surprisingly, many of us do not have any type of formalized investment plan in place.
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Source : prajnacapital

ETFs: Good Investment Options

Exchange traded funds (ETFs) have been here for quite some time, but have not caught fancy of retail investors due to lack of awareness and understanding about the nature of ETFs. However, one can earn decent returns and also reap the benefits of diversification of portfolio with judicious investments in ETFs of various asset classes.

Consider this: On March 9, 2009, Sensex had touched its 40-month nadir when it closed at 8160. Just about 16 months later on 23 July, 2010, the Sensex closed at 18,130, a whopping increase of more than 10,000 points. Also consider this, in Sept. 2008, the gold price was hovering around Rs 12,500 per ten grammes. On June 1, 2010, the gold price had touched a record high of Rs 19,000 per ten grammes, a huge rise of Rs 6,500 (over 50 per cent) within a short span of 20 months. Now, looking at the handsome returns offered by Sensex stocks and gold, how you wished you had all those 30 Sensex shares and gold in your portfolio of investments. While you could have bought gold and reaped the benefits, there is a problem with buying Sensex shares. You have to match the weightage of 30 shares in the Sensex to match the performance of the benchmark index. Even with gold, if you buy ornaments, you have to reckon with ‘making charges’ which otherwise eat into your profits (unless you buy gold coins or bars). Also, purity of gold and its safety and security are some key issues you have to deal with if you buy the yellow metal.

Now, if you do not want to get into the hassles of matching the weightage of Sensex shares in your portfolio or buy gold and be worried about its purity and security, there is a way out. You can just buy Sensex (or, if you wish, Nifty) exchange traded fund (ETF) and gold ETF to reap the returns offered by Sensex and gold, sans all the hassles and worries. But its not just index and gold ETFs, one can invest in currency and bond ETFs too and get take advantage of fluctuation in currency and interest rates, respectively.So, let us see how to invest in the ETFs.

Basket of Stocks: ETF is basically a single stock representing a basket of stocks comprising an index such as Sensex or Nifty. The ETF trades at a value which is based on the net asset value of the underlying stocks that the index represents. ETF offers built-in diversification because the basket comprises of all the stocks in the particular index. It also offers flexibility of a stock as an ETF can be bought or sold during market hours. Just as individual equity securities are traded on the stock exchange, ETFs are also traded on a stock exchange and can be bought or sold during the day through a broker just like a Reliance Industries or L&T stock. Hence, it is evident that there are advantages galore of investing in ETFs.

Types of ETFs: Broadly speaking, there are four types of ETFs, namely, index, commodity, bond and currency. A particular index, commodity, bond or pair of currencies are the underlyings for these ETfs and the movement of these underlyings are reflected in the movements of these ETFs. Let us understand each of these ETFs in detail.

Index ETFs: In India, we have ETFs of various indices such as Sensex, Nifty, Junior Nifty, S&P CNX 500 and Hang Seng. The index ETFs try to mimic the performance of these indices by investing in stocks comprising these indices. The investment is done exactly in proportion to the weightage given to these stocks in these indices. For example, Benchmark Mutual Fund’s Nifty BeES invests in the 50 stocks comprising NSE’s Nifty index and the allocation of funds is done based on the weightage given to each of these scrips in Nifty. Nifty BeES is available at about a tenth of the value of Nifty, hence when the Nifty value was 5449 on July 23, the Nifty BeES closing NAV was Rs 549.34. Nifty BeES is managed by fund manager Vishal Jain of Benchmark MF. The minor difference in the index value and NAV of Nifty BeES is due to tracking error and fund expenses (which are about half to one per cent per year). The face value of Nifty BeES is Rs 10.

Similar to Benchmark’s Nifty ETF, ICICI Prudential and Kotak Mutual Fund have made available Sensex ETFs at 1/100th value of Sensex. Hence, while the Sensex closed at 18,130 on 23 July, 2010, Kotak MF’s Sensex ETF traded at Rs 182.65, while ICICI Prudential MF’s Sensex ETF (called SPIcE) traded at Rs 170.77. Apart from the ETFs of the two major indices, ETFs are also available for other indices such as Nifty Junior, S&P CNX 500, etc.

Segment ETFs: ETFs are also available for a particular segment of stocks such as banks, PSUs, Shariah-compliant stocks, etc. These ETFs invest in stocks comprised in indices of the particular segments. Hence, Benchmark’s Bank BeEs invests in the 12 banking stocks comprised in the CNX Bank Index. Here too the value of ETF is one-tenth of the value of CNX Bank Index, hence while the index closed at 10,093.90 on July 23, 2010, the Bank BeES closed at Rs 1,022 on the same day on NSE. Similarly, when the CNX PSU Index closed at 3867.92 on 23 July, 2010, the PSU Bank BeES closed at Rs 395. Benchmark’s Shariah BeES invest in underlying securities of the S&P CNX Nifty Shariah Index. As the name goes, the Shariah Index comprises of only those companies which are compliant with the tenets of the Shariat. Hence, companies whose business involve manufacturing liquor, tobacco, giving or taking loans on interest are not considered Shariah-compliant, while companies from industries/sectors such as engineering, IT, refineries, telecom, power, etc. are included in the index and considered for investment.

The Shariah BeES were quoted at Rs 125.94 when the Shariah Index closed at 1260.85 on 23 July, 2010.

Commodities ETFs: These ETFs invest in commodities, such as precious metals and their futures. However, in India only gold ETFs are available for trading. Many of the mutual fund houses such as Benchmark, Kotak, Reliance, SBI, UTI, Religare and Quantum have launched gold ETFs. The funds received by the mutual fund are invested in gold. As with index ETFs, the value of gold ETFs is one-tenth the value of gold. The price of gold on 23 July, 2010, was Rs 18,350 per 10 grammes, while the prices of the ETFs on BSE were as follows: Benchmark – Rs 1,804; Kotak – Rs 1,795; Reliance – Rs 1,748; SBI – Rs 1,830; UTI – Rs 1,800; Religare – Rs 1,832. Quantum’s gold ETF is priced at half the price of gold and was quoted at Rs 898 on the day. The face value of all the ETFs is Rs 100.

Debt ETFs: The only debt ETF available in India is the Liquid BeES of Benchmark. According to Benchmark, the funds are invested “in a basket of call money, short-term government securities and money market instruments of short maturities while maintaining safety and liquidity.” The face value of Liquid BeES is Rs 1,000 and the AMC endeavours to keep the daily NAV of Liquid BeES around Rs 1,000, which is evident from its 52-week high-low of Rs 1002-Rs 999.99 on BSE. Returns accrue to the investors in the form of daily dividend which is compulsorily reinvested in the fund on a daily basis.The units arising out of dividend reinvestment are credited to the demat account of the investors once every month.

Currency ETFs: Currency ETFs are not yet available in India, but with stiff competition envisaged among currency exchanges MCX-SX and United Stock Exchange (promoted by 21 PSU banks and others), the day is not too far off when currency ETFs will be available to the investors along with currency futures.

Returns on ETFs: The returns generated on ETFs broadly correspond to the returns on the underlying. Hence, for example, Kotak’s Sensex ETF would broadly provide returns which are equivalent to Sensex returns.

So, if the Sensex, which is currently around 18,000 level, goes up to 20,000 level by October 2010, the returns would be around 11 per cent within a span of three month. Hence, if one were to invest now in a Sensex ETF at Rs 180 level, the NAV of the ETF would go up to around Rs 200 by October ’10 giving similar returns (around 11 per cent) to the investor.

Let’s take an example. SPIcE, the Sensex ETF of ICICI Prudential MF, has closely followed the performance of Sensex. The CAGR of SPIcE for the last one, three and five years and since inception is 15.50, 5.55, 20.8 and 25.22, respectively, is very close to Sensex CAGR of 15.77, 5.22, 20.32 and 24.47, respectively (see box). A CAGR of 25.22 per cent over a period of seven-and-half years is an impressive gain by any standard.

It is evident that investing in index ETFs gives the benefit of investing in all the index stocks, minus the hassles of monitoring the weightage of the respective stocks in the index. However, one ust also keep in mind that, when the particular index soars the NAV of the ETF also soars, but when the index tanks, the NAV also slumps. So, one must closely follow the particular index to understand when to buy or sell the ETF. It is observed that Hang Seng ETFs are also available for investment in India, which means that one can invest in the companies comprising of Hang Seng index of the Hong Kong Stock Exchange and reap the benefits of investing in the stocks of those companies.

Similar to index ETFs, the gold ETFs trace the price movement of gold and deliver the returns similar to the returns on investment in gold.

Buying ETFs: ETFs are basically funds which can be easily traded on the stock exchange like shares of companies. Of course, ETFs can also be bought from the fund house itself but unlike stock exchange where one can buy even a single unit of the ETF, the fund house may specify a lot size which may be anywhere between 100 to 1000 units. Hence, for small investors, buying from the stock exchange is feasible, while those willing to invest a sizeable amount can purchase the ETFs directly from the fund house. One can buy and sell ETFs online through a broker during market hours, for which one must have a demat account with the broker.So, if you are bullish on Sensex/Nifty, or PSUs, banks or gold, go ahead and buy the respective ETF and enjoy the returns from the underlying assets of your choice.
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Source : DSIJ

BASIC THINGS ABOUT INVESTMENT:

1.What is investment?

The money you earn is partly spent and rest is invested for meeting future goals. This is called investment.

2.Why should one invest?

You need to invest to:

i.Earn return on your idle resources

ii.Generate a specified sum of money for a specific goal in life

iii.Make a provision for an uncertain future

iv.To beat inflation

3.When to start investing?

The sooner you start investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (we shall see it later) increases your income, by accumulating your principal and the interest or dividend earned on it, year after year.

Three golden rules for all investors are:

i.Invest early

ii.Invest regularly

iii.Invest for long term

4.What are various options available for investment?

You may invest in:

Physical assets like real estate, gold, art etc. and/ or

Financial assets such as FD`s with banks, small saving instruments with post offices, insurance/ provident/ pension fund etc. or securities market related instruments like shares, bonds and debentures etc.

5.What are basic principles of investment?

Following are the basic principles, which you (an investor) should use in creating their investment strategy:

i.Harness the power of compounding

ii.Start early

iii.Have realistic expectations

iv.Invest regularly

6.What is goal setting?

Goal setting is converting your personal goals into mathematical numbers. It means identifying your financial capabilities, setting smart and realistic goals based on your dreams and aspirations and achieving them through a comprehensive plan.

Goals should be SMART, which is specific, measurable, actionable, realistic and tracked.

7.What is budgeting?

A budget is a systematic plan for the money you have and the money you will eventually spend.

8.What is an Income/ Expenditure statement?

It is a statement, which list down your various sources of income and expenses. It tells how much money you have left for saving and investing after meeting all your regular expenses.

9.What is a balance sheet?

It is also called the statement of financial condition, it is a summary of your assets, liabilities, and owners' equity.

10.What is net worth?

The market value of all your assets (including cash) less your total liabilities. It is often used as an underwriting guideline to indicate your creditworthiness and financial strength.

11.How to measure your net worth?

Net Worth is sum total of all your assets minus sum total of your liabilities.

12.What are asset classes?

Different categories of investments are sometimes described as asset classes. The three main asset classes are equities (stocks), fixed-income (bonds), cash equivalents (money market instruments), real estate and commodities.

13.What do you mean by diversification?

An investment strategy that can reduce or spread market risk by combining a several categories of investments, such as stocks, bonds, real estate, commodities which are unlikely to move in the same direction at the same time.

14.What is asset allocation?

Asset allocation is the process of creating an optimal investment mix, bearing in mind risk profile and return objectives. Asset allocation ensures that a portfolio diversifies or spreads the overall risk across investments. A balanced portfolio should include a mix of equities, debt investments, commodities (such as gold), and real estate. How much capital one will invest in each investment class will depend upon his risk profile.

15.What do mean by compounding?

One should understand the simple principle of finance that an investment can be rapid if investment proceeds are re-invested. If interest incomes are re-invested and allowed to earn at the same rates, the rates are enhanced over a period of time. This is called compounding. For maximum benefits investors should allow their investments to compound.

For eg. If you invest Rs 1000 per month continuously for next 10, 20, 30, 40 and 50 years and allow it earn an interest @12%. Your actual sum of money at the end of these period would be as follows:

10        12%     2,30,038

20        12%     9,89,255

30        12%     34,94,964

40        12%     1,17,64,773

50        12%     3,90,58,340

This is said to be the power of compounding.

16. What is insurance?

The act of insuring, or assuring, against loss or damage by a contingent event; In legal terms, it is a contract whereby, for a stipulated consideration, called premium, one party undertakes to indemnify or guarantee another against loss by certain specified risks by certain specified risks.

17.Why is it important to have life insurance?

Life insurance is always a protection against an unfortunate event. A life insurance policy can relieve your family of financial stress in case of any unfortunate happening. It will provide financial security to your family members and will relieve them of all the liabilities you might have left behind.

18.How good is `gold` as an investment option?

Gold is an old asset class in which people invest. It is a hedge against inflation and provides an extremely good liquidity in an unforeseen event like war. However, since last 25 years it has under-performed bank deposits.

19.What is inflation?

A rate of increase in the general price level of all goods and services that results in a decline in the purchasing power of money is called the rate of inflation. It reduces the value of money over the period of time.

20.What do you mean by real rate of return?

The real rate of return is actual rate of return on investments minus current rate of inflation.

21. What is estate planning?

Estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs.

22.What do you mean by risk taking capacity?

Risk taking capacity depends upon several factors such as investment objectives, personality, investment time frame, age, income, number of dependents, how much wealth you have accumulated, and so on.

23.What do you mean by risk tolerance level?

Your risk tolerance is the degree of uncertainty you can handle when there is a negative change in your portfolio’s value; in other words, how you react when your investments make a loss.

There is a subtle difference between risk tolerance and risk taking capacity. Risk tolerance lies in your mind and tells you how much risk you WANT to take whereas risk-taking capacity is the amount of risk you SHOULD take keeping in mind the factors discussed above.

24.How to monitor your investment portfolio?

Whether you are an active or passive investor. You have an obligation to be informed about economic and financial conditions. Active investors must certainly monitor general business affairs, plus specific news that has an impact on their investment. While passive investors may not wish to be so closely tied to the ebb and flow of daily, weekly or monthly information, they must have an overall understanding of what is happening to their money, what their objectives are, who is accountable to them, how decisions are made

25.What are mutual funds?

Mutual Fund is essentially a mechanism of pooling together the savings of a large number of small investors for collective investment, with an avowed objective of attractive yields and capital appreciation, holding the safety and liquidity as prime parameters.

26.What is systematic investment plan (SIP)?

Systematic Investment Plan is a method of investing into the fund of investor’s choice at regular intervals over defined time frame. This helps the investor to invest monthly, quarterly etc.

Since a constant sum is invested regularly, the investor is able to get more number of units in the falling market and fewer units when the market is booming. This helps the investor to smoothen out the market fluctuations and the investment will be at a low cost over a period. This strategy is called ``Rupee Cost Averaging``.

27. What is Rupee/ Dollar Cost averaging?

When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share or per unit over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smooth out the market's ups and downs and reduce the risks of investing in volatile markets.

28. What is value averaging?

An investing strategy that works much like Rupee cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of contribution made each month. In value averaging, you (an investor) sets a target growth rate or amount on your asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base.

For eg: Suppose that today your portfolio is worth Rs 5,000 and your goal for the portfolio is to increase by Rs 500 every month. If, in a month's time, the assets have grown to Rs 5200, you will fund the account with Rs 300 (Rs 5000 – Rs 5200) worth of assets. In the following month, the goal would be to have an account holding of Rs 6000. This pattern continues to be repeated in the following month.

With the method, you (an investor) contribute to your portfolios in such a way that the portfolios balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, you contribute more, while in periods of market climbs, you contribute less. In contrast to Rupee cost averaging, which mandates that a fixed amount of money be invested at each period, the value averaging investor may actually be required to withdraw from the portfolio in some periods.

Value averaging incorporates one crucial piece of information that is missing in Rupee cost averaging – the expected rate of return of your investment.

29. What precautions one should take while investing?

Before making any investment, you must ensure to:

1. Obtain written documents explaining the investment

2. Read and understand such documents

3. Verify the legitimacy of the investment

4. Find out the costs and benefits associated with the investments

5. Assess the risk-return profile of the investment

6. Know the liquidity and safety aspects of the investment

7. Ascertain if it is appropriate for your specific goals

8. Compare these details with other investment opportunities available

9. Examine if it fits in with other investments you are considering or you have already made

10. Deal only through an authorized intermediary

11. Seek all clarifications about the intermediary and the investment

12. Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.

30. What do you mean by paying yourself first?

A commonly used phrase in personal finance and retirement planning literature that means to automatically route your specified savings contribution from each paycheck at the time it is received. When you set down to pay your bills, the first check you write should be to yourself. Decide on an amount you can commit to for at least six months and immediately pay that ``bill`` by depositing the money into your brokerage, mutual fund, or retirement accounts.

Because the savings contributions are automatically routed from each paycheck to your investment account, this process is said to be ``paying yourself first``, or before you begin paying your monthly living expenses and making discretionary purchases.

One must do this even if he cannot afford it! Then, pay your other bills as usual. If you find that you do not have enough money to cover all the expenses, write down the amount you are short and then find away to raise the money. For this you may have to cut down your monthly expenditure, cut down your electricity, telephone and other bills or work a few extra hours, or cancel your magazine subscriptions, to make it happen.

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Source: myiris.com

Got married? Consider these financial tips:

Got married? Consider these financial tips:

Planning and managing your finances has always been an extremely challenging task. It, however, becomes even more taxing to plan your finances after your marriage.

Because you need to have a clear understanding with your partner regarding expense bill, savings, investments and other money-related matters. It may seem difficult, yet it is important.

Here we take a look at some of the important things
newly-weds need to consider while preparing a financial plan:

Expense management

Another important thing to do is to make a list of household expenses (regular as well as one-time) that you expect to incur. You are just beginning to share your life with your partner. So it is advisable to add a bit extra to the initial estimates.

Clarification of accounts: 

While you should retain your individual bank accounts (this is especially necessary from the point of view of convenience in paying tax if both the partners are working), you need to open a new joint bank account with an initial deposit equivalent to the wedding receipts in it.

Risk management

There should be an adequate risk cover on the life of the earning member/members to cover for any financial distress in case of any unfortunate event.

“After marriage one needs to review one’s coverage to take adequate life cover in a bid to protect one’s spouse and family from the risk of premature death. If the spouse is working, then her income earning capacity also needs to be protected and if she is a housewife, she needs to be given adequate protection which could safely tide her over any financial crisis that might occur in the absence of the breadwinner,”

Emergency fund

It is also advisable to keep some amount in an emergency fund to support your regular expenses in case of any urgency.
“You can invest another three months’ expenses in a short-term debt mutual fund, which can be cashed at a short notice, but will earn better post-tax returns than a bank fixed deposit,”

Focus on defining short-term priorities:

Make a list of things you wish to buy. The key to effective financial control is to buy only the absolutely urgent items and postpone the purchase of the rest, even if you have cash to go for everything right away.
Stagger the target dates of the postponed items over a six-month period. If you shorten your shopping list, you will be surprised later to see how well you managed without many of the excluded items.

Set your medium and long-term dreams:

From buying your dream house to affording the best education for your children, it is imperative to describe each long-term goal in financial terms. After this the amount to be invested on a regular or lump sum basis to accumulate the desired level of capital to meet all the important milestones in your life should be determined. You may like to take the help of a professional financial planner for this exercise.

Accumulation for your future:

Implement your financial plan by identifying different investment instruments which can help you achieve your goals. Ideally systematic investment plans in equity mutual funds may be used for this purpose.
“Final selection of instruments depends upon your profile, temperament and knowledge base of investments. Needless to say that before earmarking this amount, keep in mind immediate needs as well as annual expenses such as insurance premiums which could impact your cash flow,”


It is also advisable to discuss the financial matters with your spouse so that both of you are aware about the money that is being invested. It is important for both the husband and wife to arrive at a mutually-agreeable financial plan

ULIPs - Insurance or Investment :

ULIPs are expensive and opaque mutual funds disguised as insurance.ULIPs are not smart investments as they have high associated costs. Invest in well rated funds and opt for a term plan for your insurance requirements.

ULIPs have a mixture of the characteristics of both insurance and mutual funds. Crucially, the mutual fund aspect of ULIPs is regulated by the government under a very different set of rules compared to the real mutual funds. From the investors’ point of view (which is obviously the most important point of view), the biggest difference lies in how much of his money is actually used for his insurance and his savings and how much is taken away to pay the commissions to agents and the expenses of the insurance company. The second big, related difference is the quality of the information he is given about his investments.

Mutual funds deduct not more than 2.5 per cent as the agent's commission. And this deduction is 0 per cent (by law) if investors don’t use an agent and go directly to a fund company. In ULIPs, the agents' commission varies, but in the first year, it could be anywhere between 25 per cent and in some cases, 75 per cent. There are a lot of things in finance that are difficult to understand, but the difference between paying 0 per cent commission and 75 per cent commission is not one of those. Even the difference between 2.5 per cent and 25 per cent is pretty easy to understand.

ULIP's NAVs are effectively pre-deduction. The NAV may double, but your investments won't double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means that the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

We are often told by the insurance industry that this is because ULIPs are a superior product. That's complete rubbish. ULIPs are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising. All of which is the unitholders' money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office and many other asset types is ending up in ULIPs, where a good proportion is diverted to pay commissions.

The direction that the India's insurance industry has taken in the last few years is a huge regulatory failure on part of government. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India's under-insured masses. Instead, it has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds that are dressed up as insurance. It's tragic that there is no move to even recognise that this problem exists. Now, even higher foreign ownership is on its way, supposedly because more capital is needed to ULIP the under-ULIPed masses even harder.

It's a necessary expense, like buying a helmet or going to a doctor, but it's not an investment. You need both insurance and investment. To get the best deal in both, don't mix them up.

It's up to you, as an investor, to understand the issues and do what you think is in your best interes

W.D.Gann's 28 Valuable Rules:

Some of today’s great trading philosophies actually date back to the early to mid-1900s.And W.D. Gann, Jesse Livermore and Richard D. Wyckoff all were considered "market mavens" of that time,according to author Jim Wyckoff.

"They stressed hard work and preparation as pre-conditions for successful trading of markets. Their work is still valid and renowned by successful traders of all markets worldwide."

Gann’s 28 Valuable Rules: It is best that you read these rules once a day before you make a trade.

1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.

2. Use stop loss orders. Always protect a trade when you make it with a stop loss order 1 to 3 cents, never more than 5 cents away, cotton 20 to 40, never more than 60 points away.

3. Never overtrade. This would be violating your capital rules.

4. Never let a profit run into a loss. After you once have a profit of three cents or more, raise your stop loss order so that you will have no loss of capital. For cotton when the profits are 60 points or more, place stop where there will be no loss.

5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.

6. When in doubt, get out and don’t get in when in doubt.

7. Trade only in active markets. Keep out of slow, dead ones.

8. Equal distribution of risk. Trade in two or three different commodities if possible. Avoid tying up all your capital in any one commodity.

9. Never limit your orders or fix a buying or selling price. Trade at the market.

10. Don’t close your trades without a good reason. Follow up with a stop loss order to protect your profits.

11. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.

12. Never buy or sell just to get a scalping profit.

13. Never average a loss. This is one of the worst mistakes a trader can make.

14. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.

15. Avoid taking small profits and big losses.

16. Never cancel a stop loss order after you have placed it at the time you make a trade.

17. Avoid getting in and out of the market too often.

18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.

19. Never buy just because the price of a commodity is low or sell short just because the price is high.

20. Be careful about pyramiding at the wrong time. Wait until the commodity is very active and has crossed resistance levels before buying more, and until it has broken out of the zone of distribution before selling more.

21. Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short.

22. Never hedge. If you are long one commodity and it starts to go down, do not sell another commodity short to hedge it. Get out at the market: Take your loss and wait for another opportunity.

23. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason, or according to some definite rule; then do not get out without a definite indication of a change in trend.

24. Avoid increasing your trading after a long period of success or a period of profitable trades.

25. Don’t guess when the market is top. Let the market prove it is top. Don’t guess when the market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.

26. Do not follow another man’s advice unless you know that he knows more than you do.

27. Reduce trading after first loss; never increase.

28. Avoid getting in wrong and out wrong;getting in right and out wrong: This is making double mistake