How must you plan your Investing

You could be investing, keeping in mind the different goals that you have . Your goals could be Short,Medium or Long term in nature depending on the time you have in hand to finally reach your goal

But, no matter what kind of goals you may have , your investment must be spread across different investments type or very simplistically must be spread across at least Debt and Equity.

• Short Term Investment Horizon ( 1 year )

            Debt : Bank Fixed Deposits and FMP and Balanced Funds

            Equity : Large cap Focused Diversified Equity Funds

• Medium Term Investment Horizon ( 3-5 year )

           Debt : Bank FDs, Corporate FDs , Debt Mutual Fund

           Equity : Large Cap and Mid Cap Focused Diversified Equity Funds

• Long Term Investment Horizon ( > 5 year )

         Debt : Bank/Corporate  FDs,PPF/PF,Long Tenure Bonds

         Equity : Large Cap Focused Diversified Equity Funds ,

                     Mid/Small Cap Focused Diversified Equity Funds

                     Direct Exposure to Equity.

You can add Gold to all of these for stability .

As the saying goes, "Failing to Plan is Planning to Fail" , so lets be prudent and plan

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Why is Investing important

If you have been able to save money and have been able to spend less than what you earn, that is great, you have taken a tiny step towards wealth creation, since you could never have hoped to create wealth by spending more than you earn.


The question that now begs to be answered is, is just saving enough.

Let me explain

I usually have Idlies for breakfast, about two years back my breakfast costed me Rs.10 and today the same breakfast costs me Rs.14.

Now If,

· I had saved Rs.10 as cash, I would have found after two years that my Rs.10 would no more be able to buy me the breakfast.

· I had kept this Rs.10 in a savings bank account that which gives me a interest of 3.5 % a year, I would have got Rs.0.35 the first year and another Rs.0.35 the next, so ideally I would have ended up having Rs.10.70, which would still not buy me my normal breakfast.

Which just shows that, saving thought extremely important is just not sufficient, it must be backed by a push to invest, else rise in Prices (Inflation) eats into our purchasing power, reducing the value of money.

If you see all great wealth creators, the one consistent thing you find is that, they have learnt to make their money work harder, they have learnt, left on its own money would start loosing value hence it is a far better proposition to convert money into Stocks, Bonds, Real Estate, Businesses, Gold, etc.

Do work hard , but also learn to make your money work harder .

SBI Lower Tier II Bonds

SBI Bonds have listed on the Bombay Stock Exchange ( BSE ) and they are all trading at a premium. If the premium were to reduce , would be a good chance to buy, especially the "Series 4 Lower Tier II Bonds - Retail"

These are the BSE code of the listed bonds

SBI Bonds Listing Date: March 23, 2011 - Wednesday

Face Value of NCD: Rs.10,000/-

Series 3 Lower Tier II Bonds :9.75% Per Annum

Scrip Code: 961701

Scrip ID: SBIBIIIR

Series 3 Lower Tier II Bonds :9.30% Per Annum

Scrip Code: 961702

Scrip ID: SBIBIIINR

Series 4 Lower Tier II Bonds :9.95% Per Annum

Scrip Code: 961703

Scrip ID: SBIBIVR

Series 4 Lower Tier II Bonds :9.45% Per Annum

Scrip Code: 961704

Scrip ID: SBIBIVNR

Source : BSEIndia

My learnings from Ramit

I follow a blog that is run by Ramit Sethi "Iwillteachyoutoberich.com" and two of his teaching that have profoundly influenced me are

• Automate your Finance
• Ask your Seniors

Automate Your Finance:
This aims at removing all the "Human Element" from the act of investing and tries to make it as mechanical a process as you can possibly think of . In my limited investment experience i have see that Human Elements like fear,greed,procrastination,laziness are the biggest stumbling blocks to disciplined investing and Automating your Finances focuses on removing these stumbling blocks.

Are you desirous of Automating your Finances , you can automate in these ways click here

Ask your Seniors:
This is about , learning from mistakes , more importantly, from mistakes of others .
Ramit suggests that you approach a person about 5 years your senior , may be a colleague or a friend or may be somebody in your family and ask them , if they had the chance to re-live last five years of their financial life again, what would they have done differently . how would their priorities be different , what investment they would have avoided , what investments would they have maximised .

Think about these two points , see how simple and yet how drastically can these alter your investment style.


Thank you Ramit for these insights.

MOAT

A MOAT is a deep, broad ditch, filled with water, that surrounds a castle and it would contain not just water , but there could be crocodiles and snakes in it too. The intent of having a moat was to keep away the enemy or to make sure that the enemy has to try really hard and has to encounter lot of casualty to reach the castle and wage a war against a empire.

In modern age there are no empires , just that , empires have been replaced by Business Empires .

Every modern day business dreams of creating a "MOAT" around it , so that

• It is not too easy for somebody else to start a similar business
• Even if somebody did start a similar business , they cannot price the product as profitably.

a MOAT can be any competitive advantage like

• A extremely well recognised and customer loyal Brand ( Nestle,TITAN )
• A Financially intensive business , which needs huge investments ( RIL )
• A massive distribution network ( ITC, HLL, GAIL )
• A High technology industry protected by Patents ( Bosch )

Look for companies like these ,because of the MOAT that they build around them , they can keep competitions away , and hence can have better profit margins.

And we have found that companies with MOAT do return phenomenal return , if investor has the patience and conviction to stay with them

 Image : FreeDigitalPhotos.net,Photographer: Nick Coombs

Reliance mutual fund has launched "Reliance Gold Savings Fund". Since Gold ETFs were launched the uncertainty in purchase and sale of gold as a investment has been removed and investor could invest in gold without being concerned with the purity of gold, how to store the gold safely and also where to sell it finally.

But investing in gold ETF had certain drawbacks.

• Investor needs a Demat Account
• Investor needs to approach a broker to buy ETFs ,
• If the investor is not a regular stock investor , these would have just added to the investors overhead expenses.

 Now the investors have an alternative ."Reliance Gold Savings Fund". This is a fund of fund , which means it invests in other mutual funds. and this Reliance fund will invest only in Gold ETF

Pros

• Investor does not need a demat account
• Investor does not need to approach a broker
• Investor can start a SIP in gold investment

Cons

• Invests only in Reliance Gold ETF , though there are other Gold ETFs in the market
• Annual charges of ETF and Annual charges of "Reliance Gold Savings Fund" need to be borne by the investor

I would have liked if the "Reliance Gold Savings Fund" had kept its mandate open to invest in any Gold ETFs , but it has not done so . I'am not comfortable with this because , this means my investment is entirely concentrated with Reliance Mutual Fund and this fund house is currently not in pink of health

I would suggest investors to wait and watch , i'am sure other AMCs would come up with similar offerings , where the ETF invested into may be across different Mutual fund houses and not concentrated

Download "Reliance Gold Savings Fund" details here

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SIP, is this something new ?

"MANY DROPS MAKE A FLOOD"....Pigmy Deposit Scheme

After August 2010 , when SEBI removed entry load for Mutual Funds, it was no more as lucarative for financial advisors to recommend MFs .

MFs had to find ways not only for investor to continue to invest in them but also to stay invested and suddenly they started seeing SIPs as the panacea for all their problems.

If you see how SIP's works , it is exactly like a Recurring deposit . Recurring deposits are deposits where a investor is suppose to invest a fixed amount every month on a date chosen by the investor .

When we are on Recurring deposit , let me tell you about a very innovative scheme that was run since my childhood by Syndicate Bank this was called Pigmy Deposit Scheme . This was innovation in every sense of word , not ony did it generate employment for large number of people , but also helped people to save in denominations as small as Rs.10 and helped the bank raise low cost deposits .

The way Pigmy Deposit Scheme worked was exactly like a Recurring Deposit ,but the difference was, the Pigmy Agent would visit the investor and collect the amount from the investor's doorstep and deposit the amount in the bank and the agent would get paid a commision based on the amount collected.

Pigmy Agent was an agent of the bank and not an employee so that kind of freed the banks to engage large number of agents as there was no recruitment red tapism involved and for the investor it helped them build descipline to save and there was no question of forgetting to save , as the agents would promptly come to collect the amount.

This was a win win for all invoved . We now have to wait and see how successful would SIP prove for all involved .

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My regrets in my investment journey

I have been investing for some time now , but there are somethings i wish i had done differently

1. Wish i had started Earlier : I have no regrets about when i started investing in equities directly , but wish i had started investing in MFs earlier , wish i had started SIPs earlier . If have to change somethings , i would have started a SIP , the day i started working .
2. Wish I had placed bigger bets : I have never bought any stock on a TIP, i did listen to tips and then tried to study those stock and if i was comfortable , after tracking and reading about that stock for atleast a couple of months would then invest . But being a novice , i did not have the conviction to place larger bets , that is invest larger amounts.
3. Wish I had "Accounts" as a subject in school: I wish i had studied "Accounts" . so that i could learn to read Balance sheets and P&L statements better.

Final regret , there are no UNDOs in life ...so you just have to live with the pain of regrets.

Jargons we keep hearing

There are quite a few words we keep hearing , but may not have cared to dig deep to what do these words mean

Deficit:
A situation in which liabilities exceed assets, expenditures exceed income, losses exceed profits is known as deficit

Fiscal Deficit:
Situation in which a government's total expenditures exceed the revenue that it generates is called Fiscal Deficit. In India, our government always has a Fiscal Deficit and this short fall is cover by government borrowings , disinvestment of PSUs , etc

This year the Fiscal Deficit , could be lower because of the huge amount of money made by our government from 3G auction

Current Account Deficit :
when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.this is called running a Current Account Deficit.

Usually in trade negotiations between two countries , Current Account Deficit is a major concern for the debtor that is tried to be addressed . Every country in the world today, including USA runs a Current Account Deficit with China , which means , every country in the world imports more from China , then they export to China .

Monetary Policy:
The actions of Reserve Bank of India , that determine the size and rate of growth of the money supply which in turn affects interest rates is known as Monetary Policy. If the money supply is too loose inflation will be high and if it is too tight then economic growth is affected. So in most cases Monetary Policy is a juggling act to balance growth and control Inflation/Price.

In India, RBI does this by tweaking a whole set of parameters like CRR,SLR,Repo, Reverse Repo , etc  
what to know about these terms click here

Fiscal Policy
Government policies that influence macroeconomic conditions. These policies affect Tax Rates, Foreign Direct Investments , Government Spendings, etc . In case of India , Annual Budget is a time when major Fiscal Policy directions are spelt out by the government.

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Tax FREE

Dividends are a way companies shares their profits with share holders, This is direct credit of cash into share holder's bank account . Companies are not bound or mandated to declare dividends .Companies can very well decide not to declare dividends and decide to use that cash to grow their business.

It has been usually found that companies that already have huge cash reserves and not finding avenues to deploy them profitably are better off declaring dividends

Dividend are usually declared as a % of the face value , for example a company with shares of face value of Rs.2 , when declares a dividend of 50% means it is going to pay an amount of Rs.1 for every share held by the share holder

For share holders dividend are a source of Tax free income . Dividends declared by companies as well as Equity Mutual Funds are all tax free in the hands of the share holders .

Lets take the case of Mr. Azim Pemji of Wipro , Premji holds significant stake in Wipro ( In excess of 50%) and last year received nothing less than Rs.500 crores as dividend income ,this income is completely tax free and Premji has been receiving such dividends amounts for many years now . Premji has taken stakes in other companies using these tax free income , sure these other companies add significant tax free income to Premji's kitty.

As Investors, our aim must not only be to generate multiple sources of income , but also see to it that these are generated tax efficiently .

Image : FreeDigitalPhotos.net,Photographer: Arvind Balaraman

Topup SIP

HDFC AMC has launced a new product called Topup SIP , this is a add-on to an exisiting SIP. The investor would need to specify a fixed amount and choose a time interval . The SIP installment would be increased by the fixed amount ,once every specified time interval

Let me explain , Suppose you have a SIP currently in progress for Rs.2000, and you opt for the Topup SIP  and specify Rs.1000 , every six months for next 2 years . then after the first six months your SIP installment would be increased to Rs.3000 ( Rs.2000 + Rs.1000) and this would remain so for next 6 months . after which the SIP installment would get increased again to Rs.4000 ( Rs.3000 + Rs.1000) .and so on till it reaches Rs.6000 at the end of two year .

This product allows you to gradually increase your SIP investment in a phased manner.

This product may help you start off investing in a trickle and let that grow into a deluge

Image: Nagendra kamath 

Financial Plan for Children

We have seen a slew of Child Plans launches last few years. All these plans try to market the product , reminding the parents of their obligation to provide their kids with the best of education and about the expenses involved for the marriage .

Are these products really worth buying
Most of the child plan in the market are a combination of An insurance cover for the parent , with child as the nominee , along with this the promise to invest the rest of the money in equity,debt or some other asset class .

What i find surprising is that, these child plans would have atleast about 2% of recurring charges , along with some premature charge of about 2% .

If you see closely , it is possible for a Individual Investor to form this bouquet of investment on his own from the products available in the market .

Individual Investor with little bit of discipline can form a bouquet of

• Term Insurance Plan ( buy policy online here or compare policies here)
• SIP in a combination of Balanced Fund and  Diversified Equity Fund ( Get the best rated MFs here )
• Buy some amount of Gold  ( ETFs, know more here )

How would this help investors: 

• Reduced charges 
• Flexibility to move to some other funds, if the performance of your invested fund does not lives up to the mark. 
• Encash the investment whenever the child needs the money .

Conclusion
Have some discipline , avoid packaged child plans and form the child plan bouquet yourself  .I'm sure you would find that planning for your child, sure is child's play .

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Action

No matter what your level of knowledge , it is your actions that matter , nothing else matters .

I'am somebody , who has been planning to buy a car for ages now . I know which car to buy , when to buy , why to buy , what are the car loans available , I can even give you a hundred reasons for me not to buy a car .  Except for buying a car, i have done everything else , what is the value of all this knowledge without action ...hmm... ZILCH

The same applies to investing .. you may make mistakes or rather blunders when you try .. but without action , you will never be able to build long term wealth .

Financial Inertial , is something which people find very very hard to overcome .

Financial Inertia : Is continuing to do nothing about your financial state, knowing perfectly well what needs to be done and how

A friend of mine approached me with all his investment details and we found that , he had very little idea of what all he has invested in and why . So we started with a plan of set things in order by first making sure we gathered all the information like folio numbers , policy numbers , kind of policies and state of each policy . After we had all these details i wanted him to make sure that his contact emails were updated in all his investments and also wanted him to start SIPs  in some good MFs instead of taking direct exposure to equity

In persuance towards this goal, made sure he had the PDFs of all the MF application forms and instructions on how to fill them . All that he had to do was to fill those forms , attach a PAN card/KYC photo copy and submit it at the CAMS office, along with a cheque . It has been about a month now and my friend has not done any progress.. this is Financial Inertia .

And trust me , this is not a isolated case . I have seem this pattern of inaction over and over across a crossection of people

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Investing ? -- Make it boring

Investing is all about Capital Preservation and Capital Appreciation . Simply put investing is all about making sure that you do not lose money and that the money you invested earns a decent return.

Investing is never about thrills and excitements , if thrills and excitements is what you crave for , then you would need to visit a Casino.

So what adjectives must we associate with good investing , well to be frank "Boring" .Greater the mastery you have achieved in managing your money , more boring and may be more predictable you will be in your investment style .

i) There is hardly any excitement in finding a good Mutual Fund and starting a SIP in it ,

ii) There is hardly any excitement investing in companies like ITC,GAIL,COLGATE and then to hold on to these stocks and let them compound

iii) There is hardly any excitement in maxing out your PPF contributions

iv) Neither is there any excitement in increase your contribution to VPF/EPF

As boring as these may sound , these are the investments that would build you, your long term wealth

Power of Mistakes

"A child becomes an adult when he realises that he has a right not only to be right but also to be wrong " --Thomas Szasz

This is such a wonderful quote , there are so many things in life which we never try for fear of failure , for fear of being ridiculed . But the most lasting and greastest of lessons are learnt when we make a mistake .

The path to investing in Equity is ridden with lessons along the way . And these lessons can only be learn by being hands-on . No matter how much you read about investing , what you know is a tiny bit, as your lessons only start when you commit to getting your hands down and dirty in this amazing school called Equity Markets

The Market teach you many things , it teaches you patience , it teaches you not to be greedy , it teaches you that, no matter how many years you spend in the market, there is always something new to learn.

My learnings from market , in my little time in the market has been

1) You make money when you buy a stock not when you sell.
What this means is , buy at the right price and you will never be worries about your stock portfolio. Since by buying at the right price , you have made sure there is sufficient margin of safety and value .

2) Never be in a hurry to buy , since you will again get the very same price point , if you have the patience.

3) Buy a good business and hold it for as along as you can .

4) If you are itiching to invest without much study about the stock , stick to the large caps .

5) Have the discipline to hold on to your winners .

6) Keep reading . something read ages ago may help you spot a winner.

and always learn from mistakes either yours or somebody elses ..

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Post Office Schemes

The Post office in India is a very unique institution . Think only one in the world that delivers your mails to your door step .And i consider it one of the very very few government services which still has a large pool of very dedicated and sincere people working for it .

Indian Postal Services are unique in another sense , it is also a Bank and offer some highly popular investment option to us , which i feel cannot be ignored .

PPF ( Public Provident Fund ) :
I cannot stress more , if you do not have a PPF , get one today . PPF is a must have investment option , check my post on PPF and also how to use it Optimally

MIS (Monthly Income Scheme ) & RD (Recurring Deposit ) combo:
This is a unique combo where you try to feed the interest earned from MIS into a RD , through a S.B.Account . MIS is a simple scheme where you would do a one time deposit which would give you a 8% rate of return and the subscriber would be paid every month as the name the suggest and at the end of 6 years , you would even get a 5% of the money deposited as a lumpsum bonus along with the principal amount.You can mandate the post office to deposit this monthly income into a S.B .account and you can then open an R.D and madate the post office to credit the RD's monthly installment by debiting your S.B account . So that your MIS could in turn feed your RD .

SCSS ( Senior Citizen Saving Scheme)
9% rate of interest per annum, Maturity period is 5 years. A depositor should be of 60 years Premature closure is allowed after one year.

All Post Office Schemes

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CAGR (Compounded Annual Growth Rate)

CAGR is a term that would keep poping up when try to read about the financial performance of a Mutual Fund or a stock or any other financial instrument .

Let me try to expain what actually CAGR is and why is it important . Let us assume that we are analysing the performance of a stock over a period of last three years and we find that in last three years, the company has seen different % of growth . you may be tempted to ask , so instead of this fluctuating rate of growth , if the company had grown at what uniform rate , would we have seen the same level of growth.

So CAGR can be described as a way to calculate a uniform rate of return over a period of time when the actual rate of return has been fluctuating over the same period of time.

CAGR would help us to compare different Stocks,MFs or any other investments ,since we could never have compared these with a fluctuating rate of return .

CAGR = [(Current Value/Initial Value)^(1/# of years)] - 1

E.G:

Let us assume that a investment of Rs.100 has grown as shown and after three years has grown to Rs.225 , and we also see that every year it has grown by different %. so if we want to find a uniform rate of grown for these 3 year ..this is how we go about

CAGR = [(225/100)^(1/3)] - 1 = 0.3103 = 31.03% .

This mean that if Rs.100 grows by a uniform rate 31.03% each year , at the end of 3 years we will still endup with Rs.225

So CAGR can be described as a way to smoothen the curve .

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T + 2

When we buy stocks, the process followed by stock exchanges is T+2 , that is , suppose I buy a certain stock on a Wednesday , then Wednesday would be "T" or "Day of the Transaction" and the stock exchange would take 2 more days to square the transaction , that is on Friday , I should see my demat account credited with the stock and cash debited out of my trading account .This T+2 th day is called "Settlement day"

This would be the situation when both the buyer and seller have acted in good faith .

What would happen , suppose the seller , sells 10 shares of a certain company , when he has only 5 shares with him ?

In this situtation, on T+2th day( i.e on Friday) the stock exchange realises that there has been a short fall, this situation is called "Short Deliveries" . Now to set right this situation, stock exchange would debit the money account of the broker who is unable to deliver the promised quantity of shares an amount equal to the short fall.

The stock exchange then conducts a auction for the required shares , various brokers can take part in this auction and the stock exchange finally buys the required shortfall of shares and delivers it to the buyer . If the price paid by exchange in the auction is higher then the debited amount , then the defaulted seller would have to shell out the difference too.

In situation like these the transaction ceases to be a T+2 and ends up being a T+5 , since the stock exchange would take 3 more days to set right the wrong .

To arrive at the settlement day all holidays are excluded.

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Capital Gains

Capital Gain is profits that results from investments into stocks, bonds , real estate, Gold ETF .The profits thus made will be taxed differently.

To start with Capital Gains are classified as Short Term Capital Gains and Long Term Capita Gains

Long Term Capital Gains: If Stocks and Mutual Funds are held for atleast 1 Year and then sold , the profits made would be considered as Long Term Capital Gains. But in case of Real Estates , the holding period needs to be more than 3 Years for the profits made to be considered as Long Term Capital Gains.

Short Term Capital Gains : Are gains made from Stocks and Mutual Funds that are held for less than 1 Year and Real Estates for less than 3 Years.

In case of Stocks , if stocks had been purchased at different times , the concept of First In First Out from demat account would be considered to ascertain the date of purchase. And it is also important that the Stocks needs to be sold on a recognised stock exchange , duly paying the requisite STT( Securities Transaction Tax )

Capital Gains Tax Rate for different types of securities. click to view tax rates

source :finance.indiamart.com

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Analogy of Investing

Investing is no different from planting a tree and nurturing it . Every rupee that you have is like a seed , full of potential to blossom . Exactly like a seed , it would depend on you , how would you use it . If you spend it , that would be the end of it , as you are no longer in control of its destiny . if you sow it in a fertile soil like a really well managed company , you will see the seed you have sown grow into a magnificient tree.

The Analogy just does not end with where you have sown it . Once you have made sure that you have indeed sown it in the right kind of soil , you would need to have the patience to see it grow .

In case you realised that the soil you have sown it in , is not fertile enough, you would need to have the courage to uproot it and plant it some place else ( sell and invest it again ) where it can grow to its full potential and blossom with lots of flowers ( Bonus ) and fruits ( Dividends)

Image : FreeDigitalPhotos.net,Photographer: Sujin Jetkasettakorn