In the Wonderland of Investment (Part II)

Having addressed the ‘Why invest?’ part in earlier article ( http://magnum-pratham.blogspot.in/2016/11/in-wonderland-of-investment-part-i.html ), we will now address the more important questions of ‘How to invest’, ‘Where to invest’ & ‘How much to invest’. 

First things first.. 

Hope most of you would be knowing the 50-30-20 rule. It simplifies budgeting by allocating 50% for your needs, 30% for wants (yes, there is a BIG difference between needs & wants!) and 20% for savings! (Though I would 25% for wants & 25% for savings..) The key take-away from this thumb rule is, you need to decide what percentage of your monthly income you want to save! 

Once you decide this, move on to find out where to save.. 

Investments, which are assets, are broadly classified into following asset classes.

Real estate – Residential house, residential/commercial plot, agricultural land fall in this category

Bonds –  PPF, RBI bonds, govt. issued other bonds.

Securities – Equity stocks, mutual funds

Precious metal – Gold, silver

I will take a case of a 25 yr. young man working in his first job after graduation. Let’s call him Ram.

Ram should start investing in PPF , to begin with say Rs. 50,000 per year (and increase it gradually as his salary increases. Maximum amount is Rs. 1.5 Lacs per year as per the current rules. The savings yield say 8% on an average) If he does that every year for next 30 years and doesn’t withdraw funds in between, do you know how much money will be in his PPF account at the age of 55? More than a Crore! That is the colossal power of compounding interest you need to know and start leveraging early! (Now if you do this for your spouse and kid/s, think of the kitty you would be having!). Parallely, Ram should also start one Life Insurance policy at the age of 25-26.

As Ram progresses in career and let’s say he is 30 yr. old now. He should start investments in securities (Equity stock / Mutual funds). Even if you’re a medico or an arts graduate or a home-maker, remember investing in stock market is not rocket science! Like Ram, if you spend some time surfing internet to learn more about stocks and mutual funds, you will learn a lot. There are hundreds of websites / apps.  If you don’t know from where to start, check out Moneycontrol.com or valueresearchonline.com.  If it is still a daunting task for you, contact IFA (Independent Financial Advisor) & they will explain how you start your SIP (Systematic Investment Planning) of a particular fund/s or even stock.  SIP in plain words is buying a fixed quantity/units every month of a predetermined amount, let’s say Rs. 5000 every month. May it be mutual funds or stocks, don’t go in for quick gains. It pays to stay invested for long term. 

If you want to go for stock market investment on your own, begin investing in bellwether companies / large-cap companies, which are there, say from last 30+ years and will be there for at least next 30 years! Investing in mid-cap or small-cap companies is certainly risky if you haven’t done any analysis or have no time to do any analysis and want to invest just because you got some tip from someone! 

You should analyze key figures, financial ratios of the companies and finalize a few companies with sound performance and growth potential. Decide how much you want to invest and buy the stock when there is some market correction. (in plain words – buy it when the market dips / bottom-fishing) And again, do it in two or three lots.  That means, buy say 50 stocks of HUL today & buy 50 more after a month or two.  This needs some patience, keeping updated of the market/economy/political/technology developments. But if stock investment is done over a period of 20 years, the power of bonus/split/dividends will give you a solid return on investments. In fact, this asset class has the potential to give largest yield. 

Ok, now Ram is 40 yr. old. He should increase the cover (or go for a new additional policy) for life insurance. It is also the right time to start a mediclaim policy (as a risk-mitigation measure to high-cost hospitalization in later life). Having well-settled in life & he could also be looking to invest in Real Estate. 

 .  In most cases, people go for another apartment or a farm-house plot. Here one needs to do quite some spade work, needs to be vigilant to ensure title (of the apartment/plot) is clear, it is not ‘disputed’ property etc. Even though most of we Indians are enamoured by real estate, there are many down sides of this asset class.

1.       It is not liquid investment. That means, if you need money due to some emergency, you cannot raise funds from your real estate investment even in a month. (And if you show desperation of selling, buyers offer you much lower rate!)

2.       The rental income (of apartments) in India is pathetically low. If you calculate, the yield could be much lesser than even bank interest rates!
3.       Please note - While calculating your Net worth, you should NOT include your primary residence (i.e. the house you're living in currently). 

Ram is in mid-forties now & ‘precious metals’ asset class is on his radar.  And why not? Traditionally & globally, gold has been seen as a safe haven investment.

Now let me share some ground rules:

Rule # 1 - 

Higher the interest rate / yield potential, larger the risk!

Yes, while nationalized banks give 6.5% interest on FDs, cooperative banks give more (& still smaller banks/trusts give much more) but you know the risks attached. Same is the case with day-trading or investing in futures (derivatives).  You don’t want to lose your shirt!

Rule # 2 –

Do NOT put all the eggs in one basket.

If you talk to your investment advisor, chances are he will make you believe that Mutual Funds is the best investment you could do!  Remember what Mark Twain said, “To a man with a hammer, everything looks like a nail!”   You need to spread your investment across all the asset classes, what is called as asset allocation.  Without going too much into details, remember, when one asset class goes down, some other asset class goes up.

To minimize the investment risks & maximize the yield, here is the investment portfolio mix what many investment advisors recommend (& remember, this is NOT a proven or scientific formula)

·         Bonds -30%

·         Stock – 30%

·         Real estate -20%

·         Gold -10%

·         Bank FD and saving accounts– 10%

Rule # 3 –

Don’t put all the eggs at the same time even in different baskets!

Yes, do not rush. You need to have patience of a crane to invest at right time.  (Even though I agree that nobody can predict what a right time is. You always know it in the hind sight, like when property market took off around 2006-2007 in India! But you do develop the timing sense over years)

Rule # 4 –

Review your asset portfolio at least annually and make adjustments if necessary.

Asset allocation is not something you do just once and forget about it. As asset classes rise or fall at different rates, over time the assets you have selected are likely to deviate from your original allocation. For example, your portfolio may have become more cautious or more aggressive.

To ensure your portfolio reflects the type of investor you are, it is recommended you review your portfolios at least annually and make adjustments where necessary.

You also need to change the mix of your investment portfolio as you grow old. 

When Ram is 60 yr. old, he needs to reduce his exposure to equity & move more towards Bonds & FDs.

To summarize the vast topic – In the young age, you start taking care of your investments & the investments will take care of you and your spouse in your golden years!

Happy Investing!!

*Disclaimer – The article is intended only to create the awareness towards investment. Investment decisions are subject to market risk, as explained earlier. The author is not responsible for any financial (or any other) losses (or even gains :-)) in any of the investments a reader may undertake.

In the Wonderland of Investment (Part I)

While we all agree to seize the moment, live the moment and be happy, it should not be construed to spend whatever you have without giving a thought for tomorrow! Many messages float on social media advising you to spend money on your well-being, don’t worry about the future or don’t save too much (lest your kids would become lazy/dependent on you, etc.).  While I do agree with the first part of the sentence, I would not agree with the latter part.  Allow me to explain.

1.    We (assuming most of my readers are living in India) are living in a country where the inflation rate hovers between 7% to 9%.  Those of you who are good in Mathematics or in MS-Excel, just try to find out how much your monthly expenses would be in year 2046 (assume your current monthly expenses as Rs. 70,000 – all inclusive – Assume inflation rate a modest 7%) . Most of you would get a shock of your life when you see that number..

2.    Thanks to the overall rise in the standard of living, increased awareness about health/fitness/nutrition, the average life expectancy has increased in India (It was 66 yr. in 2012, it could be 70 now & soon we could be catching up with the Developed countries where it is 80+)

3.    We are also witnessing a disturbing rise in air pollution, water pollution, food contamination which negate the earlier point slightly. The mortality rate will not increase much but the risk of various respiratory, gastro-intestinal diseases increases exponentially, expecting a big hole in the pocket on account of hospitalization, medical expenses.  (Also note –  Most of the health insurance plans cover only hospitalization & not OPD charges – which are substantial and which most of us incur frequently)

4.    Work environment has changed a lot. Increased competition, more travel, working at odd hours, fast food / alcohol consumption & lack of stress management has given invite to more life-style diseases. Many are getting burnt out in 30s and considering to leave the rat race. Those in their late 40s are struggling to survive in the ever-changing IT industry (or even engineering industry) .  While many are opting for voluntary retirement, there are many cases of forced ones too. 

5.    Most of us would be living in ‘empty nest’ since kids would be living either abroad or in metro cities, necessitating need of a driver, maid (and or a nurse in some cases). These expenses need to be planned. Add this to the number you got in point 1)

6.    The well-heeled can also add overseas vacations

Now tell me, would you want to spend money today (as if there was no tomorrow and find yourself in awkward situation in old age) OR would you want to spend it discreetly? 

(On a related note - Do NOT ever be an impulsive buyer using credit cards incessantly! And do note, pay the entire credit card outstanding amount on time & NOT just minimum due amount , as it puts so deceptively; because if you keep paying only minimum due amount, you might be coughing more than double of its purchase price without your knowledge!) 

Coming back to investments, wouldn’t you want to invest your money wisely so that the savings outgrow at least the inflation rate and enables you to maintain your life style?  So you could be on the verge of graduation and looking for the first job or you could be 40s, it makes sense to invest and …invest wisely!

To be honest, to invest or not to invest is not a question at all. 

Rather it should be, how to invest and which we will cover in part II.