MONEY MANTRA - Two Factors that hamper sound investment decisions
  • GREED : Sensex will touch 25000 in one go
  • Greed proved to be undoing for most of us who invested right upto Sensex levels of 21000
  • Subsequent market correction wiped out the entire gains in equities accumulated by investors over years
  • Most investors committed investments at the later stage of the rally.
  • Most retail investor’s portfolio’s who were patient enough to hold have just made it to the no profit no gain zone.

  • FEAR : Sensex may go down to 14000
  • Will fear be a hindrance in investing in stocks when they are available at attractive levels
  • Will we again let markets rally and re-enter markets after the smart investors have already moved in
  • 1st stage of a rally generally is very quick and typically retail investors are last to join in which is what is happening now.
  • Opportunity loss of over 40 % - 50 % for most of the investors.
  • If you are waiting for the Sensex level of 14000 to invest, it is already gone !
  • Investors should be fearful when others are greedy, and greedy when others are fearful” – Warren Buffet.

    The markets have again provided an opportunity to invest now for the early mover advantage : TIME TO INVEST IS NOW !
  • Rebalancing Asset Allocation: Allocations to equity will go a long way towards recouping losses and delivering optimum returns for a long term investor
  • Value Averaging : This is the best time to average your investments – else even if markets reach 20000, most portfolios may still be in the negative.
  • Better Risk Reward Ratio Today: Investing today will always be better than investing later at 20000 – 22000 levels since there is a low downside risk with higher potential returns. The Perceived risk and actual risk seldom go hand in hand. While in January 2008, at an index level of 21,000 the perceived risk was low, whereas the actual risk was more. Now, after the sharp fall in the markets the risk reward of equity investments has improved remarkably, at current levels the perceived risk is high but where as the actual risk is low.
  • To invest in Mid Caps : May not be the first movers but will outperform the large caps eventually over longer run.

  • Where to invest :
  • Given the attractive valuations across sectors; Investing in a diversified portfolio will augur well as compared to a sector / cyclical portfolio.
  • A diversified portfolio will also enable tapping into future growth sectors.
  • Invest in Mid Caps : They may not be the first movers but will outperform the large caps eventually over a longer period of time.
  • While market in general are available at attractive valuations. Mid cap valuations are that much more lucrative
  • Opportunity to play for long term wealth creation with lower downside risk.
  • Today the need is to invest in equities like we do in gold where the time horizon is long. Such an approach to investing in equities is likely to result in handsome returns.

Gift Yourself an SIP
We all work for 10 days in a month for the Government of India (30 % of our income is to be paid as income tax), 3 days for paying the house rent / installment on housing loan, 2 days for the electricity charges, 3 days for the monthly Ration, 2 days for the telephone / Mobile Bill, 2 days for the Conveyance and 3 days for the repayment of Auto/Personal Loans that’s in total of 25 days of the month we all work for our existence. It is the earning of just 5-6 days that we make for ourselves and we should be humble enough to give ourselves a Gift called SIP.

Most of us investors know that equity is the best asset class over the long term but take investment decisions based on the short term. Investors seem to concentrate on the absolute index value rather than looking at the long term growth prospects of the market. Today when the markets are trading at 18000 plus levels, we feel the markets are unpredictable should we invest our money…… the fact is that we don’t know when the current trend would become positive, and by the time we realize the tread would have already begin and catching it at the right time is virtually impossible. Investor’s should spend 95 % of the time in “How much to invest in Equities” as this is the only decision an investor has control over and markets are driven by multiple factors which are out of our control .Markets have always been volatile and they would always be. The best investors can do to contain volatility is to do Systematic Investment Plan that is similar to the recurring deposits that we have been traditionally.

The easiest way to wealth creation is to Start Early, Keep on Investing and Staying Invested. SIP helps an investor become disciplined .Think of each SIP investment as laying a brick. One by one, you’ll see them transform into a building . You’ll see your investments accrue month on month. It’s a perfect solution for irregular investors. SIP also makes the process of achieving financial goals easy. Imagine you want to buy a car 2 years from now, but you don’t know where the down payments will come from. An SIP is a perfect tool for people who have a specific, future financial requirement. By investing an amount of your choice every month, you can plan for and meet the financial goals, like funds for a child’s education, a marriage in the family or a comfortable post retirement life. SO WHY THE WAIT “Open up to Equity Investing”
  • 1. Save 10% of your income for your Retirement
    Given the power of compounding, even a small contribution can bloat into a big sum over the long term. Don’t underestimate the significance of the savings in the first few years. Assuming that a 25-year-old investor puts away a fixed amount every month, his savings in the first five years will account for 44% of his total corpus when he is 60 years old. The later you start, the more you list to save. If you have started late, say in your 40s or 50s, you will have to invest up to 20-25% of your income if you want a comfortable retirement.

    Start an SIP in a mutual fund and automate the process by giving an ECS mandate to your retirement planning will stay on track.

  • 2. Increase investment as your income grows
    According to recruitment firms ABC Consultant, India Inc hiked salaries by 12-15% in 2011. By how much did your income go up? More importantly, did you step up the quantum of your investment accordingly? Not many people do that. Sure, inflation has been on the rise and most of this year’s increment would have been nullified by the increase in the investable surplus, people don’t match their investment with the increase in income.

    This is understandable since it is human nature to put things off, especially once that require sacrifices in return for future rewards. This can severely undermine your retirement planning. If a 30-year old with a monthly salary of Rs.50000 start saving 10%(Rs.5000) for his retirement every month in an option that earn 9% per year, he would have accumulated Rs.92 lakh by the time he is 60.Now, assuming his salary increases by 10% every year and hi raises his investment accordingly, he would have a gargantuan retirement corpus of Rs 2.76 crore. If he does not immediately step up the investment but waits five years to raise it by 50%,he will have Rs.1.93crore.

    SMART TIP: Whenever you get a raise, allocate half of the additional income to savings. You might not notice the change since you will be enjoying the other half of the raise.

  • 3. Don’t dip into corpus before you retire
    This might sound weird, but every time you change jobs, your retirement planning is at a grave risk. This is because you have the option to withdraw your investments at that time Dipping into the corpus before you retire prevents your money to gain from the power of compounding. Don’t underestimate what this can do to your retirement savings over the long term. A person with a basic salary of Rs. 25000 a month at the age of 25 can accumulate Rs. 1.65 crore in investments over a period of 35 years. This is based on the assumption that his income will rise by 10% every year. The sudden flush of liquidity can trigger a spending spree and ill-planned decisions that can cripple your financial planning. Often, the money goes into discretionary spending, which means your retirement planning is back at square one. A late start means a smaller corpus even if you start investing more.

  • 4. Withdraw 5% a year initially, then step up
    One of the biggest challenges for tomorrow’s retirees is to insure that they don’t outlive their savings. This is the distinct possibility because of two major factors: rising cost of living and an increase in life expectancy. High inflation, in fact, is enemy no. 1 for the retired investor. Sure, the inflation rate will not remain as high as it is right now. However, over 20 years, even a nominal inflation of 6% will reduce the value of 1crore to 29lakh. Besides, Indians are living longer. Life expectancy rose from 61.3 years in 2011. By 2020, the average Indians can expect to live till 72 years. In urban areas where people have better access to healthcare, and in higher income groups, the life expectancy could extend beyond 80 years.

    To ensure that you don’t run out of money in your old age, you must have a drawdown plan in place. The thumb rule is not to withdraw more than 5% of the corpus in the fort five years of retirement. This can be progressively increase by 10% by the time the retiree is 70. This essentially means that the retiree should draw down less than the appreciation in the initial decade, but in the next 10 years, he can withdraw more than the accretion to the corpus. At 80, even a 20% annual drawdown rate would be considered safe.

    You can safely draw down half the inflation- adjusted appreciation every year. If the portfolio has earned 12%, you can easily withdraw 6%.

  • 5. 100 – Age= Your allocation to stocks
    An investment portfolio’s performance is determined more by its asset allocation than by the returns from individual investment or market timing. How much you have when you attend your last day at work will depend on how you divided your retirement savings between stocks, fixed income and other asset classes .Experts recommend that you should have an equity exposure of 100minus your age. So, at 30, you should have about 70% of your portfolio in equities. At 55, the exposure to this volatile asset class should have been pared down to 45%. After you retire; your exposure to stocks should not be more than 25-30% of your portfolio. Even within equities, the type of stocks (or equity funds) in your portfolio should vary with age.

    This is not a hard and fast rule and should also take into account the financial situation of the individual. It assumes that all people at a certain age will have the same risk appetite. This is not true. A 45-year –old person with a good income and few dependants will be able to take on more risk than someone who is 30 but has a low and unsteady income.

    : Invest in asset allocation funds that redistribute the corpus depending on the age of the investor. As he grows older, the exposure to equity is progressively reduced.

  • 6. Borrow for education, save for retirement
    Indian parents love to save for their children .Whether it is for their education or marriage, or even to provide them with a comfortable life, children are the biggest motivators of savings in the country. But before you pour money into a child plan, make sure your retirement savings target has been met. In an effort to fulfill the needs of the child, Indian parents sometimes sacrifice more than they should. Some even dip into their retirement funds to pay for the child’s education. This is risky because your retirement is going to be very different from that of the previous generations. It will be entirely funded by you and will be devoid of the cushion of defined benefits.

    This doesn’t mean you should compromise on your child’s education .It can still be done through an education loan. In the past two decades, we have seen how the MRP of a products has been replaced by its EMI in our everyday lives. Home, travel, car, education, gold, consumer durables-you can get a loan for almost anything’s and everything. What’s more, the government encourages you take loans by offerings tax breaks on the interest paid on housing and education loans. No bank however, is going to lend you for your retirement. Sure, there are reverse mortgage schemes, but those require your house as collateral.

    SMART TIP: An education loan helps inculcate financial discipline in the child. If he is responsible for the repayment, he gets into the savings habit early in life.

  • 7. Save 20 times your annual expenses
    This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as transportation, medicine and insurance, go up. Add up all the expenses you are likely to incur after retirement to know how much you will need per month. Then, multiply this amount by 240 to know how much should be your retirement corpus.

    However, this calculation is based on a number of assumptions. Firstly, you should not have outstanding loans when you hang up your boots. Secondly, you and your spouse should have sufficient health insurance. A survey conducted by HSBC earlier this year shows that Indians are increasingly becoming aware of the need to plan their retirement. In a 2010 survey by Bharti Axa Life Insurance in eight top cities in the country, 74% of the respondents said that they knew how much they would require in their sunset years.

    SMART TIP: Buy a health insurance cover that continues till you are 80+ years old. It is difficult to buy one afresh when you are older and not so healthy.
We all have been taught how to earn money. We go to college, learn skills, gain knowledge, specialize, get a job and start earning money. But what's more important is application of the money that's earned to fulfill our basic needs and meet our life goals. It's a very well known fact that, by vigilant spending, saving & investing, one can meet the needs and life goals effectively. Why we are saying this is because as human beings, we do not have an end to dreams and aspirations. Meeting of one goal leads to another and usually it's a little costlier goal!

In this situation it becomes imperative to prioritize our needs and goals, put our best efforts to meet each of them through proper management of our personal finance. And that's what Financial Planning teaches us. An exercise analyzing our various needs and goals will go a long way in getting clarity on what is achievable, by when they can be achieved and how to achieve them. This drill may take time but is vital in Financial Planning as Need Analysis is the fulcrum around which we can build a solid foundation and leads to fulfillment of life goals & financial freedom.

Needs & Goals Financial Objectives Financial Instruments
Contingency Planning • Provide for the unforeseen
• Have liquidity to meet day-to-day expenses
• Create an emergency fund
• Savings Bank A/c
• Cash in Hand / Home
• Short – term FD
• Liquid Mutual Funds
Risk Management • Cover life Risk
• Cover Health Risk
• Cover Disability Risk
• Cover Property Risk
• Cover Liability Risk
• Life Insurance
• Medi-claim Policies
• Health Insurance
• Accident & diability Cover • Property Insurance
• Debt Management
Planning of Financial Goals • Marriage & Family
• House
• Car, Home Furniture & household products
• Child's Education
• Family Vacations
• Other family Commitments
• Other Dreams & Aspirations
• Fixed Deposits
• Debt funds & Bonds
• Gold
• Small Savings Plans
• Mutual Funds
• Real Estate
• Stocks
• Home Loan,Car Loan & personal loans
Retirement Planning • Early Retirement
• Steady Income
• Contribute to Society
• Maintain Standard of Living
• Fund for Illness, disability & Healthcare
• Other Family commitments & Protection
• Above instruments to manage portfolio, risk management & meet contingencies
• Pension Schemes
• PPF & Senior Citizen Schemes
• PF & Gratuity
Tax & Estate Planning • Tax Optimization
• Minimize tax outgo
• Wealth Succession Planning
• Avoid Legal Hassles
• Charity
• Tax Consultancy
• Estate Consultancy

These goals and dream can be met through a corpus we have created through investments. Building a corpus is harder than taking a loan / credit. But remember the saying “ Credit buying is much like being drunk”. The buzz happens immediately and gives you a lift…… the hangover comes a day after”

Identify your goals – short term / Medium Term / Long term
Start Early and put your money to work for you, an early start ensures the best returns. Remember the importance of an early start in a One-day International cricket match? Remember the heroes? An early start ensures that the middle order batsmen can play with lesser stress and strain
All these goals will mean some sacrifice of present consumption for a benefit in the future. You need to feel very strongly about these goals and keep yourself constantly motivated to continue to invest in order to meet your goal.
Financial Planning & Budgeting go hand in hand. You need to estimate how much money you will need to meet each of your goals, and determine how much you need to invest each month to reach that goal within you time frame.
Planning is like a word document and budgeting is putting the plan in excel.
Try not to sacrifice your goals one for another, try to prioritize them.