Saturday, November 14, 2009
Sunday, November 1, 2009
1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.
Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.
--Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number.
--Research and analyze your company's performance through quarterly results, annual reports and news articles.
--Get a good broker and understand settlement systems
--Ignore hot tips. If hot tips really worked, we'd all be millionaires.
--Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.
3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking!
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary
4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.
Wednesday, August 19, 2009
Companies , these days, increasingly position the loan benefits that they offer to their employees , as a major financial benefit to the employee. But, taking a loan from the employer is something I strongly recommend people to avoid . Here’s why I believe you should not opt for a loan from your employer:
1. Any loan from your employer ties you to your job. You can’t come out until the loan amount has been cleared in full. You might argue that you can always ask your new employer to bear the loan. But where does that take you? From one chain to the next? Plus, I’m not sure if any employer today would be willing to bear existing loans.
It’s psychologically debilitating to see your take home salary cut by the EMI (Equated Monthly Installment) amount on the loan even before it’s credited into your salary account.
2.There’s a hidden cost. Though you do not actually pay any direct interest on the loan amount, the notional interest surfaces as a perquisite in your income tax calculations and adds directly to your taxable income. I didn’t know this fact until I saw my income tax calculations; it was already too late.
3. People take loans that they dont really "need" . I have seen people taking loans from the employers just to take the benefit of saving on the interest differential that is there between the employer's rate and the prevailing market rate. This leads to people taking on credit liability when they do not really need the money. Most of the time credit is not used in the best possible manner leading to drain on savings and finacial stress.
With some fanatic fiscal steps, those already in the trap can manage to come out of this situation sooner than they think.
Friday, August 7, 2009
Thursday, July 30, 2009
Wednesday, July 29, 2009
One of the most classic dilemma facing a retired or soon - to-be -retired person is whether he should use the retirement proceeds to start up some sort of business to keep himself busy while making good money out of it or should he just invest the money in a safe place like bank FD and live off the interest accrued? There are people who would argue in favor of starting up something on ones own using the money while there are equally good number of people who think otherwise.
So, what is the right decision or rather which is the better option? Well , I think there are no right or wrong options here . Both the options have their own merits and demerits , but, I would stick my neck out in favor of one option. But before I do so , let us examine the pros and cons of both the options :-
OPTION 1 - STARTING UP A SMALL BUSINESS
- The first and foremost benefit of starting a business after retirement will mean that the person will be able to productively employ himself or herself. This is a big consideration since there are numerous cases where people feel left out and are unable to cope up with the feeling of being unemployed . Sometimes retired people can suffer from depression if they are not doing anything productive. Having a small business or shop etc can easily help them stay active both physically and mentally.
- Business does offer chance of making more money than the retired person will get from bank FD.
- Business, if successful, can turn into an asset which he can pass on to the family thereby creating wealth not only for himself but also for the whole family.
- Starting up a business always has an element of risk associated with it. Generally the success rate of start ups is not more than 10-15% and as such the thought of putting one's retirement proceeds into starting up a business may not turn out to be a wise decision.
- To be successful in business one requires different type of skills than what one requires to be successful in a 9-5 job. Hence, it is increasingly difficult for retired salaried people to start up a business and turn it into a success. One can however overcome this challenge by hiring experienced person with the respective domain knowledge . One would also need to learn from experience.
- The trauma of failure may not be the best thing for a retired person to handle considering that the time that he has to make a success out of the business is much lesser than a young businessman starting out in life. Retired person will have much lesser headroom and time to make mistakes and learn from it .
OPTION 2 - INVESTING IN SAFE INSTRUMENTS AND LIVING OFF ITS INTEREST
1. The biggest advantage of this option is that one will get enough time to enjoy one's retired life as he will have plenty of time to do things he always wanted to do. Many people never manage to find time to attend to their hobbies in their working life time and as such this option will give them that option post retirement.
2. Another very important factor for a retired person is the safety of his capital. Since the retirement proceeds is all the money a retired person has, it is prudent to invest it in an instrument which has minimum to zero risks associated with it. This option of investing in Bank FD, Post Office Monthly Income scheme, Senior citizen savings scheme etc offers retired person exactly this benefit.
3. Since health also is major concern in old age, the fact that the person will not be required to do any physical activity ,unlike in case of starting up a business, is also a big plus .
1. The strategy on living off on interest income has a limitation that the interest income does not increase with inflation and the over a period of time inflation can reduce the real income in the hands of the investor.
2. The income generated out of interest alone will not be anywhere near the income a successful business can generate.
After going through both the pros and cons of the two options , I think it is always better to play safe adopt the second option viz investing the retirement proceeds and living off the interest income. The compelling reason for this is the fact that one must attach highest importance to the safety aspect of the retirement proceeds since this is the last sum of money the person has. As such he can not take any risk with this money . Investing it in safe instruments will give him modest income and considering that a retired person has almost no liability , this should suffice. And in case a person is worried about inflation eating into his interest income over a period of time, then he might consider investing part of his sum in equity based well diversified mutual funds. The superior returns from these mutual funds will guard the investor from ills of rising inflation.
Monday, July 20, 2009
These are good times for rich people. People who are affluent have many advantages and privileges in general life. An addition to their long list of privileges is the availability of term insurance at a much cheaper rate.
The term insurance premiums have seen drastic reduction recently for life cover of RS 1 cr and above. Even term plans having life cover of Rs 25 lakhs and above also have seen quite a large reduction in the premiums. This large scale reduction in the premiums is attributed to the following reasons:-
1. Better mortality rates - The recent experience has shown that the mortality rate isn't as bad as is shown in the mortality chart currently being used. And as such the premiums have come down owing to this.
2. Access to better health care and lifestyle - Rich and HNIs have greater access to health care and quality lifestyle which also plays a role in increasing the life span of the person. This in turn means lesser claims on insurance companies pushing the overall premiums down.
3. Wider coverage - Since insurance primarily is based on the concept of "risk sharing" with increase in the number of people under insurance cover , the premiums to be paid to make the whole exercise viable, also comes down. With more and more people getting in the insurance ambit in India, it is expected that insurance premiums might see some more downward movement going forward.
Today, one can avail of a LIC term policy with a sum assured of Rs 1cr for an annual premium of nearly Rs 25,700-32 ,000. But unlike LIC whose rates are available to most buyers, Birla Sun Life has stringent underwriting norms and the rates are available to only those in the best of health.Term insurance is a cover where the only benefit is a payment if the insured dies during the term of the policy is the most basic form of life insurance. The cover is now almost a commodity with web-based aggregators offering quotes from all insurance for term protection.
Wednesday, July 8, 2009
Tuesday, July 7, 2009
Saturday, July 4, 2009
Monday, June 29, 2009
Mutual funds are one of the most efficient and popular investment options for people looking to invest for wealth creation.There are thousands of funds to choose from, yet most investors really don’t need more than four or five funds. Sifting through all of the choices can be rather daunting.
There are thousands of funds to choose from, yet most investors really don’t need more than four or five funds. Sifting through all of the choices can be rather daunting.
HOW DOES A MUTUAL FUND WORKS
A mutual fund is a fund where money is collected from all the investors investing in that fund, and is invested by a qualified fund manager on behalf of all the investors. The fund manager manages the investment and aims to beat the benchmark returns like BSE 100, Nifty 50 etc. Each of the funds will have a investment goal and strategy and the fund manager is required to invest according to that mandate. There are 3 kinds of mutual funds basically on the nature of its investments
1. Equity based mutual funds
2. Debt Based mutual funds
3. Balanced or hybrid mutual funds
Mutual funds are also classified as active funds and index funds. Active funds are the funds where the fund manager actively trades the stocks to generate maximum possible returns , while in an index fund the investment is made in stocks representing that particular index like nifty or sensex , in the same proportion. The active funds can have greater returns but also have higher costs, while index funds have lower costs and believe in "buy and hold"strategy.
HOW TO EVALUATE A FUND?
First, you need to figure out what type — or style — of fund you need, which is based on your investment goals, time horizon, tolerance for risk, among other factors. After deciding what types of funds you need — like an international stock fund or a fund of small companies — you will want to evaluate the funds in each category using the following criteria:
1. Costs - First, find out if there are any suitable index funds — they have the lowest costs and typically beat their actively managed counterparts over time. The average active mutual fund charges about 2.25 percent of your investment each year — this charge is known as a fund’s expense ratio — while the average index fund costs 0.50 percent.Pay close attention to other fees. You want to avoid funds that charge loads, which are sales charges levied when you buy or sell a fund.
2. Company - Do business with companies that have long track records. The same goes for portfolio managers. Find out how long they have been running the fund, and what they have done in the past. Web sites like Morningstar.com and valueresearchonline.com track this type of information.
3. 5 star or 4 star funds only - Morningstar and valueresearchonline rate the funds depending on their relative performance over years. The 5 star rated funds are supposed to be best performing fund and one must look to invest in those only.
4. Performance over long term - Don’t put too much weight on fund performance over recent past. Often, this year’s star funds are next year’s worst performers. Check the fund’s performance over three-, five- and 10-year periods. If the fund is actively managed, compare how the fund has performed versus its benchmark, especially during market downturns. Be sure to stack it alongside its peers, or funds of the same style, too. Choose a fund with relatively consistent returns.
5. Portfolio turnover - This is a measure of how often a fund manager buys and sells the securities it holds. If a fund has a portfolio turnover of 100%, that means it has bought and sold its entire portfolio within the last year. The higher the turnover, the higher the trading costs -- and the more likely the fund will generate capital gains. Lower turnover means the portfolio manager is adhering to a longer-term buy-and-hold strategy, which should translate to higher returns. Index funds have a very low turnover ratio. For funds held in taxable accounts, it is best to choose a fund with turnover of less than 25 percent.
WHERE TO BUY MUTUAL FUNDS FROM
One can buy mutual funds from various distributors of the AMCs. Most of the banks and FIs act as agents or distributors for the mutual funds company and one can buy it from them. Mutual fund company have direct sales offices and representative as well. There are AMFI certified agents as well who sell mutual funds. One can buy it from them as well.
Sunday, June 28, 2009
Friday, June 26, 2009
Thursday, June 25, 2009
Wednesday, June 24, 2009
Tuesday, June 23, 2009
Let us examine this in detail . Now, the question that we need to answer is this : Do we invest in a fund to make more money /return or to buy a unit at lower NAV? the answer is obvious. There are various drawbacks of a NFO , some of which are mentioned as under:-
Now, let us take an example of Rs 1000 being invested in 2 funds . One is an NFO offering units at NAV of Rs 10 while the other one is an existing fund with NAV of 12. So the units that one gets in both the fund will be
NFO - 1000/10 = 100Existing fund - 1000/12 =83.33
Now , assuming at the end of 1 year the NAV of these funds are as under
NFO - 12Existing fund- 15
The returns in both these funds at the end of 12 months
NFO = (2/10)X100=20%Existing fund = (3/12)X100=25%
Total fund value at the end of 12 months
NFO = 100X12=1200Existing fund = 83.33X15 = 1249.50
So , you can see that in the existing fund, the returns are more than the one in NFO even though the NAV of NFO at the time of entry in the fund was lower than the NAV of the other fund.This establishes the fact that the return on your investment does not depend on the NAV of the fund when you enter into it. It depends on the growth in NAV during the time you enter and the time you exit. Hence, the notion of NFO being a better option simply because they offer NAV of 10 is completely false one.
2. NFOs have higher charges - NFOs have higher charges than an existing fund since they have to spend on marketing and sales promotion of the fund. A new fund is launched amidst much fanfare and all this cost money. Even the sales commission for an NFO is significantly higher than the existing fund and all this add up to increase the charges. NFOs have first year charge of 3-4% as against a charge of 2.25% for an existing fund. So, you end up loosing money in an NFO because of these unnecessary charges.
Since NFOs are in no way better than an existing fund , then the question is why are they so popular? They are popular because of NFOs offer companies to package their fund in a unique way and they also play on the mindset of investors that low NAV is better for them. An informed investor will stay away from NFOs and would invest in funds which have performed exceedingly well over 5-10 years. Why would you like to take a chance with a newcomer when you have a veteran ready to take care of your money.