You enjoy your holidays and your money works for you, is it possible?

You enjoy your holidays and your money works for you, is it possible? Read my article on the subject in Mid-day Gujarati edition today. ________________________________________________________________________________ English translation is as under: How does it sound when your money works for you even when you are enjoying your holidays? August is the month of festivals and long weekends. Many of us go for mini-vacations – either on some excursions or to meet our families. During such periods, often the money lies idle in the bank accounts. There are no options where the money can be parked to earn some returns. Bank fixed deposits are available for a minimum period of 15 days if the amount is small. That means, the money remains idle in savings or current accounts. With most banks, the current accounts do not earn a single rupee and the interest on savings accounts is a low 4% p.a. In such cases, mutual funds offer an incredible opportunity in form of liquid funds. It is possible to invest amounts as small as Rs. 10,000 and even for weekends. Many large companies use this facility offered by mutual funds to park money for weekends. The liquid funds are open-ended mutual funds and hence the transaction can be done on any business day. Let us say, there is a holiday on a particular Monday, making it a long 3-day weekend – Saturday, Sunday and Monday. If you have surplus money in your bank account on Friday before these holidays, you can invest the same in a liquid fund and simultaneously file for redemption such that you get the money in your bank back on Monday. In case you do not need the money on Monday, you may continue to stay invested. Mutual funds offer a great flexibility in terms of not declaring the investment period in advance. You may invest your money in a liquid fund without mentioning the date of redemption in advance. You may stay invested till the time you do not need the money. As per the website of Value Research, a leading portal for mutual fund information, the liquid funds have delivered the following returns in the past: Table 1: Period Returns (p.a.) Last week 6.76% Last month 7.08% Last 3 months 7.36% Last year 7.83% (Disclaimer: Past performance may or may not be sustained in future) As you can see, the rates of return are around 7% p.a. However, you may also observe that the returns for the shorter periods are lower than the longer periods. This is not like a bank fixed deposits where they offer lower interest rates for shorter periods and higher for longer periods. This has happened in case of liquid funds since in the last some time, the interest rates have come down. Liquid fund is a product that responds to the changes in interest rates in the market very fast. If the interest rates in the economy start going down, the liquid fund returns would get adjusted and if the rates start going up, the liquid fund returns would improve. Let us do some Math with the above numbers. If you have a surplus of Rs. 5 lacs to be invested for a long weekend (3 days), how much do you earn? Table 2: Assumed rate of return Money earned 6.76% Rs. 277.81 7.08% Rs. 290.96 7.36% Rs. 302.47 7.83% Rs. 321.78 (The rates of return are taken from table 1) If you do not need money, as we mentioned earlier and you keep the money in a liquid fund for 10 days, the earnings would be as under: Table 3: Assumed rate of return Money earned 6.76% Rs. 926.03 7.08% Rs. 969.86 7.36% Rs. 1,008.22 7.83% Rs. 1,072.60 (The rates of return are taken from table 1) If in a year, you get four to five such opportunities, we are now talking about serious money. Liquid funds also offer facilities to transact through SMS, increasing the convenience. In fact, just before writing this article, I invested some money in a liquid fund just by sending an SMS. The redemption from the fund account also happens through an SMS. All you need to do is to get a one time mandate registered. So, what are you waiting for? Enjoy your holidays and let your money work for you. The earning would take care of part of the expenses. -        Amit Trivedi The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Chat transcript - 8th August 2016

Click on the link below to read the transcript of the live chat session today on www.moneycontrol.com

Equity investments simplified

Chat transcript on www.mooneycontrol.com date: 9th May, 2016

Equity investments simplified

Benefits of starting SIP in ELSS in April

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

Click here to read my article in Mid-day Gujarati edition ...

The English translation of the article is as under:

In the last month, i.e. in March many would have worried about paying the tax or saving taxes at the last minute. This behavior of waiting till the last minute often ends up in a mistake, and sometimes the mistake is too costly. So this year, let us resolve to make amends and not repeat those mistakes.

One of the things that we can consider doing is to start planning for saving taxes right in the beginning of the year. In case if you avail the services of a good financial advisor, you must be taking care of this already. In this article, we will talk about how one can benefit out of some brilliant strategies that help achieve multiple objectives.

As we all know, we can get tax benefit under section 80C of the Income Tax Act upto Rs. 1,50,000 per year. There are various avenues that allow us to take this benefit. One of those avenues is the ELSS – Equity Linked Savings Scheme.

What is ELSS? How does it work?

ELSS, or Equity Linked Savings Scheme is a mutual fund scheme that invests in equity shares. It is generally a diversified portfolio, i.e. the money is invested across various companies and industries. The NAV of such a scheme moves in line with the average movement of the prices of shares in which the scheme has invested money. In some of our earlier articles, we have already highlighted the benefits and risks of investing in equity mutual fund schemes. We would request you to understand the risks before you invest your money. However, equity funds could be quite useful when you have some long-term financial goals to achieve. While the biggest risk in investing in a diversified equity fund is the price fluctuation, such an investment has the potential to provide protection against inflation – the rise in prices of items we consume.

This means, equity can help us fight one of the major risks in one’s financial life – price inflation. However, as a trade off, one would be exposed to the other risk, that of price fluctuations.

This risk of fluctuation in the prices of investment has certain interesting characteristics. First of all, price fluctuation is a big risk if someone is investing for a short period of time. However, the same is quite low when the investment horizon is long. Second, there are certain investment strategies that help an investor manage this risk – in fact, make this risk work in the favour of the investor. 

We will highlight this strategy here. It is not a new one, but already discussed in a few earlier articles – SIP or systematic investment plan. This is an investment plan that is available in almost all mutual fund schemes. All ELSS offer this facility. Under SIP, an investor can make periodic investments – the most convenient being monthly. 

SIP helps an investor manage the cash flow since majority of us have a monthly income and hence monthly savings. This can be very conveniently and efficiently invested in an equity scheme to achieve long-term goals. At the same time, regular investment of a fixed amount turns the risk of price fluctuations in favour of the investor. 

As we know, the number of units purchased would be equal to the amount invested divided by the prevailing NAV. Hence, when the NAV is high, we get fewer units and when it is less, we get more units. Thus, even the most ignorant of the investors benefit due to this inherent characteristics of SIP. 

Now, if you start an SIP in an ELSS in the month of April, you get multiple benefits:

1. Investment in equity fund (ELSS is an equity scheme), can help one achieve long term financial goals
2. Investment in ELSS helps one reduce the tax liability since this is eligible investment under Section 80-C of the Income Tax Act
3. SIP in an equity fund help one turn the price fluctuations in one’s favour.
4. Monthly investment eases the cash burden by spreading the investments monthly. This ensures that one does not have the year-end pressure
5. ELSS comes with a 3-year lock-in period. Holding onto your investments for that period ensures the capital gains would be tax-exempt. 

So go ahead and start your SIP this month and reap multiple benefits.

• Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions. 

Answers to questions about mutual funds and investing

Here is the transcript of the chat on www.moneycontrol.com

Equity investments simplified

Pros and cons of investing through Equities - chat transcript 14th March 2016

Click on the link below to read the transcript of my chat on www.moneycontrol.com


Equity investments simplified

Where does this road lead to? - My article on www.moneycontrol.com

Where does this road lead to? Asking the right question can put you on the right path. It holds good in the world of personal finance too.

Read more at: http://www.moneycontrol.com/news/planning/where-does-this-road-lead-to_5859581.html?utm_source=ref_article

10 years back, South Africa taught us a lesson in personal finance

On 12th March 2006, Australia created a world record scoring the highest total in a One-day International match against South Africa. They scored 434/4. The record lasted for around 3 1/2 hours as South Africa won the match by scoring 438/9.

There is a lesson for all of us to learn.

Click on the link below to read my article ...

Create wealth through simple planning

Equity investments simplified - chat on Moneycontrol

Please find below the transcript of my chat on www.moneycontrol.com today

Equity investments simplified

Equity investments simplified - my chat on Moneycontrol

I would be doing a chat session on www.moneycontrol.com today at 4 PM, answering questions on investment in mutual funds and planning your investments

Equity investments simplified

Equity investments simplified - Understand the pros and cons of investing through mutual funds

My monthly chat show on www.moneycontrol.com

Jan,11,2016, 16:00 hrs to 16:30 hrs

Trust, but verify

In financial transactions, the mantra is: "trust, but verify".

Read my article here



The English translation is as under:

The other day, I was talking to an investment advisor. He was very excited about the trust he has won from his clients. He claimed that he was so much trusted by his clients that they give him signed demat account slips and mutual fund transaction forms.

I asked if the client would ever give blank signed cheques to the same advisor. He laughed it off. Nobody in one’s right mind would ever give blank cheques.

So often, people consider this argument of comparing blank cheques with signed demat slips as ridiculous and laugh it off. While giving someone a blank cheque is accepted as a huge risk, giving a blank signed demat slip is not.

So let us understand what all can happen if you give signed blank demat slip to someone. You are letting the person fill in the details without your knowledge, yet legally you have approved whatever he writes on the slip. This “whatever” means that he can transfer the securities from your demat account to his personal account or anybody else’s account. If it comes to your notice, one can argue that it was just a mistake and he can return the securities in your account.

One has also come across cases where the investor lets the securities remain in the broker’s pool account. When the investor was suggested not to do so, he came up with arguments: (i) it is convenient; (ii) he wanted to avoid the transfer charges. The convenience argument also appeared in case of giving signed but blank demat transaction slips.

So often, we seek to avoid minor inconveniences and fall in a major trap.

In both the above cases, one is offering an opportunity to someone to defraud. Are we suggesting that you should not trust anyone? Well, we cannot. It is one’s choice to decide whom to trust and whom not to. However, we would only like to ask one question, “What is the priority – safety or convenience?” And then to what extent do we want to compromise one for the other?

This is not just about demat accounts. There have been many instances of defrauding innocent investors by conmen. Some have collected cash from investors for depositing in the post office schemes. The amount never reached the post office.

Majority of the frauds have this pattern in common. It all starts with convenience and the same is given the name of trust. Convenience is the primary objective. The conman pretends to be trustworthy and sells the convenience part. He keeps both the decisions and custody of assets with him. The custody is kept in form of the transaction slips in the above example. If someone has the authority to take decisions and also controls the transaction related documents, it becomes easy to commit fraud.

Trusting someone is not bad, as we have already mentioned earlier. However, once convenience becomes a habit, it takes a painful experience to once again get trust on priority.

Mutual funds are a bit different. When redemption is filed in a mutual fund scheme, the proceeds would only go to the investor’s bank account registered with the mutual fund folio. Mutual funds have built this safety mechanism in place and hence they do not issue cheques to third party.

For all other investment avenues, please insist on transfer of all the money only through the banking channel. Else deal through mutual funds, which do not accept cash beyond Rs. 20,000 and always pay the redemption proceeds and dividends in the registered bank accounts.

An investor would be better off being objective in deciding the trust v/s convenience equation. It is better to decide whom to trust and why. Even after that, it is good to take stock of the situation once in a while. Blind trust may not always be desirable. The mantra to remember should be, “Trust, but verify”.

Wish you a very happy 2016!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Natural disasters, how prepared are you?

The Chennai rains and the subsequent floods have been devastating. A friend of mine shared that they were without electricity for five days and nights. How many of us can even imagine such a state? Nature showed how helpless we could be.

I had written a couple of articles some time ago. The links for both are given below:

If disaster strikes, are you prepared?

Is your family safeguarded against disasters?

These have nothing to do with how you invest. This is also not exhaustive. Take the ideas and think how you take preventive actions.

God bless all!

How to maximize your wealth?

Most individuals prefer to keep looking for the highest returns offering investment. However, the return is not in our control. It makes sense to work on things that are in our control.

Click here to read further ...

Santa Claus is coming along ...

A couple of years ago, I wrote an article around Christmas time. We tend to be stuck so much to the calendar that many of our discussions are about dates, months or periodic events like Diwali or Christmas. We tend to assume that the market also celebrates all our festivals. In this context, I came across a term "Santa Claus rally" while surfing through the net.

Here is my take on it. Click here to read further ...

Tame the volatility of equity markets with asset allocation

Equity markets are volatile. They have always been volatile. They will remain volatile. In fact, all asset classes exhibit price volatility as long as there are trades happening in open markets involving  so many market participants.

One of the ways to tame this volatility is to know how you invest. Click on the link below to read further ...

Tame the volatility of equity markets with asset allocation

_________________________________________________________________________________

The English translation is as under:

Last time we wrote about the power of SIP to tame the risk of price volatility. However, this is suitable for individuals having regular income and savings. Someone may wonder, what about those who do not have regular savings? What about the retired investors?

Retired investors invest their money and then draw regularly out of these investments. Many are comfortable with fixed income investments and get the regular income in form of interest. On the other hand, there are some who invest in mutual funds and withdraw their money regularly. At the same time, in case of some, they may have money that may remain invested without any withdrawal from the same.

In fact, it is not just retired investors; many investors from other categories have some money that need to be untouched. No income may also be required out of the same as some other investments may be generating enough.

If such money is going to remain invested for long periods of time, one need to find how much should be invested in the volatile asset class called equity and how much in safe fixed income investments. This process is popularly known as asset allocation. (Asset allocation may involve investment in many other asset categories apart from equity and fixed income, e.g. real estate, international stocks, currency, etc.)

The big question in deciding the asset allocation is: “How much money should be allocated to which asset category?” The answer depends on three things: (1) the need to take investment risks, (2) the ability to take such risks, and (3) the willingness to take risks. One can have a separate detailed discussion on these three. However, broadly, the need to take risks arises when one needs returns higher than the safe short-term Government securities. The ability depends on one’s financial as well family situation and the willingness is a function of how soundly one can sleep at night after making certain investments.

Once the allocation is made to various asset classes, one has choices (1) let the allocations change in line with changes in asset class performances, or (2) rebalance the asset allocation to the original ratios, or (3) take market views and increase or decrease the allocations to various asset categories based on one’s views on the relative attractiveness. Most investors would be better off with taking the approach number 2.

Let us understand this approach, known as rebalancing the asset allocation to the original levels.

Let us assume that after assessing the needs of one of the clients, the advisor recommends investment of 50% of the assets in an equity mutual fund and 50% in a money market mutual fund. The investor and the advisor then decide to review the performance of the portfolio every six months. The review process is also very simple. The objective would be to maintain the allocation between equity fund and money market fund at 50:50.

Given that the stock prices are volatile over shorter terms and move in line with the profits of the company over longer periods, we are likely to see the value of the equity mutual fund go up and down over time. When that happens, the asset allocation would stray from the 50:50 that was set originally.

When the equity prices move up faster than the debt prices, the allocation will get skewed in favour of equity and our review process would restore it back to 50:50 by shifting some money from equity fund to debt fund. In the other case, when the equity prices move adversely, the balance would get skewed towards debt and the balance can be restored by shifting from debt fund to equity funds. What you are doing here is selling equity when the prices run up and buying when the units got cheaper. One is able to do this without having to worry about analyzing what is happening in the market place.

The above example is applicable to an investor, who has a static portfolio without any additions into the portfolio or withdrawals from the same. In reality, the investor may get inflows, which need to be invested in the portfolio or have a need to take some money out of the investments. In such cases, at the time of investment or redemption, the investor has to look at the current market value of the equity fund and debt fund and rebalance the portfolio to 50:50.

Automatically, the money goes into equity fund when the stock prices are low and into debt fund when the stock prices are high.

The only problem with the above is that what looks so simple is very difficult to execute since the approach means ignoring all the sound bytes taking place around you. It takes a lot of courage to chart one’s own course and more importantly, to continue walking that path – at times, all alone.

Maintaining the asset allocation helps an investor work the volatility in one’s own favour.

Wish you all a very Happy New Year!

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.