Are you ready to start on your own?

Be ready with a financial kitty for at least a couple of years. Here's some help on how to proceed

Click on this link to read further ...

(From archives)

 

Chitralekha - Birla Sun Life Mutual Fund Conclave yesterday (4th Dec, 2016) at Ahmedabad

What a response to this wonderful event. Thank you Ahmedabad. There were more than 250 people present on a Sunday morning to attend this function. Chitralekha had to close further registrations as the hall was already jam packed.

Fantastic audience. People listened to the speakers for over two hours and then there were many questions.

Thank you Ahmedabad once again. Thanks to Chitralekha and Birla Sun Life as well.

Why we are a nation of underinsured tax-savers

Tax saving and not the risk cover is the sole influencer on the insurance buying in India.

Read my article at: http://www.moneycontrol.com/news/insurance/why-we-arenationunderinsured-tax-savers_7086701.html?utm_source=ref_article

Questions on investments answered

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

Equity investments simplified

Why mutual fund is the ideal investment vehicle for goal-oriented investing

If you know your financial goals and are planning to invest your money to achieve these goals, read this article first ..

Ideal investment vehicle for goal-oriented investing

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The English translation is as under:

Why mutual fund is the ideal investment vehicle for goal-oriented investing

A very important question all investors must consider before investing is: Why are they investing? What is the purpose of investing?

All the other questions are secondary to this one. This must be the first question that an investor must consider.

Let us understand the financial requirement of most of the middle class investors. Most of middle class people have certain large lumpsum expenses to incur in order to fund some major and important events in their life. These events could be having their own house, acquiring a vehicle, getting the children educated, marriage in the family and living a comfortable retired life. All these events require large sum of money, which may not be available when the event occurs. Money must be saved earlier in order to fund these events.

These are financial goals. Funding these financial goals is the primary purpose of saving and investing for most of middle class.

Once we understand that, the next question is how does one invest money. We have two options: invest your money in various avenues yourself or invest through mutual funds. We have discussed this in detail in some of our earlier articles.

There are some basic rules that one need to follow:

1.     Keep some money in short-term investments – these investments may not fetch high returns but the money would be safe here.

2.     Allocate your money in line with your unique situation – a process known as asset allocation.

3.     Periodically one needs to check how much is the deviation from the required asset allocation. This happens since different markets, viz., equity and debt markets behave differently from each other.

4.     Consider investing in equity if the goals are far in future. However, as the goal approaches near, the exposure to equity should be reduced.

It is really in points 2, 3 and 4 above that mutual funds become extremely convenient. First of all, allocating money across various asset categories is very easy if one uses mutual funds. At the same time, when one has to shift money from one scheme to another – be it from debt to equity or vice versa – mutual funds allow very convenient switching facility.

Mutual funds also have a major benefit in terms of availability of daily NAV, which allows one to regularly monitor if the current asset allocation is in line with the required one or has it deviated. Based on this, a decision regarding switch can be very easily taken.

All these switching can be done seamlessly within a fund house. The transaction is convenient as well as low cost. Mutual funds also are highly tax-efficient when it comes to such switches.

As against that, if one has built a portfolio by buying stocks and bonds, the big decision would be which stocks or bonds to sell and which ones to buy. In case of mutual funds, it is just a scheme that one needs to get out of or get into.

It is such high degree of convenience that majority of financial advisors also prefer to recommend mutual funds to their investors.

So, go ahead and take advantage of mutual funds in order to achieve your financial goals conveniently and comfortably.

-        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.

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

Transcript of my chat on "Master Your Money" segment on www.moneycontrol.com on 8th March

Click on the link below to see the transcript of my chat yesterday:

http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=24&source=mym

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!

Beware! Discounts, tax deductions can ruin your finances

While Diwali is round the corner, newspapers are full of discount offers. Good time to have a look at this article from the archives.

Planning your personal finances based on discounts or tax deductions can be hazardous. Amit Trivedi tells you why and how to overcome these fatal attractions.

Read more at: http://www.moneycontrol.com/news/mf-experts/beware-discounts-tax-deductions-can-ruin-your-finances_318241.html?utm_source=ref_article

Questions on mutual funds, answered

Investors had queries on investing and mutual funds. Here is the link to the transcript of the chat:

Build wealth with mutual funds

Invest your irregular income systematically

How do you take the advantage of SIP if your income is irregular? Read on ... (My article is at the bottom of the page)

http://epaper.gujaratimidday.com//epaperpdf/gmd/19102015/19102015-md-gm-19.pdf

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The English translation is as under:

“You had written about SIP some time ago. I think that is a good idea, but I do not have monthly income. I get some money every once in a while. Is there a way that I can benefit from the features of an SIP in that case?”

A reader asked the above question.

He was considering investing on a regular basis in equity mutual funds with an objective of creating wealth over a long period of time. At the same time, he was uncomfortable investing lump sum. He also seemed to have understood the power of compounding as well as the concept of Rupee cost averaging.

While the power of compounding helps one create wealth over long holding periods, the Rupee cost averaging brings the average purchase price down. We have already discussed these in our earlier articles.

SIP or Systematic Investment Plan allows one to invest money saved on a regular basis. This is ideal for people who get monthly salary or such regular income.  The reader, who asked the question above, seemed to have an irregular income or no income. What is the alternative for such investors?

Mutual funds offer another convenience and flexibility here. Investors having irregular income, but who want to benefit out of SIP can invest their money in liquid funds, as and when they have surplus. They can then give a standing instruction to the fund house to transfer a fixed sum of money at regular interval into an equity fund. What this does is that it helps the investor park the surplus in such a way that the money earns some returns. At the same time, since the lump sum is to be invested in a liquid fund, there is no worry about the price fluctuations. Many investors are not comfortable with the wild swings in the value of their investments, especially in the beginning.

Since the money is transferred regularly into an equity fund, this is like an SIP. The only difference between this strategy and SIP is that, in case of an SIP, the money is invested in an equity fund from a bank account. In the proposed case, the same happens from a liquid fund. The liquid fund replaces the bank account in this case for the stated purpose.

Now let us look at someone who has irregular income. Some months, there is high inflow, whereas there are some lean months. Whenever this investor has high income, he can keep investing this into a liquid fund. On a regular basis, some money is getting transferred into an equity fund, systematically.

Thus, the investment in equity fund gets the benefits of SIP, though the investor does not have regular income.

Such a strategy is known as Systematic Transfer Plan or STP.

Someone planning to opt for this strategy should first choose the equity fund into which one wants to do an SIP. The next step is to select the liquid fund from the same fund house and invest lump sum money into this liquid fund. Then, one can give a standing instruction to the fund house for the said systematic, regular transfer. You have set up your systematic transfer plan.

Yet another benefit of the great flexible and investor-friendly mutual funds.

Happy investing.

-        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.

Understanding why SIP is the best investment strategy for some ...

Read my article on why SIP is considered to be best, but also keep in mind why and for whom ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/14092015/14092015-md-gm-14.pdf


The English translation is as under:

“SIP is the best investment strategy” – an expert was speaking on the television. A friend sitting next to me asked, “Does it mean that investment through Sip would always fetch higher returns? Or at least most of the time?”

Well, the question is logical. Our mind interprets information in a predictable manner. The moment an investment is mentioned with the adjective “best”, we interpret as something that is likely to offer highest returns. This is true for majority of investors.

However, this is not always true. Very often, there are other parameters that make an approach better than other options.

In the past, we have discussed about SIP – Systematic Investment Plan. It is an approach that allows an investor to systematically and regularly invest a predetermined amount of money into a chosen mutual fund scheme. This ensures discipline – critical for investment success.

Apart from discipline, SIP is ideal for a long-term approach to investing by most people, who earn regular income. Simply because the income stream is regular (monthly salary), one has a need to invest regularly. SIP allows just that. A single instruction to the mutual fund company and your bank and all your monthly savings go into the scheme you have selected – no hassles of wondering which scheme to select every month, no hassles of filling up forms and signing cheques every month.

That is what makes it the best in terms of offering great convenience to fulfill a need to invest on a regular basis.

Apart from that SIP also helps accumulate a corpus through the benefit of compounding, if you stay invested in the scheme over long term. Compounding works wonders over long periods of time. as the corpus grows, slow and steady, the future returns on the grown corpus add up to large amounts. For example, if you have invested Rs. 10,000 per year in a scheme that offers 8% p.a. and you keep reinvesting all the earnings in the scheme, the earning in the 11^th year would be Rs. 11,589. However, if you continue for another 10 years, the earnings in the 21^st year would be Rs. 36,610. By the way, in the 31^st year, the earning would be Rs. 90,627. You can see the magic happening here. Longer you stay invested, higher the benefit of compounding.

Just as an additional benefit, if you are investing in an equity fund through SIP, it would allow you to make the inherent volatility to work for you. As we all know, the prices of equity shares go up and down regularly. When you are investing a fixed sum of money in an equity fund, you buy fewer units when the prices are high and you buy more when the prices are low. This happens automatically. Let us see with some numbers. Assume that you are investing Rs. 10,000 per month. In the first month if the NAV of the fund is Rs. 20, you buy Rs. 10,000 / Rs. 20 = 500 unitss. If the NAV goes up to Rs. 25 in the next month, you would buy only 400 units (Rs. 10,000 / Rs. 25). At Rs. 25, you bought 400 units and at a lower price of Rs. 20, you bought more units. This brings down the average purchase price of the units. When your purchase price is low, the returns are better (as compared to buying at higher price) – and this is common sense.

These are the features that make SIP an ideal investment approach for those in early stage of life, earning regular income and are investing for a long-term goal, far in future.

Wish you a happy and fulfilling life.

-        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.

Are all rules of thumb trustworthy in personal finance?

Rules of thumb are approximations and one should not over rely on these rules. It is better to take a bit more cumbersome but accurate route. Read on ...

This was written way back in 2006

I wrote this article in 2006 and was published on www.moneycontrol.com in March 2007. It still makes sense. Nothing has changed. Click here to read further

Chat transcript: www.moneycontrol.com on 11-May-2015

Equity investments simplified

Is SWP from an equity fund a good idea?

In recent times for retirement planning, traditional instruments are losing its sheen because of inflation. Its time to make use of innovative financial tools like SWP to beat inflation and get regular payments but before using it understand the risks and benefits of SWP. Read on ...

Is SWP from an equity fund a good idea?

Understanding inflation and its impact

Price inflation is currency deflation. 

Click here to read further ...

SWP in a mutual fund - a better option for regular income

My article in Mumbai Mid-day Gujarati edition today:

http://epaper.gujaratimidday.com//epaperpdf/gmd/17112014/17112014-md-gm-11.pdf


English translation of the same is as under:

In the last two columns, we have highlighted some points about how mutual funds make it convenient to attain some of our objectives. First we talked about someone who has a regular savings that one needs to invest to achieve long term goals – mutual funds offer a facility called SIP for this. Then we looked at how convenient mutual funds make to buy gold. Let us now look at another category of investors, who need regular income from the investment portfolio.

Such an investor typically looks at certain traditional instruments that offer regular interest income – Post Office Monthly Income Scheme (MIS), Senior Citizens’ Savings Scheme, Fixed deposits, Debentures are some of the options that come to mind. All these are good investment options, but each has certain limitations. Due to these limitations, these instruments may be suitable to only certain investors and only in certain situations.

Let us spend some time in these instruments. All the abovementioned instruments give a feel of safety. However, the level of safety could be very different among all these. The Post Office MIS and Senior Citizens’ Savings Scheme are much safer than debentures issued by companies. Fixed deposits issued by banks are much safer than those issued by Non-Banking Finance Companies (NBFCs). An investor must keep this in mind.

Two features of these instruments must be understood properly. These are: term and interest rate. All the traditional instruments listed above have a fixed term and a fixed interest rate. That gives a good feeling of safety and regularity. However, if we consider the needs of a typical investor and compare the same with the features of these instruments, we start seeing a gap.

·      First of all, the investor may need regular income for a period that is different from the term of these instruments. We may have a five-year debenture available in the market. What if the investor needs regular income for seven years or three years? What about a retired investor, who would need regular income till one is alive and that period is unknown.

·      Secondly, all these instruments have a fixed interest rate. If we consider a retired investor, the income from investments is required to fund regular household expenses. These household expenses do not remain constant – they go up over a period due to the rise in prices of essential items like food or medicines.

Given these two gaps, the traditional instruments, though safe and predictable, may not be suitable to all in all situations.

Hence, there is a need to look at alternatives, if available. One such alternative is offered by the mutual funds. This comes in form of Systematic Withdrawal Plans (SWPs).

How does SWP work?

All mutual funds offer facilities for systematic transactions. An investor is required to give standing instructions to the fund house and they take care of completing the transaction based on the instructions given. SIP is one example of such standing instruction or systematic transaction.

Any investor can invest a lump sum amount in a mutual fund scheme and give standing instruction to the fund house for regular withdrawal of a fixed amount. Let us say, one needs regular income of Rs. 5,000 per month and has a sum of Rs. 5,00,000 that can be invested. After investing the amount in a particular mutual fund scheme, the investor needs to fill up a form for SWP. Every month on the stipulated date, the money would be taken out of the scheme and paid out to the investor.

This small amount withdrawal can be set up irrespective of the gains generated by the scheme. This is possible due to the divisibility of the investment. Though one can withdraw any amount (as long as it is less than the balance in the account), one would recommend keeping the withdrawal rate closer to (preferably lower than) the expected rate of investment growth. If you are expecting the fund to grow at 10@ p.a., keep the withdrawal rate at less than 10% p.a.

At the same time, if one has a need for regular income only for a stipulated period, say 5 years, one can draw the full amount over these 5 years.

SWP is much more tax-efficient than earning interest income from fixed income investments, if the withdrawal is done for a very long period. As compared to traditional instruments, this does not need the full amount to be blocked for the entire period, which means, one can keep withdrawing regularly and keep funding the account whenever other investments mature or when other lump sum amount is available.

A word of caution: please consider this discussion only in the context of liquid and short-term debt funds and no other categories.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.