Category: Investing

Investing With Debt

This might seem huge risk to any body who is reading this. I have applied for a loan from my employer. As per the service rules of my company I am eligible for an interest free loan of Rs 50,000/- payable in 10 equal installments. This loan would put me in some more debt (you can see my current debt position here), but this would be the first time that I would be using the debt amount for leveraging my financial position.

For me I cannot see idle cash sitting around with me and doing nothing. I want it to get moving and for this reason i went for that loan. The options that I have after taking the loan are:

  • Pay off debt
  • Invest in Tax Savings Instruments
  • Purchase of Mutual Funds
  • Go to the stock market

Continue reading →

Guide to Investing; Chapter 2

After defining the objective in Chapter 1 for investing the next logical step is to collect the raw materials for investing. I have prepared a tentative list of raw materials required for investing. This list may not be exhaustive but shall be sufficient to invest and generate above average returns.

I will take a break from this chapter here and want to inform you that you should not look at my financial condition right now as it is because of my spending habits. My investments, whatever amount I have invested are giving me good returns based on my informed decisions. The current rate of return on my portfolio is 100% in the past six months.

Now, back to the chapter; I have classified the raw materials into two stages. Stage I consists of materials that prepares you and your mind for investing these would be intangible items that would form the core or the base of your investment decisions. Time and again we shall be referring to them while we make any decision. Stage II shall contain some tangible items including money that are required for investing. I would like to point out here that these items in both the stages are mandatory for those who want to get into investing.

Stage I

  1. Self awareness
  2. Open to learning the art of investing.
  3. Time allocation.
  4. Conceptual understanding.
  5. Regularity.
  6. Awareness and Updates.
  7. Patience and Focus.
  8. Discipline.

Stage II

  1. Revising Stage I items.
  2. Some know-how of analytical tools and theories.
  3. Where to invest.
  4. Platform to invest money.
  5. Some amount of money.

The Stage II items are not exhaustive as the terms like portfolio, asset allocation, alternative investments, value cost averaging and similar complicated terms will confuse you and deter you from enjoying the learning process. I shall be putting these terms in course of the process. Till then do some brainstorming and try to understand the need for Stage I

Guide to Investing

This is a series of posts that I have started for those who want to get into investing but do not understand the concept of investing. This series will be a three stage series and every stage will have different chapters.

    Stage I will cover Basics and Concepts for Beginners
    Stage II will cover the Intermediate level
    Stage III will be Advanced level

Before going further, I want to disclose my level in the field of investing, so that you can take a decision whether to go for this Recipe or not! Currently I am on an intermediate level and to reach at this stage it took me four years. It is typically a self learned study over this period and loads of mistakes done before reaching such a stage. I do not guarantee that you will be perfect investors after reading this series but yes! You will be getting better returns than an average investor gets. I am saying this because I too will be on the same ride with these lessons as you are after reading.

Anyways let’s get started:

Chapter 1; Defining Objective
Why do you want to invest money? To answer this question, most people give answers which appear irrational to me.

Others invest so should I
There is lot of money in the share market
The Market is booming buddy! I saw this in the news
I want to invest because I want to invest, there is no particular reason.
I want to save on taxes by investing into shares

If you have similar reasons for investing which are similar to above, you definitely should read the rest of the post and the whole series, but if not then you can skip this chapter.

So why should you invest?
The answer to this can be vague but not irrational.

I want to invest so that my investment gives me a cover for my future plans/goals
I want to be financially free by XX years
Provision for higher studies for my child
I want my money to work for me.
I want to beat the inflation

The list is not limited to above; you can have your exclusive reason that can substantiate your investing. For me! It is “I want to get financially free by XX years”

The next big question is, why do I need an objective to invest? A very clichéd line suffice for this, “You have to have a goal to keep you motivated and directed”. You need to know the purpose of investing! As simple as that, find a reason to invest before you start investing, remember you studied 20 years of your life to get a job, the final goal was to get a job, to be independent, and to enjoy luxuries which a job can provide. Same is the case with investing; you need to know why you should invest before you even think of investing.

Defining Frugality and Ethics

After reading this post by Golbguru, I thought I should define frugality for myself. I was amazed that people do such things to gain a temporary advantage which I call as cheating.

In India we find these replacements very rare, change of barcode! I feel here the hi-tech crimes are very less. But still for general people like me, I think defining ethics and frugality will set parameters of the alien domain over which I shall never travel.

Ethics:

    Most simply ethics for me is the act that my heart will not feel bad after doing it. Most people won’t believe but I have stopped lying, and I lie only in extreme case where I am doing for the good of someone.

Frugality:

    Frugality for me is something altogether different. It’s controlling my natural behavior (e.g. impulse buying etc.) to avoid unnecessary expenses and getting myself in my budget.

These are the long term definitions to which I will stick over my life time. Looking from an investing perspective I see this as an intangible asset which will ensure that my children and people near me get a rub-off effect and help them to become better people.

Investing into Intangible Assets

In the past week Canadian Financial stuff has put up a post on financial resume. I got really inspired by the post and started to prepare my networth statement. While preparing it I realized an important term which is missing from my balance sheet.

Goodwill is the element that I cannot quantify in my balance sheet while calculating my net-worth/self-worth. This prompted me to think over intangible assets for an individual that can’t be quantified but forms the basic part of one’s individual financial health. A little thought and I came up with the following:

  • Health: Physical and mental fitness is of utmost importance while considering your intangible assets. Try to refrain from unnecessary stress and work pressure. Stress drains out your energy which can be put into some positive or constructive work.
  • Time Statement: The importance of time and its management has been mentioned many times, but I want to put emphasis on time statement. Do we keep a time budget by estimating our time expenses as we keep a monetary budget by estimating our future expenses?
  • Career: Can career be an asset? Yes it always is! It gives a source of steady income. But have we considered enhancing the value of our career by trying out different strategies e.g. focusing on our core strengths and weaknesses.
  • State of Mind: The only thing that you can control 100% in this world is your mind. And if you can be positive towards the externalities of life good or bad then you build up your confidence as an asset over a period of time. Your mental stamina increases towards the downs of your life.
  • Discipline: This is the most important intangible asset that helps you to manage all the four assets mentioned above. Discipline can provide you best asset allocation and growth for the future.

Coming up with strategies to invest into such assets your networth will show a drastic increase in the tangible or quantifiable assets.

Systematic Investment Plan

Systematic investment plans (SIP) are coming out as a popular investment option. SIPs involve investment on a systematic basis over a period of time. Under a SIP option, as investor commits making regular investments in a particular mutual fund/deposit. Investing in mutual funds through systematic investment plans is easier and efficient. It helps to grow one’s investment over a period of time.

The SIP option is available with all types of funds like equity, income or gilt. SIP is a long-term investment plan. The investor needs to set aside some amount of money every month for investing in a fund like a diversified equity fund or balanced fund. The investor needs to give post-dated cheques or debit advice to the fund house. The investor can put more amount also as per the policy of the fund. He can change the SIP structure only in the multiples of the SIP amount. In case an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However, if the first holder in those schemes is different, they will have to fill different SIP forms, as the first holder has to sign on the form.

The investor invests a specific amount for a continuous period, at regular intervals. So, the investor can save compulsorily a fixed amount each month. He can also avail the advantage of rupee cost averaging. The investor automatically participates in the market swings. The amount of investment remaining the same, the investor buys more number of units in a declining market and less number of units in a rising market. By investing consistently the same amount at regular intervals, the investor’s average cost per unit will be lower than the average market price, irrespective of how the market is rising, falling or fluctuating. The advantage of rupee cost averaging is that the net asset value (NAV) is averaged out, as the investor will be entering the fund at different NAVs, which may be higher or lower depending on the market condition. As such, the returns are enhanced under the SIP schemes.

Rupee cost averaging offers its greatest benefit with investments that tend to regularly fluctuate in price. When one invests the same amount in a fund at regular intervals over time, he buys more units when the price is lower. Thus, he may reduce his average cost per share over time. Thus, rupee cost averaging helps make market fluctuations work for the investor, and reduces the risk of investing all his money just before a market downturn.
SIPs can be especially effective when used in buying equity funds. The NAVs of these funds can vary widely. Through rupee cost averaging, an SIP can make this volatility work for the investor. It is to be noted that rupee cost averaging may not work well if the market rises continuously.

As it is systematic, SIP ensures that one plans for his long-term goals along with the short-term goals. SIPs offer a disciplined investment plan and help reduce the susceptibility to market fluctuations. It helps preserve capital and also translates into substantial creation of wealth in the long run.

An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment should always select a SIP option. This will enable him to invest regularly. Some plans now also offer additional features like life insurance.
The investor is at a liberty to enter or exit from the scheme whenever he wishes to , depending on the market conditions. He can redeem his units any time irrespective of whether he has completed his minimum investment in that scheme or not. SIP offers more flexibility and helps identify funds that suit one’s risk-return profile. In case of SIPs, the asset allocation keeps pace with the investor’s changing risk return profile Also; it offers instant liquidity whenever required.

An Article from Economic Times Dated 1st April 2006

Indian Investor of the year

The Investor Hunt is started. ING-Vysya is sponsoring the first of its kind game show, The Investor Hunt. This is a real time stock market game, similar to the games we used to play in B-schools, but this is at a much bigger level, competing against the whole of India.
I am game; I want to participate in it. I don’t know whether I will be able to get to the top 1000, but I want to try and if I make it through then it will be great learning for me. Even if don’t make it through to the top 1000, I will play my own game creating a notional portfolio and try to maximize the returns over a period of time.
This game has given me the idea to learn investing by directly jumping into the market, creating a great learning environment and a platform to get into the equity market with an experience of an investor.
You can register here. The prizes are awesome, you can have a look at them here.
But first refer to the Terms and Conditions.How to play the game: Continue reading →

Risk Thermometer

Today I took a questionnaire called Risk thermometer. It claimed to provide my risk taking ability. Following are the results for my appetite.

growth portfolio

High level of growth on the capital invested. Modest level income stream, High level of volatility

The Chart titled Growth Portfolio; I couldn’t comprehend the graph completely, I feel it depicts the growth portfolio for me, based on my risk taking ability.I guess My portfolio for the future would be like this. I am still not into debt instruments, and not planning to have any for the next couple of years. Lets see how it goes in the future.

Paradox

When I was young my father gave me an advice, and told to remember it always, ” Son, earn people over money, with people you can earn, but concentrating on money will never earn you money”.

Today when I think over the statement I find it to be true and false at times. Lets say for example, to consolidate money, you go for an extreme frugal living, as is suggested by many blog writers, but in this scenario you stop socializing with people, you ask your pennies back from your friends, even from your best of friends, and many more and you concentrate on finding ways to earn more money, by working hard/smart, working over internet and host of other channels.

But in the other scenario, in which you concentrate on building relationships, investing time in creating teams, you are investing into asset creation and reap its benefits over the period of time.

The above concept may be flawed, in the sense that you may socialize etc. but still investing in team building or earning people may come handy. Hewlett started with Packard, Steve Jobs started with a team to form Apple, even lee Iacocca in his biography mentions acquiring his team to save Chrysler.

The point here is whether to invest time in wealth creation or for team building or a mix of both. I would say that; chuck the idea of extreme frugal living (for wealth creation) and to go for some people assets so that you can limit your risk on the way to become rich.

Investing Mistakes

I started investing in stocks almost two years back in school. I wanted to learn the basics of investing (Though I must say I am still learning). But those days were the initial days of fear and small investments from the money I saved which my parents sent for my college studies.

Once I got a suggestion from my friend to buy shares of Uco Bank( A nationalized bank in India). He told that the share price is expected to go up in the next three months. Acting on his suggestion I bought the 50 shares @ Rs 32/- per share.
Soon after that my eyes started going to the bottom of any news channel watching the fast moving ticker. I started observing the price movement after every 15 minutes on the college television.

Research and having a plan is the key to investing.

The other effect was that the share price caught a downward trend the day I bought them and after three months it was Rs. 7 less i.e. almost 10% down. Then I stopped bothering about it until today (two years after I bought the shares) when I spoke to my friend.
I told him,” Uco is still going down! And it’s almost two years now, Its your mistake that you listened to my suggestion ,was his reply and I was shocked. I learned two big lessons from the whole episode.

  • Neither you should suggest nor you should take advice from someone other than you.
  • Set upon a loss target that will stop you tracking the stock price every now and then.

You can always get advice with professional money managers instead of going to a friend, who knows nothing or knows something you know too, about investing. If taking tension solves problem then take it, otherwise plan, and follow the plan.