Investing It!

Financial Ratios: Quick way to check your fiscal health

Yogi — Sun, 21 Feb 2010 18:35:08 GMT

“Prevention is better than cure”. You need to assess your fiscal health and take remedial action before it’s too late. Financial ratios are decision making tools which tell you how good or bad your financial health is. Since this financial year is about to end you should sit down and spend some time on it. We present some useful and easy to calculate personal finance ratios.

Why are they relevant?

Personal financial ratios are devices used to better understand your financial standing. They also attempt to make impending financial crisis visible, which we might have otherwise overlooked. For example, a growing credit card debt may be creeping up on you; soon to become a burden. Debt to income ratio will make the growing debt burden visible.

There is a fundamental relationship between one's monthly income, debt (debt is synonymous with liability), and savings - one affects the other and so on. Individuals need to act fast before the situation becomes unmanageable.

Below is a list of most important personal financial ratios:

Before you start working on ratio analysis, the most important thing you need to ask is ‘what am I trying to find out?’ Once you have decided what you want to know then you can decide which ratio you need to use to analyze the problem facing you.

1) Net Worth ratio

Simply put, it means if you were put on sale, how much you would be worth in rupee terms. Finding out your Net worth is the first step to your future financial goals’ journey. Before you can reach a financial goal, you need to know where you currently stand.

Net worth is not only that starting step that directs you to set a financial plan to reach your goals, but helps you to protect your assets via insurance coverage by determining the worth of your assets.

Formula: Net Worth = Total of all your assets – Total of all your liabilities

Thumb rule: Net Worth thumb rule = (Your Age x Gross Annual Income from all sources except inheritances)/10*;

Example: If you're 30 and earn Rs 5 lakhs a year, ideally you should have a net worth equal to or more than Rs 15 lakhs.

2 more net worth ratios -

(i) Total Debt-to-Net Worth: This ratio compares your overall debt to your wealth.

Formula: Total of all Liabilities / Net Worth

Thumb rule: Total debt-to-net worth ratio should be kept below 1.

(ii) Liquid assets to Net worth ratio: It indicates that the liquid part of your net worth is an emergency fund and for what period would it support you. Liquidity is required for sudden short-term contingencies (and/or opportunities!). Remember to always keep enough cash on hand (preferably in a liquid mutual fund) for 6 months worth of expenses.

Formula: Liquidity to Net Worth ratio = Liquid Assets (including financial assets such a stocks, mutual funds, bonds, cash)/Net Worth

Rule of thumb: Around 15% is a sign of good liquidity. Above it can be excess liquidity meaning the person is losing out on investment opportunities.

2) Savings ratio

The Savings ratio simply tells you how much are you saving monthly. It is not only the proportion of income which is saved, but also a measure of one's risk profile whether you are proactive with investments or not.

Formula: Savings Ratio = Monthly savings / Total monthly Income

Rule of thumb: There is no general rule of thumb as the amount of savings to be made depends upon an individual’s lifecycle stage. As a guideline, it can be taken as 15%-20% of monthly salary. However, the more the better.

Note: A single month savings ratio does not reveal much but taking an average of several monthly savings ratios will be a better indicator of how good or bad you are at saving.

3) Debt to income ratio

This ratio indicates the total monthly income that goes towards paying all your monthly debts (home loan, car loan, personal loan, credit card, consumer durable, gold loan etc) - all outflows towards servicing debt are taken into account here.

Formula: Debt to Income Ratio = Monthly debt payments / Total monthly Income

But just about everyone has debt. The real question how much is too much? That will again depend upon the lifecycle stage of the individual. For example, a man in his early 30s usually would be servicing more debt payments (on account of home loan, auto loan, consumer durable etc) than a person in his 50s who is nearing retirement.

Rule of Thumb: The lower the ratio, the better. The lower this ratio the lesser burden there is on the individual to make payments on his/her debts. High debt to income ratio also means having a low savings rates. It also threatens one’s ability to retire with the desired retirement corpus. General guideline is a ratio of less than 40%.

2 more Debt ratios:

(i) Housing loan outflow Ratio – This is a parallel version of debt-income ratio used by home loan underwriters to scrutinize the creditworthiness of borrowers. You can apply this to assess your monthly housing loan liability against monthly total income.

Formula: (Home loan EMI + loan insurance + property taxes + other relevant payments) / by Total Monthly Income

Rule of Thumb: Housing loan expenses should not exceed 30% of gross monthly income.

(ii) Credit card debt Ratio – On similar lines of housing loan outflow ratio is credit card debt ratio. It is useful to assess credit card debt payments vis a vis total monthly income.

Formula: Monthly credit card debt payments/ Total monthly income

Rule of Thumb: This ratio should be less than 20%. A high ratio could point to excessive use of credit cards.

4) Debt assets to Total assets ratio

This ratio compares total debt assets to total assets to gain a general idea as to the amount of borrowed money being used by you.

Formula: Total debt assets/Total assets

Rule of thumb: A lower ratio is desirable. A low ratio means that you are less dependent on borrowed money.

An Illustration

Let's take a look at some of the particulars from the financial statement of Mr Naresh, 34, Marketing manager at a retail chain:

Gross monthly salary: Rs 1,00,000 pm
Home Loan EMI: Rs 30,000 pm; Amount outstanding: Rs 45,78,900
Car Loan EMI: Rs 10,000 pm.; Amount outstanding: Rs 5,03,000
Credit card outstanding: Rs 5,000 (for month ending Jan, 2010)
Monthly Savings: Rs 50,000 pm
Current value of Investments (Equities): Rs 8,00.000
Residential property: Rs 52,00,000
Provident Fund balance: Rs 1,02,000

Based on this information, the individual ratios are as follows:

Net Worth: 61,02,000 – 50,86,900 = Rs 10,15,100
Total Debt to Net Worth ratio: 50,86,900/10,15,100 = 500%
Liquid assets to Net Worth ratio: 8,00,000/10,15,100 = 79%
Savings ratio: 50,000/1,00,000 = 50%
Debt to income ratio: (3,00,00 + 10,000 + 5,000) / 1,00,000 = 45%
Housing loan outflow ratio: 30,000 / 1,00,000 = 30%
Credit card debt ratio: 5,000 / 1,00,000 = 5%
Debt assets to Total assets ratio: 10,2000 / 6,10,2000 = 1.67%

Analysis –From the above ratios, we see that although his savings rate is good for his age, debt is high and needs to be trimmed – he may do it by prepaying his car loan (which gives no tax benefits) with a combination of surplus savings lying in his bank account, windfall gains from equities, etc. He has surplus liquidity to counter any short-term unforeseen circumstances. Also, debt assets to total assets ratio is low at 1.67%, which means that his assets are not well diversified and he lacks safety/security factor in his investments. The housing loan outflow ratio and credit card debt ratio are within the thumb rule of 30% and 20% respectively. If Naresh reduces his debt (by foreclosing auto loan), he may divert the extra cash towards paying down his home loan or make investments towards retirement plan or other future aspirations.

Before concluding, the following points may be noted –

Ratios serve as a quick guideline to help individuals assess their current financial health.
There may be different ways to compute ratios. It is important to be consistent and use the same method when making comparisons.
Ratios maybe calculated over time so that trends can be seen. Setting up an Excel worksheet is helpful - you can create a table containing a list of your ratios – month-by-month/year-by-year; this will help you organize & see trends.
Financial ratios need to be considered in the context of your personal situation. Therefore, life cycle is an important factor to consider as you review your financial ratios. Moreover, Ratio analysis alone cannot be used to draw a financial plan as they cannot be a substitute for experience and guidance. You should consult a qualified financial planner when in doubt.

Conclusion:

The objective of the personal financial ratios is to help individuals move from a situation of having low net worth, high debt and low savings to one where they have high net worth, low debt and high savings. The rule of thumb given for the each ratio is on a generalized basis to facilitate individuals to use them as a benchmark to improve their financial situation. The more people understand these primary principles, the more likely it is they will make good financial decisions.

Action item:

InvestmentYogi has created an application (free online financial plan) which calculates all these ratios for you. It takes only a few minutes of time. Click at this link and start with the FREE basic plan : http://investmentyogi.com/Financialplans/common/home.aspx

*[source: The Millionaire Next Door by Thomas J. Stanley].

Crystal Ball FEB’10

Yogi — Fri, 05 Feb 2010 06:56:43 GMT

Having said that 2010 looks to be the trickiest of years to play from asset allocation point of view, here’s our outlook on the key asset markets in India.

Both the years 2008 and 2009 have given us bitter and sweet memories and therefore having a circumspect attitude towards the present year 2010 seems completely natural. In addition, there seem to be quite an uncomfortable balance between the positive and negative factors confronting the Indian economy.

For instance, the risk of continued high inflation and government’s unwillingness to press the button just yet on rate tightening; stock market valuations, which are amongst the highest in the region and perhaps even among emerging markets as a whole and corporate earnings fatigue which is sure to set in on the back of high base of 2009 and consequent seemingly lackluster results in first half of fiscal 2011. On the positive side though, there is apparent demand from the consuming class for all kinds of consumables (FMCG), possibly a nice pick up in the durables (discretionary) segment; positive corporate outlook of the medium term evidenced by opening up of the hiring season; fast rising rural incomes on the back of higher agri-commodity prices should all reflect in the strong performance along the consumer value chain. This apart, the ability of the current government to drive through reforms and continue the infrastructure push it started late last year should put even the capex heavy sectors in demand in the medium term.

However, this fine balance seems to be tilting towards making a case for investments in equities on the back of lackluster expectations in the fixed income space over bulk of 2010. Similar arguments can be put forth for gold (after its linear run up over the past 4-5 years) and real estate (prices of which haven’t cooled down as much as one might have expected).

Bazaar Buzz FEB’10

Yogi — Fri, 05 Feb 2010 06:53:39 GMT

Weak global cues and a few disappointments in the earnings results (L&T, Bharti Airtel and ONGC) this quarter, snapped the 4 week winning streak that the markets were enjoying. China played spoilsport with its control measures to curb bank lending and policy tightening motivated by its concerns of speculative bubbles such as in real estate. Obama didn’t want to be left behind as he proposed new rules to limit banks’ risk taking. The new proposal aims to control the speculation by commercial banks and stop them from growing bigger and jeopardizing the financial system – this could force the breakup of the some of the biggest banks of the country.

Soaring food prices continued to be a concern despite some softening in recent weeks. The RBI acting under pressure to apply brakes on the inflationary tendencies, raised the CRR ratio by 75 points rather than the 50 that everyone was expecting. It has its limitations in tackling price rise; limitations posed by fiscal dominance, poor absorptive capacity of the economy that makes it difficult to utilize capital inflows all adding to the RBI’s woes in managing money supply.

Best Mutual Funds to Invest in 2010

Yogi — Wed, 27 Jan 2010 17:31:27 GMT

Mutual funds need no introduction. They are one of the most popular investment vehicles in the country today. Mutual funds allow a group of investors to pool their money together and taste a broader range of stocks or bonds than they could if they were trying them on their own.

Some of the many benefits of investing in mutual funds are:

Easy to buy and sell.
Investments can be made in lump sum or periodic payments (easy on the pocket).
Mutual fund industry in India is very well regulated and transparent.
Professional management - saves time and costs.
Diversification - to protect from downside risk.
Rupee cost averaging – profit from small regular investments.

There are many categories of mutual fund schemes available today and in each category there are 100s of mutual funds present akin to stars in a milky way.

A Mutual fund scheme category depends on the kind of securities it holds. For example, an equity fund invests in stocks of private companies. Depending upon the category of mutual fund scheme you invest in, the earnings from such investments can be in the form of regular income (dividend payouts) and/or capital appreciation. The taxation differs for different categories of mutual fund schemes.

CATEGORIES OF MUTUAL FUND SCHEMES:

The characteristics of growth oriented mutual fund categories and the top funds under each category based on last 5 years’ performance are reviewed below:

Equity Diversified: Equity diversified funds invest primarily in stocks across sectors and industries. Hence it minimizes the risk of exposure to a single company or sector. These funds can be large cap, mid cap or small cap oriented depending on the fund manager’s style and investment objective.

Figure 1: Best Equity Diversified Funds

2. ETF (Exchange Traded Funds): Exchange Traded Funds (ETFs) are funds that track stock market indexes. The main difference between ETFs and other types of index funds is that ETFs don't try to outperform their corresponding index, but simply replicate its performance. ETFs are highly valued for their low cost in terms of expense ratios. Since they don’t have managers actively buying and selling investments within the funds, the costs to run them are significantly lower.

Figure 2: Best Index Funds

3. Balanced funds: Balanced funds (also called Hybrid funds) provide investors with a single mutual fund that combines both growth (equity) and income (debt), by investing in both stocks and bonds. Such diversification ensures that the funds will manage downside of the stock market fluctuations without too much of a loss; the flip side is that balanced funds will usually give returns less than an all-equity fund during a bull market.

Figure 3: Balanced Fund

How to choose a fund for investing?

A good track record is no guarantee for future performance. You should also look at some quantitative measures to evaluate which fund is good for you.

Expense Ratio: Denotes the annual expenses of the funds, including the management fee, and administrative cost. Lower expense ratio is better

Sharpe Ratio: An indicator of whether an investment's return is due to smart investing decisions or a result of excess risk. Higher Sharpe Ratio is better

Alpha Ratio: Measures risk relative to the market or benchmark index. For investors, the more positive an alpha is, the better it is.

R-squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index. A mutual fund should have a balance in R-square and ideally it should not be more than 90 and less than 80.

You should do sufficient analysis before taking investment decisions. It should be guided by your overall financial situation, goals and risk profile. A Financial Plan is recommended before making investment decisions. SIP (Systematic Investment Plan) for a long time horizon is the most recommended way to invest in equity funds. You should avoid lump sum investment especially when the market is on a high.

Index Funds

Yogi — Mon, 25 Jan 2010 06:45:07 GMT

InvestmentYogi tells you why you should invest in Index Funds or Exchange Traded Funds (ETFs). How ETFs work and the advantages, disadvantages are discussed here.

While India’s business world is made up of thousands of entities like corporations, companies, partnership and sole proprietorship firms, cooperative societies and the one man outfits, only a few hundred are actually listed on the various stock exchanges of the country and of these only 50 large companies actually form the two major market indices, the Sensex (30) and the Nifty (50). These indices are important indicators of India’s economic and financial health. When these indices are soaring consistently, the economy is doing great and when, languishing in the red, these indices announce the dismal state of affairs in the country.

So when you believe in the success of an economy one of the most efficient ways of turning this belief into gains for you is investing in the index of this economy. Very simply, if the economy is going to do well, the stock market index will rise and hence you gain.

An index fund is exactly that. It is a fund that attempts to mirror a stock market index or a sectoral index as closely as possible by investing in the stocks that form that index in the very same proportion. So a nifty index fund would have the same 50 companies that make up Nifty in the same weightage.

The aim of an index fund is to replicate the performance of that market index. So if the markets are rising, then your investment will rise with almost the same percentage and if it is falling, you will get similar negative returns. Of course, investing in a stock index fund guarantees that you'll never outperform the overall market

The main advantage of investing in an index fund is the low Expense Ratio that is incurred in these funds as compared to other investments. Expense ratio is the annual fund management charge that is charged on a daily or weekly basis and varies between 1.7 to 2.3 per cent p.a. for actively managed funds. However, for Index Funds this expense ratio is usually as low as 1-1.5 per cent as there is little for a fund manager to do here other than replicate the index. There is no need for research, analysis or scouting for good bargains and hence the reduced expenses for the fund. Further there is little portfolio turnover resulting in lower trading costs. All this cost savings can be significant, especially for long-term investors.

There is absolute transparency as far as the holdings of the fund are concerned since the investor knows which stocks are being held and in what proportion. Another important advantage is the benefit of diversification through investing in different companies from different sectors of the economy which largely diffuses risk.

On the whole in strong bull markets, index funds investing or indexing as it is also called, as a strategy makes a lot of sense.

One can follow an indexing strategy either through investment in index mutual funds or index exchange traded funds (ETFs). The ETFs are collection or basket of stocks, that are bought and sold like individual stocks on the stock exchange. An index ETF would be a group of all the stocks that make up the index and in the same proportion. An ETF offers few additional advantages besides the above such as far greater trading flexibility since they are priced throughout the day and can be traded at any point unlike the index mutual funs which has only one value – NAV, during a single day. Further, ETFs are traded on the exchange and hence the opportunities for option and short-selling exist.

Whichever route one follows for index funds, there is a flip side to this. In growing markets like India, while index funds will give good returns, actively managed funds are likely to give better returns. Let’s understand this using Sensex as an example. When the economy on the whole is doing well, all the 30 stocks in the sensex will also grow but in different proportions. While an index fund can capitalise only on the general growth, an actively managed mutual fund will invest in larger proportions in those companies of these 30 which have a higher potential for growth and thereby increase the returns and therefore beat the market returns or index returns.

As seen over past several sharp bull markets in India and other economies, one can conclude that during sharp rises and strong bull markets, a well managed, consistent and diversified fund can beat index funds by a huge margin. However as markets mature and go through a stabilising period or a falling period; diversification, lower cost and maintenance give index funds an edge over individual stock picking.

The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.

Crystal Ball Jan’10

Yogi — Tue, 19 Jan 2010 05:42:11 GMT

2010 could be unpredictable, but here are our thoughts!

If we were to base our view on the study above ad the indicators prevailing in the economy globally and in India today the equity market could at the end of this year 2010 give returns similar to the year 2004 (refer the table above) and the rationale behind this is:

Firstly, fixed income markets are in a territory which could deliver 4-5% returns for better part of 2010 and the longer end of the curve could rise further. That means any hope of a fast revival of the real estate market could only remain a hope. Gold, we believe could take a breather in 2010 with very modest gains as compared with roaring performance seen in the last 3 years (unless the west cracks badly). Equities could therefore be amongst the better performing asset classes on the back of continuing cost prudency by corporates, ample liquidity despite tightening and improving consumer satisfaction and therefore base. But beyond 2010, there should be a tough fight between equities and fixed income.

Bazaar Buzz Jan’10

Yogi — Tue, 19 Jan 2010 05:22:42 GMT

2008 was a complete turmoil globally and 2009 a fight back towards stability and growth, with India and China leading the fight. On the last day of 2009, Indian indices once again proved why global investors can not afford to ignore India - Sensex stood at 17464, up 81% since the start of the year and Nifty at 5201, up 78%. On this positive note, at the end of an eventful decade, let’s see how assets have performed over this decade in the Indian context. For the purposes of this study, we have looked at four major asset classes that we can broadly invest in India: Equity, fixed income, gold and real estate. The objective of this study is to understand the linkages that exist and thereby be able to devise a cohesive asset allocation from a tactical and strategic view point.

The Beginning

It all began quietly in the early part of the decade as the doom cycle had just ended with the dot com bust taking equities with it. Key interest rates were higher and that was chocking credit for corporate demand for funds. While there was large inactivity in the stock markets, which had consequent impact on real estate market, bond markets was the only place which offered positive returns. The real trigger came in for bonds with a series of rate cuts (which were sustainable) and the consequent rally in bond prices. As a result the early part of this decade belonged clearly to bonds.

The Middle

2003-2007 can be called a golden period for stock markets which on the back of easy credit and foreign funds, rose to “never before seen” heights each successive year. This also propelled the real estate markets which followed stock performance during the later part of the period. So to put things in perspective, real estate followed equities which followed fixed income. Gold remained the joker of this pack doing nothing for the first half of this period.

The Finish

2008-2009, these years will remain the most talked about years – perhaps not immediately, but much later in our careers and lives when we would in most probability remember these years with awe after the next decade. We would hold intense discussions on what happened, what went wrong and how we all lived through it successfully. Much like those of us who lived through the 70’s crises and talk and reminisce about those times. However, we must remember that these periods of crises occur at least once in each person’s working life. That normally translates into one such happening in around 20-30 years by logic. That’s also precisely the reason why we look at gold within the asset for comparative purposes. Let us leave the discussion on gold a few paragraphs away.

Post Office Monthly Income Scheme (PO MIS)

Yogi — Thu, 07 Jan 2010 07:03:55 GMT

What you need to know about Post Office MIS? InvestmentYogi tells you all about it.

This scheme appeals to conservative investors with traditional values, and for good reason. This scheme offers monthly income and is a safe, guaranteed-by-the-government option. For retirees, widows and others looking for a steady income, it can be ideal. Read on to learn more.

The Post Office Monthly Income Scheme, or PO MIS, is offered by Indian Post Offices. A lump sum amount is deposited with the post office and monthly interest earned each month is paid out to you.

As the scheme is offered by post offices, it is backed by the government. Thus, the PO MIS is one of the safest investments available.

Interest

The rate of interest offered on PO MIS is 8% per annum (year). Interest is paid out every month but direct credit to your bank account remains a problem as Post Offices are not that technologically advanced in India, as such one needs to go and collect the monthly income from the PO directly. However if you have a savings account in the same post office then interest can be credited directly to your account. A 5% bonus is paid on maturity of the fund, therefore, the effective yield works out to 8.9% per year.

The interest earned is fully taxable. There is no tax deducted at source (TDS). The investment in PO MIS is exempt from wealth tax.

Who is eligible to invest?

Only individuals can invest in PO MIS. You can either open a single or joint account. A Non Resident Indian (NRI) or Hindu Undivided Family (HUF) cannot open a PO MIS account.

Investment Limit

There is an upper limit on investment in a PO MIS scheme. You cannot invest more than Rs. 4.5 Lakhs in a single account. If you invest jointly (2 / 3 names), the limit is Rs. 9 Lakhs. The minimum investment is Rs. 1,500.

Duration

The tenure of PO MIS is 6 years – your investment is locked in for this time period.

Number of Accounts

Any number of accounts can be opened, but the total investment cannot exceed the upper limit across all the accounts.

Nomination

You can specify the nominee at the time of opening the account, or at any time later.

Premature withdrawal, encashment, closure & Penalty

Premature withdrawal of the invested amount is allowed after 1 year of opening the account. If the account is closed between 1 and 3 years of opening, 2% of the deposited amount is deducted as penalty. If it is closed after 3 years of opening, 1% of the deposited amount is charged as penalty. The bonus amount is forfeited when you close the account early.

The author Ariadne Horstman is a Financial Planner at InvestmentYogi

12 Money Mantras for 2010

Yogi — Mon, 14 Dec 2009 13:25:53 GMT

As 2009 draws to a close we present to you some New Year Resolutions for 2010 which will go a long way in making you financially fit. All you need is will power and determination to follow these simple tips.

1. Articulate your goals

Make sure you have clear and concise financial goals put down. This would help you to shape out how your investments for the year ahead should be. Unless you know what you want and where you want to be, you will not be able to direct your investments into something useful. It is best to list small, attainable goals rather than go for a lifestyle change overnight. By giving yourself simple tasks that you can even complete in five minutes, once a day, you will make headway over the course of time.

2. Decide your Asset Allocation

A lot of people make investments in an ad hoc manner especially to save taxes in the last months of financial year. It results in portfolio which is heavily skewed towards debt and low-return instruments – FDs, PPF, endowment policies, NSCs, debt options in ULIPs. All these have fixed or low-returns, thereby making them unsuitable options if you are investing with a horizon of 15 -20 years or more. Young people should do an asset allocation based on their age, risk profile and time horizon and then start making investments. For a longer horizon the exposure to equity should be higher especially if you are in 20s.

3. Protect your Family

This is an area that is omitted from most peoples’ lists, but it should be a top priority - protect your loved ones. What happens in the event of a death or disability? Will the family be comfortable financially? Will the children be able to go college? Most people’s greatest financial asset isn’t their home or investment accounts; it is the ability to earn money. It is necessary to protect against this asset being prematurely taken away.

4. Create a Budget

Determine your income and expenses for each month by reviewing your bank statements, credit card bills and receipts for the last year. Record actual results regularly and update your plan quarterly. This will reveal where your money is being spent and provide information you need to manage it correctly. This will also help you to provide for big expenses which arise during some months like a festival or a short holiday.

5. Put your savings to work

Saving early for long-term expenses such as retirement or your kids’ college expenses allows you to capitalize on the most important investing force: Time. Start a systematic investment plan and make sure that your savings are routed in to long term investments. This way, you are forced to save because the cash is drawn directly from your bank before you can get your hands on it.

6. Be prepared for emergencies

Emergencies arise. Cars break down, ankles are sprained, and jobs are lost. It would be ideal to set aside three to six months of living expenses as a regular reserve. This fund will cover those inevitable, unexpected costs and keep you from borrowing money when they occur. Make sure you and your family has adequate health insurance so that you are not bogged down by a financial crunch during a sudden medical emergency.

7. Do not try to time the market

In the long run slow and steady wins the race. Try to be a regular and disciplined investor. Even the best of investors and stock market veterans have repeatedly failed to predict what’s going to happen next. The recent crash and then sudden surge in the market is an example to prove this. As retail investors this task becomes even more difficult. SIP and rupee cost averaging are great techniques to invest regularly and have a great return over longer horizon.

8. Contribute to your retirement plan

Look at your salary slip and see how much money you are contributing to the EPF (Employee Provident Fund). Make sure you maximize it and keep it going. Over 15-20 years the power of compounding will do its magic and it will grow into a decent corpus. PPF is another good option for investing extra money for retirement purpose. It offers tax benefits as well.

9. Keep Good Records

Lack of documents and records can hamper your tax filing process and you may not be able to claim all benefits. Maintain records of all important transactions in a systematic manner. You can use the age old system of maintaining documents in files or use the new age budgeting and other online software. Good record keeping also help you in collating and analysing how you spend and invest.

10. Pay your credit card dues

Pay all credit card balances in full each month. Leaving a balance on a credit card account will leave you susceptible to very high interest rates. Having balance on credit cards is the beginning of debt trap. Control your urges to spend and try to spend using debit card or cash so that credit card debt is avoided.

11. Find a good financial advisor

One fails to realize that the wrong financial advice, and thus the wrong financial advisor, could be costing you lots of money every year. Do you know how your advisor is compensated? How does that compare to other advisors? Do they have the expertise you need? Even if you prefer to do things yourself, the occasional check up from an advisor may provide you with some valuable tips.

12. Money isn’t everything

Remember health, family and happiness are as important so do not neglect these aspects. Another very important thing to realize is your investments in skill accumulation. If you keep enhancing skills related to work, you can probably get a better job, faster promotion and chance to earn more money. Take a deep breath and think about how you can move up the ladder. It may mean doing new certifications, improving soft skills and learning to manage human relationships better. This will probably be your biggest investment in the New Year.

Investment Planning for 2010

Yogi — Sun, 13 Dec 2009 17:36:09 GMT

We all like to make certain resolutions for the New Year and promise ourselves to follow them. It is time to take stock of your savings, investments and taxes for this year and see how you have fared. Keep the following Investment Planning tips handy for 2010.

1. Get yourself a Financial Plan: As an individual it is very important to have a financial plan which will guide you with investments as per your goals and needs. It serves a very important purpose of bringing discipline to your investing habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. The goal can be buying a car, house, going for a vacation, children’s education or building a retirement corpus. When you are young you tend to live for the moment and do things as they come but it’s very important to secure your financial future. It does not have to be at the cost of a good lifestyle.

2. Start SIP (Systematic Investment Plan): SIP is a proven instrument for long term investments for steady returns. Timing the market is rarely possible for anybody and you can end up spending a lot of your productive time and energy trying to do that. Even after doing that the chances of getting it right remains very low. Better alternative is to do SIP in some equity funds with a good track record of performance.

3. Make your PPF and other fixed income investments at the beginning of the financial year:

If you invest in the latter half of the year, you miss out on a good amount of interest income. Investing early in the year will tie-up your money which will also help you control certain discretionary expenses.

4. Create a budget and track your expenses:

A budget helps you break down your spending and compare on a month to month basis. Thus it helps you identify areas where expenditures can be cut and money diverted to meet your goals like buying a car or house. When you look at your budget and see anomalies, it becomes possible to take remedial action. Do not procrastinate on this

5. Invest in insurance policies:

You can get life cover, child education cover, health cover and save for retirement when you invest in the right insurance policies. Besides this, you get tax exemptions to reduce your current tax payout. This exercise should be done in the beginning of the financial year so that your tax planning can be taken care of. Remember that choosing the right insurance policy can be a tricky exercise and you might need to take assistance from a qualified financial planner.

6. Buy a house:

A house is one of the best investments you can make and it offers many advantages:

i. You save on the rent

ii. Your interest payments are tax deductible

iii. It usually appreciates in value

iv. In times of need it serves as great collateral

v. Peace of mind and many other intangible benefits

7. Determine your asset allocation and diversify:

This involves matching your investment vehicles with your investment goals. Your investment choices should always be based on your age, portfolio, personal situation and level for risk tolerance. Diversification is the key to minimizing risk. You should not put all your eggs in one basket. Real diversification means spreading your money across multiple asset categories including stocks, bonds, real estate and commodities etc.

8. Rupee cost averaging:

If you invest directly in stocks then rupee cost averaging is one technique you should look at adopting. It is similar to SIP for Mutual Funds. You fix certain amount of money for a stock and buy at regular intervals regardless of the price. In this way when the prices are low you get more units and vice versa. The key here is to select quality stock for the rupee cost averaging.

9. Don’t be obsessed with tracking your portfolio:

Stay invested for the long term and don't allow every downward market move to rattle you. It's far too easy to panic when you're watching daily, weekly or monthly results. Too many trading tips, recommendations etc only confuse you. Investment is like a test match and not a T20 match.

10. Don’t wait. Start Now!

One of the mistakes we do is waiting for the right time as well as a lump sum amount to start investing. Being slow and steady wins in this case. Start small but start now. All you need is self discipline to stay on course!

Crystal Ball Dec’09

Yogi — Wed, 09 Dec 2009 06:37:21 GMT

December is a crucial month with many important and landmark policy changes being tabled at the winter session of the Parliament, the insurance sector FDI related norms and the opening up of the pension sector key amongst these.Further more will be known about the extent of the Dubai debacle as the month unfolds and businesses open after the ID break,Otherwise with Christmas and New year, it should be a quite month on the business front.

Bazaar Buzz Dec’09

Yogi — Wed, 09 Dec 2009 06:35:19 GMT

Sensex is up more than 70% in this calendar year 2009 with just one more month to go. From a 3-year closing low of 8,160.40 on 9 March 2009, the Sensex is up more than 8000 points (100%) at the end of November 2009. A setback towards the end of the month did pull the markets in the red, as Dubai's debt problems sparked concerns about corporate exposure and the risk of foreign investors repatriating funds. Sensex fell below the psychological 17,000 mark and Nifty fell below the key 5000 mark.

Dubai's financial health came under scrutiny after a major government-owned investment company asked for a six-month delay on repaying its debts. Dubai World, which has total debts of $59 billion, is asking creditors if it can postpone its forthcoming payments until May next year. The company has been hit hard by the global credit crunch and recession. It was due to repay $3.5 billion of its debts next month. The request for a delay in repayments led to major credit ratings agencies downgrading a number of Dubai state backed companies.

From India’s point of view the effect now seems to be more localized to Indians mainly Keralites working in Dubai and businesses with direct links with Dubai. Whether this is all, and FIIs continue to view India as a safer haven amongst the emerging economies, we will know in next few months. But the going for the present seems buoyant with the good GDP numbers for now.

Mutual Fund Trading on NSE Platform now – What does it mean for you?

Yogi — Tue, 01 Dec 2009 12:23:14 GMT

From Nov 30^th 2009 investors have got the ability to transact in Mutual Funds through National Stock Exchange’s fully automated online system. You can place buy and sell order (or in other words subscription and redemption orders) online through your demat account as you currently do for stocks. But it doesn’t mean you can’t buy/sell offline. If you don’t have a demat account you can place orders in the physical mode through an AMFI certified broker by providing specific KYC documents.

For this purpose a fully automated online order collection system called National Exchange Automated Trading-Mutual Fund Service System (MFSS) has been provided to the participants (brokers). This pilot program has started with UTI as the first AMC (Fund house) and others are expected to join soon.

The unit prices will be based on daily NAVs. Moreover, trading in mutual fund units would come at a price to you as there will be charges by the broker (similar to the brokerage charged for stocks). There will also be some charged levied by the exchange and the NSDL. It partially dilutes the effect of removing entry load.

Advantages:

If you have a demat account then life just became easier to you. No more form filling and dealing with agents/distributors. You can build your dream portfolio right from your office cubicle. It will also help you track your portfolio just as you do for stocks.

Disadvantages

If you want to do SIP (Systematic Investment Planning) you will still need to do it offline as brokerages can’t handle that yet. It may become confusing for you to monitor the portfolio.

Implications

This change will have the following implications:

Rise of more and more companies giving you Mutual Fund research and tips
Your broker giving you frequent tips to buy and sell. This is because his income comes from transaction charges. The more you trade, more money he makes.
Growing nexus between brokers and the AMCs. The brokers might advise you to buy a particular fund irrespective of its suitability to you. Similarly you might see an AMC offering its fund only through a select few brokers.

Mutual Funds are the best instruments for long term investments into equity market. Do not start trading in them due to this development. Choose carefully and stay invested for long term preferably through SIP route. That’s how you will be able to reap the benefits.

Gold at record high! How should you invest?

Yogi — Fri, 27 Nov 2009 06:23:26 GMT

InvestmentYogi tells you everything about investing in Gold.

Gold breached Rs 18,000 per gram level on November 25^th. The reasons for this spurt in price are:

1. A weakening dollar

2. Buying by stockists for marriage season

3. Reports that the Central Banks may buy more gold from International Monetary Fund

4. Rising inflation and doubts about economic recovery

The current price level is unprecedented and it’s making many people realize the importance of diversifying your asset allocation and looking at Gold as an investment. Don’t get carried away by the rising prices as it may prove to be foolhardy.Let us see why you should invest in Gold for reasons other than capital appreciation:

Safety: In volatile and uncertain times (as seen recently due to recession) Gold provides a safe haven as there is no default risk. Gold has its own intrinsic value.
Brings diversification and stability to a portfolio: the forces acting on gold are different from those acting on other financial assets. Most of the time it is negatively correlated to stocks and bonds.
Highly liquid and portable: Gold can easily be converted to cash and vice versa, prices are internationally determined.
Tool against inflation: Irrespective of market cycles the purchasing power of Gold stays intact over a long period of time. It’s better to keep your cash in the form of gold.
Less regulatory intervention: you don’t have elaborate disclosure norms for gold as it is for many other asset classes. Gold can be a very private investment.

Investment Avenues:

Jewellery: It is one of the oldest forms of investment which also has some amount of pride and honour attached in Indian families. It is something you can use and enjoy but at the same time it keeps appreciating in value. But the price of jewellery is usually marked by anywhere between 20 to 200% depending on the complexity of design. This makes it unattractive as an investment.

Gold bars and coins: Gold coins and bars are increasingly becoming popular not only as investments but also as gifts. But they have to be physically stored which can be a security nightmare. You might have to incur extra cost in renting a bank locker or insuring your possession. Moreover you have to be careful about adulterated and fake ones. There can be a substantial difference between buy and sell rate of gold coins and bars.

Electronically traded Funds: More popularly known as ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding is denoted in units, which is listed on the stock exchange just like a share. It is expressed as NAV (Net Asset Value) which represents the price of one unit (equivalent to 1 gram gold) on that particular day.

These are many advantages of ETFs vis-à-vis physical gold when seen from an investment perspective:

No need to worry about the security and storage
No need to worry about quality of the gold
No need to worry about resale as the exchange provides comfortable liquidity (just like shares)
No making charges
You can invest very small amount of money (minimum 1 unit) which is not possible in case of jewellery and coins/bars.
No wealth tax. Long Term capital gains just after 1 year whereas it is 3 years in case of physical gold. ETF is a tax smart investment as well.

ETF options:

Gold ETFs are offered by Benchmark, Kotak, SBI, UTI , Quantum and Reliance. Among these, the ETF offered by Benchmark AMC (Gold Bees) is the most preferred among investors. It has the lowest expense ratio of 1% and can be bought and sold at the click of a button using your demat account. It’s listed on the National Stock Exchange (NSE).

Name	Expense Ratio	Price per unit	Inception Date
Benchmark (GoldBees)	1%	Approx 1 gram	Mar 08, 2007
UTI Gold ETF	2.5%	Approx 1 gram	Jan 03, 2007
Kotak	2.5%	Approx 1 gram	Jun 21, 2007
Reliance	1%	Approx 1 gram	Nov 01, 2007
SBI	2.5%	Approx 1 gram	Mar 30, 2009
Quantum	1.25%	Approx 0.5 gram	Feb 27, 2008

How to invest?

There is no SIP facility in any of these funds. If you want to build a credible portfolio of Gold then invest in a staggered manner, certain amount at every fall in price or at regular intervals. Timing the market is rarely possible.

Look at your investments as a portfolio and it should include gold among other asset classes like equity, Fixed Income, Debt, Real Estate etc. In this way your investments give good return during times of boom and protect you during recession. You should also look at holistic Financial Planning to achieve this task.

5 Money Mantras for the Young and Working

Yogi — Mon, 16 Nov 2009 12:58:24 GMT

In this day and age of 'quick' money, it is important for youngsters not to lose sight of a few basics in managing their money. Presented below are five must follow mantras. Take a print out, write them down, whatever; but do not lose sight of them.

1. Set Your Financial Goals: Be it planning for future studies, buying a car or a laptop or a pool table - identify it and put a monetary value to it. You can achieve your goals only if you systematically save for it.

2. Buy an Insurance Policy: For those youngsters who have dependants; insurance is a must. However, we generally undermine the importance because we are young. The sooner you get insured, the better. It will also work out cheaper because of the age factor.

3. Spend Lesser on Credit Cards: The plastic money is very convenient and most of us prefer this to actual money. And since it is convenient, we tend to over spend. Do make sure you read the fine print before using your C-card lest you be unpleasantly shocked to receive the bills. Do not forget the basic rule, 'Don't spend what you don't have'.

4. Think 'Future': It is never too early to start preparing for your future; plan for your retirement now, the sooner you start the better it is for you. You will be able to see the power of compounding, when you start investing small sums of money, but still see it grow gradually to the amount you set as target.

5. Invest Regularly: There are various options for investing your money. One of the most popular and rewarding options is to invest in mutual funds. There are a variety of options to choose from (equity, balanced, debt) and also a variety of fund houses. Also, most of the fund houses have fairly easy procedures for Systematic Investment Plans (SIP). Systematic Investment Planning is a simple process of investing the same amount of money every month over an extended period of time, regardless of whether the market is up or down.

Money Matters Mantras:

Set your goals
Do not spend what you do not have
Start saving for your goals- small but systematically
Postpone your expenses, not your investments

The author Lovaii Navlakhi is a Certified Financial Planner, Managing Director of International Money Matters Pvt. Ltd.