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Plan your wealth & retirement with Mutual Funds – WealthSamurai

Plan your wealth & retirement with Mutual Funds

 

 

mutual fund investments

A young techie sent me a message “I am 24 years old and I need help with my retirement planning . Can you help me out?”.

Amazing, isn’t it? Hardly around a decade ago it was impossible for people like us – early into the professional life to talk about retirement planning and personal finance. The scenario has changed completely. Now a days I see a lot of young professionals lined up seeking early retirement advice and discuss on the ways how they can accumulate wealth. Till a few years ago, these kind of questions were the subject of discussion for people in their late 40s and 50s

The reason behind this is the younger generation is much more aware about the surroundings. Youngsters are more worried about the retirement and investments. They indeed should be as

  • There is no provision of company funded pension schemes in private organizations and even in most of the Government organizations now.
  • It’s unlikely that the kids / family will help the current generation during their retirement times.  Hence they can not even think of relying on them during their golden years.
  • Due to advancement in medical facilities, people are living longer now. This means they have to provide for themselves for few more years.
  • The cost of living, including the healthcare costs are on the rise and one needs money to fund the living.

So how to get around and plan for a decent retirement for yourself? Rather I should frame this question as “How best mutual funds can be used to fund your retirement plan effectively?”

 

investment in mutual fund

A lot of historical data which is available at hand at many online portals / financial magazines indicates that the returns from a small amount invested religiously over many years in equity mutual funds have always beaten the inflation by a huge margin.

What does this mean? When you are investing for retirement you have to make sure that your earnings are not affected by inflation. Say for example, money in savings bank account as of today earns around 3% as interest per year. Retail inflation usually hovers at around 4%-6%. This effectively means that your money is eroding its value when you keep it in savings account.

When you are investing for a long term or a goal like retirement, you must ensure that you go full throttle to increase the gap between inflation and the returns you generate from your investments.

As per the historical data, over last 10 years

  • Large Cap mutual funds category has generated an average of around 14% returns per year
  • Diversified mutual funds category has generated  an average of  around 17% returns per year
  • Midcap / small cap mutual funds category has generated  an average of around 20% returns per year

So we do have some learning from the statistics above. To keep our earnings well above the inflation – we must tap the potential of Equity Mutual Funds. Right? It is extremely important to to earn well above inflation to save our money from eroding its value.

Now coming back to Mutual Funds, all one has to do is to select a mutual fund which fits in one’s risk taking appetite and set aside a sum every month to invest in it. Do it religiously for eternity – you will certainly hit the jackpot. If you are young, starting your career and love to take risks, pick a more aggressive small cap / mid cap combination. Choose the best funds in the category and you are done. Only catch is you have to invest in it month on month for many years. If you keep on investing and do not withdraw your earnings, you are set for your retirement corpus. One more things, invest a sizable amount. My suggestion is you must aim to invest 20%-30% of your take home income every month.

If you are conservative by nature, pick any top rated large cap equity mutual fund and hang on with it till you reach your retirement age.

 

benefits of mutual funds

Believe me, there are no shortcuts of becoming rich. One has to invest diligently over a long period of time and once you give exposure of time to your equity mutual funds investments none can stop you from acquiring a decent retirement corpus. You will be amazed to see the power of compounding.

One word of caution – do not get disturbed or distracted with short term fluctuation in markets. Every few years there will be sharp down turns which can be used to park more funds and earn better during the upcycles.

If you are young, ready to start – I am reachable at wealthsamurai at gmail.com to help you out.

More Reads:
Want to enter equity markets? Index based ETF funds are the safest bet
6 Sins people commit when computing retirement corpus

Happy Investing !!!

 

I am Too young to start with investments

I am Too young to start investing

“I have just started working last year. I am too young to invest.”
“I will invest once I have sufficient money. Right now my salary could barely survive by month end”
“Investments are for the later part of life. Let me enjoy now”
“I don’t want to invest my hard earned money now, I will do it later”

I get to hear above statements from a lot of youngsters who are fresh out of College, earning handsome income and are hell bent on spending all what they earn month on month.

too young to invest

Yes, but isn’t it true? Let me enjoy my earnings. I am a fresh pass out and I have a full 40 years of professional life ahead of me. I can take up investing later.

When you delay investments, you miss out on power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

Power of Compounding

 

I agree about the power of compounding. But I do not have spare money for investments. Many young professionals will not have any money left as the expenses are on the rise.

It is all about priorities. Since we know that most of the things in this world revolves around money, we have to give a certain level of priority to investments. “Pay yourself first” is the phrase widely used by financial planners across the globe. Instead of investing the money which is leftover after incurring all the expenses in a month, invest first and manage the expenses with the leftover money.

Once you make this a habit, you will become more responsible towards your finances.

And when you start young, you can amass wealth easily as you are giving time to your investments and supplementing your investment corpus by adding certain amount month on month.

I agree. But how to manage the expenses? Inflation is high and cost of living is rising rapidly month on month. If I invest my income then from where will I get money to pay utility bills and shop for groceries?

You don’t have to invest your entire monthly income. Take out say around 20% of your after tax income and invest every month. Manage your monthly expenses with the rest 80% of your  monthly income. Make use of the tools like Excel sheets for your benefit. Budget your expenses, cut down money leaks, increase your invest-able income and invest diligently.

Why you need insurance

Ok understood. Can you simplify this for me step by step?

There is no one sure shot formula for investments. But everything works on certain simple principles

  1. Start early – this will give you sufficient time to grow your money.
    Delaying investments? It can cost you DEARLY

  2. Budget your expenses.
    Making a simple budget to improve your personal finances
    A simple budget can save you from 5 big troubles

  3. Spend less than what you earn
  4. Invest your savings through proper diversification – consistently month on month
    Why I need diversification of investment?

  5. Cover yourself for any eventuality through health insurance and life insurance
    Why you need Insurance ?

  6. Have adequate emergency fund
    What is an emergency fund? And why you should have one?

  7. Don’t get into debt trap
    Consumer Debt & personal finance

  8. Don’t indulge in buying stuff
    Financial success : It’s not about the Stuff you gather

invest now
Bottom line is – it is your own money and you only have to take care of it.

Personal finance is not a rocket science but it requires your careful attention on money matters in your day to day life.

Happy Investing !!!

10 Money goals to accomplish before you turn 40

10 Things to accomplish with money before you turn 40

Money matters a lot in our life. Arguably money is the biggest facilitator in this world for a comfortable life.

midlife investments

When we touch the magical number of 40 years in our life, we can safely consider ourselves as quite mature. Mature in handling personal life, professional commitments and to a certain extent our finances.

Here is the list of 10 milestones or financial accomplishments we should aim to achieve by the time we touch 40. These milestones are also important as 40s are considered as peak performing years in one’s professional life.

  1. You should have a dedicated folio for your retirement savings with at least 10%-15% of your monthly net income going into it. If you are looking at 60 years as your retirement age then by the time you cross 40, you must have 10%-15% of net monthly income going into retirement corpus and that too with a raise in amount every year.
    This ensures that you are not stressed with your finances once you approach retirement age.
    6 Sins people commit when planning retirement

  2. Your investment folio should not have retirement as the only goal. By the time you cross 40, you should have identified financial goals in life and should have started goal based investing.
    A goal could be kids higher education, kids wedding, buying a vehicle 10 years down the line, upgrading your house from 2 bedroom to a 3 bedroom etc. A proper planning makes the execution easy.

    goal based investing

  3. Try and finish paying up your home loan / mortgage by the time you hit 40. At 40, you would already have completed a professional stint of about 15 years. 15 years are good enough to pay off the home loan and free up the property.
    If your home loan is still around, take immediate steps to pay it off ASAP as by doing this you can free up a lot of investable income which can be safely redirected to your retirement corpus.

  4. Clearly establish money and life goals for your later life. Plan your finances around your goals and make them happen. Life goals could be – at what age you wish to retire? Where would you like to settle? How do you look at post retirement life? How to tackle day to day finances when you are at the fag end of your life?
    It’s better to roughly identify such goals and start working on them. This will give you enough time to plan financially for these goals.

  5. Cover yourself adequately with life as well as health insurance.
    Note that more you delay, more premium you have to shell out. Do I need to say that the healthcare costs are skyrocketing. By the time you reach 40, you and your dependents must be adequately insured to tackle any emergency situation.
    Why you need insurance ?

    Why you need insurance

  6. You must try and have a side hustle by the time you touch 40. It can simply be a freelance consulting in the field of your expertise or it can be your hobby which you can monetize. The idea is to have some alternate source of income. This extra income can do wonders to your investment portfolio.

  7. By the time you hit 40, you should have the list of all investments made, all financial details of bank accounts, insurance, nominee details etc handy with you and with your spouse. You should also have regular discussions on investment and money matters with your spouse. This will keep both the spouse on the same page with respect to money.

    investment discussions with spouse

  8. By the time you hit 40, make it a habit to revisit your investments periodically. Not only revisit, but do readjust the investment from asset allocation perspective keeping in mind your life and financial goals. Also you may require to tweak your investments from the perspective of external factors like sudden change in government policies, global cues. Note that these external factors can quickly eat up your gains in your investments so make sure that you periodically revisit your investments.
    In addition to external factors, as you age, you have to tweak asset allocation too in order to align your folio with your life goals.
    Delaying investments can cost you dearly

  9. By the time you hit 40, you must learn the art of staying fit and follow a fitness regime. When you are young, you play a lot, you move a lot. Some of the young lads work out a lot. Once you cross 30, due to professional and personal commitments in life, the exposure to physical activity gets curtailed.  
    Ensure that you create a fitness regime and follow it religiously before you hit 40. Now how does fitness is related to finances? It’s an old saying – HEALTH is WEALTH. More fit you are, longer you can enjoy healthy life.
    Stay fit and be WEALTHY

  10. Last but not the least – Make a will and have a proper inheritance plan before you touch 40. Life is quite unpredictable. We don’t know the future and can not even predict what will happen tomorrow. However with a will and an inheritance plan of our financial assets we can streamline the things a lot for our dependents. By 40 you must finish this task so that you can be assured of a smooth transition of your financial assets in case of any eventuality.

    Preparing a will

Bottomline is that if you plan things well in advance, you won’t get surprises on the course. This is specially true with the financial planning. Since 40s are considered as peak performance years in your professional life, it is advisable to set few things right before you reach 40.

Happy Investing !!!

Why you must Start investing in Equity markets through mutual funds

Why you must Start investing in Equity markets through mutual funds

Most of us are scared of the equity markets. We have some or the other excuse NOT to start investments in equity. For some, it’s risky, for some it’s too technical. Some feel that it’s too complex to understand and they are not qualified enough to understand the nitty gritties of the market ups and downs.

 

mutual fund investments

 

If you have never invested in mutual funds, you are at the right place. This post briefs you on how and why you should invest in mutual funds for various financial goals and milestones in your life.

Search for higher returns on investments make people to look out for investments in equity markets. Investment in equity markets bring “high risk” to the table. Everyone can not be an equity expert to understand the technicalities of the market swings, when to enter the market or when to exit the market. The loss of the principal amount is the biggest threat which keeps most of the investors away from the equity markets.

An equity Mutual Fund is the best tool for common investors to enter into equity markets. It helps them to reduce the risk, earn higher returns and since they are professionally managed, they play fair game.

By definition, “A mutual fund collects money from individual investors and invests the money on their behalf in the stock market, bonds, government securities etc. and it charges a small fees to manage the investment.”

 

investment in mutual fund

 

I am listing down 5 compelling reasons on why one should invest in mutual funds.

 

  1. Equity Mutual funds give higher returns :
    Ultimately every investor aims for a higher return on his/her investments. Equity mutual funds have given much higher returns in the past if you compare it with the fixed income instruments like fixed deposits / recurring deposits / bonds etc. Mutual funds have controlled exposure to the equity markets which in turn gives higher returns to the investors. If you see the returns from equity mutual funds over the last 15 years, most of the funds have given returns around 14%-15% compounded annually. This is much higher than the inflation figures

  2. Mutual funds are professionally managed:
    Mutual funds are professionally managed by qualified and trained fund managers usually picked up from top schools.  Fund manager’s daily job is to study, track the stock markets and tweak the fund’s composition accordingly. Also all the mutual funds in India are governed by SEBI which is a government agency which is governed by the government.

  3. Mutual funds can make you a disciplined investor:
    Mutual funds have amazing concepts of Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal plan (SWP). Armed with these plans, you need not have to bother about logging into your account every month and buy fuds, or switch funds. You can set up SIP, STP or SWP and sit peacefully while mutual funds work with your investments

  4. Mutual funds have greater liquidity:
    Unlike some investments like PPF, Government Bonds, mutual funds have an excellent liquidity. Except ELSS – Equity Linked Saving Scheme mutual funds (which have a lock in for 3 years), equity linked mutual funds can be sold and redeemed within 3 working days. Liquid mutual funds can be sold and redeemed in 1 working day. Thus one does not have to worry about liquidity related concerned when he is investing in mutual funds.

  5. Equity mutual funds are highly customizable:
    Equity mutual funds comes in various shapes and sizes. There are diversified funds, thematic funds, sector funds, large cap funds, small cap funds, mid cap funds, index funds, tax saving funds, arbitrage funds and so on. You can chose funds as per your choice and investment horizon. Mutual funds are not rigid like Government bonds or PPF scheme where you do not have right to alter the composition. Also the switch facility from one mutual fund to other givers it more flexibility.

  6. Mutual funds provide you ease of investment:
    Mutual funds are so convenient. No need to stand in long queues to invest your money or no need to do loads of paperwork to park your money. A simple online account can work for you. Usually one can approach their bank to open an online trading account through which mutual funds can be bought and sold by merely clicking mouse.

 

benefits of mutual funds

 

Looking at the historical data, there is no denial that equity mutual funds gives you much better bang for your money. The returns are much higher than the traditional investment avenues. If you want to get rid of earn-save-spend cycle, you have to look for professionally managed schemes which gives you higher returns.

Look no further, make a good portfolio of mutual funds to get better returns and invest money for your future retirement and goal based investment needs.

 

Happy Investing !!!

2018 is here – Simplify your finances in 7 easy steps

2018 is here – Simplify your finances in 7 easy steps

New year 2018 is here. A new year is always a great time to start/restart your life for better. It’s a time to re-haul your life, review and take steps to remove negative components from your life and move towards positive.

One excellent component to re-haul is your financial life. Be it saving for your retirement, saving for marriage, saving for kids education or be it the repayment of debt which is hovering on your head.

 

2018 and finances

 

You can simplify your financial life in 7 easy steps this year. The only effort required from your end is commitment to put your financial life in order. So take charge of your life, use the new year as an opportunity to boost your finances.

  1. Take inventory of all your Debts:
    Be it home loan, credit card balance, vehicle loan, personal loan you took for vacations, loan against property or education loan. List them down in descending order of the interest rates. Once you have the list, start attacking the highest interest loan with extra payments regularly.

    This way you can save loads of money in terms of outgoing interest on these loans. Who doesn’t want to be debt free – so target the same for yourself.

    Consumer debt & personal finance

 

  • Close all the unused bank accounts and cut off your unnecessary subscriptions:
    List down all your bank accounts including ones which you had opened many years ago and you are not using it anymore. Keep one personal account and one business account – close rest all of them. Remember all bank accounts require certain minimum balance and you do not need many bank accounts. With payments going digital way, it’s better you close all your accounts except one.

    This will free up a lot of money for you which can be used for debt repayment or investment. Similarly review magazine subscriptions, newspapers subscriptions etc as in this digital age mostly all publications have online version and that too free.

    This will save you from money leaks and the saved money can be utilized in a better way for further investment.

    What are money leaks? How to find out your money leaks and plug them?

 

Money leak - how to fix it

 

  • Review your insurance needs:
    Be it life insurance, vehicle insurance, homeowners insurance or health insurance. Review all of them, compare premium for the similar sum assured with other service providers. Call them up and bargain for the premium amount – there is always a room for bargain. Look at your age, your other family member’s age and tweak sum assured based on the needs and finalize the most cost effective plan for yourself. Repeat the same exercise for your vehicles.

    You will be surprised to know the amount you can save by switching to different service providers / porting the policies to other service provider.

    Why you need insurance ?

 

 

  • Review and tweak your investments:
    Be it PPF, Mutual funds, Stocks, shares, Fixed deposits, recurring deposits, post office deposits or commodities. Review all of them in terms of gains since you invested in them and what current rates they are offering. You might want to close down some dead investments based on the returns or shift to more fruitful ones. Based on your requirements and goals, tweak the investments in order to gain better returns. It’s always good to do a thorough review of your investments once a year and rejig your portfolio.

    If you have not yet started investments, it is right time to start investing gradually towards your goals in life so that you have enough funds when you reach your life goals.

    Delaying investments can cost you dearly 
    Diversify your investments

 

diversification-of investment

 

  • Make a budget and stick to it for the entire year:
    Budget is one of the major step on the road to financial independence. If you master the art then you can be assured of sealing the money leaks in your month on month expenses. If you are making your budget for the first time, there are good chances that your spending is more than your income otherwise you would not be taking pains to make the budget. Don’t think it is complicated. Keep it simple to suit your needs and it can work wonders for your financial life.

    Once you have data for a few months – say three months you can see and analyze the expenses you have incurred under different heads. This will help you free up money for fruitful investments.

    How to make a simple budget 
    A simple budget can save you from 5 big troubles

 

 

  • Use tax exemptions to minimize your taxes:
    Government runs many schemes which can be utilized to minimize the tax impact by investing in them like RBI bonds, infrastructure bonds. Investment towards PF, PPF is also tax exempted so as investments in equity linked mutual funds and life & health insurance.

    If you are running a business many exemptions are there in terms of expenses incurred towards the business.

    File your returns efficiently, take appropriate steps to pay minimum tax using exemptions. This will help you with more money at hand which can be utilized to invest more efficiently.

 

tax exemption

  • Educate yourself:
    You may not be an expert on finances but basic investments through various vehicles is not a rocket science. A lot of literature is available online which helps you in taking informed decisions. Do not rely solely on the other so called financial experts from your neighbourhood and local banks to help you out with your investments.

    A little reading and self education can do wonders for you. So take out some time from your busy schedule and start reading about personal finance and investments.

 

One final suggestion is to keep a piggy bank at your home to save all the loose change you gather. This will also inculcate savings habit among the other members of your family, especially the kids.

At WS, we always stick to the policy that “your money is your money“. None other than you would be able to manage it better. Others, who claim they can manage better, have their conflict of interest since they would be doing it for their livelihood. When they earn commissions for suggesting you the investment avenues, they can never be honest with you.

Wish you a very Happy and Prosperous New Year 2018 !!!

 

6 Sins people commit when computing retirement corpus

6 Sins people commit when computing retirement corpus 

“I will think about investing for retirement when I am a few years away from it. Let me live life to the fullest till then. I want to enjoy my life” – said a bubbly young software engineer staying in the same township where we stay. He is fresh out of college and just started working for an Information technology major.

 

retirement planning


Most of the young Turks working with handsome salaries have the same thing to say. Financial experts say that one must start investing from month one of getting a job. This can save you from unnecessary stress at the fag end of your work life.

The biggest issue with the shortfall in retirement corpus is the delay in investing. Most of the people forget this. They consider the exercise of early investments in their career unnecessary and run short of money in their sunset years.

When you are running a marathon, you have to perform consistently throughout the run. You can not start after 30 minutes and then run faster to take place on the podium. This will end up in a big disaster. If you delay in starting the race, you will never be able to finish it on time. Same is applicable when we talk about creating retirement corpus.

I am going to discuss six issues which people miss out while planning their retirement corpus. These issues are applicable to most of us who are planning to accumulate a decent size retirement corpus. If these issues are tackled, they will help one immensely in planning a perfect retirement corpus.

  1. Not considering inflation:
    Inflation is an important factor while working on any goal based investment like retirement. To keep it simple – if my grocery budget was ‘X’ some 10 years ago, today it is ‘3X’ then I have to keep in mind that it could be ‘8X’ 10 years down the line.

    If you do not consider inflation while planning for retirement corpus, you will end up having less money accumulated when you hit the retirement age. This will result in you outliving your retirement corpus and will surely be a disaster.
    inflation
  2.  Underestimating the expenses in retired life:It’s a common perception that expenses will fall once you are retired. You do not have to maintain a formal wardrobe, commute expenses will not be there, you will be free from monthly payments / EMI etc.This may not be true. The medical expenses skyrocket and same is true for the travel and travel related expenses. And as your dependency increases on others, the expenses related to household help will also increase exponentially. So you must consider this while accumulating your retirement corpus.

    a good retirement plan
    Thumb rule for any retirement plan – Remember your money has to outlive you

  3.   Delay in investing for retirement:It’s a straight equation. If you do not start investing early, you will end up with inadequate money in your retirement corpus. Even if you accelerate your savings after realizing this at a later date, still you will not be able to generate adequate corpus. Late start will deprive you from the benefits of compounding.

    Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.Do not delay your investments

    The Magical power of
    compounding

  4.  Not riding equity markets for better gains:
    The thumb rule is that during initial years of professional life have a good exposure to the equity markets through Mutual funds, direct equities etc. But once you approach retirement age, bring down the equity exposure and park money in debt.

    Make sure to ride a good equity wave for around 25-30 years. This long period will give you excellent returns and will also spread out your risk with your investments the equity markets as the long duration will take care of ups and downs of the equity markets.equity markets - bulls and bears
    The Magical power of
    compounding
  5.  Not evaluating and taking advantage of TAXATION:
    Most of us fail to take tax advantages on investments. The money we lose in doing so can be substantial over a period of few years. This results in waste of money and one has to toil few more years to make up the losses.Few points to ponder
  • Income from fixed deposits is taxed as per your tax slab. 
  • Income from recurring deposits and any other fixed deposit scheme is taxed as per your tax slab.
  • Income from savings account is taxed as per your tax slab
  • Income from equity mutual funds when invested for more than 1 year is tax exempted
  • Income from equity / company shares over 12 months is tax free – long term capital gains are not taxedTake stock of the taxation before you invest money for your retirement corpus. You can save loads of money only by investing in proper instrument.

    taxation6. Reckless spending habits can wreck havoc in your retirement planning:
    One should stick to the safe withdrawal rate once the retirement kicks in. Drawing recklessly can drain the corpus much sooner. Remember Thumb rule for any retirement plan – Your money has to outlive you.The solution is to budget. Budget is one of the major steps in road to financial independence. If you master the art then you can be assured of sealing the money leaks in your month on month expenses. This way you can make your retirement corpus last longer.

    budget
    A simple guide to make budget

    To conclude, we at WS always believe that it is your life and your money. Only you have to plan it as none else would be interested in doing it for you without any personal interests. So take charge of your life, plan out things, work on a proper retirement plan and early financial independence so that you can spend your golden years in peace.

    HAPPY INVESTING !!!

A high income does not guarantee a RICH YOU

A high income does not guarantee a RICH YOU

Almost everyone among us aim for a higher income. We all work very hard towards achieving the fat pay package which we always dream of. For most of us, it’s a straight equation – more the income – more the bonus and we can be rich throughout our life and can retire rich in peace with loads of money.

high income

 

 

Unfortunately with respect to finances, the equation is not so straightforward and simple. Had it been so straightforward, guys with high salaries would have become filthy rich and all of them would be happy by now.

More money, more income is sadly not the answer to financial woes of human beings.

Don’t get me wrong!

Here I am not denying the importance of the high income for an individual. A high income gives you a head-start in planning personal finances for you. It also gives you distinct advantages in the process of building wealth.

Here are the 5 indicators which points that you can not be rich even with the high income

  1. You are trying to keep up with joneses : This one is a major pitfall. While uncontrolled spending can leave anyone broke, keeping up with joneses will never allow any high income household to become financially responsible. whether  we are working in corporate jobs or living in a tony neighborhood, there is a lot of peer pressure which compels us to own latest cars, expensive homes, latest gadgets, to party every weekend etc. Easy credit availability by the banks also fuels this mentality and the advertising ensures that you feel outcast if you do not buy the latest gadget or the fastest car.financial peer pressure

    Do you often succumb to Financial Peer Pressure?  

  2.  You think investments are to be done only when you are nearing retirement : Many individuals are highly qualified in their respective streams. They did well in studies, mastered the art of their trade and earn a lot. Many are doctors, engineers, designers – earning high incomes. But they seldom pay attention to investments just because of ignorance. Their incomes are high, their expenses are high. Their monthly income is usually equal to their expenses. Since their expenses are met month on month, they do not think of investments. Also they do not feel the need of taking consultancy on the investments.

    When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances. Unknowingly, one ignores an important fact that there is a REAL cost which is associated with the delay in investments. Most of us tend to get away with this as there are no immediate visible effects of these delays. Nor we proactively calculate the potential damage it can cause.

    If you keep delaying, you need more amount as investment at a later stage to achieve desired funds. The early you realize this, better it is for you. You must know how to use the magic of compounding to your advantage.
    delaying your investments

    Delaying investments can cost you DEARLY 
     

  3. You keep accumulating depreciating assets : When you have a high income, it’s easy to reach your financial goals of life and retire rich with sufficient money. Unfortunately most of us start pouring money towards depreciating assets. We tend to spend money on the asset class which loses its value quickly. We fail to identify these money drains and our money keeps losing its value over time. 

    By the time we realize this, it’s usually too late and a lot of money had already gone into the drain.

    Latest cars, high end furniture, multiple vehicles, latest gadgets, luxury brand accessories are some of the items that comes under this category.
    Car is not asset

    Your Car is not your ASSET ! 
    Financial success : It’s not about the Stuff you gather
     

  4.  Your fixed expenses are very high: If you compliment high income with less expenses, the leftover is the investable surplus. This investable surplus can be systematically invested to build wealth.

    If the income is high and so the expenses, you will not be left with investable surplus. The lack of investable surplus will never let you accumulate wealth. The major expense month on month is the fixed set of expenses. Expenses like home loan / mortgage payments, monthly payments towards car and any other vehicle, utility payments etc.

    A bigger house translates into a higher monthly payment for mortgage, higher utility bills, higher maintenance cost, higher home association charges. Same stands for cars. A bigger car translates into a bigger monthly payment, a bigger insurance premium, a bigger maintenance cost, a bigger wear and tear costs.

    One need to identify fixed monthly costs and try to keep them at minimum. Buy the right house you need, do not overspend. Same stands true for your vehicle. 

    Overspending - hurdle in personal financeOverspending – the biggest block in financial freedom
    What are money leaks? How to find out your money leaks and plug them?)
     

  5.  You do not budget and you think that you are managing money well : Poor spending habits, uncontrolled expenses can be a disaster to your finances. They can even put you in a really bad situation financially.

    But if you are not budgeting and not tracking your expenses, it can also cause a big disaster to your finances. It can not only put financial stress on your retired life, but also your day to day finances can get affected badly.

    Tracking expenses becomes more important when your income is high. In case of high expenses, it’s good to track expenses and find money leaks. If you do not track expenses and budget, you can easily blow up your monthly income and will never come to know where all your money went. This will not leave you with any investable surplus to build wealth and achieve financial independence.

    So, take charge of your money. Do not count budgeting and writing expenses as a burden. If you start budgeting and writing expenses, you can avoid many common issues and problems related to money which you are facing in your day to day life.

    Simple Budget
    A simple budget can save you from 5 big troubles

    Here is how to make a simple budget? 


    Always remember

 

 

  • Money alone doesn’t bring happiness but it sure can help
  • You only have to take care of your money and ensure that it grows – none else will do it unless they have their own personal interest attached to it
  • Money can not solve all your problems. Yes but it can help you sail through most of your problems

 

Happy Investing !!!

 

7 Financial mistakes you will certainly regret when you turn 50

7 Financial mistakes you will certainly regret when you turn 50

 

financial mistakes

For a common man, investment just happen. Every working professional becomes an investor for sure at some point during his / her career. It could be

  • By buying tons of insurance policies just because your father also bought when he was young
  • By becoming elite member of a famous get rich quick Ponzi MLM scheme – where only elite and selected few are invited to join. You join this because one of your highflying and partygoing neighbor has selected you to be a part of high flying life.
  • Opening some fixed deposits and some recurring deposits as one of the senior coworker is doing the same.
  • By buying some land miles away from town, purely going by the words of the land developer that the piece will be worth 100 time after x years

Here we see that investment choices are highly influenced by external factors. This external factor could be our family member, coworker, media – digital / print / TV, so called experts or relationship managers from our bank etc.

A common man, influenced by external factors take financial investment decisions. I am going to discuss a few of the financial mistakes made by common man which he will regret once he turns 50. This common man could be YOU – reading this post.

financial-mitakes-2

These mistakes you will certainly regret when you turn 50

Delaying investments

When it comes to decision making about finances and investments, most of us like to postpone it to some other day. This stands true not only for decision making about investments but also for evaluating existing finances.

If you think that you will invest once you have sufficient money at a later date – You are WRONG. Believe me, the later date will never come in your life. The more you delay, more you will lose on the benefits of compounding.

 

Delaying investments? It can cost you DEARLY
The magical power of compounding

 

Not taking any risk with investments

For most of us, investing means opening up a fixed deposit or buying an insurance policy from some relative or a friend. While investing we never check for the real rate of returns or the cost of investment we are making. This ignorance results in the earnings which are far below the inflation rate and highly taxed. Though we do investment, but it results in a loss for us as the net gains usually are less when you figure out inflation and taxes in the earnings.

It is indeed surprising that even young working professionals resort to insurance and term deposits as an investment. When you have age in your favor, you must look to invest into equity through various channels.

Investments in equity will fetch far better returns over a long period compared to the money invested in term deposits and insurance. You can not create a sizeable retirement corpus without the help of equity exposure.

You do not have to be an equity expert to invest in equities.

Want to enter equity markets? Index based ETF funds are the safest bet 
When you should start investing in stocks?

 

Not diversifying the investment

Diversification of investment is a common practice where your investments are spread across different asset class such that your exposure to any one asset class is limited. In other words you are not dependent on only one asset class to give you returns. This saves you from extreme swings in your net-worth in case of any financial turmoil in the economy.

When you do not diversify, you are unable to take advantage of the better performing asset class. Broadly speaking there are asset class like stock market, Government bonds, bank deposit schemes, commodities, real estate. At any given point of time , certain asset class will be giving better results than the other – based on the market economics. When you diversify, you need not to keep looking at your investments constantly and can sit and relax in peace.

Imagine during a bull run if you place your entire money in stock market and suddenly one day the market crashes and by the time it settles down you are down by 30%-40% on your principal. So no diversification is a big threat to your hard earned money too.

Why I need diversification of investment?

 

Falling prey to dubious / MLM investment schemes

We must accept that we are greedy and our investments are also greed driven sometimes.

We have seen in the past – many ponzi schemes come and go. They do not make anyone rich but most of the investors are left with no money when the scheme suddenly disappears.

Speak Asia, questnet and many such schemes are example where people have invested huge sums and lost their entire investment in no time.

There is no fool proof quick rich scheme which exists. If someone promises this to you, it’s a big trap. This is also true for get rich quick MLM schemes. When you invest, do some logical postmortem of your investment instrument. And always be skeptical about get rich quick and MLM schemes.

 

Mixing investment with insurance

Life Insurance covers your life and safeguard your dependents. Health insurance helps you in emergency situation where in you have to undergo some expensive medical procedure. So the term “insurance” assures you that in case of any unexpected emergency – insurance company will take care of you or your dependents.

The moment you try to mix insurance with investment – you are headed for something which is not right for your portfolio. Insurance linked investments can cost you heavy in the short term as well as long run. The thumb rule is not to mix insurance with investment but still millions of policies are bought every year – just for sake of investments or for sake of taking last minute tax benefits. These policies not only gives below par returns but also force you to have long term lock in. you can not get out of them as the exit costs are very high.

Also by investing in insurance linked investments you are locking your precious capital which can be used to generate much better returns.

Why you need Insurance ?

 

Not taking adequate insurance

Why you need insurance?

You never know what is going to happen in near/distant future. If someone is the only earning member of a family and due to health reasons, he is unable to work, or due to sudden demise of the sole earning member, family goes in no earning mode.

  1. Who will pay the EMIs of home loan, vehicle loan?
  2. How the monthly household expenses would be taken care of?
  3. How to pay kid’s school fee & tuition expenses?
  4. How to pay expensive nursing care? Hospital expenses are skyrocketing these days.

Do not assume that you need to buy insurance policy just because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Assess your requirements, do your research properly and make sure that you are adequately covered with insurance for Your life and your health.

 

money mistakes

 

 

Not having an emergency fund

In personal finance and money management, emergency fund is the first line of defense against the unexpected problems in life. Financial emergencies can happen anytime, and most of the time they occur without warning.

  1. What if your car needs immediate repair?
  2. What if you are out of job for a couple of months?
  3. What if you broke your leg while playing gully cricket?
  4. What if a sudden voltage surge damaged your TV/Fridge/AC and all devices?
  5. How you are going to tackle this?

One must have a sufficient emergency fund to tackle any emergency situation. This fund can be parked in any accessible liquid mutual fund which can give you good return and you can access it pretty quickly when the need arise.

What is an emergency fund? And why you should have one?

 

So instead of being sorry when you turn 50, TAKE CHARGE or your finances. Be active and start investments for your needs.

Happy Investing !!!

 

 

 

 

 

 

Want to enter equity markets? Index based ETF funds are the safest bet

Want to enter equity markets? Index funds are the safest bet

Most of us do not invest in equity markets because

  • We are afraid of stock markets as we do not know how they work
  • We think we do not have enough money for investments
  • We think that investment is something which is to be done when you are nearing retirement
  • We think we do not have basic education to invest money in stocks  

what are index funds

 

All have investments in mind but we love to delay it due to reasons best known to us. We all know that we have to accumulate enough retirement funds as we need regular income when there is no salary for us. Still we try to avoid investing money.

It has been historically proved that stock market gives the best returns on your investments. If one is looking to create a retirement corpus, stock market can not be ignored as the returns generated through them beat the inflation by a good margin.

If you do not know anything about equity markets, if you have never invested in equity markets / funds, still you have one option which is quite safe and which does not require you to be an equity market expert. It is INDEX based Exchange Traded Funds. Index funds have consistently outperformed markets and so called equity experts if you look at a longer duration. In fact one of the richest fellow in the world and a great investor Mr. Warren Buffet says “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. Index funds make the best retirement sense ‘practically all the time’

 

warren buffet on index funds

 

So what are index Funds?

By definition, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500), BSE or NIFTY. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover

 

So what makes index funds safe as an investment instrument in equity markets?

  • Index fund is a way to avoid the risk that comes with picking of individual stock: Index fund spreads out your investment into the stocks which are top performing on any equity index. This way you are not buying individual stock, but a set of stocks which are like top performers of any equity market.
  • It helps you to buy not “the top company” but it lets you buy all top companies at a very low cost.

 

Costs matter a lot in the investment scenario. Most of the equity diversified funds charge a fund management cost of 2.5%-3.5% per year. In comparison to this, index funds usually have fund management cost of 0.5%-1% per year. So when you invest in index funds, you are already ahead of any equity diversified fund by 2%-3% and anyone who knows a little bit of arithmetic can say that over a period of 20 years this can make a huge difference in investment corpus.

 

Then why ETFs are not recommended by investment advisors / financial planners?

When you talk to an investment advisor, his or her salary is linked to the income they generate for the fund houses. More the fund management charge, more their salary. So it’s obvious that they would recommend top ranked funds which has more fund management charge than the plain vanilla index based ETFs.

There are no free lunches so anyone unless he has a personal interest can not give you honest advice regarding your investments.

 

about index funds


So what is the recommendation regarding index based ETF?

As pointed out by investment mogul Warren Buffet

  • Start buying index based Exchange Traded Funds (ETF)
  • Buy them every month through Systematic plan
  • Stay invested in them for a very long duration
  • You can bank on index based ETFs for your retirement plan
  • When markets are battered or down – do not panic, keep investing regularly. This will help you average your cost of investment.

 

If you stick to the points mentioned above, you do not have to worry about your retirement corpus.

So with index based ETFs:

  • You are saved from headache of actively managing stock portfolio
  • ETFs give you exposure to the gains of stock market over a long period.
  • You can plan your long term corpus goals for retirement / kids education with ease through index based ETFs
  • You can keep the cost of your investments low through ETFs.

 

Happy Investing !!!

How to save and invest for your Kid’s higher education ?

How to save and invest for your Kid’s higher education?

It’s not a rocket science to calculate how the cost of education has increased in last one decade. Where some of us paid close to nothing for our schooling, we are paying through our nose for our kid’s schooling. I myself studied in a central government school and paid INR5 per month as fees for my entire 12 years of school education. And these days just to buy application form for school admission one has to shell out INR500-INR1500.

 

higher education

 

Now imagine the cost of higher education. The PGP class of the most prestigious B school in India – IIM – Ahmedabad will pay INR19.5 Lacs in 2018 for the two years course. And behold, this amount is 400% higher than what IIM-Ahmedabad charged for the same course in 2007.

 

Almost same is the story with all the undergraduate courses for engineering, sciences and all other subjects. If you extrapolate the fee for the next 10 years, the figures become scary. If you have not planned well for your kid’s education fund, you could get a rude shock. Remember, here we have only talked about the cost of education. I have not even touched the cost of lodging and boarding during the education period.

 

This sharp spike in the tuition fees in last decade or so is a wake up call for parents saving for the higher education of their kids. Through this post I am trying to cover the means by which parents can plan the savings and investments for their kid’’s higher education.

 

The strategy for investment will be different for

  • A new born
  • 5 yrs of age
  • 10 years old kid
  • 15 years old kid

 

Based on which group kid falls, you can choose the strategy for your kid’s higher education.

I am covering very simple means to build corpus fund for higher education. I am not using any complicated investment streams for this.

 

When planning for a newborn

The main benefit of planning at this stage is one get a target investment period as 15-17 years. This target period for investment is sufficient to ride on the equity wave to get high returns and plan for a good corpus without pinching pockets. One can try the below mix

  • Start Mutual fund SIP in 5 equity diversified equity funds (distribute MF investment amounts across 5 different funds). With this you can earn up to 12%-15% gains per annum
  • Don’t fall for ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • For a 17 year target, once you reach 15 years, start taking out money from equity mutual funds and start parking in short term debt funds through STP
  • Open a PPF account in your kid’s name and max out the account every year. This gives tax free returns on maturity.
  • Whatever cash gifts your child gets on birthday year after year, use it to fund PPF account. Also there is no harm in asking relatives to give cash on birthdays as opposed to gifts and feed the PPF account.
  • Make sure that you start moving equity investments through equity mutual funds to short term debt funds when target year is about 2 years away. This will safeguard your gains in case stock markets show fluctuations

 

When the kid is 5 years old

In this case, one has an investment horizon of 10-12 years. This is also a good time horizon for using equity as investment tool. The benefit of using equity is generating higher returns. If always gives good returns over a longer duration but returns could be volatile in short term. Below mix can be tried

  • Start mutual fund SIP in 3 diversified equity mutual funds. With this you can earn up to 12%-15% gains per annum
  • Start mutual fund SIP in 2 balanced mutual funds. They have up to 40% exposure in debt instruments so the chances of losing money is little less during turbulent markets
  • Open PPF account and max it out every year. This gives tax free returns on maturity.
  • Whatever cash gifts your child gets on birthday year after year, use it to fund PPF account. Also there is no harm in asking relatives to give cash on birthdays as opposed to gifts and feed the PPF account.
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • Make sure that you start moving equity investments through equity mutual funds to short term debt funds when target year is about 2 years away. This will safeguard your gains in case stock markets show fluctuations

 

When the kid is 10 years old

In this case, the target investment horizon is 7 years. Equity mutual funds to be used judiciously to generate good returns for close to 5 years and then entire equity investment has to be moved to debt in order to keep the gains safe.

Below mix can be tried

  • Start mutual fund SIP in 2 equity funds
  • Start mutual fund SIP in 2 balanced funds
  • Open RD account (if you are under 30% tax bracket – better to move to debt funds right away )
  • Open PPF account and max it out every year
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies

 

graduation - higher education

When the kid is 15 years old

In this case, you have only 2 years as investment horizon. You can not rely on equity so all equity mutual funds are ruled out. Your entire folio has to be debt oriented. You can try below mix

  • Invest heavily in short term debt / liquid mutual funds through SIP
  • Open RD accounts (if you are under 30% tax bracket – better to move to debt funds right away )
  • Don’t fall for any ULIP
  • Don’t fall for any child education or insurance plan from insurance companies
  • Liquidate all your investments in physical gold which are in the form of coins/bars and move the money into short term mutual funds.
  • For those who have invested in PPF when the child was just born, they can move the maturity amount in short term debt fund. For them it’s time to consolidate the investments and try to save the gains through moving all investments for kid’s higher education into debt instruments.

 

As a parent one has to take charge and start investing for kid’s higher education. Cost of education is rising and educational loans are an expensive bet. Though it’s good to encourage your kid to part fund his/her higher education through educational loan but since the cost of education is very high, a parent can also chip in some amount with the help of steps discussed above.

 

One final word:

If you start planning and investing when the child is just born or up to 2-3 years old, you have a good time horizon to ride the equity markets. A small amount per month for about 15 years can give you excellent returns without straining your finances. For example if you are targeting INR25 lacs over 15 years, you need to save only INR5000 per month in equity funds. If you delay investing for 6 years, your monthly investment figure becomes INR9200. If you wait for another 3 years, the monthly investment amount jumps to INR23800 and with this you may not be able to take benefit of equity market. So be active and start planning now.

 

Happy Investing !!!