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We have been working on some tools and calculators for measuring your finances and here are some updates on the website:

• How long will it take to become a crorepati?
• Check out your Tax Liability
• Suggestions for controlling cost of your investments
• The fundamentals of Asset Allocation

We now have 4 more calculators on our website which calculates

• the amount of Insurance you need,
• the present value of your future returns,
• the effect of inflation and
• when you will be able to become a crorepati!

Check them out and let us have your feedback and suggestions

Investing means, making more money on your hard earned money towards increasing your wealth. An investment is anything you purchase for future income or benefit. In other words, anything not consumed today and saved for future use can be considered an investment. Income earned from your investments and any appreciation in the value of your investments increases your wealth. Before we take a look at the different financial products, it is important to know the basic principles of investing!

Investment refers to a placement of funds in some assets that will be held over some period of time with the expectation that the funds will grow. Each one of us has assets of some kind, ranging from physical assets to financial assets. For our purposes, investment will mean a measurable asset retained in order to increase one’s personal wealth.

The prime motive behind investing is that we want to improve our future welfare. Sources of funds may be from assets already owned, savings or foregone consumption or borrowed money. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors.

The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.

Three rules of investment:

* Invest early
* Invest regularly
* Invest for long term and not short term

* Invest Early : The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning.
* Invest Regularly : Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario.

* Invest for Long Term and Not Short Term : If you decide that your money can work for you over a long period of time, then better compounding works. Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the 10th year, Rs.507 in the 25th year, and Rs.1,609 in the 40th year — returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000.

The proper choice of investment instrument can actually make it almost simple to realize your goals. In other words, right choice of investment will improve your present life and let you look ahead to the future too. It allows you to understand how today’s financial decision affects other areas of your finances. For example, buying a particular investment product might help you pay off your housing loan faster or it helps to support your retirement significantly.

One must view each financial decision as part of a whole and also consider its short and long-term effects on your financial objectives. Surprisingly, many of us do not have any type of formalized investment plan in place.

Doesn’t Asset Allocation (AA) sound sophisticated? It assumes you have an asset to allocate and gives a boost to your ego. It’s a smart and sexy word for something as drab and dreary as planning your personal finances. Asset allocation also gives you a feeling that you are holding some aces up in your sleeves. It specially applies to the Financial Planners or Advisors.

But seriously, asset allocation is a useful concept to know. And it’s very simple too. Once you get your fundamentals clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.

Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.

Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100 - your age).But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.

And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:

What is your risk appetite? I mean if you are jittery with the slightest tremor in the stock market, you better be away from the stock market. Even though, stocks give the best returns on a longer run.

What are your financial goals? For example, if you believe in frugal approach to life and give a thumbs up to “Simple living, High thinking”, you don’t need to set very high goals with your money. In the other case, you may have to align the allocation to your goals.

When do you need the money? Is it for the car you want to buy in another 2-3 years? Or is it for the dream house 10 years from now? Ask yourself and then decide your asset allocation.

And if you love ready made formulas, here’s some allocation strategies from John Bogle:Older investor in distribution phase: 50% equity; 50% debtYoung investor in distribution phase: 60% equity; 40% debtOlder investor in accumulation phase: 70% equity; 30% debtYoung investor in accumulation phase: 80% equity; 20% debt

The accumulation phase means the period when you have no use for the money and are focussed on building it on. In the distribution phase, you are also using your assets for your goals.

All said and done, AA can contribute to your financial prosperity in a big way. Studies have pointed out that the asset allocation decision is more important than the process of choosing the actual stocks, funds and even market timing. In other words, if you just replace active picks with simple asset allocation decisions, it will work just as well as, if not even better than, professional fund managers.

Do your allocations now. 

This is the fourth in the series of Financial literacy series. Previous ones here: 1, 2, 3.

Age of an investor, family situation and health are important determinants of financial goals. Also financial goals and plans depend on the income, expenditures & cash flow requirements of an individual.

For the purpose of ideal financial planning, investors can be segmented according to certain stage in their life cycle

Stage I : Ages: 20 to 30 (Unmarried, Young Professionals)
Stage II : Ages 30-45 (Married, With or Without Kids)
Stage III : Ages 45-55 (Pre Retirement)
Stage IV : Ages >55 (Retirement)

Let’s start with the first stage: Life Cycle Stage I : Ages: 20 to 30 (Unmarried, Young Professionals)

• Continuing higher education or just started working
• May or may not own home
• May or may not have dependents

Financial Needs Are Immediate & Short Term

• May still have some support from parents
• May be saving towards future family needs - say buying home
• May be paying off education loans
• Likes to spend money

Ability to Invest :

• Limited due to higher spending

Choice Of Investments :

• Liquid plans & short term investments.
• Some exposure to equity and pension products,
• Term Insurance plan

The second stage comes in another post!

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Getting rich is in your hands, nobody else’s . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You’re Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I’ve not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I’m ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I’ve managed to stay clear though I’ve had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I’ve never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I’ll be partial to myself and give some score here too! I do save about 15% of my income though it’s a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They’ll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I’ve yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it’s an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it’ll tell you a lot about yourself. Look at it as a personality test!!

And yes, Taxquery wonders how any financial planning can be successful without tax planning. He’s dead right. Go to his wonderful blog for tons of info on Taxes

Gaurav’s post on the 30 things he wanted to do before he’s 30 was a brave one. I wondered at his bravery and wished him all the best only to land up in trouble myself He wants a way to build a Networth of 1 Crore before he’s 30 and now wants me to find it.
Gaurav’s target of becoming a crorepati is brave but also bordering on being foolhardy, I think. To top it, he wants to start with a seed capital of only Rs 2 lacs and a monthly infusion of Rs 20000! This way he will need to grow his money at an outstanding rate of 200% annually!!

Impossible. Or could be there some way? Legal, ofcourse.

Very recently I read a book, The Big Idea, which ends with the following Goethe’s couplet: Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.

Here in this blog I have been talking about Mutual Funds, Real estate, Bonds, ULIPs and ETFs. All of them do not pass muster when it comes to giving a return Gaurav wants. What about stocks? Yes, there are stocks that have given that kind of return in the past. But how to identify those stocks who would do the same in the next 30 months? Nobody knows those stocks. So is there still a way?

Now Gaurav says that he has avery high risk appetite. That should essentially mean that when he has invested in shares that he expects will zoom and those share prices drop 30% soon after he buys them, he will average his cost by buying more. Letus assume that he is willing to take the volatility for the desired growth and he is confident of his decisions.

Moving on that assumption, Stocks can give you that growth. But since we cannot identify the 5-6 stocks that will give a growth of 150-200% over a period of 30 months, we need to ride the waves on the stock market.

The first magic happened today morning when I looked at a blog/site that I had been avoiding (Because I understood little of that). It’s EagleEyeTrade by Rajeev Mundra.

Talking to Rajeev who runs a Technical Trading seminar too, I did some number crunching. Assuming a challenging but realistic goal of 10% growth every month, a starting amount of Rs 6,25,000 will become Rs 1.09 crore after 30 months. Vow!!!

Atleast, theoretically it’s possible. Ofcourse it will take a lot of guts (time & energy too). It depends on Gaurav’s risk appetite. And Rajeev’s expert guidance. If you ask me, the guys can do it. I wish them Good Luck.

For the first time I’m putting a disclaimer. Here it is: Ideas posted on the blog are educative in nature and must not in any way be construed as advice or recommendations. Investing/Trading in financial instruments is risky. This blog cannot be held liable in anyway for losses incurred.

I have been following the EagleEyeTrade blog and even though I don’t understand technical analysis, I find this blog very credible. I am delighted that Rajiv found time to answer some of my doubts/questions which have been reproduced below:

Technical analysis is the study of the trading history to attempt to predict future prices. What qualifications make you confident of doing that?

Do you have a detailed training kit for beginners. Tell us more about that.

What is Elliott wave analysis? What benefits it brings?

Critics of technical analysis include well known fundamental analysts. Warren Buffett has exclaimed, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” What do you say?

.
The time and energy required is very high. Dou you agree/disagree? Why

You provide the knowledge/information/calls. How much time do you expect your clients to put in?

As an asset class, Equity stocks offer the best returns. But so many of us have burnt our fingers in the process?

Unless you’re working full-time in the financial world, you don’t have the skills, tools, information, time or interest in playing the market. Comment.

What is the average monthly return an investor can expect from your trade calls?

I found the answers insightful and reassuring. What do you say? Check out EagleEyeTrade

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price: Warren Buffett

During the period from 1980 to 2003, the stock portfolio of Berkshire Hathaway beat the S&P 500 index in 20 out of 24 years. During that same period, Berkshire Hathaway’s average annual return from its stock portfolio outperformed the index by 12.24 percentage points. The efficient market theory predicts this is impossible, but the theory is clearly wrong in this case.

The genius of Warren Buffett lies in his simplicity. See this article in Fool.com

You can also have an insight into his mind by reading his letters he writes every year to his shareholders. Go to this wonderful investment advice minefield

But it is easy to intellectualize about his wisdom. Hard to follow them even though they look so simple. The trouble is that we consider investment to be rocket science. Which, it is not.