Fin10 eBook

Fin10 from www.finqa.in | [email protected] |+91 96500 65242 All Rights Reserved

Welcome to Fin10

Congratulations on taking the first step towards become better financially literate.

First things first If you are reading this because you think it will help you become a Financial Planner / Advisor and provide you with the expertise to invest your money directly, then you might as well stop reading right now.

Here are some of the things that you will NOT learn from this course:

This course is not a Certification course and is not something that you should put on your resume (Though if you are looking for a career in the financial services industry, it can form as a good primer for the basics)

It will not teach you to become a professional Financial Planner

It will not teach you to become an expert Stock Market Investor overnight

It will not teach you any get rich quick schemes

Here is what you will get:

It will teach you to become financially aware and manage your money

It will teach you the basics of money including savings, expenses, inflation, asset classes, portfolio management, diversification, and investments

It will ensure that when you are talking to a professional advisor, you understand exactly what they are suggesting + What questions to ask them

It will ensure that when you are buying financial products (like insurance or mutual funds), you know how to select the right products


Why did we start Fin10? Fin10 is an initiative by Finqa, a fee based financial advisory firm, which helps individuals with planning their personal finances and investments for the long term.

While conducting workshops for our clients, we discovered that a lot of individuals were ignorant of the basics of personal finance. We realized that its because of the fact that managing money is something that is not taught either in schools or colleges.

Most of what we learn is from our parents, friends and family or via magazine / newspaper articles. In our haste to make money, most of us dont really think about how to make their existing money work harder.

Another reason is the rampant mis-selling of financial products, Insurance being one of them. The primary purpose of insurance is to provide for your family in the event of a mishap However, they are sold as investment products with the promise of a large return later in life. What most people dont realize is that the annualized return on them is just about 6-7% (which happens to be less than annual inflation) + the investment cover of Rs 5-10 lakhs is not sufficient after an accident.

A lot of folks also have their money saved in savings or Fixed Deposit accounts. After tax returns from both these are again way below inflation so your money is actually losing value instead of growing over a period of time.

So thats when we thought, why not have a book or guide instead of individually explaining the basics to everyone. We suggest you take out some time to go through the chapters and see if these make sense to you.

If you have any questions, please fee free to contact us at:

[email protected] +91 96500 65242 or visit our website at www.finqa.in

Cheers and all the best.

Ankur Kapur ,CFA ,CFP

[email protected]


Whats in this e-book? 100 lessons on a variety of topics as outlined below

Basics of Personal Finance

# 1: What do you want in life, financially?

# 2: What are some common financial mistakes?

# 3: What are some common financial myths?

# 4: How to make your personal finance budget?

# 5: What is your Net Worth?

# 6: How do you measure return?

# 7: The Eighth wonder of the world Compounding!

# 8: How does inflation impact your return?

# 9: Do you have an emergency fund?

# 10: How are financial products Mis-Sold?

Investment Types

# 11: What are the various forms of investment?

# 12: Types of investment vehicles: Public Provident Fund

# 13: Types of investment vehicles: National Savings Certificate (NSC)

# 14: Types of investment vehicles: Post Office Schemes and Deposits Post Office Monthly Income Scheme (POMIS)

# 15: Types of investment vehicles: Government Securities

# 16: Types of investment vehicles: Corporate and Infrastructure Bonds

# 17: Types of investment vehicles: Bank Deposits

# 18: Types of investment vehicles: Real Estate?

# 19: Types of investment vehicles: Equity?

# 20: Types of investment vehicles: Mutual Funds?

Investment Strategy

# 21: Asset allocation defines your return

# 22: Why should one have a diversified portfolio?

# 23: What is your risk profile?


# 24: Understanding your risk profile

# 25:What should my portfolio be like?

# 26:How to create a savings fund of Rs 12+ crores?

# 27:Benefit from the Power of Compounding!

Mutual Funds

# 28: Why should one invest in Mutual Funds?

# 29: What are the different types of Mutual Funds?

# 30: What are Equity Mutual Funds?

# 31: What are Debt Mutual Funds?

# 32: What are Hybrid Funds?

# 33: What are ETFs? International funds? Arbitrage funds?

# 34: How can I invest in Gold?

# 35: What is a Systematic Investment Plan (SIP)?

# 36: What should one keep in mind while choosing a good Mutual Fund?

# 37: How to make extra return on your portfolio?

# 38: How to invest your lump sum money into Equity market?

Equity / Stocks

# 39: Myths of Investing directly in the stock markets

# 40: What is a Demat account and how does it work?

# 41: Income and tax slab

Taxation

# 42: Understand various income heads

# 43: What is salary and what does salary include?

# 44: Types of tax benefits on Investment products

# 45: Taxation of Capital Gains

# 46: How can I do safe investment for a short span?

# 47: Set off and Carry forward of Losses

# 48: Should I select growth or dividend option in case of a mutual fund?


# 49: Tax Saving Infrastructure Bonds vs. Infrastructure Bonds

# 50: How can a NRI open a bank account in India?

# 51: NRI equity investments and taxation in India?

# 52: NRI Mutual Fund investments and taxation in India?

# 53: What are the Income Tax rules on sale of a house?

# 54: 7 incomes you shouldnt forget to declare

Insurance

# 55: Steps in insurance planning

# 56: What are the different types of insurance products?

# 57: What is bonus in case of a Life-insurance?

# 58: Types of Life Insurance Policies

# 59: Riders on a Life Insurance Policy

# 60: Types of Non-Life Insurance Products

# 61: How do you calculate your life insurance needs?

# 62: What type of Insurance do you need?

Planning

# 63: Retirement planning is not for the old

# 64: How to determine your retirement expenses? Part I

# 65: How to determine your retirement investments? Part II

# 66: What is the amount you should be saving now for your retirement?

# 67: What are the kinds of retirement products?

# 68: What are the various mandatory retirement saving products?

# 69: What is a NPS under voluntary retirement saving option?

# 70: What are pension plans offered by insurance companies?

# 71: What are pension plans offered by mutual funds?

# 72: If you are already retired, what are your options for creating pension during retirement?

# 73: So many retirement products but which one should I buy?

# 74: When and why to rebalance your portfolio?


# 75: How can Real estate help you during your retirement?

# 76: Alternative to pension plans?

# 77: 10 things to do before you Retire

# 78: What should I do with my Bonus?

# 79: Should I buy a flat or rent one?

# 80: Why you dont want to be Amitabh Bachchan?

# 81: How can you not become victim of mis-selling?

# 82: Do I need a professional to help me with my finances?

# 83: Can I take care of my financial matters my family and myself in the future?

# 84: Higher education is expensive, why not plan for it!

# 85: True returns for the Investors

# 86: 5 steps to the perfect financial plan

How to do stuff?

# 87: Which should you use Credit or Debit Cards?

# 88: 6 things you should NOT try and save money on

# 89: Should You Hire A Financial Planner Or Wealth Manager?

# 90: When and why to rebalance your Portfolio?

# 91: Why your credit score is very important ?

# 92: Which Loans should you pay off first?

# 93: The 3 starters to Managing Debt Effectively

# 94: How to avoid the cycle of Bad Debt?

# 95: Things you should know about PPF

# 96: From whom to buy mutual funds

# 97: How to Open Post Office Monthly Income Scheme

# 98: How to buy National Savings Certificate

# 99: Want to invest in bonds but dont know where to start?

# 100: How to buy life insurance?

Lets get started


# 1: What do you want in life, financially? Key Message: To be aware of why you are earning money and what you need to plan your finances for. Everybody wants to be rich and famous but very few of us have actually sat and thought about how rich do we really want to be and what will keep us secure in life. Something along the lines of what makes you happy think about it and the answer might surprise you.

Having money in your hand every month does not guarantee you the lifestyle you anticipate throughout your life. Circumstances and needs always keep changing. Todays sound financial situation does not necessarily foretell an equally rosy future. A loss of income, even temporary, can eat into your savings or lead to debt. An uninsured loss can wipe out your accumulated wealth. Insufficient savings can force a reduced lifestyle during retirement. Frequent or unplanned borrowings can leave negative money i.e., debts for future. Also, poor tax planning can result in paying higher taxes than what you are liable to pay. All this, combined with changes in your life cycle needs and/or external economic changes can make you and your future generations financially vulnerable.

You need to plan and manage your current income (the money you earn today) and your future income (money you can expect to earn in future) according to your needs. These needs are your goals, are your dreams. `

People who write their goals are much more likely to achieve them. Sit down by yourself or with loved ones and start to imagine your future. Consider what drives you in your life and how that has changed over time. While we cant tell you what you should want in life, the below list of questions should provide you a fair idea of how you should think about your future.

What milestones do you see in the future? Start a family, Send kids to college, Buy a new home, Retire, etc

If you could do anything, time and money aside, what would that be? Spend more time with your family, A second home, Start your own business


What would you like to add in your life? More time, More money, More social life, etc

What would you like to reduce in your life? Debt, Job stress, etc

Having a vision for the future and planning for that vision are as important as money in achieving a fulfilling life.

Envisioning your dreams and putting them down on paper is the first step in making them a reality. The next step is to prioritize the goals that are most important to you and to establish milestone for reaching them.

Reflect on your life, your dreams, and your goals. Unless you know what you want to achieve, you will never be able to reach where you want to be. Start planning financially for your dreams.

ACTION:

Make a list of your goals and an estimate of how much they cost today. Then, use this goal calculator ( http://finqa.in/investing-to-meet-your-goals-and-aspirations/ ) for calculating the future value of your goals.

This will give you an estimate of how much money will be required at various points in your life.

# 2: What are some common financial mistakes? Key Message: Before you start planning your finances it may be relevant to know what are some of the financial mistakes most people make. Money saved is money earned. Majority of young people have goals of how they can spend their salary and not save. Whether its a need to buy expensive phones/watches as a social status symbol, or buy expensive cars on long term EMIs or eating out regularly A section of these people who are living beyond their means are heading towards financial disaster. Here are some common financial mistakes.

1. Spending frivolously It may not seem like much at the time, but even small expenses when added up can lead to a big hole in your pocket. Upgrading cell phones, buying a bigger car and regular movie tickets all amount to a huge unnecessary expense. A first-day-first-show movie with popcorn for two costs Rs.1000 every Friday, effectively means an outflow of Rs. 4,000 a month. Usually the movie watching is followed by a dinner which costs Rs 2,000, an additional outflow of Rs 8,000 a month. Recreation is necessary too but going overboard can be controlled. Instead of going out all four weeks you can go once a month. Saving this additional amount every month can allow you Rs 1.08 lacs for something bigger over a year.

2. Mindless use of credit cards


Using credit card means spending borrowed money. Credit cards are a convenient way to borrow money, but they come with double-digit interest rates. If the payments on your credit card are not made on time, the money you will have to pay back will be much more than what you spent on your card and that too within months. People are most susceptible to fall for this mistake. Paying your credit card bills always in full and on time, will help you get the best of this handy tool.

3. Caring little for regular savings Contributing regularly to savings account, either for emergencies or for investment, is one of the best wealth building habits, often ignored by many. Notwithstanding the nominal returns on savings, building a healthy corpus by saving regularly is essential for sustenance and growth.

4. Investing based on half knowledge or imitation Wise investment decisions should be based on ones risk profile, needs and priorities, and financial goals. As these differ from individual to individual, investment strategies also should be different. Just because an investment strategy has worked for someone (even for best of friends), does not mean it would work for you. Investment decisions should be made only after thoroughly knowing your investment needs and matching them with the options available to you.

Here are a couple more which people make: Not having an emergency fund Not spending enough time budgeting and planning expenses Not having enough insurance (And not aware of how much their company provides ) Procrastinating (I will start investing tomorrow / when the market is low ) Not asking enough / the right questions when buying financial products Paying late fees and penalties Buying too many LIC moneyback policies Keeping surplus money in a savings bank account Keeping a large corpus of your net worth in Fixed Deposits Investing to save Tax (usually at the end of the year before filing taxes)

Action: Make a list of mistakes which you make and try and think why you have been making them.


# 3: What are some common financial myths? Key Message: How many myths have you fallen prey to? I have a lot of money (or very little money); I need not plan Whether you have a lot or little money, you cannot achieve your financial goals consistently without a plan. Planning for your finances not only helps you achieve your goals, it also helps you monitor and review your progress with your finances.

I am far too busy to spend my time on planning Anything new seems to be tedious at first. But it is worth investing some of your time on acquiring this skill as it would enable you to worry less about and enjoy more of your hard-earned money. You should ideally spend time planning finances or overseeing from time to time, as no one would understand your needs and goals better than you do.

If I earn enough now, I would have enough money during retirement The only way to retire rich is to plan and manage your finances well today, no matter how much or less you earn today. There are many cases of millionaires retiring paupers and of modest earners retiring rich. The difference lies in the way they manage their cash, cash flows, investment, debt and insurance.

Investing in mutual funds is risk-free and guarantees huge returns No investment is risk-free, it can be either high risk or low risk and the risk is generally proportional to the returns it offers. Mutual funds are managed by professional wealth managers or portfolio managers, whose main task is to create an investment portfolio by wisely balancing the risks and returns. Thus, the objective of the fund manager becomes to minimize risks and maximize returns for the investors. But the risks cannot be totally eliminated and the returns can never be promised.

Investing in stock markets is very risky and best avoided Stocks are categorized as high riskhigh returns investment channel. They have over the years proved to be one of the most profitable investments. Stocks have a significant role of growth to play in a diversified investment portfolio. But some look at stock investment as a get-rich-quick formula and invest blindly, without proper knowledge. Such people should certainly avoid stock market investments, at least until they gather some know-how about it.

It is okay to pay the minimum amount mentioned in my credit card statement every month Paying only the minimum amount means interest being charged on the balance amount, which you anyway must pay sooner or later, with much more interest later. The sooner you repay all


the money spent on credit card, the more beneficial the card will be for you. Paying only the minimum amount every month is one bad habit that many young people get themselves intoleading to mounting debts on them. It is best to avoid it. If you have got into this bad habit, the sooner you get out of it, the better it is for you and your finances.

Action: Think of some of the notions you have about money and your finances and list them below. We will help you with if its a fact or myth and how you need to act accordingly.

# 4: How to make your personal finance budget? Key Message: To find out where your money goes, and how much of a monthly deficit / surplus you have. Step 1: Identify your goals/dreams What are your financial goals? Are you planning to go on a vacation? Are you planning to buy a house/car? Do you have debts you need to pay off? Budgeting involves tough choices, but having a goal will make budgeting a little less painful.

Step 2: Unravel the mystery of where all your money goes. Do you check your bank account at the end of the month and wonder where all the money went? Before you can manage your money, you have to know how youre spending it. Use an excel file to track and categorize your expenses for one month. Get in the habit of recording your expenditures once a day.

Its useful to separate your expenses into three categories:

1. Fixed Needs Necessary expenses that stay the same from month to month, e.g., rent, phone bill.

2. Variable Needs Necessary expenses that may vary from month to month, e.g., petrol expense, food.

3. Discretionary Needs Nonessential expenses, e.g., movies, eating out. If you have a monthly savings goal (and you should!), include it as an expense. It is much easier to save money if youve planned for it in your budget. And its important, too: if you run into unforeseen expenses, youll want to be able to pay them without going into debt. And even if nothing goes wrong, having some savings will help you follow your dreams in the future.

Step 3: Identify your sources of income.

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Where does your money come from? List the sources of your income (e.g., work, rent, pension plan) and the amount that comes in from each source each month. It is always a preferred option to look at after tax income that will be available.

Step 4: Add it all up. When you compare your income and expenses, do you have a monthly surplus, or will you need to lower your standard of living.

If you already have a surplus in your budget, congratulations! You can invest in your future. On the other hand, if your expenses exceed your income, step 5 will help you make some adjustments.

Step 5: Make adjustments if needed. If youre over budget, you need a strategy for controlling costs. Balance your budget, starting with the discretionary expenses identified in step 2. When you added up your monthly expenses, did you notice any surprisingly large numbers? Did you spend Rs 5,000 at restaurants or on yet another new outfit? Did you spend more on electronics than food?

Begin with such discretionary expenses that you may be overindulging in. For each type of discretionary expenses, decide on a reasonable monthly limit that will help you balance your budget. Set a cap on your discretionary expenses expenses and see if youve balanced your budget.



If you cant trim enough from your discretionary expenses in order to balance your budget, you will need to reduce your variable needs expenditures in the short term and perhaps your fixed needs expenditures in the long term. This may mean taking the bus instead of driving and finding less expensive house to rent next year.

Action: Use our Savings Calculator (http://finqa.in/savings-calculator/) to identify your income and expenses and determine your surplus / deficit. Create a budget accordingly if required. You should be saving at least 10 20% of your income for growth investments

# 5: What is your Net Worth? Key Message: Learn how to calculate your net worth. No matter how much (or less) you know about investments, stock markets, credit cards and insurance, if you do not know your money well, you are most likely to fail with in planning financially. The first and perhaps the most important step in financial planning is to know your money i.e., your financial position well and then be able to manage it wisely.

What makes up your financial position or Net Worth?

Your income and expenses: What you earn and how much you spend determines how much money you have on hand after meeting your needs (and some wants). This balance is an important indicator of your financial position. It can be used as a guideline to plan your finances. A healthy positive balance every month indicates a trend towards a good financial position and a zero or negative balance most of the months corresponds to a weak financial trend (especially if you are not building assets on the way). A healthy positive balance from your income will allow you to build funds for meeting your financial goals. Below mentioned is a sample of what you need to have:

Sample outcome of cash flow analysis

Incomes

Net Salary Income (Salary) Rs. 13,20,000 p.a.

Partners Net Salary Income (Salary) Rs. 10,20,000 p.a.

Total Income: Rs. 23,40,000 p.a.




Expenses

Living Expenses Rs. 9,00,000 p.a.

Total Expenses: Rs. 9,00,000 p.a.

Committed Savings

Regular Savings (MF SIP)

into Mutual Fund Savings/SIP (Mutual funds) Rs. 1,20,000 p.a.

Total Committed Savings: Rs. 1,20,000 p.a.

Repayments

Regular Repayment (Home loan)

into Housing Loan Rs. 7,80,000 p.a.

Regular Repayment

into Car Loan Rs. 84,000 p.a.

Total Repayments: Rs. 8,64,000 p.a.

Total Income: Rs. 23,40,000 p.a.

Total Expenses: Rs. 18,84,000 p.a.

Net Cash Flow: Rs. 4,56,000 p.a.

Your assets and liabilities: The amount of assetsitems of valueyou hold, is a precise indicator of your current and future financial position. Assets tend to add to your income (either now or in future) e.g., investmentsin gold/silver, deposits, stocks, mutual funds, art/antique, land etc. Or they help reduce expenses, as in case of owning a houseit saves you taxes and rent. Thus, assets help to strengthen your financial position. On the other hand, liabilities weaken your financial position. Debtsomething that you owe is a liability. And so is an old vehicle that needs a lot of fuel and repairs, for the work it is doing.

More assets and lesser liabilities would help you better your financial position and strengthen your money.



Sample Statement of Position or Net Worth

Investments Current Valuation

Cash in Hand (Bank balance) Rs. 3,00,000

Fixed Deposit (Bank FD) Rs. 9,00,000

Mutual Fund Savings/SIP (Mutual funds) Rs. 5,00,000

Public Provident Fund (PPF) Rs. 10,00,000

Employee Provident Scheme (EPF) Rs. 15,00,000

Partners Employee Provident Scheme (EPF) Rs. 8,75,000

Total Investments: Rs. 50,75,000

Other Assets Current Valuation

Residential Property Rs. 1,00,00,000

Car / Two Wheeler Rs. 4,50,000

Total Other Assets: Rs. 1,04,50,000

Liabilities Current Valuation

Credit Card (Citi) Rs. 45,000

Housing Loan Rs. 65,00,000

Car Loan Rs. 3,45,000

Total Liabilities: Rs. 68,90,000

Total Assets: Rs. 1,55,25,000

Net Worth: Rs. 86,35,000

Just like any disease is best treated when detected in an early stage, similarly with regard to your financial health recognizing early signs can help you take right steps and prevent great disasters for yourself.


Action: Calculate your Net Worth via our Net Worth Calculator ( http://finqa.in/networth-calculator/) Focus on having a larger Net Worth than a liquid bank balance (Its not funny how many Indians are obsessed with having a large bank balance which does pretty much nothing for their money.

# 6: How do you measure return? Key Message: There are various ways you can calculate investment return. Today you will learn broad classes of how you can evaluate performance of your investment. Return on investment is a basic computation made to assess how an investment is performing. Return can be measured in three ways:

1.) Absolute Returns Comparing the amount of inflows and outflows on an investment in absolute terms. In mathematical terms an absolute return can be calculated as:

Absolute return = (Ending value Beginning value) Beginning value X 100

2.) Annualized Return Computing an annualized rate of return by comparing inflows and outflows.

Annualized return = (Ending value Beginning value) Beginning value X 100 X (1/Holding period of the investment)

Annualized return can also be calculated in the form of Compounded Annual Growth Rate (CAGR). We will develop detailed understanding of CAGR in tomorrows lesson.

3.) Total Return Total Return is the return computed by comparing all forms of return earned on the investment. For example, dividend payment, interest payment, bonus payment. Thus total return is the annualized return after including all benefits on the investment.

Total return = (Ending value Beginning value + additional benefits) Beginning value X 100 X (1/Holding period of the investment)



Comparing the above 3 types of returns and why they make a difference. Lets say you invested Rs 1 lac and it became Rs 1,16,664 lacs (8% p.a.) in 2 years. We will use this example to calculate returns as per the above mentioned methods.

I. Absolute return = (Ending value Beginning value) Beginning value X 100

= (116664 100000) 100000 X 100

= 16.6 % II. Annualized return = (Ending value Beginning value) Beginning value X 100 X (1/Holding period of the investment)

= (116664 100000) 100000 X 100 X (1/2)

= 8.3% p.a. III. Total return = (Ending value Beginning value + additional benefits) Beginning value X 100 X (1/Holding period of the investment)

Lets say a dividend was also paid in second year, Rs 5000.

= (116664 100000 + 5000) 100000 X 100 X (1/2)

= 10.8% p.a. The rate of return that you should ideally be looking at during investments is the Annualised rate of return and your aim at the minimum should be to beat inflation. E.g. in the scenario above, if the inflation was 7% in the last 2 years, then your net increase in value of money was actually 1.3%. However, if you consider it with Absolute or total returns, then the figures can appear higher than they really are.

This is also a tactic most insurance agents use to fool people Their pitch will usually go like Invest Rs 500,000 this year and at the end of 15 years, you will get Rs 13 lakhs a return of 157% Most people will think in absolute terms while the real annualised returns may be much lower.

Action: Whenever you are buying a financial product, ask the seller for the expected annualised rates of return instead of the absolute returns. Use our Real Rate of Return (http://finqa.in/real-rate-return-investment/) calculator to calculate the actual rate of return on your existing investments



# 7: The Eighth wonder of the world The power of Compounding ! Key message: The incredible power of Compounding. Compound interest is the eighth wonder of the world. He who understands it, earns it he who doesnt pays it. Albert Einstein As time progresses some things just get better..Red wine gets an enhanced taste while aged cheese is so much tastier. Women tend to look more beautiful and generally men tend to get wittier.

Dont you agree?

Now whats with Money?? It grows.. grows with time

And why?? Because it gets compounded.

So what exactly is compound interest ? Its earning interest for interest already earned. In other words, your interest on savings also earns interest. Suppose you deposit some money in your account today, there will be an increase in the value of it after a year. And, thats because it has earned interest.

The journey to wealth can begin with even keeping aside the smallest amount each day.

Dont believe?? The picture below says a thousand words.


Rs. 15000/- invested per month for 20 years will turn into more than Rs 1.13 crores. On the contrary, if you left it in a savings account, it would be worth something in the region of Rs 36 lakhs.

And the best part about enjoying the power of compounding is:

You dont have to be rich to see its benefit; but you can become rich in the process You can start from today; so why not start now? The more time you give it, the fatter balance you can enjoy with, later.

Compounded annual growth rate (CAGR) can be calculated by using the following formula:

= ((Ending value/Beginning value) ^ (1/holding period of investment) 1) X 100

Lets say Rs 1 lac became Rs 1,16,664 lacs (8% p.a.) in 2 years. CAGR would be:

= (1,16,664/100000)^(1/2)-1 X 100

= 8% p.a.

CAGR is the most powerful tool to assess performance of your investments. Now an LIC or bank agent cannot fool you by saying if you invest Rs 5 lacs today, after 15 years you will get ~13 lacs, a return of 157%. Because you would know that CAGR for this investment would be mere 6.5% p.a. which does not even meet inflation rate. This sort of investment will end up destroying your wealth rather than generating any positive returns for you.




However, its not as easy as it sounds else everyone would have been a millionaire by the time they retired. The good news is that with a bit of planning, you can reap the benefit of compounding. As a first step, you will need to plan your expenses in such a way that you save 20% of your income every year. Secondly, your savings need to be invested in such a way that they provide you with consistent return.

Action Item: Review your existing investments and see if they are utilizing the power of compounding.

# 8: How does inflation impact your return? Key message: What is inflation and how it impacts your savings and earnings. Everyone knows that inflation eats into savings and increases costs, but do you know by how much?

Inflation is a rise in general levels of price of everyday goods, over a period of time. If your household expenses were Rs 20,000 in 2003, you have to spend double the amount now!!

Year Inflation Expense

2003

20,000

2004 3.78% 20,756

2005 5.57% 21,912

2006 6.53% 23,343

2007 5.51% 24,629

2008 9.70% 27,018

2009 14.97% 31,063

2010 9.47% 34,004

2011 6.49% 36,211

2012 11.17% 40,256


2013 9.13% 43,932

Due to inflation, a steady income alone is not enough to help you reach your financial goals. For example, the current cost of a college admission may be Rs. two lakhs. But after 5 years, the cost would typically be higher. While saving for a goal, therefore, it is important to estimate the future value of the goal because that is the amount that has to be accumulated.

The future value of a goal = Current Value x (1+ Rate of Inflation) ^ (Years to Goal)

If the rate at which the cost increases is taken at 10% then the cost of the college admission after 5 years would be: Rs.200000 x (1+10%) ^ 5= Rs.3,22,102. This is the value of the goal which needs to be achieved by saving and investment.

So now you know that your focus on saving and keeping your money in your savings account or a fixed deposit is not sufficient to meet your goal. This is the reason provident contribution and gratuity will not take care of your retirement needs. You typically have to keep your savings in a diversified pool of assets that will help you provide income and growth.

Action Consider the following strategies for inflation-proofing your portfolio: Start investing as soon as you can to take advantage of the power of compounding. Seriously consider investments with a track record of beating inflation. Talk to your financial advisor about an investment plan tailored to your personal needs.

# 9: Do you have an emergency fund? Key message: Do you have sufficient funds to meet your financial needs if you were to leave your job? Know how much to save for your contingency purposes. Imagine you won a bumper prize for an all paid expense trip with family to a place of your choice. Or Imagine seeing an email from your dream company selecting you for a job & offering a salary 7 times your current one. Imagine you wake up to find yourself a whole lot richer after hitting a jackpot of Rs. 50 crores.


So all smiles and all glory, who said money cant buy happiness?

Now, imagine if you were to lose your job all of a sudden tomorrow or you the financial backbone of the family met with a fatal accident. Just as much as you would like to dream of all the good things you also need to plan for unforeseen circumstances.

So, amidst brouhaha over inflation, job insecurity, unexpected emergencies and no hikes in salary there is nothing that can guarantee you the event reversal but yes definitely something that can help you traverse these moments more confidently setting an emergency fund. Just as the name implies, emergency fund is the amount of money that you save solely to help you sail smoothly during emergencies. An emergency fund forms the core of a smart financial strategy. At the time of despair the last thing that you would want to worry about is regarding how to arrange for the money. It is then that you can rely on the money that you have kept aside every month.

A better way to maintain this would be to keep separate accounts for smaller emergencies (like unexpected expense on car repairs or any home repairs) and for greater emergencies (like losing a job or any natural disaster). An emergency fund must be kept liquid i.e. you must be able to actually convert it to cash in your hand so that you can access it immediately.

Though there is no fixed value as in how much one should set apart as emergency fund, it is generally believed that you should have enough to sustain yourself for at least 3-6 months in your current lifestyle.

And just because an emergency is truly an emergency that comes uninvited or without notice; sooner you start out better for you.

The Emergency fund is to be used only for absolute emergencies and not for vacationing or indulging into your desires.

# 10: How are financial products Mis-sold ? Key Message: We will cover broad areas how various financial products are mis-sold.

The way a bank or insurance company sells in India is much like a trap with companies, regulators, agents and staff colluding to defraud you of the hard earned money. The process is usually as follows: you have a bank that you have banked for years. As soon as there is any


credit (salary, bonus etc.) in your account, the trigger is generated and sent to your account relationship manager. As soon as a trigger is sent to your Relationship Manager, he would call you to fix an appointment. This manager pitches a product to you. The pitch is verbal. The merits of buying this product are explained with great enthusiasm. However, the same merits will not appear in the product brochure. The excuse will be that the brochure is not updated. Words like guaranteed, surety, historical returns and mutual fund with free insurance are commonly used. Next day your RM will follow up again and probably even pressurize to decide quickly. You will get convinced because after all you are dealing with your own bank. You would have bought something for which you either have no knowledge or half-baked knowledge.

One of the two things will happen after few months. Either you will find out that the product you bought is not the one that was described to you. Or you wait for few years to see that market is performing well but the product has not delivered any return. When you approach your bank with your concerns, you will find a different manager who would be your new relationship manager. He will either say talk to the relevant department or you should return back the policy and invest in a better scheme with the same company. You will land up sending emails to 100 different departments or get sold for the new product with new features.

These scams are very common irrespective whether you are dealing with a government agency or a private company. All these relationship managers are sales agents and do not have any knowledge of the product. They are assigned targets and they are simply chasing those targets. Neither do they have any understanding of your financial objectives nor do they care.

A rampant practice among banks is to cross-sell insurance and mutual funds of their respective insurance and asset management companies to customers who approach them for a loan. Customers taking a home loan are sold mortgage redemption insurance or term insurance policies of their insurance subsidiaries. Similarly, when a customer wants to get a locker in a bank branch, he is made to invest in a fixed deposit. Bank personnel selling mutual funds or insurance plans are usually not even certified by AMFI and IRDA to sell the respective products.

How can you avoid becoming a victim of mis-selling?

You must have your own basic understanding of the financial product. You must understand how the financial product helps you achieve your financial objective. Do not accept facts as suggested by the agent, investigate. Any time is a good time to start investments so take your time to perform due-diligence. Please read offer document before signing it. Make sure the agent is registered with relevant regulator, ask for licence details. Ideally deal with a fee-based SEBI registered investment advisor.


# 11: What are the various forms of investment? Key Message: Know the difference between an investment product and Asset Class. You must have come across various occasions when a sales agent would push for a financial product. There would be numerous benefits quoted by the sales agent regarding the product. But what this agent forgets is the basic aspect of any investment instrument. The returns of any financial product depends upon its underlying. For example, a public provident fund (PPF) is a debt instrument and is directly dependent on the interest rate in the economy. The underlying remains the same for a fixed deposit, government security or a corporate bond. Therefore, the return of any financial product depends upon the underlying and not on the claim made by an agent.

Every investment option can be described in terms of its risk and return characteristics. Traditionally the asset classes were broadly equity and bond. However, as investment options have extended beyond capital market products, these basic categories have also expanded to include commodities, real estate and currency. The risk and return features of each asset class are distinctive. Therefore, the performance for each asset class may vary from time to time. Following is the list of generally used asset classes and their risk-return attributes:

Debt Debt instrument provide fixed return in the form of coupon/ interest income. Debt instrument have the scope for capital appreciation when interest rates fall, but may

be subject to interest rate risk when interest rates rise. Risk and return characteristics of Debt instrument are relatively lower than equity and

hence, suitable for an investor seeking regular income flows with minimal risk. There are variety of assets that are categorized as debt. For example, public provident fund

(PPF), National Savings Certificate (NSC), Provident Fund, fixed deposit, corporate bonds, government bonds and treasury bills.

Equity A stock represents ownership in a company. Empirical study suggests that this asset class provides higher returns if invested for long

run. Volatility is higher in this asset class than cash and bonds as an asset class. Equity can be broadly classified as large cap, mid cap and small cap. We will build our deep

understanding in the later lessons on equity classification. Remember, Life Insurance Corporation (LIC) also invests in equity. Bonus amount in case of

an insurance product would also depend upon how the underlying portfolio of equity has performed.


Real estate Real estate involves investment in land or building (commercial as well as residential). Real estate is also considered as a growth asset that has the potential of providing higher

returns if invested for long run. Real estate investment includes commercial real estate, residential real estate and real

estate investment trusts (REITS). Gold Physical gold is preferred by Indian families as a secured and stable investment and is also

highly liquid. Gold is generally used as a hedge against inflation. Gold category would include investment in physical gold, gold fund, e-gold or gold

exchange traded fund. There are varieties of other investment options such as derivatives, hedge funds and private equity but these are not suitable for retail investor. In case you are interested in knowing about these products, you may write to us and accordingly we can share material on these products.

In the next few lessons, we will develop deeper understanding of these asset classes.

# 12: Types of investment vehicles: Public Provident Fund Key Message: Public Provident Fund is probably one of the ways that the previous generation used to save for their retirement. For todays generation PPF should be just a part of ones portfolio. Objective The objective of the PPF is to provide a saving option to those individuals who may not be covered by the provident funds of their employers or may be self-employed. The return is decided by Government of India and is directly dependent on the prevailing interest rate in the economy. Therefore, PPF can be categorized in the debt asset class. Basic features PPF is a 15-year deposit account that can be opened with a designated bank or a post

office. A person can hold only one PPF account in his or her own name or in the name of a minor

child to whom he or she is a guardian.


Account can be opened by an individual for himself/herself, and or on behalf of a minor of whom he/she is a guardian. HUFs and NRIs are not allowed to open PPF accounts. If a resident subsequently becomes an NRI during the prescribed term, he/she may continue to subscribe to the fund till its maturity on a non-repatriation basis.

Joint account cannot be opened, however nomination facility is available. Maturity Regular deposits have to be made for a period of 15 years; penalties apply for skipping the

deposit. The account matures after expiry of 15 years from the end of financial year in which the account was opened.

One withdrawal in a financial year is permissible from seventh financial year from the year of opening the account. Maximum withdrawal can be 50% of balance at the end of the fourth year or the immediate preceding year, which ever is lower.

The account can be closed in the 16th financial year or continued with or without additional subscription, for further blocks of 5 years. However, the continuation can be with or without contribution. Once an account is continued without contribution for more than a year, the option cannot be changed.

Investment Limits Minimum amount that needs to be deposited in this account is Rs.500 and maximum

amount that can be deposited in a financial year in this account is Rs.1,00,000. Maximum Number of Deposits A maximum of 12 deposits can be made in a single year. Interest is calculated on the

lowest balance available in the account between 5th of the month and the last day of the month. However, the total interest in the year is added back to PPF only at year end. Interest is cumulated and not paid out.

Taxation Contribution to PPF is eligible for deduction under sec 80C of Income tax Act 1961. Interest

is completely tax free. Unlike other instruments which are eligible for tax deduction under Section 80C, PPF enjoys an exempt-exempt-exempt (EEE) status, where withdrawals are also not taxed.

A PPF account is not subject to attachment (seizure of the account by Court order) under any order or decree of a court. However income tax authorities can attach PPF accounts to recover tax dues.

PPF is quite attractive because of exempt-exempt-exempt (EEE) status. However, you must bear in mind that PPF rate of interest is decided by the Government and is directly linked with the interest rate environment in the country. As an investment asset, a PPF should be treated in par with the income assets


# 13: Types of investment vehicles: National Savings Certificate (NSC)

Key Message: My father had NSCs, I should also have these certificates. But wait, do you even know what NSCs are and how do they operate. Features NSCs are like bonds, issued by the government for a specific period, and pay interest. They

can be bought from a post office and are usually held until maturity. NRI, HUF, Companies, trusts, societies, or any other institutions are not allowed to

purchase the NSCs. Certificates are available in denominations of Rs. 100, 500, 1000, 5000, and 10000.

Minimum investment is Rs. 500 without any maximum limit. It can be bought by an individual or jointly by two adults. Nomination is possible. NSCs can

also be bought in the name of minors. Maturity The certificates issued under NSC (VIII issue) Second Amendment Rules, 2011, will be for a

maturity period of five years, commencing from the date of issue of the certificate. Premature encashment is allowed only in case of death of the holder, forfeiture by a

pledge, or under orders of court of law. Pre-mature encashment is permitted after a period of 3 years from the date of purchase at

a discounted interest rate. The certificates are also accepted as collateral for taking a loan. NSCs are not transferrable.

Taxation NSC enjoys tax benefit under section 80C of Income Tax Act, 1961. Interest on NSC VIII is 8.5% p.a. compounded half yearly, which works out to be 8.68% p.a. Accrued interest is taxable, but is deemed to be reinvested and therefore eligible for

Section 80C benefits. As an investment asset, a NSC should be treated in par with the income assets (Debt asset class). NSCs are not very attractive investment now because the interest you earn on NSC is taxable. Lets say you operate at 30% tax slab, the effective after-tax return on NSC would be ~6 p.a. Is this return good enough to beat inflation @8%, probably not. In fact, if you are keen to invest in a government instrument, PPF is quite attractive because of exempt-exempt-exempt (EEE) status. But even in case of PPF, rate of interest is decided by the Government and is directly linked with the interest rate environment in the country.


# 14: Types of investment vehicles: Post Office Schemes and Deposits Post Office Monthly Income Scheme (POMIS)

Key Message: Post office schemes are usually not talked a lot in youth, but no harm in understanding these options, right!! Investment in post office scheme is primarily to provide regular monthly income to the depositors. This scheme has a term of 5 years (reduced from 6 years w.e.f 1 December, 2011). Minimum amount of investment is Rs.1500, and maximum amount in case of single account is Rs. 4.5 lakhs, and in case of joint account is Rs. 9 lakhs. Interest rate is 8.4% p.a. payable monthly with no bonus on maturity. The earlier facility of bonus of 5% payable on maturity stands withdrawn from 1 December, 2011.

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.

Post Office Time Deposits (POTD) These are similar to fixed deposits of commercial Banks. Interest rates are calculated half-yearly and withdrawals are permitted after six months. No interest is paid on closure of accounts before one year, and thereafter the amount of deposit shall be repaid with interest @2% below the corresponding time deposit rate for the completed number of years. Accounts can be pledged as a security for availing a loan. The POTD is offered for various durations as mentioned in the below table:


These rates are subject to changes annually as indicated by the government.

Duration Interest rates (p.a.) w.e.f 1 April 1, 2013*

One Year 8.2%

Two Year 8.2%

Three Year 8.3%

Five Year 8.4%

Post office schemes are traditional channels of safe investment option that can provide you current income (debt asset class). These schemes do not offer any tax advantage and interest is completely taxable. # 15: Types of investment vehicles: Government Securities

Key Message: Investment in Government securities is not very popular among retail clients due to tedious process involved in the opening of the account. However, if you decide to invest in G-Sec, you should have a good understanding on these securities operate. Government securities (G-secs) are issued by the RBI on behalf of the government and are categorized in debt asset class. G-secs represent the borrowing of the government, mostly to meet the deficit. Deficit is the gap between the governments income and expenditure. G-secs are issued through auctions that are announced by RBI from time to time. Banks, mutual funds, insurance companies, provident fund trusts and such institutional investors are large and regular buyers of G-secs.

With a view to encouraging retail participation, the government has reserved 5% of the auction amount in every auction for non-competitive buyers, including retail investors. In order to buy G-secs retail investors have to open a constituent SGL account with their bank or any other holder of SGL (Securities General Ledger) accounts. The CSGL account is held as parts of the accounts of the offering bank, in which the G-secs are held as electronic entries in demat form. Investors can also hold G-secs in their normal demat account, after buying them.


The minimum investment amount is Rs.10,000. Investors can apply for buying G-secs through their SGL-holding bank and make the payment through their bank. The price at which they will be buying the G-secs will be determined at the end of the auction. Interest is paid out on pre-specified dates into the designated bank account of the investor. Interest is not subject to TDS but is fully taxable. Redemption proceeds are also paid into the bank account.

Though there is a retail debt market segment in which all issued G-secs can be traded, there is no liquidity for small lots of G-secs. The institutional market where the trading lot is Rs.5 crore is quite active. Retail investors may have to hold the G-secs to maturity.

G-secs are benchmark securities in the bond market, and tend to offer a lower interest rate compared to other borrowers for the same tenor. This is because there is no credit risk or risk of default in a G-sec.

Although the option of investing directly into a G-Sec is available to you, but understanding the bond market may be a challenge. Instead Gilt fund maybe a better option. We will share more details about Gilt funds in mutual funds section. # 16: Types of investment vehicles: Corporate and Infrastructure Bonds Key Message: Lot of people invest into corporate and infrastructure bonds without knowing the risk attached to investing into these bonds.

Corporate bonds are debt instruments issued by private and public sector companies. They are issued for tenors ranging from two years to 15 years. The more popular tenors are 5-year and 7-year bonds. Publicly issued bonds tend to have a face value of Rs.10,000.

Bonds of all non-government issuers come under the regulatory purview of SEBI. They have to be compulsorily credit-rated and issued in the demat form. The coupon interest depends on the credit rating. Bonds with the highest credit rating of AAA, for example, are considered to have the highest level of safety with respect to repayment of principal and periodic interest. Such bonds tend to pay a lower rate of interest than those that have a lower credit rating such as BBB.

Bonds issued by companies in the financial sector tend to carry a higher coupon interest rate, compared to those issued by companies in the manufacturing sector. This is also due to the


perception of higher risk, as companies in the finance sector tend to borrow more (as a proportion of their equity capital) compared to companies in the manufacturing sector.

Apart from a regular fixed-interest-paying bond, the other types of bonds issued are: zero coupon bonds, floating rate bonds and bonds with put or call options. Convertible bonds, allow investors to convert the bond fully or partly into equity shares, in a pre-determined proportion. Corporate bonds offered to retail investors tend to feature various options, to make it attractive to investors across tenors and frequency of interest payments. Apart from credit risk, retail investors also bear liquidity risk while buying these bonds. The interest on these bonds is completely taxable.

There is lot of analysis which needs to be performed in selecting the right corporate bonds for investment. You must invest into corporate bonds directly only if you understand how the debt market operates and what the interest rate scenario in the economy is.

Infrastructure Bonds The government announces from time to time, a list of infrastructure bonds, investment in which is eligible for deduction under Section 80C of the Income tax Act. Bonds issued by financial institutions like the Industrial Development Bank of India (IDBI), India Infrastructure Finance Company Ltd. (IIFCL) and National Bank for Agriculture and Rural Development (NABARD) are eligible for such deduction. The bonds are structured and issued by these institutions as interest paying bonds, zero coupon bonds or any other structure they prefer. The terms of the issue such as tenor, rate of interest and minimum investment may differ across the bonds. What is common is that these bonds have a minimum lock-in period (which could be three years, or five years) and they cannot be transferred or pledged. Investment up to Rs 20,000 in these bonds is eligible for income tax deduction under Section 80 CCF of the Income-Tax Act. This is over and above the Rs 1,00,000 deduction available under Section 80C. The interest earned is added to the income and taxed according to the investors income tax bracket. No tax is deducted at source if the annual interest is less than Rs 2,500.

You must take the benefit of extra tax savings in an infrastructure bonds. If you operate at the highest tax bracket and if you plan to invest Rs 20,000 in an infrastructure bonds, you effectively invest Rs 14,000. This is because Rs 6000 are potential tax savings which you would have paid as taxes had you not invested into infrastructure bonds.


# 17: Types of investment vehicles: Bank Deposits

Key Message: Everyone knows fixed deposits with banks, but today we will explain why a fixed deposit may not be the best option always. A bank fixed deposit (FD) also called as a term or time deposit, as it is a deposit account with a bank for a fixed period of time. It entitles the investor to pre-determined interest payments and return of the deposited sum on maturity. Fixed bank deposits offer higher returns than savings accounts as the money is available for use by the bank for a longer period of time. Fixed deposits are preferred by investors who like their money to remain with their bank and do not have an immediate need for it.

A fixed deposit is created by opening an FD account with the bank which in turn issues an FD receipt. Interest on an FD can be paid into the depositors savings bank account at a pre-defined frequency, or accumulated and paid at the end of the term. On maturity, the lump sum deposit amount is returned to the investor. Investors can also choose to renew the deposit on the maturity date. The minimum deposit amount varies across banks. The duration of deposits can range from 14 days to 10 years though FDs longer than 5 years are not very common.

Interest Rates on FDs Interest rates depend on the duration of deposit, amount deposited and policies of the bank. In general, longer term deposits pay a higher rate than shorter term deposits. Banks also offer special rates to senior citizens, defined as those who are over 60 years of age. Interest rates also vary from bank to bank. The interest rate paid by a bank depends on its need for funds. Interest rates do not remain unchanged. Deposit rates offered by banks for various tenors change over time, depending on the economic cycle, their need for funds and demand for credit (loans) from banks. Having said that, an interest rate committed to be payable for a tenor, until maturity, does not change even if market interest rates change. New rates usually apply only for fresh deposits. Banks may also prescribe a minimum lock-in period during which funds cannot be withdrawn from the FD account. They may levy a penalty on depositors for pre-mature withdrawals.

Investment in specified (under Section 80C of the Income Tax Act) 5-year bank FDs are eligible for tax deductions up to a maximum amount of Rs.1 lakh, along with other investment options listed under the same section. These deposits are subject to a lock-in period of 5 years and have to be added back to the taxable income in the year of redemption.


If you operate at the highest tax bracket (30%) and say you invest into a fixed deposit offering 9% p.a. Your after tax return would be 9% X (1-30%) = ~6.3%. Given the average inflation rate in our country at 8.5%, do you think you will ever be able to grow your money?

The only situation you should invest into a fixed deposit is when you expect interest rates to fall down so that you can lock-in your return at a higher interest rate. # 18: Types of investment vehicles: Real Estate Key Message: Its a myth that real estate prices can never decline. Real estate investments may be structured as income generating or growth oriented investment. Income generating investments focus on rental income; while growth oriented investments seek to benefit from value appreciation over time. Real estate growth is aligned to economic cycles, as real estate growth has a high dependence on money supply and credit availability. Rental incomes are a hedge against inflation, as rentals rise with inflation.

Over valuation in bullish markets is a common feature, as prices rise rapidly and hence, is a big risk. Therefore, the sector tends to suffer steep corrections when the bubble bursts. There are even more concerns for under-constructed property. Project delays are a reality and very few are completed on schedule. The new trend in real estate is also to offer freebies. From cars to modular kitchens, all are being offered when you book an apartment in a project. Dont fall for these lures. All freebies are already factored into the price of the apartment. The same goes for the attractive schemes on offer. The truth is that developers urgently need the cash and many of the projects have not even got approvals from the authorities. This puts a question mark on these projects. Another such lure is the attractive financing schemes that builders offer by tying up with banks and housing finance companies. In most cases, you will get a better deal by approaching the bank directly.

Lot of people believe that real estate prices will never go down. This is just a myth, real estate prices also go down but the decline is gradual. Therefore real estate should be considered as any other asset class and typically should not be more than 20% of your investment portfolio. Instead of investing a large amount into a real estate project, a better way of getting real estate exposure is through Real Estate Investment Trusts (REIT). REITs are companies that buy and manage rent-producing assets such as offices and retail outlets. They raise money from issuing units, which are listed and publicly traded. You can invest in a minimum of two units. The REIT distributes the rental income earned, after expenses, as dividends. At least 90 per cent of the profits have to be distributed, giving a regular income for investors. Professional managers will handle operational issues such as building maintenance and managing tenants. Property held


by REITs may also be sold and reinvested in other assets. Any gains can go to unit holders. If you are a safe player, REITs with their diversified portfolio will fit your bill better than land or mega-projects.

Recently, the Government of India has provided tax benefits to boost real estate investment trusts (REITs). Given the ticket size, not many can invest in large properties but through REITs, one can invest smaller sums, which will be added to the larger pool. The one advantage that REITs have is that the underlying asset, the property, also appreciates in value apart from providing rental income. REITs could be an option for those who want to diversify their portfolios into real estate.

# 19: Types of investment vehicles: Equity? Key Message: What is equity investment? What are the various ways of getting equity exposure? Equity (stocks) is one of the principal asset classes. In general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered the owners equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company.

People who invest into equity market without fundamental knowledge of investing claim that stock market as a place where you always lose money. If this was true then we would not have seen billionaires such as Warren Buffet, Rakesh Jhunjhunwala, Peter Lynch, Thomas Rowe Price, John Templeton etc. They all were patient investors and did not get perturbed by market volatility. Once they identified value in a stock and invested, they stick to it as long as there was no fundamental negative change even if the particular stock went out-of-favour in the market. In fact, they used volatility as an opportunity to buy more as they believed that sooner or later, the market would recognise the inherent value and the stock would bounce back.

Equity is an important component of ones portfolio. Equity is a long term investment, ideally the investment horizon should be atleast 7 years. Lot of people claim that investing into an FD is risk-free and equity is too risky. Think about it, with an inflation of more than 8%, an after tax FD return of ~6% isnt risk free after all.


Return as of June 2014

Returns NSE nifty RESIDEX index

(NHB) Delhi Gold Fixed Deposit

1 year 6.8% 0.5% -18.5% 9.5%

3 year 0.9% 16.8% 5.4% 9.2%

5 year 16.3% 8.6% 11.6% 9.5%

10 year 12.9% 16.3% 14.6% 8.0%

There are various ways you can get equity exposure in your investment portfolio:

Direct Equity Applying stock valuation techniques successfully takes years of practice. Do not try to invest directly into equity market unless you have years of experience. Ideally work with a financial advisor and in parallel build your knowledge with respect to selected stocks. There is usually a brokerage charge between 0.25%-0.75% on each transaction. Mutual funds is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks on your own. Investors can sell their units when they want. Each funds investments are chosen and monitored by qualified professionals who use this money to create a portfolio. In return fund manager charges a maximum of 2.5% of the investment amount as fee (in case of equity funds) for managing the funds. Exchange Traded Funds (ETFs) invest in stocks that comprise an index. The proportion in which it will allocate money may be the same as individual stocks weight in the index. For example, a Nifty ETF will invest in 50 stocks comprising the Nifty, most likely in accordance with the weight of individual stocks in the index. Since the selection and weight is decided by the index itself, there is no active manager to manage your investments, hence management fees of ETFs is very low. If you are a first-time investor and not accustomed to the market, we would recommend you to take the passive route, that is, invest in ETFs. New Pension Scheme (NPS) allows you to choose maximum of 50% allocation to equity. NPS is a very good scheme to save for your retirement especially if the scheme is sponsored by your employer. We will discuss details of NPS in retirement section. ULIPs Unit Linked Insurance Policy (ULIP) is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan. Lot of people think that insurance linked investment plans are safe. Reality is that your premium on your insurance policy is also invested into equity market. Ulips have been the most sold, as also the most mis-sold, financial products in the past 5-6


years. ULIPs may not be the best option to get equity exposure since they charge exorbitant management fees (>12% for first 3-5 premium payments). Depending upon your risk profile and your objectives equity allocation may be decided. There are various ways of getting equity exposure as mentioned above. For the first time investor, a combination of ETFs, Mutual funds and NPS may be a preferred option. However, if you are an experienced investor, a combination of direct equity and mutual funds can grow your wealth even better. # 20: Types of investment vehicles: Mutual Funds? Key Message: Different people have different notion about mutual funds. This email will address some of

the basics of mutual fund investment.

Quite simply, a mutual fund is a mediator that brings together a group of people and invests their money in stocks, bonds and other securities.

Each investor owns shares, which represent a portion of the holdings of the fund. Thus, a mutual fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Investing in a mutual fund offers you a gamut of benefits:

Small investments: With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments. Professionally managed: The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favourable investment opportunities. Spreading risk: A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds. Transparency and interactivity: Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided. Liquidity: Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.


Choice: A wide variety of schemes allow investors to pick up those which suit their risk / return profile. Regulations: All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor. Imagine you had an option of investing into good company shares and that too managed by someone who is an expert in picking shares. Similarly, mutual funds provide you a platform to start with small investment and that investment is managed by experts who guide as well as execute the transactions for you.

# 21: Asset allocation defines your return Key Message: If you invest in the best equity mutual fund and equity market as a whole crashes, your selected product cannot beat the market. Therefore right asset class allocation defines your return and not the product selection. Asset allocation is essentially an investment strategy to stabilize risks and returns by choosing investment instruments according to your financial goals, risk tolerance and time horizon. Asset classes have different levels of risk and return variability. Each asset class may perform differently over time. Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk.

Asset allocation is critical for long-term investing and financial planning as it can help absorb the impact of market fluctuations and balance your tolerance for risk. A downside of a specific asset class is usually neutralised by an upside of another asset class. This way you can enjoy the upside and de-risk the downside to a great extent.

Prudent asset allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single asset allocation strategy may be right for everyone. Some investments may be up while others may be down helping minimize the overall potential impact of market decline and enable you to reach your retirement goals smoothly.

Prudent asset allocation can help you balance your appetite for risk within your timeframe and financial goals. This requires assessing, adjusting and tracking your investments regularly.

Assess your portfolio Assess your portfolio allocation regularly to make sure it matches your risk tolerance, time horizon and financial goals and needs.


Adjust your allocation Adjust your allocation mix and re-align it to your financial goals based on your risk tolerance and investment horizon. Track your investments Revisit your asset allocation regularly to make sure your investments are aligned with your financial goals, since your investment timeframes and risk tolerance may change over time. A quarterly financial check-up for the short term and a three-year long-term horizon check to make sure your investments are aligned with your risk tolerance and long-term financial goals is usually recommended. However, you need to review your portfolio when you anticipate a major life-event. # 22: Why should one have a diversified portfolio?

Key message: What are the various classes of investment and how does diversifying across various asset classes help? A portfolio is made up of several investment options across asset classes. The construction of the portfolio involves allocating money to various asset classes. It is this decision which determines how much of the assets need to be distributed over the following asset classes with different characteristics. It is very difficult to determine in a year which particular asset class would be the best performing one. Investing in only one class of asset could prove to be risky. Distributing your investment among various asset classes reduces the overall risk in terms of the variability of returns for a given level of expected return. Therefore, having a mixture of asset classes is more likely to meet the investors expectations in terms of amount of risk and possible returns.

Asset classes like equity and real estate provide long term growth but come with short term volatility. Asset classes like deposits, bonds and other fixed income securities provide income. The allocation between growth and income depends on the investor needs, and therefore, portfolio return is driven by the financial goals of the investor.

Assets Risk Return Primary objective

Corporate/Government bonds Low Low Income

Fixed deposit Low Low Income

Gold High High Growth


Equity High High Growth

Real Estate High High Growth

As you can see, higher the risk higher is the return. In order to grow your portfolio after considering the inflation, you must allocate some portion to growth assets such as gold, equity and real estate. However, how much to allocate across various assets would depend upon your objective.

When a need can be expressed in terms of the sum of money required and the time frame in which it would be needed, we call it a financial goal. When a financial goal is set, its monetary value and the future date on which the money will be required is first defined. This goal definition indicates the amount of investment value that needs to be generated on a future date. It is normal to include assumptions for expected inflation rate while defining a future goal. Then the return that the portfolio should generate to achieve the targeted sum can be ascertained, after understanding how much the investor can save for the goal. Lets take two scenarios:

1. House down payment in 1 year for Rs 5,00,000. Current bank balance Rs 125,000. What should be the amount of monthly savings?

This can be calculated through excel:

Rs 29,409 should be saved on a monthly basis. Please note that this amount should be saved in a safe investment since the time horizon is just 12 months. Therefore, ideally a combination of debt mutual fund and fixed deposit is most suitable. 2. Marriage of daughter after 25 years, current cost Rs 40,00,000. How much needs to be

saved on a monthly basis? This can be calculated through excel: Lets say the inflation is 8% for next 25 years, therefore the future cost of marriage in 25 years would be = (1.08) ^ 25 X 40,00,000 = Rs 2,73,93,900. Looks like an exorbitant amount, right? But how much should be the monthly savings for next 25 years?


Rs 20,646 should be saved on a monthly basis to achieve Rs 2.74 crores after 25 years @10 % per year. Please note that this amount should be saved in combination of various assets including growth assets. Therefore, ideally a combination of debt mutual fund, equity mutual funds, real estate and gold fund is most suitable.

In order to decide your asset allocation, understanding of your goal, time horizon and the expected return is very important. Before you even decide where you want to invest, knowing why you are investing is even more critical.

# 23: What is your risk profile ? Key Message: Everyone has an attitude towards life. This attitude is also reflected on how an individual

manages his/her investments. Today you will learn how to assess your risk profile.

It is human nature to want the highest return possible. However, return is just one of the factors you need to consider when selecting an investment portfolio. Equally important is how comfortable you are with fluctuation in market values, your requirements for regular income versus capital growth and your investment time frame.

Risk profiling is a process for finding the optimal level of investment risk for an individual considering the risk required, risk capacity and risk tolerance, where,

Risk required is the risk associated with the return required to achieve an individuals goals from the financial resources available,

Risk capacity is the level of financial risk an individual can afford to take, and Risk tolerance is the level of risk an individual is comfortable with.

This risk profiler helps in determining your tolerance to risk and how that relates to particular investments risk profile is a summary of your current situation, which is likely to change over time. You should periodically review your profile to ensure it remains consistent with your circumstances. Please note that risk profile should only be used as a guide and not a substitute for a detailed financial plan. Click here to calculate your Risk Profile.( http://finqa.in/risk-profile/ )


# 24: Understanding your risk profile

Key Message: Learn what your Risk Profile tells you about yourself. To assess your risk personality, we asked you to answer few questions in the previous lesson. The analysis it provides can help you understand what sort of risk you are willing to take, what sort of investments to stay away from and why you make the decisions you do when it comes to finances. While no psychometric test can completely describe you, this questionnaire gives you an insight into how comfortable you are with risk. Broadly there are five risk categories:

Conservative investors are investors who want stability and are more concerned with protecting their current investments than increasing the real value of their investments. A conservative investor is generally seeking to preserve capital and as a trade-off is usually prepared to accept lower investment returns. Moderately conservative investors are investors who want to protect their capital and achieve some real increase in the value of their investments. This investor is usually seeking a diversified investment portfolio with exposure to a broad range of investment sectors. Moderate investors are long-term investors who want reasonable but relatively stable growth. Some fluctuations are tolerable, but investors want less risk than that attributable to a fully equity based investment. Moderately aggressive investors are long-term investors who want good real growth in their capital. A fair amount of risk is acceptable. They are generally willing to trade some risk for greater long-term returns and typically will have a longer investment objective. Aggressive investors are long-term investors who want high capital growth. Substantial year-to-year fluctuations in value are acceptable in exchange for a potentially high long-term return. An aggressive investor is comfortable accepting high volatility in their capital value, with the risk of short to medium-term periods of negative returns. They are willing to trade higher risk for greater long-term returns and typically will have a long investment objective. Please note that your risk profile cannot completely describe how you will or should feel about any particular financial matter. Your choice on the level of risk to take in your financial matters should also take into account:

Your timeframes how much time do you have until your bigger goals? Longer time frames allow you to take greater levels of risk because the fluctuations even out over time.

Life Stage various seasons in life have an impact on the level of risk that is appropriate. When there are others dependant on you, the level of risk taken will need to be lower.

Partners risk profile where a partner is involved the level of risk should reflect both partners risk tolerances rather than just one.


Your risk personality assessment should be viewed as information for you to include in your decisions on financial matters, not as a constraint on what you should do.

Action item: While it maybe tempting to invest in riskier investments for higher returns, its better to invest based on your risk profile. Know your appetite for risk http://finqa.in/risk-profile/.

# 25: What should my portfolio be like ? Key Message: We combine our understanding of all the investment options and asset classes to create a portfolio. Investors are classified broadly into categories based on the risk and return profiles. Indicative portfolios for these profiles may be constructed as follows:

Asset Conservative Moderately

Conservative Moderate

Moderately

Aggressive Aggressive

Short term bills 20% 15% 10% 7.5% 5%

Long term debt 60% 50% 40% 25% 10%

Gold 10% 10% 10% 7.5% 5%

Commodities 0% 0% 0% 5% 10%

Large cap equity 10% 20% 30% 30% 30%

Mid cap equity 0% 5% 10% 15% 20%

Real Estate 0% 0% 0% 10% 20%

Total 100% 100% 100% 100% 100%

These are broad guidelines for long term investors. However, if your investment horizon is less than three years, you must choose income assets.


Asset classes like equity and real estate provide long term growth but come with short term volatility. Asset classes like deposits, bonds and other fixed income securities provide income. The allocation between growth and income depends on the investor needs, and therefore, portfolio return is driven by the financial goals of the investor.

Assets Primary objective

Short term bills Income

Long term bonds Income

Gold Growth

Commodities Growth

Large cap equity Growth

Mid cap equity Growth

Real Estate Growth

We will briefly discuss what qualifies under debt, gold, equity and real estate.

Debt Most of the people think that investing into an FD is the only risk

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