Friday, January 11, 2013

5 Things To Know About Asset Allocation



With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold - this is referred to as your asset allocation.

What Is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors it's the best protection against a major loss should things ever go amiss in one investment class or sub-class.

The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.

We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldn't be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:


1. Risk Vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. It's easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest "potential" (stocks and derivatives) isn't the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2007-2009 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. It's time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you can't keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities.

2. Don't Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one old rule of thumb that some advisors use to determine the proportion a person should allocate to stocks is to subtract the person's age from 100. In other words, if you're 35, you should put 65% of your money into stocks and the remaining 35% into bonds, real estate and cash.

Stock Watch List: CTLE
But standard worksheets sometimes don't take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that don't capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because it's best for you, but because it's easy for them. Rules of thumb and planner sheets can give people a rough guideline, but don't get boxed into what they tell you.

3. Determine Your Long- and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your child's education or to simply save up for a new car, you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.

For example, if you're planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.

4. Time Is Your Best Friend
The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.

5. Just Do It!
Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.

The Bottom Line
There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.

Happy New Year to All


Saturday, December 8, 2012

How to secure your child's future?




How to secure your child's future?
On at least one aspect, I think several of the insurance company advertisements have got it spot on. The initial celebrations on the arrival of the child gradually leads to a more sober reflection on how best to ensure his / her comfortable upbringing and education. Doubtless, finances are but one aspect of this concern; but they are an important one! Moreover, they are probably much easier addressed than some of the softer and other cultural aspects of parenting.

INVESTMENTS

Investment is distinct from Savings
Savings simply mean you set aside a portion of your income for future use. Yet, it is (careful and planned) investing that makes maximum use of these savings and optimizes your portfolio in later years. This is especially important since inflation tends to erode the purchasing power of money over a period of time. A headline inflation of 6%-7%, actually translates into a lifestyle inflation of 10%. Thus, if your money is lying in a deposit fetching 7% interest rate, you are actually eroding wealth!

�India� is the best growth story to invest in
In contrast, with the medium to long-term prospects of India�s growth being as strong as they are, the long-term returns on equity can be assumed to be 15%. Thus, this provides an effective way to not get left behind the growth story that is India. In addition, investing in equity as an asset class, if well researched and carefully done, enjoys various benefits, such as:

    High liquidity, to withdraw money in desired quantity whenever needed
    High flexibility in terms of investing as and when funds are available
    Favourable tax treatment (especially compared to real estate and fixed deposits)
    Low transaction costs
    High degree of transparency in knowing how your corpus grows

The power of compounding
Returns on investments exhibit the effect of compounding. Very simply put, it means that the returns earned on the investment in the first year, gets added to the corpus in subsequent years and fetches its own returns. Thus, in the illustrative returns shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would only be Rs 2 crore in 10 years time.

Index investing
Investing in the index is possibly the best long-term way to benefit from the India growth story. You can invest in the index either one-time, or systematically as you earn more, or a combination of these. The benefit of index investing is the low transaction cost and low need for research involved. Thus, for those not very comfortable with the markets, or with those having no time to do extensive research, it is also a good starting point to gain familiarity with the working of equity markets.

Once you are more comfortable with equity markets and with how an investment portfolio works, you can consider allocating funds to more actively managed portfolios as well. These require much more research and active management, but at the same time have the potential to generate higher returns than the index by leveraging existing market conditions.

Trust formation
Very often we come across customers desirous of making a trust in each of their children�s names. In India, unlike in some other countries, such trusts by themselves have no special tax benefits. Yet, they often have softer benefits such as helping mentally allocate resources for each child�s milestones, monitor each set of investments clearly, etc. Given the formalities and procedures around trust formation, maintenance and reporting, we would recommend this to people having a large corpus only. With most others, the money may be managed through mental accounting alone, without going through the legal procedures around trust creation.

LIFE INSURANCE
The concept of life insurance is to secure the lifestyle and indeed the financial well being of the family in the unfortunate event of the breadwinner not being around. Due to cultural reasons, this often brings unpleasant thoughts, and hence the subject of insurance gets pushed under the carpet.

However, we would rather look at it as a means to lead a more secure and worry-free life. While the emotional trauma of loss of a family member is unavoidable, insurance atleast spares the financial burden that this could bring. Thus, an insurance of five to seven times annual earnings is a useful benchmark to have as amount of life insurance.

A term plan is a simple and effective life insurance policy. Very roughly, the annual premium for a healthy 35-year old, for a life cover of Rs. 1 crore, should amount to about Rs. 45,000. There are two important points to note here: the earlier you start the life cover, the lower the premium rate you can lock-in (once locked-in, the premium does not ever change). Secondly, it is a huge benefit to start life insurance when one is healthy and unaffected by any chronic ailments. This ensures much lower premiums, and a hassle-free claims process.

We would, at this stage, advise against the more complicated unit linked products; or the typically low yielding �traditional� insurance products. These are useful for investors only in very specific cases, and only when the investors have understood the cost-benefit equations of these plans very carefully. The insurance agents very seldom do such elucidation; and hence it may be useful to stay away from these for a while.

KEY NEXT STEPS

Just as it is impossible to learn swimming without jumping into the pool, we believe a start has to be made sometime along both these dimensions. And there is no better time than today!

Thus, we would recommend a simple starting point for parents thinking about their child�s future:

Invest a lump sum in an index fund, and plan to systematically build this through authorising smaller additional investments monthly. You can look at research to see which are the good funds, and keep your portfolio under periodic monitoring.
Insure your life, for atleast five times your annual earnings. Again, a simple shopping expedition should get you the best term insurance cover applicable for your age and health.

- Ramganesh Iyer

Om Namah Shivaya

Jai Shri Eklingnath Ji Ki

Saturday, April 14, 2012

इन 5 बड़ी भूलों से बचें तो 60 साल की उम्र में आप भी बन सकते हैं करोड़पति


इन 5 बड़ी भूलों से बचें तो 60 साल की उम्र में आप भी बन सकते हैं करोड़पति

क्या आप जहां पैसा लगा रहे हैं वह आपके लिए सबसे बेहतर विकल्प है? अपने पैसे का सही निवेश न कर अधिकतर लोग नुकसान उठा रहे हैं। मीडिया में सिर्फ बड़े घोटालों की खबरें आती हैं। लेकिन इन्वेस्टमेंट में चूक हो जाने से हर रोज जो पैसा डूब जाता है, वह इन घोटालों से कई गुना बड़ा है। हम गलत बीमा पॉलिसी ले रहे हैं, बचत खातों में बड़ी रकम पड़ी रहने देते हैं, छोटी-छोटी लापरवाही के कारण कर्ज, क्रेडिट कार्ड और बचत खातों में जुर्माना भर रहे हैं, गलत स्टॉक में पैसा लगा रहे हैं और अपनी जरूरत को नजरअंदाज कर निवेश कर रहे हैं। भास्कर बता रहा है कि कौन सी हैं निवेश में पांच सबसे ज्यादा होने वाली गलतियां? और कैसे सही समय पर सही जगह पैसा लगाकर हम बन सकते हैं करोड़पति....

उम्र और जरूरत का ध्यान रखे बिना निवेश करना

क्या आपने कभी ऐसा कोई प्लान बनाया कि आपकी और परिवार की जरूरतें क्या हैं - वर्तमान की ही नहीं, भविष्य की भी? आज आय कितनी है और आगे कितनी हो सकती है? अभी कितनी बचत है और पांच या दस साल बाद कितनी होगी? इस बचत का आप आज क्या इस्तेमाल कर रहे हैं और आगे कैसे करेंगे? पहले कार खरीदेंगे या मकान? टीवी-फ्रिज खरीदेंगे या बीमा पॉलिसी? क्या कम जरूरी है और क्या ज्यादा? क्या तुरंत चाहिए और क्या कुछ सालों बाद? ये सोचे बिना निवेश यानी नुकसान को दावत।

महज टैक्स बचाने के लिए जीवन बीमा पॉलिसी लेना

अगर आपकी शर्ट का साइज 42 है तो क्या आप 38 नंबर की शर्ट खरीदेंगे? नहीं? तो फिर गैरजरूरी पॉलिसी क्यों? जीवन बीमा होता है मृत्यु के बाद परिवार के पोषण के लिए। इसके लिए टर्म पॉलिसी है चूंकि वह कम प्रीमियम पर ऊंचा रिस्क कवर देती है। रिटर्न नहीं देती। लेकिन अधिकतर लोग इनकम टैक्स बचाने के लिए या निवेश के लिए ही बीमा कराते हैं। एंडाउमेंट और मनीबैक पॉलिसी पर रिटर्न केवल 6 फीसदी मिलता है और लाइफ कवर बेहद कम। ये हाई कॉस्ट और लो रिटर्न इनवेस्टमेंट हैं।

योजना और लक्ष्य तय किए बगैर पैसे लगाना

अगले तीन साल में आप घर खरीदने की योजना बनाते हैं। इसके लिए अगर आप फिक्स्ड डिपॉजिट में पैसा इन्वेस्ट करें, तो रिटर्न केवल आठ-नौ फीसदी मिलेगा। लेकिन अगर किसी म्यूचुअल फंड में निवेश करें, तो रिटर्न दोगुना तक मिल सकता है। वह भी टैक्स फ्री। हर जरूरत पूरी करने के लिए अलग योजना बनाएं। किस चीज को पाने में कितना समय लगेगा, उसके लिए कितने पैसे की जरूरत होगी और कहां इन्वेस्ट करने पर फायदा होगा, इन सभी बातों को ध्यान में रखें।

जिम्मेदारियों के मुताबिक निवेश न बदलना

उम्र बढऩे के साथ ही जिम्मेदारियां और जरूरतें बदलती हैं। साथ ही बदलती हैं इन्वेस्टमेंट स्कीम। कॅरियर की शुरूआत में आप वल्र्ड टूर पर जाना चाहते थे, लेकिन दस साल बाद आप अपने बच्चों की पढ़ाई के लिए इन्वेस्ट करेंगे। या फिर घर खरीदना चाहते हैं। ऐसे में जरूरी नहीं कि आपने दस साल पहले जिस योजना में पैसा जमा कर मुनाफा कमाया था, वही आज भी उतना ही लाभ दे। अलग अलग लक्ष्य के लिए इन्वेस्टमेंट योजना में भी बदलाव लाना जरूरी है।

रिटायरमेंट के बाद की योजना समय से न बनाना

क्या आपने रिटायरमेंट के बाद के खर्चों के लिए निवेश कर दिया है? यदि कर भी दिया है तो क्या सही समय पर? अधिकतर का जवाब होगा, नहीं। कॅरियर की शुरुआत में जिम्मेदारियां कम होती हैं। तब बचत और इन्वेस्टमेंट का विचार नहीं आता। अगर 30 की उम्र से भी इन्वेस्ट करना शुरू करें, तो रिटायरमेंट के समय आपके हाथ एक बड़ी रकम होगी। अगर 55 साल की उम्र में निवेश करते हैं तो रिटायरमेंट से पहले रकम बढऩे के लिए सिर्फ 5 ही साल हैं। ज्यादा निवेश पर भी रिटर्न कम ही रहेगा।

Sunday, March 25, 2012

Liquid funds – quick money when needed!


Liquid funds – quick money when needed!


Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

While searching for different investment options, you might have come across the term ‘Liquid Funds’. There are many of us who might have wondered what these funds are and more so after the news articles popped up telling everyone that investing in these funds is not a smart choice. However, before we make a decision, let’s discuss what Liquid Funds are.

What are Liquid Funds?

When we try and understand the term ‘liquid’ in financial terms, it means an asset which is as good as hard cash. Real estate is the least ‘liquid’ of all assets and a savings deposit is the most ‘liquid’ of all. Similarly, Liquid Funds are a kind of mutual fund or debt fund which can be redeemed in as less as 24 hours.

What are Liquid Funds invested in?

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

What is the ‘lock in’ period for Liquid Funds?

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. However, some funds may even have a lock in period of a week or a month or more. However, the tenure is always far less than a normal mutual fund.

What are its features?

Here are some of the features of Liquid funds:

  • No Entry and Exit load (sometimes exit load is charged if redeemed before the lock in period)
  • Low annual fee 0.30 to 0.70%
  • Variable Minimum investment amount according to scheme
  • Great tax benefit
  • Easy liquidation, hence the name
  • An average 8% p.a return on liquid funds
  • Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.

What are the tax benefits?

If you invest in a short-term fixed deposit, the returns are taxable as per the investor’s tax bracket. Therefore, if you are in the highest tax bracket most of your returns from the fixed deposit would be wiped out.

On the other hand with liquid funds, as mentioned before, if the dividend option is taken, the returns are tax-free in the investor’s hand!

Has the past performance been good?

In the last one year, liquid funds have returned between 7.7 per cent and 8.85 per cent. Recent data shows that banks are taking fresh exposures in liquid funds which indicates a high degree of safety and confidence in liquid funds. This shows that liquid funds are a good product to invest in if you are looking to fulfill some short-term goals.

How does it compare to a short-term fixed deposit?

Fixed Deposit

Liquid Funds

Returns on investments range between 4-5%

Returns on investments range between 5-8%

The interest on Fixed deposit is taxed by adding it to the assessee’s income.

If you opt for a dividend option the dividend is tax free in the hands of the investor

Long Tenure

Very short tenure

Returns are fixed

Returns are not fixed

Not dependent on market performance

Dependant on market performance