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Last week We received a e-mail from a young reader of our blog requesting for our input to his investing in mutual funds. We have got similar requests in past but we avoid giving specific inputs as we have no expertise in offering financial advise, we are NOT from financial background(we are from software background). Through this blog we are kind of writing notes for ourselves and trying to get input from others. These requests remind us of the time when we were in similar stage and we can empathize with them. But this request made us think that we can use this platform to share our experience, our learning and more importantly get input from our other knowledgeable readers to help him out.

Reader’s Query

We exchanged few emails asking for details on his choice of investments. Summary of email communications are given below with relevant points highlighted :

I am a avid reader of your blog.I know you are not a professional but need your inputs. I fully understand and appreciate your articles on investing which propagates the idea that investing is a purely personal thing and it should/would vary for every individual.

I am 25 years old and lucky to be in a position to start investing early. I hail from a typical middle class family and the first person to enter the corporate world from my family. Both my parents are retired Govt servants.They have saved enough for my marriage as well as my younger sister’s. By God’s grace,being relatively young I earn Rs. 50,000 per month and can now easily afford Rs.1,20,000 per year to build for my retirement corpus.

 I am already investing 14000 per month through VPF and have decided to continue it as long as possible. I started to invest in VPF couple of years ago because I saw it as a good way to imbibe a ‘saving’ culture in me as it is deducted at my salary and typically the interest rate is above 8.5% besides it is also compounded annually. I did not see any difference between VPF and PPF when i started with VPF. Also there was this leverage with VPF to withdraw amount when required. I am planning to do it for the next 10-15 years.

I think in order to beat the inflation one need to have some of his assets in equity. Since I am working full-time and dont know the intricacies of market, I want to invest in the markets through mutual funds. Now I want to invest this additional 10000 per month as a long term prospect. I am very new to the markets and after some analysis got to know that SIP is the best way to go for me to invest in markets.I am planning to invest Rs.10000 per month through SIP.I am looking for a long term retirement corpus through this(may be after 20 years). Right now ,I am thinking of having my portfolio as below

  • Large Cap – Rs 3000
  • Diversified Equity  – Rs 3000
  • Small & Midcap – Rs 4000

I have not yet decided on the actual  fund to invest. Have also read somewhere that choosing the right fund does not really matter if someone is investing in the top 10 funds in any category.

Is the above diversification sufficient ?Or Do I need to include one more category in there to be less-risky ? Since I am already investing in VPF and relatively young ,I think I am in a position to take more risks.Is this type of thinking less prudent  ?

I am not  inclined to see gold as an investment.May be I have not done enough research on gold as an instrument of wealth yet.

As far as financial adviser,I want to wait till a couple of more years to settle personally and take decision after planning with my spouse after marriage !

Request

Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime”—Author unknown. We know he has already started investing in VPF and we have been asked for investing in mutual funds.  But please bear with us for not answering the question directly.  Our aim is to help him and other readers learn fishing and that too properly(avoid the mistakes that we did). Other readers please share your views on the topic, your financial experiences and financial learning to enlighten this young man. Young man please take everything mentioned here as information only. These are pointers to help you, it’s your money, your decision, your life.

Starting Early

“Early investing is very much like growing a tree…if you can take good care of it at the start, it will take care of itself later” .  You are blessed for having Indian parents whose life is spent on taking care of kids (till their marriage at least) and seeing their children doing well is their desire. Congratulations on starting early. Youngsters believe that they have a lot of time to think about the future. But by saving and investing early, they can harness the power of compound interest. For instance, if you start saving at 30, you will have 30 years to build your corpus. At 30, Rs 5,000 invested every month will grow to Rs 75 lakh (assuming 8 per cent compounded annual growth rate) by the time you are 60. If you start at 40, you will have just Rs 30 lakh at retirement. A delay of 10 years will halve the corpus. First chapter of book JagoInvestor:Change your relationship with money which discusses the advantage of starting early is now available online. You can read first chapter of the book online here.

Handicap: Financial Illiteracy

Let his starting early not turn from boon to bane. Money makes the world go round. As a subject, Money is never taught in school or college.Words like basis point, inflation, CTC, 80C, 80CCF, Tax free bonds, Tax, Indexation, FMP, Mutual Funds, Fixed Deposits, ETF, Stocks,Capital gain sound like Greek and Latin. We don’t allow people to drive without taking a driving test yet we allow them to enter complex financial world without financial education. Once the realization dawns that we need to learn about finances we don’t have much clue or help or guidance, unlike school where we have a curriculum and know that we know to begin from (ABC, DoReMe). So it ends up being hit and trial. Dedicate time for learning  Personal Finance Books For Adults And Young Adults and Book Review-JagoInvestor:Change your relationship with money might give you some pointers.  There are bound to be mistakes, but don’t be scared. As we said in Oops I did it!,  even world famous investor Warren Buffet has made mistakes. His biggest trade mistake of 200 billion dollars that was of buying Berkshire Hathaway, then a fading Massachusetts textile company. Mistakes is a signal saying you need to learn more.

Know yourself

As explained in Why Is Investing Confusing?An infographic Investing is confusing because it is a very large subject With many different people having as many different opinions.  And as explained in What is Investing? Investing is a plan not a product or a procedure. Before investing in any product think of Think about Liquidity,Safety,Returns,Risk,Tax

To be a good investor you need to know something more than products, returns etc. You need to know yourself. Are you brave or timid? A maverick or middle-of-the-road? Do you pay attention to every little move in the market–or could you not care less? The idea is to adjust your investing strategy to your personality. Quoting a question from CNNMoney: What Kind Of Investor Are You? This unconventional (and more than a bit irreverent) self-assessment test will help you identify your core investing tendencies.

Question: You’re standing on the edge of the Grand Canyon holding a wad of cash worth $10,000. A sudden gust of wind rips the bills from your hand and you watch, helplessly, as they flutter to the ground below, where they’re eaten by coyotes. How might you describe your mood?

 A) Sad B) Bitter C) Wistful D) Elated; what a great view!

Answer: If you said A, B or C, you possess, to varying degrees, a healthy aversion to losing money. If you answered D, take all the money out of your wallet and light it on fire. Still feeling elated? I’m guessing not.

Investment risk is tough to grasp. No one really knows how much they can stand until they’ve suffered a loss. Agreed You can’t earn decent returns over the long term without embracing some risk. But How much risk depends on your age, your goals and your personality. I have seen people in 20’s who can’t stand losing money so they are happy to invest in Fixed income instruments and people aged 60+ investing in Mutual funds and stock markets.

Know the World

Just like man No investment product is an island. It is influenced by a host of factors political, economic, affecting the world’s economy, country’s economy. Let’s see the image given below which shows Fixed Deposit rates and Sensex returns which have inverse relationship.

FD rates Sensex rates since 1991

FD rates Sensex rates since 1991

As we have said  Fact or opinion:Do Due Diligence  if we explore about the Indian stock market we’ll find that The Great Indian Stock Market Story of the last twenty years is only about four years, 2003-2007. If you’re finicky, we could add the stellar 1991-92 time when Harshad Mehta pushed the market up 3x in one year. Check out the picture from CapitalMind:The Great Indian Stock Market Story was only 5 good years given below,

Indian stock market since 1991

Indian stock market since 1991

Numbers do tell a story but it is also important to look beyond numbers. Why did the Stock market rise between 2003 – Jan 2008? Fixed Deposit rates are high now(around 9% ) though in early 90’s FD was giving assured interest around 11%. Why? We also have to understand relationship between different asset classes. For ex: Equity Mutual funds invest in stock market so their performance is tied to that of the stock market.

While hindsight is perfect and we can spend hours discussing it but that is just a step to learn about how to invest better in future. As Prashant Jain, the CIO of HDFC, says It’s tomorrow that matters. In his letter on May 2012, he lists out the key challenges currently facing Indian economy : One can read letter html version at IndiaInfoline or HDFC:It’s tomorrow that matters (pdf version at HDFC website).

  • High Fiscal Deficit
  • High Current Account Deficit (CAD)
  • Depreciating INR: This is a result of high CAD and of poor investment sentiment leading to weak capital flows.
  • European Crisis: It is interesting to note that DAX (German Stock Market Index) is marginally up in this period where as India is down 10%.
  • GAAR

Their are plethora of investment options and the marketeers blandishments may confuse you, the best way is to sit and work out a plan  (with or without help of financial adviser.). You should be financially prepared not only for life’s predictable big events like your wedding, buying a house, educating your children, but also for your retirement years and sudden and unexpected bad news such as losing job or cost cutting etc. In next part we shall discuss more on the topic including reader’s query on recommendations about mutual fund. Looking forward to sharing of financial experiences, suggestions by our readers both experienced and newbies, contradictions to our suggestions. 

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