Rule of 15

Whenever anyone starts investing, the three most common questions that come to his mind are

• how much to invest?
• for how long?
• where to invest?

The rule of 15 will help in getting the answer for the first 2 questions.

This rule is good for someone who is investing without any goal in mind. The rule simply says that if you invest Rs 15,000 p.m. for 15 years giving a return of 15% p.a. you will build a final corpus of Rs. 1 Crore.

SIP Amount = Rs 15k per month
CAGR =15%
Time horizon =15 Years
Final corpus = Rs 1 Cr

Your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Now let’s see what happens if we increase the tenure by just 5 more years. So, we invest Rs 15,000 at 15% for 20 years. Here just by increasing your investment tenure by just 5 more years you will build a total corpus of Rs 3 Crores. This is the power of compounding and that’s why it is considered the most substantial factor for wealth creation. The time period is a significant factor when you are investing.

In this post, you can notice how by increasing the time horizon from 15 to 20 years; you can get three times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

 “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. Returns can be higher in bull market and lower in bear market. The longer you stay invested higher is the chance of averaging out the volatility.

Greed and Fear

These two words are enough to describe the situation of the investment world today. Greed forces oneself to make wrong choices and fear also apparently does the same thing. Whether one makes money or loses money is dependent on how much one allows these forces to have a control over them. Warren Buffet has very aptly tapped these words, when he says that “Be fearful when others are greedy and be greedy when others are fearful”.

The last 6 months have been pretty bad for investors.  A majority of the investors haven’t made money in spite of the index touching an all-time high. This is probably one of the most hated all-time highs of Sensex.

Index always indicates how the stock markets have performed, however it is not the case this time. In the last one year, out of 50 Nifty stocks, only 10 of them have been able to make money for the investors and they are the ones that are responsible for the markets touching an all-time high. Valuation correction has been pretty sharp in mid and small caps. Similar is the case with BSE. If we exclude the market cap of the top 10 stocks, the remaining 4000 stocks listed on BSE have lost whopping INR 16.70 lakh crores since January 2018 and more than 300 stocks have fallen anywhere between 50%-90% from their 52-week highs.

Rising inflation, high oil prices, unclear election results are not allowing the markets to go high whereas factors such as domestic liquidity is not allowing the markets to go down.

In such a situation, it will be incorrect for an investor to think that their portfolios are down (in spite of all-time high markets) because of wrong investment decisions. It is important to understand that these kinds of situations are rare and should be dealt with patience.  Thus, making it even more essential for one to trust the fund managers / advisors and continue with his/her investments. Markets are bound to remain irrational but an investor should not.

Undoubtedly, returns can be generated only through proper asset allocation and following a disciplined way of investing.  Noise will always be there. But, what is vital is that one learns to avoid/ ignore this noise and focus on long term investments. Remember Rome was not built in one day but Hiroshima and Nagasaki were destroyed in one day.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.”

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET

MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET. I believe making money is quite simple in equity markets, difficult part is to lose money. Surprisingly most of the “investors” lose money successfully.

To make money in equities, the theory is quite simple, select a set of good funds, invest systematically, review periodically and stay invested. For e.g. A large cap fund like Aditya Birla Frontline Equity has given a return of 16% CAGR over last 10 years or a mid cap fund like HDFC Mid Cap which has given a return of 23% CAGR during the same period. This covers all the ups and downs of last 10 years including events like the Lehman Crisis. The idea was simple. “Keep investing”.

The tough part here is to lose money. For that you have to track your SIP returns on a daily basis, read the market outlook, listen to experts on CNBC and redeem your money or stop your SIP because some experts believe that markets may correct more. If one tries to time the market, then one will never be able to enter the markets again. One generally wants to be invested in the best fund , which apparently keeps on changing every year. The list goes on and works as a perfect recipe to lose money.  Always remember “MORE MONEY IS LOST OUTSIDE THE MARKET RATHER INSIDE THE MARKET”.

Volatility is investors best friend. It’s like that friend who gives us right advice but somehow, we never like them. Scams, elections, rate cuts, rate hikes, high inflation, low inflation, etc. will come and go as short-term positives and negatives. They can disturb the momentum for a short period of time but over a long period these events don’t even matter. If someone expects markets to deliver only positive returns then, equity is definitely not the right choice.

What matters is “PATIENCE”. I had mentioned in one of my earlier posts also that investments are like kids. Just like one doesn’t measure their kid’s height and weight daily, similarly one should not look at the performance of the funds daily.

The stock market is a device for transferring money from impatience to the patient                                                                                                                                   Warren Buffett

“I could have handled my life in a better way”

What is it that you want to think on the day of your retirement?

“I could have handled my life in a better way”

Or

 “Good I handled my life in a better way”.

According to one report more than 45% of working Indians have either not started saving for their retirement or have stopped saving.  Most of us keep running and gets busy with – raising kids, stressful jobs, EMIs, Cars etc. We live in “today” and usually forget future. Most of the people start looking at their investments only when their kids move out of house to start their own life.

Retirement is like your girlfriend. It will be fun only if you have money, else very stressful. After retirement you will have good years left to live and you will require lot of money to live a peaceful life. In today world worry is not about early death, it’s about living more than planned.

Let me share a secret with you – “One day your salary will stop coming”.

If you have still not started, start saving today for your retirement. A per month saving of Rs. 10,000 has the potential to create a corpus of Rs. 1.2 cr in 20 years and Rs.4.4 cr in 30 years at an average return of around 12%. Possible that you don’t have enough time to save for the required corpus but as they say – something is better than nothing. Yesterday was a good day and today a better day to start you investment but tomorrow may be late.

At the risk of repeating myself, investing in Pension funds or retirement plans will neither give you liquidity nor the flexibility in case of emergency. It is always advisable to have portfolio which provides liquidity. The investment has to be a mix of debt and equity . Your risk profile and time available for retirement should decide your asset allocation.

Once you start planning for your retirement it will be easy to replace the work “RETIREMENT with FREEDOM”.

“It doesn’t take ages to retire, it takes money.”

Tax Saving….

Tax Saving!!! Probably the biggest worry of all Indians. Even being the biggest worry, somehow we deal with it in a haphazard manner. We think of it only when HR asks for tax declaration (for salaried) or on 30^th March, and then we go and invest in an insurance policy which we actually don’t need or invest in any tax saver fund. So we not only postpone it till year end but also invest without thinking.

Let’s take a look at few tax savings investments available:

Mutual Funds: The best option available as on date. You can choose the funds as per your requirement, very easy to invest, no long term commitment to pay every year, with lock in of just 3 years and the capability to give superior returns compared to other available options. Remember to choose the growth option and invest in funds with good track record. Only one Caveat- Don’t go by last one year performance. Choose a right fund with a long track record.

Insurance: If you are buying it for tax saving you are doing a big mistake. Insurance has to be bought only for protecting your family for any unexpected events and not for saving tax. Buy a term plan from any of the company you are comfortable with. It will not make a difference which company you chose till the time you are giving correct details. Insurance is a commitment and should be done after doing some research.

National Pension Scheme: NPS became attractive as it allows an additional deduction of 50K. Couple of point to ponder – First, maturity amount is taxable and second 40% of the corpus must be put in Annuity. Income from annuity is also taxed at normal rate. So choose wisely.

PPF and VPF: Decent option. If you are looking for fixed returns then probable this is a good option to look at. Return on PPF is known in advance. It again needs a long term commitment but loan available incase required. Return on VPF is same as that of EPF, so again the returns are guaranteed and know in advance. You can invest as much as you want. Choose any of them if you are ok with long term lock-in. Ensure its good from overall perspective of asset allocation. Don’t invest if you already have investment in fixed deposit or Insurance.

Sukanya Samruddhi Scheme: Good initiative by govt for girl child. Interest rates are decided by central govt every year. Interest earned is tax free. Max deposit amount is 1.5 lakhs. Not very attractive from financial planning perspective as the returns are less( 9.1% was for last year, when your avg inflation at 7%), is ill-liquid and only 50% can be withdrawn when your daughter is 18 years old. Rest when she attains 21 years of age.

Bank FD: Again not a very good option as the lock in is for 5 years, offers very low rate of return and interest is taxable. Don’t know what purpose does it serves. Invest at your own risk.

Pension Plans: First they have very high expense ratio which makes them unattractive and second 66% of the corpus has to be invested in annuity. So no flexibility at the hands of investor.

A small reality check

Sir John Templeton once said “The four most dangerous words in investing are – ‘this time it’s different’”, but there is something which is even more dangerous than that – Postponing your investment decision. Isn’t it intriguing that we work hard to earn money and then we keep it in a bank account or a fixed deposit to depreciate? Most of the time we don’t postpone our “SPENDINGS” but somehow we defer our investments. One can have various reasons to defer investments but are any of them justifiable? Let’s run a reality check for few of such reasons:

• Busy to decide?? You may be busy today but don’t forget that it’s just a matter of time when you will retire and the only thing that will rescue you from most of your troubles will be the money saved and invested today. So take out time. Just a couple of hours every 6 months are more than enough.

• Not having sufficient money to invest? You just need to save Rs.1k per month to start a SIP.

• What will Rs. 1k saving do? Well, something is better than nothing, so at least start one.

• Is it the right time to invest? Somehow, no one has ever been able to time the market perfectly. So the right time to invest is now. Divide the amount you want to invest and spread it over a period of time.

• Don’t know where to invest? Hire an advisor (not a banker) and he will do the homework for you. Don’t invest in something which is complicated or difficult to understand.

Another point of indecisiveness is whether it makes any difference to start investment early or not? Let’s run a reality check on that too. So, if you require Rs.25 lakhs after 20 years for your kids marriage, you just need to invest Rs.2k (assuming 15% CAGR) per month. The total investment you do in 20 years is Rs. 4.8 lakhs. However, if you postpone this investment for 5 years, you will have to save Rs.4500/- p.m. The total investment that you will do now is Rs.8.1 lakhs. The amount required to achieve your goal has almost doubled. This happened because you lost on compounding for 5 years.   So it’s important to start your investments early and then let the money work for you. Well, this was for just one goal. Now think how much additional investment you will have to do to achieve all your financial goals? So either start your investments today or be ready to forego some of your goals.

 

“Money is always eager and ready to work for anyone who is ready to employ it.” 
― Idowu Koyenikan

 

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Lights, Camera, Action….

Bollywood!!! Indians live by it and get inspired by it day in and out. Some aspire to dance like Hrithik, or have a physique like Salman bhai whereas some inspire to have a grace like Madhuri. Several people aspire to be an over-arching personality like Big B, or dream of a girlfriend like Katrina. And we Indians can be real crazy Bollywood fans, beyond all limits. We even wear clothes, have hair-cuts, use tooth paste and face wash which are endorsed by our favourite actor/actress.

Well, Bollywood has taught us many things – How to dance, how to propose, how to sing, etc. But is that all, that we can learn from Bollywood or is there something more? Certain things which may be non-glamorous but,real.

For example, have we learned anything from the Rajesh Khanna of Avtaar ? Or coming to more recent times, from Hema Malini and Amitabh Bachhan in Baghban?

A lot of people often give every penny of their savings to their children. It is perfectly fine to finance our kid’s education to make them able and independent to build their life. But, should we give them money for their marriage or to buy a car inspite of them earning money remains a debatable topic.

If your kids want to pursue higher education abroad, or throw a lavish marriage party, or purchase a high-end luxury car, allow them to get a loan and fund for the same. Luckily, our banking system provides a loan for everything. It is very good to give your kids, the best in the world (what you can afford, of course), but not at the cost of your retirement funds. One can get an education loan, home loan, car loan but not a retirement loan.

Let’s not forget what happened to Rajesh Khanna or Amitabh Bacchan in above-mentioned movies. Both these characters in the movies, worked hard to fulfill their kids wants, to the extent that they gave their retirement funds. But then what happened to them in the movie? Give it a serious thought. This is not the story of one or two individuals, but if we observe, we will notice several such incidents in our neighbourhood.

Movies like Avtaar and Baghban, were movies not based on fiction like Kkrish but stories inspired by social problems.

So do plan and invest for your kid’s education, higher studies, marriage but, most importantly your retirement. It’s not only important for you but also for your wife when you are no longer around her. Allow your kids to grow and let them take their own responsibility.

P.S : Don’t forget to teach your kids about financial planning along with loving their family.

Avoid Noise

Do you know what is the biggest hurdle or problem in wealth creation??

Is it money? Majority of the people say that they don’t have enough money to invest and so they can’t create wealth. We often tend to forget that every single penny saved or invested will help in wealth creation. So how can less money be a hurdle?

Is it knowledge? Several people feel that they don’t have enough information or knowledge as to where to invest. Well you don’t understand medicine but still you are alive is a proof that knowledge can be acquired or hired. So this can definitely not be the hurdle in wealth creation.

Is it time? Well first, it’s all about time management and secondly you don’t need to put loads of hours into this. A couple of hours every month is more than enough.

All the above mentioned, so called “perceived hurdles”, are more of distractions. However, even after overcoming them there is one big hurdle which most of us fail to overcome.

It’s the NOISE, the noise that surrounds us. And what is this Noise?

Noise is when a friend / colleague shares that he has received 50% returns in just 2 weeks by investing in stocks. Now, there are 2 ways one can react/respond to this.  One, believe him ( P.S. – No one tells how much they have lost or how much they actually invested, Rs.5,000 or Rs. 5,00,000) and stop existing SIPs and start investing in stocks on expert advice (TIPS), or, two, just ignore this noise and continue with your SIPs.

Noise is when markets correct for 4-5 days in a row and our so called experts start predicting it as bear phase. Again, you have two choices. First, listen to such experts who change their opinion every week and stop your SIPs or the other option is avoid this noise and continue with your investments.

Noise is when people who invest in bank FDs give “expert advice” on markets and risks associated with it. Again you have two choices. First, listen and second avoid.

In India you will find at least one or two Warren Buffet in every organization who will tell you which stock to invest in. Most of these self-acclaimed Buffets have never made money from the stock market and on the contrary have generally lost it. In the last 15-20 years, we have seen several ups and downs, scams, global issues etc., be it the Harshad Mehta phase, the Tech bubble or the Lehman Crisis, and the Indian stock market has survived all these events.

Smart people who avoided all the noise during such events and continued with their SIPs have made around 18-20% CAGR on their investments.

There are and will be many more global and domestic events in the future and with the unfolding of each of these events, you will have two choices, first listen to noise and second avoid noise and keep investing.

Remember, there are two types of investors, one who makes money and the other who creates noise.

68 years of Independence

First, let me wish all of you a very Happy Independence Day. Today we all are celebrating 69 years of Independence. It is and will always remain a proud moment for all of us. After lots of sacrifice and efforts we finally achieved our Independence.

Isn’t it nice to be free and independent? How will you feel if you don’t have freedom to spend the way you want, go out when you want or buy stuff when you want. Its not going to be an easy affair.

But, how many of us actually want to be independent, I mean financially independent at the age of 60?  And even if we want, are we actually planning for it?

After spending 40-45 years of financially independent life, if suddenly you have to ask for money from your kids, I don’t know how many of us will be comfortable doing it. But if you don’t start planning for your retirement today it’s not going to be easy tomorrow either. It doesn’t make a difference if you are 25 or 35; you still have decent time to plan for your retirement. We keep on thinking that there is still a lot of time before retirement and we can start tomorrow, but that tomorrow never comes. The right time to invest is today.

Similar to the amount of sacrifice done in achieving freedom, it requires lots of sacrifice today to ensure financial freedom tomorrow.  Especially when culturally we are shifting from joint families to nuclear families, high chances that our kids will want to stay separately, and hence retirement planning should be the first agenda in financial planning.

“If you buy things which you don’t need, you will have to sell things which you need” – Warren Buffet

Savings v/s Investment

For many of us, it is may be difficult to differentiate between savings and investment. Seldom people realise the difference between the two. Well in the dictionary savings and investments are synonyms, but when it come to personal finance there is a huge difference.

So what are savings?? Savings are nothing but depositing money into risk free products, for example, savings bank account, bank fixed deposits,money back insurance etc. The returns generated by these products are generally in the range of 4% to 9%. These products are good for short term parking of money but when it comes to long term investment or wealth creation, they lose badly.

What is an investment?? Investment is placing your money into a product which not only beats inflation but also generates return over and above inflation. This is possible only when you invest into products which participate in the growth story of the economy, which is by way of investing into equities. This can be done either in form of direct equities or through mutual funds. Other avenues are investing into real estate or other alternate products like currency etc.

What difference does it make if someone invests into a bank FD or a mutual fund??

Well, rarely people realise that firstly, the income generated by most of these risk free products are taxable and secondly the average inflation for last 30 years is 7.5%. So when you put your money into a bank FD giving 9% return, the net return you get after deducting tax (30%, assuming you are in top slab) is 5.7%. Good for a risk free return. Now, here comes the twist. The average inflation in last 30 years is 7.5%. What does that mean?? It means that you have actually reduced your capital by 1.8% (7.5% – 5.7%). OMG!!!!

Let’s take the example of equities. In last 30 years Sensex has given an average return of 24.83% CAGR, so even after reducing inflation of 7.5%, the investor would have made a decent return of 17.31% CAGR. Now this is called investment or wealth creation.

The average return given by various asset classes in last 30 years are (these figures are before considering inflation):

Gold – 11.46%
Bank FD – 8.43%
Sensex – 24.83%
PPF – 10.21%
LIC Bonus Rate – 5.27%

Investment can’t be something which eats your capital. Your investments should have only one work, to create wealth for you.

So, STOP Saving and START Investing.