Akruti Agarwal - Page 4 - WCafe Financial Services Pvt Ltd

Should You Prepay Your Loans?

Hello fellow investors

Every person who takes a loan faces the question of whether they should prepay the loan or invest the surplus.
You take a loan at an EMI you can afford. Eventually, your income increases and you find that can pay back more of the loan than you had originally planned. So what should you do? Prepay your loan or invest the surplus?

The answer to this question depends upon 2 things:

A. How much interest are you paying on your outstanding loan?

B. How many returns would you earn by investing that money?

If the trade-off is positive enough then you continue with your loan and invest and if not – you prepay your loan. Pretty simple right? I shall break this up for you based on the type of loan you have and what kind of investments you are comfortable to make.

Credit Cards & Personal Loans:
These are the most expensive loans ever! In fact, the cost of borrowing i.e. the interest you pay on your credit card varies from 2% - 4% per month i.e. 24% to 48% per annum. The interest on your personal loans is also usually 14% - 18% which is also pretty high.

The only way you can earn a return higher than these loans is by taking an extreme risk with your investments which include the risk of losing your capital. It makes no financial sense in not paying your card bills and using that money to make investment gains.

Given choice, prepay your credit card and personal loans with your extra savings.

Education Loans and Home Loans:
Education loans are attractive for their tax deductions. Home loans are the cheapest and the longest loan that you will ever own and hence, there is always a question of whether to prepay your home loan or not.

To help you decide, you should do the below three checks.

Check I

One way to check this is how comfortable you are with your home loan. If the home loan EMI is at 50% of your take-home income – you should consider pre-paying your Home loan and reducing the EMI to at least 20%-30% of your take-home income. If it is already a 20%-30% of your home loan EMI, you can consider continuing with the home loan.

Next, you need to consider the returns of your current investment opportunities i.e. what is the after-tax return of available investments opportunities versus the interest burden on your home loan.

Let us understand this with numbers:

Cost of home loan: Home loans EMI are at an interest cost of about 8.00% per annum. If you fall under the 20% tax bracket, the home loan cost is reduced to 6.40% after assuming you are able to claim the entire interest as a deduction in your Income Tax Return. If you come under the 30% tax bracket, the cost of your loan falls to 5.60% because of the tax-saving you get.

Check II
Return on Investments: It will make sense not to prepay the loan if the returns you will earn from investing today are higher than your cost of 6.40% or 5.60%,

How much you earn from your investments would depend upon in which asset class, you invest your savings:

1) Fixed deposits – The interest rate on Fixed Deposits today range from 5.00% to 6.00%. Some of the Corporate deposits are yielding returns in the range of 7%. The post-tax returns will be lower by 20%/30% depending on your tax bracket.

If you are risk-averse and generally park your money in fixed deposits and other safe and low-return instruments, then you are certainly better off using your surplus earnings to reduce the home loan.

2) Equities - The returns on equity investment average about 12-15% over 10-15 years. So investing your surplus into Equities is numerically more beneficial than prepaying the loan.

Check III

But before you make the decision to invest the surplus in Equity Mutual Funds/Equity Stocks, you must check if you have the risk tolerance for dealing with the ups and downs of the equity market. You should choose to if you are planning to stay invested for 7-10 years because equity investments give better risk-adjusted returns over the long term only.

Also, by investing the surplus into Equities, your target Debt Equity ratio determined by your Asset Allocation should not get skewed towards Equities.

In conclusion, the decision to prepay the loan or not depends on your existing financial situation, the extra earnings from investments, and your risk-taking capacity as an individual.

Do ensure that you have your emergency fund in place and some investments at your disposal before you go ahead and prepay the loan with all the money at hand.

See you next Thursday!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Should you spend or invest your bonus?

Hi fellow investors

The bonus season is here!
Given that we cannot use our bonuses immediately to travel anywhere as such, it is a good time to put our thoughts to what we can do with our bonuses.

Generally, what you do with your bonus is a very personal choice on how you want to use your lump sum money and make the most of it. I have made the following suggestions to help you make an informed decision.

1. Reward yourself
Bonus is the money that you get for doing exceptional hard work in the year that has passed by and it is only fair to use a part of it to reward yourself. You can use it to buy yourself that fancy gadget that you always wanted, go on that vacation, put it aside for your dream car, etc.

2. Create your emergency fund
Using your bonus amount to create your emergency fund of 4-6 times of your monthly expenses if you already don't have one. Given, the uncertainty of COVID 19 has not yet found a resort/calm it is best to have an emergency fund in place.

3. Pay your outstanding debt
Many people use their bonuses to prepay their loans and reduce the burden of a heavy loan. While how much loan you are comfortable with is a very personal choice, you can consider these 2 parameters to check if you should prepay or not.

If your loan EMI is 50% or more of your take-home income, you should use your bonus amount to prepay and reduce the same to a comfortable 30% - 40% of your take-home income.
If your loan EMI is 20% - 30% of your take-home income, you can continue the same and pay it from your monthly income and enjoy tax benefits. You can avoid using your bonus to prepay your loan.

Basically, if you are having sleepless nights because of outstanding loan amounts, then use the bonus to prepay and have a good night's sleep.

4. Cover up your tax-saving investments
My first advice is always to invest regularly even for tax deductions to avoid any last-minute cash crunch in February and March. However, if you have not done the same, then use your bonus to do so and plan your investments to claim the tax deductions.

5. Keep it aside for your dream goals
Take that photography/culinary course, put it aside for your trip to Norway, buy that bike, save up for your business idea you have - keep this money aside for any goal of yours that is important to you and can be used for your own dreams. Use the bonus money for something that would add value and make you happy.

Bonus is a good lump sum payment and it is good to use it for something that will have a lasting impact on you.

Have fun splurging and investing (at least some of it).

See you next Thursday!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Money tips / Salary / Uncategorized - 07/23/2020

List of banks for your PPF investments

What is PPF?

Public provident fund is a popular investment scheme among investors courtesy of its multiple investor-friendly features and associated benefits. It is a long-term investment scheme popular among individuals who want to earn high but stable returns. Proper safekeeping of the principal amount is the prime target of individuals opening a PPF account.

Why open a PPF account?

A public provident fund scheme is ideal for individuals with a low-risk appetite and is okay to invest their money in the long term. Since this plan is mandated by the government, it is backed up with guaranteed returns to protect the financial needs of the masses in India.

Eligibility Criteria

Indian citizens residing in the country are eligible to open a PPF account in his/her name. Minors are also allowed to have a Public provident fund account in their name, provided it is operated by their parent.

Non-residential Indians are not permitted to open a new PPF account. However, any existing account in their name remains active till the completion of tenure. These accounts cannot be extended for 5 years – a benefit available to Indian residents.

Interest in a PPF Account

The interest payable on the public provident fund scheme is determined by the Central Government of India. It aims to provide higher interest than regular accounts maintained by various commercial banks in the country.

Interest rates currently payable on such accounts stand at 7.9% and are subject to quarterly updates at the discretion of the government.

How to Open a PPF Account

Both offline and online procedures are available for an individual provided he/she meets the requisite parameters mentioned in the eligibility criteria. Activating PPF online can be done by visiting the portal of a chosen bank or post office.

The following documents have to be produced at the time of activation of a public provident fund account –

KYC documents verifying the identity of an individual, such as Aadhaar, Voter ID, Driver’s License, etc.
PAN card.

Residential address proof.

Form for nominee declaration.
Passport-sized photograph.

Tax Benefits

Income tax exemptions are applicable on the principal amount invested in a PPF as an account. The entire value of an investment can be claimed for tax waiver under section 80C of the Income Tax Act of 1961. However, it should be kept in mind that the total principal that can be invested in one financial year cannot exceed Rs. 1.5 Lakh.

The total interest accrued on PPF investment is also exempt from any tax calculations.

Therefore, the entire amount redeemed from a PPF account upon completion of maturity is not subject to taxation. This policy makes the public provident fund scheme attractive to many investors in India.

List of Banks Offering PPF Accounts

Allahabad Bank
Corporation Bank
Bank of Baroda
HDFC Bank
ICICI Bank
Axis Bank
Kotak Mahindra Bank
State Bank of India and its subsidiaries which include the following –
- State Bank of Travancore
- State Bank of Bikaner and Jaipur
- State Bank of Hyderabad
- State Bank of Patiala
- State Bank of Mysore
Canara Bank
Bank of India
Union Bank of India
Oriental Bank of Commerce
Central Bank of India
Bank of Maharashtra
Dena Bank
Syndicate Bank
United Bank of India
Indian Overseas Bank
Vijaya Bank
IDBI Bank
Andhra Bank
Punjab National Bank
UCO Bank
Punjab and Sind Bank

These are some of the common PPF Account opening banks. There are other banks too and if you hold a savings account with another bank that is not on the list, you can find out whether the bank is a PPF Account opening bank or not.

Insurance / Investments / Money tips / Salary / Tax - 07/20/2020

A Fixed Interest Of 8.5% With Low Interest- Invest Now?

Hi fellow investors

Have you recently checked returns of debt investment options like Fixed deposits/Liquid Funds? I am sure you would have been very disappointed by the return numbers there. The approx interest from some of the popular debt investments today are::

1. Overnight/Liquid Debt Funds (Up to 90 days): 3.5% - 4.0%
2. Short term Debt Funds (1-3 yrs): 5.5% - 6.5%
3. Fixed Deposits (1-5 years): 5.5% - 6.5%
4. Bharat Bond ETF (5-year bond) - 5.46%
5. Public Provident Fund (PPF) (15 years) - 7.1%

Clearly, the returns have reduced by 3%-5% across different debts in the past few months and debt as an investment category doesn't look very attractive. With the latest inflation number hovering at 6%, our money invested in the above debt options barely covers the impact of inflation on our expenses.

What if I told you that there was an option to earn 8.5% per annum?

For salaried fellow investors, it is something you deal with every payslip; Employee Provident Fund (EPF), giving an interest rate of 8.5% (for FY 2020-21) which is not only risk free, but also tax free.

How can you make the most of it?

If you are a salaried individual and your company has a provident fund and you have not opted for EPF, you could opt for it as in the current market scenario no other debt investment is giving returns as high as 8.5% p.a.

1. Maximize your EPF Limit

If you are just contributing only INR 1,800 (the minimum required under EPF rules) towards your EPF account, you could consider increasing it making it to 12% of your basic salary. That way you can make the full use of the EPF limit available to you.

2. Invest as VPF (Voluntary Provident Fund)

Where you are already investing 12% of your Basic Salary towards EPF and want to invest more to earn 8.5% you have an option to increase your contribution in EPF by opting for VPF (Voluntary Provident Fund). You can invest an amount up to your entire 'Basic' salary with the EPFO and earn the same interest rate of 8.5%. Please note your employer is not obliged to match this higher contribution and hence, it is called a 'voluntary' provident fund.

Features of VPF that you must know of

It will earn you the same interest as your EPF i.e. 8.5% per annum (currently)
It will have a lock-in period of 5 to 10 years but you can withdraw for some specific reasons. Check out when can you withdraw from your EPF here.
Your employer will not match the contribution of your VPF unlike EPF
our contribution to VPF is eligible for tax deduction under section 80C.
The interest earned from VPF would also be tax-free (provided it is not withdrawn within the first 5 years).

So, if you have funds that you want to invest in risk-free investments and can park it for a while, (EPF + VPF) is a good debt investment option and can be mapped to your retirement goal.

How much should you invest in VPF?

We are not advising you to invest your entire salary as VPF and have no money to pay your bills or cover your short term goals. We also don't want you to miss out on your equity investments that result in wealth creation over the long run. You can compute how much to invest as your VPF as under:

For example, if your in-hand salary is INR 1,50,000 per month (A basic component of INR 50,000):

12% of your basic salary i.e. INR 6,000 would be invested as your EPF.
A matching amount of INR 6,000 will be contributed by your Employer.
If your monthly expenses are INR 100,000, you have a monthly savings of INR 62,000 (INR 50,000 + INR 12,000).

Now if you are looking to invest in VPF, the lower of the 2 parameters will help you compute the same.

Limit I:
Not more than 40% of your total portfolio holding should be in illiquid investments (Know about the step-by-step process to withdraw your EPF). You can ensure this by not contributing more than 40% of your monthly savings towards Illiquid investments.
Accordingly, 40% of your savings (INR 62,000) will be INR 24,800 out of which INR 12,000 is already invested as EPF. So the balance you could additionally invest is INR 12,800 as per this.

Limit II:
It should be considered as a part of the contribution you make towards your retirement goal. Now if your retirement goal requires you to invest 18,000 per month for the next 25 years to achieve your corpus to retire peacefully (based on Wealth Cafe Investing tool) and you are already investing INR 12,000 from the EPF, then only the balance of INR 6,000 should be invested towards VPF.

Limit III:
You are already investing INR 12,000 towards EPF. A maximum of another INR 38,000 can be invested by you in VPF.

Based on the above limits, INR 12,800 or INR 6,000 or INR 38,000 whichever is lower can be additionally invested in your VPF.

For simplicity sake, the above computation assumes that you are not investing your money in any other illiquid investments and are not saving for your retirement in any fund apart from EPF and VPF. If you are doing so, the amount invested in that could be reduced from the amount arrived at in Limit I & II above.

Another advantage of using the VPF route is that it is invested directly from your salary and then the balance salary comes to you, ensuring the consistency of your investments.

Do review your numbers and you will have to contact your HR/accounts team to start contributing to VPF. Let us know if you have any questions about this in the comments section of our blog.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Debt / Equity / Investments / Money tips / Salary - 07/15/2020

Be the champion of your Investments - A Liverpool Fan's Analogy

Hi fellow investor,

Date night discussions with my husband does belong to our goals or my travel plans but the evenings he gets a chance to contribute to our conversations (which is not rare), it is a detailed discussion on how sports can help you build character, release stress, and become a better strategist. For me, sports was always Cricket and Sachin (why not!); but this weekend I was celebrating the championship win of Liverpool Football Club (they won the domestic league after 3 decades) with my husband.

I am not a football expert; but yes, in the past one year, I have heard enough stories and 'force watched' some late-night matches with my husband to understand what this win means to him and in general to everyone who is a football fan. So along with one such discussion, we have together compiled this financial learning from the win of Liverpool and we hope that you will enjoy this too.

Learnings from the Liverpool championship after 30 years:

Planning & Strategy Is Most Crucial For Your Win
The player cannot just kick a football anywhere he wants - similarly you just can't get up and start investing your money anywhere you want. There are defined goals and strategies to put your money (like the ball) in the right asset classes. As they say - A goal without a plan is just a wish.

The way the Liverpool team transformed itself from very ordinary gameplay to a very possession and pressing-oriented gameplay with a purpose behind every move, and every player in the team has a specific role to play, similarly there is a definite role to be played by every asset in your portfolio and you should invest by maintaining your asset allocation and goals.

Some Championships Take Time
Don't jump ship after every loss - Liverpool, historically one of the largest and most successful clubs in the football world had to wait for 30 years to win a domestic league cup. They won the champions league last year making it 6 Champions League titles (a record number of Champions League by an English club). But they were just a point shy of a Domestic League last year which cost them the title (but that did not make me stop supporting the club). Finally, they made it happen this year!! So yes, at the face of it one may say 30 years too long but it is important to know what has happened right and wrong in these years.

Similarly, when you are investing, some of your best investments may give you unexpected loss in some years and you may tend to dump them. If you start selling with every sight of loss, your investments will not have enough time to compound and grow. Every decision to invest, stay, and sell must be made based on an appropriate analysis of the variations in the returns and your goals.

Focus On The Management Style
A new manager who took charge almost 5 years ago, brought about some gradual changes to the club for good, resulting in all the success the Club garnered in these 5 years.

Similarly, when you are investing in Stocks or Mutual Funds, a change in management (style of investing) can move your investments either towards good or bad. Hence, it's important to know about your managers, their style of investing, and whether that matches your expectations from the investment or not. It is not only numbers that show you performance but also non-financial things like the attitude and strategy of the management.

A Good Strategy May Take Time To Show Results
Give time to your fund managers/advisors - Jurgen Klopp took over Liverpool FC almost 5 years ago (in October 2015) and the first 3 years were only spent in organizing/ streamlining the team, picking up the right player to include in the squad and prepping them. There was not much belief then as compared to now. In the past year, Liverpool FC has won 4 major honors in football that made them the world Champions in 2020. But when someone with new strategies comes in we need to be patient about the kind of results they can show.

The same applies to our investments and advisors. No one holds a magic wand and it takes time to show results; in the right hands, there is a possibility of the results compounding over time and give the investors exponential returns. Don't go asking - 'Kitna returns milega?' as your first question to your advisors.
"Sometimes it is not about money, but rather the process of managing the money" - Anonymous

To sum up, have a plan for your investments and see them work towards that plan instead of letting time and circumstances let your goals fade away. Discuss the plan with your partners and family just like you discuss sports and movies. In the last year I learnt a lot about about football and Liverpool over the dinner table. But we never forget to sit and discuss our investments each month and review our statements because remember - You will never walk alone.

Investments / Money tips - 07/08/2020

How can I downsize my portfolio? - Part 2

Hi fellow Investors,

As discussed 2 weeks back (in our article - How many Mutual Funds should you have, an investor should not have more than 5-6 Mutual Funds in his/her portfolio. These should be restricted to 1 Mutual Fund scheme to invest in each Mutual Fund category based on your risk profile, goals, and other requirements. As a follow up to this, we told you that we shall tell you how to downsize/limit your portfolio to 5-6 Mutual Fund schemes.

The simplest way to do this is to first identify which Mutual Fund categories you need to invest in (based on your risk and goals) and identify the right schemes in each category (it is advisable to invest in schemes that are right for you and not look for the best schemes). This will give you your desired holding of Mutual Fund Schemes.

Once you have done that, it is important to take stock of mutual funds that you already have.

Make a list of all your investments in Mutual Funds. To do this, you can download your Consolidated Account Statement from CAMS Online. It will give you transaction wise details of all your mutual fund transactions provided you have used your existing email ID when doing the transactions. Otherwise, if you have an agent or use a platform for investing in mutual funds - you can ask them as well for a holding report.

Compare the existing holding of schemes with the list of desired holding schemes determined above.

SELL unwanted schemes

The way to downsize is to redeem the extra/unwanted schemes and invest the proceeds from the redemption into the desired mutual fund schemes. You can exit from some scheme and buy another scheme in the same category (hence, setting off your loss or gain). You will have to trim your portfolio to reduce it to 5-6 mutual fund schemes.

How should you decide what to sell?

Maintain your Asset Allocation
We always tell you to do this and this time around as well, it's the same solution. Your investments in various asset classes should be made to achieve the right allocation. Even with Mutual Funds, your split between Debt & Equity should be based on your asset allocation. You can read more on this here - https://financial.wealthcafe.in/how-should-you-invest-right-now/

% of your portfolio - Small value funds
You can choose to sell the schemes where the invested amount is low and they are only increasing the number of schemes you hold.

Underperforming funds
Analyze the performance of your invested funds and understand which are the funds you should have in your portfolio. Exit from risky funds and poor performing funds. This can be understood by checking the returns of your scheme with the underlying benchmark returns.
Currently, almost all your investments pre-march would be performing poorly, hence it is important for you to check funds past consistent performance and not just last 2 months' results.

Minimalism is the key to a cleaner and better portfolio as the reduced number of funds makes it easier for you to analyze your invested funds regularly and also, take a more informed decision with respect to your investments. Also, the cost of managing these funds is reduced.

Where you have just started investing, keep in mind that every time you want to invest more money, you need not invest that in a new mutual fund scheme. You can instead increase your SIP amounts in your existing schemes.

Consult an Advisor
Where you already have 15 - 20 Mutual Funds and are finding it difficult to select which ones to keep and which ones to let go, it is advisable to get the assistance of a financial advisor who will go through your risk profile and advise you exactly which mutual funds to hold and for how long. Where you need an advisor/financial planner for your specific financial needs, you can reach out to us at https://ria.wealthcafe.in/

Investments / Money tips / Mutual Funds - 07/01/2020

What To Do When You Lose a Part of Your Income

Hi there

Times are difficult, as the economy is getting back on its feet and everything is slowly opening up again. Payments have been delayed/cut and jobs have been lost amongst the various uncertainties that plague our everyday. Amidst this, it is very important to keep our heads straight and use this time and your money effectively.

Here are a few things that you can do right now to make the most of your money in case you have had a pay cut/job loss recently:

1) Keep a track of all your spendings

It is extremely important to prioritize your expenses and use whatever money you have effectively. Make a list of all your expenses - divide them into essential and non-essential expenses (and avoid this completely for a while). This way, you can reduce expenses which are not important at the moment.

We know shopping is relaxing and helps you feel good but do not use 'delivery start ho gaya' as an excuse to go overboard with online shopping. If you don't need something in the next few months as you are still working from home,- DO NOT SHOP! SAVE that amount instead! Use this time to evaluate all your unnecessary spendings and list them down and control it.

2) Use your Emergency Fund

This is what your Emergency Fund was built for. If you have been following us, you must be having at least 3 months' worth of your expenses on hand. DO use it to cover your essentials like groceries and rent. DO NOT use it to splurge on that big sale. Make sure you are spending your Emergency Fund sensibly. Cutting back on spending will help you stretch your savings for longer.

If you can take support from your parents/spouse/family - there is no harm in asking them for help. These are tough times and asking for help is not a bad thing.

3) Hide your Credit Cards

Hide this card, give it to your mother if you must, to keep it away; but do not use it. Credit cards may look very lucrative right now and even make you buy some things which you 'feel' like buying. Stay away from them. It will be a financial disaster, given the uncertainty around your future income and the interest rates that get charged on deferred credit card payments. Completely avoid using them.

4) Stop/Pause your Investments

If there is a reduction in income/ or no income now - it is advisable to stop/pause your SIPs until you have a regular flow of income to match up to them. If you have a credit card payment pending, use your savings to pay that off. But remember, the idea, for now, is to free up your cash flows, instead of spending or investing it away.

Also, evaluate your investments to check what you can do if things get worse (its good to be hopeful but better to be planned) and know all the avenues you can revert to if things go bad.

Ensure you have your health insurance & life insurance in place. If a health emergency strikes now, it can really eat into your savings, so it is better to be prepared.

As a last resort - if you have been contributing to EPF (Employee provident fund), you have the option of taking money out from the same, worth 3 months of your contribution to EPF. Do remember it will take some time to get this money credited to your account and we would recommend not touching it unless it is extremely important.

5) Start preparing for what is next right away

Update your skill sets, read about things that can help you become better in your field, and also garner more attention.
Update your social media and use it as a tool to interact and network with new people.
Take up freelancing work, many organizations are looking to hire part-time/freelancers for case-specific work - a good time to learn about that.
The idea is to reach out as much as possible, towards people and opportunities that may help you come out of this crisis sooner.

Clear communication and a positive planned approach will help you sail through this. Look at hidden opportunities in this to develop those skill sets, writing your weekly blogs (like this one :P) or catch up on your reading.

Whenever you feel like you're stuck in a difficult situation, it is advisable to seek the services of a good, honest financial advisor. You can always reach out to us for any financial problems that you may have. We are here to listen and help you out.

Until then keep reading, learning, and growing. This too shall pass.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Uncategorized - 06/24/2020

Mistakes Investors Make That You Should Avoid

Hello fellow investors!

This Thursday, we are sharing a few mistakes that a beginner does when he/she starts investing and it is important that you understand them and act on it accordingly.

1. Not investing

The first and the biggest mistake investors and savers make is not doing it.
Don’t wait for that raise, inheritance, or lottery win. Start today, right now, with whatever you can.

Consider this: If you can save just 100 INR a day every day for 20 years, and earn 12 percent on it, you’ll end up with INR 30,48,395. That’s enough to change your life and the lives of those you love. So let's just start with keeping INR 100 aside.

2. Investing before doing your homework

When it comes to investing in risk assets like stocks, one mistake I’ve made is going on “gut instinct” and 20 minutes of Internet research.

When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of online research and information available free, not to mention TV shows and library books.

3. Being impatient

In a post called The 10 Commandments of Wealth and Happiness, the author, Stacy Johnson, offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever.

Stare at a newly planted tree for 24 hours and you’ll be convinced it’s not growing. Fixate on your investments the same way, and you could miss out on a game-changer.

As discussed above, your 100 INR daily grows into 30 lakhs over 20 years, you gotta be consistent and patient.

4. Not diversifying

There are two types of risk in stocks. The first is called market risk: If the entire market tanks, your stocks probably will as well. The other is called company risk: the risk a specific company will do poorly.

It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies.

Can’t afford to own a meaningful number of companies? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens – even hundreds – of companies with an investment of as little as INR 500.

5. Taking too much risk

Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.

Some investments are little more than gambling. Investments like options and commodities, for example, promise huge rewards, but the risk is also huge. Don't forget high risk = high returns.

6. Not taking enough risk

On the other side of the same coin, some investors stand like a deer in the headlights, unwilling to take even a measured amount of risk.

Instead, they keep their savings only in fixed deposits and bank, earning less than 6% (which is only reducing) and comforting themselves with Mark Twain’s expression: “I’m more concerned with the return of my money than the return on my money.”

Insured savings will ensure you never lose anything. But they’ll also ensure the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.

7. Paying too much attention

There is such a thing as information overload. Between the Internet, newspapers, magazines, and cable TV, it’s easy to get more than your fill of conflicting information.

Step back, look at the big picture, find a few financial journalists or others you trust, then tune out the rest.

8. Following the herd

One of the world’s wealthiest men, Warren Buffet, said, “Be fearful when others are greedy; be greedy when others are fearful.”

If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest – even if that day is a long way away, and even if it’s possible things could get worse before they get better.

We have seen the recovery that has happened from the below of March 23, 2020, of the stock market to current where we are almost back to what we were at the beginning of 2020.

9. Holding on when you should be letting go

Equity is best played as a long game. You should hold on long enough to see it through, but not knowing when to get out could cost you big.

Don’t obsess over your investments, but don’t ignore them either.

10. Being overconfident

The economy runs in cycles of boom and bust – when times are good, people often confuse luck with skill.

This is what happened during the housing bubble and the dot.com stock bubble and the past 4 months (March 2020 to July 2020). Being in the right place at the right time isn’t the same as being smart.

11. Failing to adjust

How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes.

As you approach retirement age, you should reduce your risk.

12. Not seeking qualified help

While investing isn’t rocket science, if you don’t have the time or temperament, consider getting help.
The wrong help?
A commissioned salesperson more interested in their financial success than yours.
The right help?
A fee-based planner with the right blend of education, knowledge, credentials, and experience - you can contact us at ria.wealthcafe.in

Happy Investing!

Disclaimer: - The emailers are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Investments - 06/19/2020

How Many Mutual Funds Should You Have? (Part 1)

This week I am back with some discussion around Mutual Funds. In one of my workshops, during our mutual fund's discussion, I had this one trainee ask me - So what's your number?

I stared at her for a while not knowing what I am supposed to answer to that. Well, she rephrased her question, 'What is the number of mutual funds you are invested in?' I said, '6 Mutual Funds'.She had the bewildered look on her face wondering how I had so fewer funds. I decided to show her my portfolio.

How many mutual funds schemes should you own?

Owning around 5-7 mutual fund schemes across various categories is enough. These many mutual fund schemes will help you diversify, do your asset allocation, and also map these investments to your goals. You can invest your savings in the mutual fund schemes as per the below categories:

Large Cap Mutual Fund (Equity)
Large & Mid-Cap Mutual Fund (Equity) (your ELSS tax saving schemes are generally a Large & Mid Cap Mutual Fund)
Mid Cap Mutual Fund (Equity)
Small-Cap Mutual Fund (Equity)
Thematic Mutual Fund (where you understand specific sectors and have a higher risk-taking appetite)
Short Term Debt Mutual Fund (For your short term goals)
Long Term Debt Mutual Fund (For your long term goals)

In addition to the above, I have one Liquid Mutual Fund where I park my Emergency Funds. You can park your Emergency Fund in a Bank Fixed Deposit as an alternative.

Why only 5-7 Mutual Funds?

When you invest in Mutual Funds, you already diversify your risk across the stocks of the companies a particular mutual fund has invested in. Hence, with a large-cap mutual fund, your risk is diversified across more than 70 stocks that particular large-cap mutual fund has invested in. Investing in three different large-cap funds is not going to reduce your risk further, it will only make your investment portfolio messy.

'Mutual funds investing is to diversify your risk and not to di"worsify" the same'.

Further, reducing the number of schemes to a minimum of 5 also reduces the cost of managing the same and the time that goes in keeping a track of it and analyzing it regularly.

What do I do when I have more savings to Invest?

Increase your investment in the existing mutual fund's schemes you own.
Investing in a new scheme every time you have extra savings will just lead you to own 15-20 mutual funds schemes with no plan in sight. Hence, it is important to do your due diligence and identify the mutual funds you want to invest in and stick to them.

Yes, you must review your schemes regularly to see how are they performing in various market cycles but know that all schemes will not give you the best results always. There are some time periods where mid-cap and small-cap schemes will do better, other times when large-cap schemes will outperform and sometimes your debt investments will be the best performer for the year. Hence, it is important to be diversified across categories.

'Every time I check for the best mutual fund scheme and invest in the ones that are on the top'

Studies have proven that selecting mutual funds based on high-performance track records is naive. The Star rating of various mutual fund keeps changing, a fund that is top rated in this one year, is hardly the top-rated fund in the subsequent years. Tim Courtney, a chief Investment advisor of US-based Burns Advisory did backtesting of past performance of the funds most highly rated, he found that they usually performed poorly after they have gotten 5 ratings. Hulbert financial digest, an investment newsletter found that if investors continually adjusted their mutual funds' holdings to hold only the highest-rated funds, a total stock market index would have beaten them by 45.8 % in the past decade (he studied funds from 1994 to 2004 in the USA). In fact over the years, it has gotten even more difficult to beat the markets and get alpha on your investments. - extracts from Millionaire extracts - How to build wealth living overseas by Andrew Hallam

Hence, just investing in top-rated schemes is not going to give you the desired returns but only make your portfolio messy and not even get you the best returns.

Wealth cafe Takeaway - While you are investing in 5-7 different schemes across the options stated above, ensure that you invest across various AMCs as well. This will ensure that you are diversifying your risk and your entire money is not with only one AMC.

We shall follow up this article with a part 2 on how to downsize your portfolio.

Until then, keep reading, if you find this helpful, do share it with your friends.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Making Money / Money tips / Mutual Funds / Uncategorized - 06/17/2020

One size does not fit all!

Hi fellow investors,

Ever walked into the ladies' shoe section of the mall during the sale season?

They have long tables filled with all kinds of shoes and each table has the shoe size written on it. I happened to have very petite feet (a size 36) and I look forward to the sale season to upgrade my shoe collection. And during the sale, I go to the mall oozing with enthusiasm to pick up some great heels at flat 50% off, fight off scores of other women and claw my way to the front of the table only to find ugly black chappals in my size!

However, at the end of the store, there is a table filled with some amazing shoes and without the commotion around it, but they are SIZE 41 - 42. Ugh! I hate having small feet during the sale season. All the best brands have their best discounts on shoes in the 40-42 size range. They even have color options! They have so many great options that I am even tempted to try them on just to see what they'd look like. But I do NOT buy these shoes because they are NOT my SIZE. They may be the BEST shoes out there but I DO NOT BUY it. Why would anyone spend money on shoes that would ever fit them, right?

So, in spite of knowing not to buy shoes that do not fit them, why do people invest without knowing what is the right fit for them?

Everyone is always searching for:
'The best Mutual Funds to Invest in?'
'Tell me where can I get the maximum return possible'
'How much returns will I make through this investment'

The best returns are in the shoe of size 42 but clearly, they do not fit me and will only be a waste of money and similarly, so will your investments if they are bought considering only the 'best returns' as criteria.

You need to invest your money in the investments which are 'RIGHT' for you as per your risk profile. The investments which fit perfectly well in the asset allocation determined by your risk profile just as my feet size determine the final shoe design I pick.

What is this Risk Profile?

The risk profile is your risk-taking capacity and how much risk you can take so that you can peacefully sleep at night. It is based on your ability to take a risk and your willingness to take the risk. Where the ability is more a function of your age, your money, and your goals, willingness is completely behavioral and is determined by your life experiences and education.

Before you start your investments, it is very important that you take a risk profile test (we have attached an indicative risk profile for your reference) and know what is the RIGHT Debt-Equity mix for you.

High Risk = High Returns
Low Risk = Low Returns

Where you make the investment decision based on the risk you are taking, you will eventually be able to achieve your goals with peace of mind and not worrying about the volatility in the markets.
Shouldn't that be the whole point of investing in the first place?

Hence, don't just run behind the highest returns, they might not be the right fit for you. Instead, understand what you want to achieve by investing, plan accordingly, and then invest.

Disclaimer - These articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Investments / Money tips - 06/10/2020

Should You Prepay Your Loans?

Should you spend or invest your bonus?