Cost of Ignorance and it’s consequences on financial life with some real life experiences

There are two kind of losses

1. Loss of money because of wrong decisions
2. Loss of potential profit because of lack of knowledge or having wrong information (I like to call it loss)

cost of ignorance

I personally feel and realized most of the losses happen to people because of the second point. Today after so much of progress, India Personal Finances still has some very immature characteristics. Indians have one of the highest saving rates in World, but we fail to invest our hard money in the best way.

What happened because of lack of knowledge

– Every insurance agent told that insurance is important, but not the best product for a person which suits him/her. They made Insurance policy synonymous with an Investment product to our average Indian. They packaged those Money back and Endowment policies as must have products for any married person with family.

– People love numbers, they love to get back 30 lacs back by investing just 10 lacs in a 20 years. They were never told about inflation, about decreasing purchasing power of money. Hence they can figure out that 30 lacs after 20 years is less than today’s 10 lacs, so actually they are getting cheated (yes, i like to call that cheated)

– Ask people what is an ETF, FMP, STP or REMF? Its like asking people what is LIC in 1957-58 or asking some one what is Mutual funds in early 90’s. These are important financial products of future, but people are not able to get benefited because of no knowledge.

– People who invest for long term (5-10+ years) still invest in FD’s and bonds, I don’t say that its wrong, but they do it because they don’t know that equity is best for long term, they know there is risk but don’t know that it almost no risk if they are investing in Equity for 10+ years.

When it comes to personal finance, people are almost clue less … Every one wants high returns but without any risk of loss. Everyone has heard about mutual funds giving 40-50% CAGR in 2005-06-07, but not even few know how what role did there excellent management and stock picks played to generate those returns.

Let me tell you what happens when you don’t know a lot of things.

See some of Real life examples :

Example 1 –

One of my classmate has taken ULIP, she pays 25000 per year as premium … She didn’t knew that there are high allocation charges of 18-20% in initial years… She didn’t knew that she can switch her investments in other safe options in ULIP if markets are down …

On the top of that she is given an Insurance of 1.25 lacs (i am not sure how it helps with her insurance needs) …

Example 2 –

One of my friend took LIC policy and pays 60000 per Annam as premium, he heard that it will save him tax … he did a great job in choosing the policy, returns are good … Insurance is fine .. but when asked if he has any financial dependents, he was clueless… I am not sure why the hell he took insurance at all then …

Example 3 –

One of my friend had put 100% of his investments (around 1.4 lacs) in Equity (80% shares and rest in mutual funds in early 2007 … when i asked on what basis he has invested all his money in Equity .. he said he needed good returns because this money will be used for his brother education in another 2 yrs …

I told him that they are risky and more than his risk appetite … he ignored it, saying that his money is almost grown by 70% already and gave him decent returns which he expected …. then came Jan 2008 crash and now his total investments are worth 80,000-90,000, he had invested in small -cap companies which gives nightmares to even great investment guru’s …

Example 4 –

Lot of my friends have invested in Mutual funds in lump sum in Dec 2007 or Jan 2008 and didn’t take SIP instead of my telling them several time that SIP is the the systematic approach and will bring down there average cost … and returns in volatile markets …

All of them have 30-40% loss at the moment, but all those who invested through SIP have loss of around 10-12% only … .

Example 5 –

I know many who earn good money, have good risk appetite and long term financial goals to meet … but they invest in what? NSC and Money back policy of insurance schemes … Any one who is out of his/her mind and is totally insane will invest in NSC or KVP in today time …

They take money back Insurance policy of 3 lacs or 5 lacs for 25 yrs or 30 yrs … I wonder how will that 5 lacs help them in 2035 when average monthly expenses of a medium class family will be around 1 lacs/month … they pay hefty premium of 30k, 40k or 50k in today’s time to get back the kind of money back after 30 yrs which will just pay there 1 yrs expenses …

They do it because they cant see not getting money at the end if they survive for all the money they have paid … they stay away from Term insurance because they don’t get any thing in the last .. So what if for 20 lacs insurance for 25 yrs they just have to pay 4200 total every year … they don’t get anything at last .. so better not to take term insurance .. its not giving anything … that’s what they feel …

Whats the solution?

It takes Rs.30 to buy “Outlook Money” and Rs.20 for “Money Today” (or read online : ) and 5-6 hrs to read all of it .

Just Rs.100 and some hrs per month can help anyone save thousands or lacs (depending on there investments), but it takes discipline and regularity


Today I am going to talk about something which is one of the extremely important tool for risk management and also something which is encouraged if you want stable returns from your investments. We are going to talk about the investments in Equity and Debt.


How Re-balancing the portfolio will help in –

  • Risk Management
  • Stability
  • Maximize returns

Understand the pros and cons of Equity and Debt


Pros : High returns, Low risk in Long term, High Liquidity
Cons : Risky, not suitable for short term investment


Pros : Stable and assured returns, Good investment for short term goals
Cons : Low returns

Equity + Debt :

When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the same time risk is also minimized compared to Equity and Debt, and when we apply technique of Portfolio Rebalancing, both risk and returns are well managed.

What is Portfolio Rebalancing?

The first step to understand is that each person must divide his investments into Equity and Debt in some ratio, it can be 40:60, 50:50, 60: 40, 75:25 or any ratio, The ratio depends on a persons risk taking capability and return expectation.

For an example let take the ratio to 60:40, portfolio rebalancing is nothing but rebalancing your portfolio in same ratio, in case they got changed after some months or years, as you wish. Preferably the good time is every 6 months or 1 yr, but not 15 days or 1 month.

Why Do we do it?

You have to understand that each person should concentrate on both returns and risk.

Case 1 : Equity:Debt goes up.

Action : Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.
Reason : As our Equity has gone up, we could loose a lot of it if some thing bad happens, we shift the excess part to Debt so that it is safe and grows at least.

Case 2: Equity:Debt Goes Down.

Action : Decrease the Debt part and shift it to Equity, so that Equity:Debt is same as earlier.
Reason : As out Equity part has decreased, we make sure that it is increased so that we don’t loose out on any opportunity.

Limitations Lets also talk about the limitations of this strategy, once your equity exposure has gone up, if you rebalance and bring down your Equity Exposure, you will loose out on the profits if Equity provides great returns after that, or if your Equity exposure as gone down and you bring up your exposure from Equity and if Equity does bad, then you will loose more.

Understanding the Game of Equity and Debt

But, we already said in the start that our primary concern is managing risk and profit is secondary. Let us understand that markets are unexpected and they can go in any direction, so better be safe than sorry. Many people are confused that if there equity has done very well then shall they book profits and get out with money and wait for markets to come down so that they can reinvest.

Portfolio rebalancing is the same thing but a little different name and methodology, so once you get good profit in something which was risky you transfer some part to non-risk Debt.

When we say Equity we mean shares or mutual funds which are related to Stock markets, which tend to go up and down, if it goes up, there are high chances that it will come down and when it comes down, its highly probable that it will move up again.

Lets us now see the most interesting part : Examples

Ajay has Rs 1,00,000 to invest and he want to invest it for 5 yrs and the 5 yrs returns are 30%, -35%, 40%, 60% and -30% .

Lets look at his money and its growth in 3 different mode
– Only Equity
– Only Debt
– Equity + Debt in some ratio (without Portfolio Rebalancing)

(click on this image to see in large resolution)

We can see here that Debt performed better than Equity, because of the uncertain movement in returns, also the Equity+Debt performed better than Equity but not Debt.

Let us now see the performance of Equity + Debt (with portfolio rebalance)

So now, every time our Equity and Debt ratio changes, we will rebalance it.

Ratio = 30:70
Investment = 1,00,000
Equity = 30,000
Debt = 70,000
At the end of 1st year (Equity return = 30% , and debt = 9%) :
Equity = 30,000 * (1.3) = 39,000
Debt = 70,000 * (1.09) = 76,300
Total Capital = 39,000 + 76,300 = 1,15,300

Now we will rebalance the portfolio

Equity = 30% of 115300 = 34590
Debt = 70% of 115300 = 80710

Now This is our new Equity and Debt investment

At the end of 2nd year (Equity return = -35% , and debt = 9%) :
Equity = 34590 * (1-.35) = 22484
Debt = 80710 * (1.09) = 87974
Total Capital = 22484 + 87974 = 110457

Now we will rebalance the portfolio

Equity = 30% of 110457 = 33137
Debt = 70% of 110457 = 77320

In this way we keep rebalancing the portfolio and lets see its performance for 5 yrs

(click on this image to see in large resolution)

Here, you can see that The column (E+D with PR) is the our main column which shows the performance with portfolio rebalancing. Here we have example for two ratio’s 30:70 and 70:30, we can clearly see that at the end of every year the final corpus for rebalanced portfolio was always greater than the non-balanced portfolio for both the ratio.

For ratio 30:70

Year 1 : 115300 vs 115300
Year 2 : 110457 vs 108517
Year 3 : 130671 vs 126142
Year 4 : 162424 vs 155595
Year 5 : 158039 vs 147452

For the 70:30 ratio also we can see that rebalanced portfolio outperformed the non-balanced portfolio.

Also you can see that for most of the years re-balanced portfolio outperformed “Only Equity” and “Only Debt” except 1st year and 4th year.

1st yr is very easy to understand why it happened and for 4th year, the returns were positive again after 3rd year and we made more profit in “Only Equity” portfolio because of high concentration on Equity side, but you can see that in 5th year, when there was a negative return of -35%, then the “Only Equity” fell heavily, but the rebalanced Portfolio fell very little because we have rebalanced it already and dropped our Equity Exposure to be safe.


So at last the question is what is the ultimate conclusion of all this talk.

Each person has his own Equity and Debt diversification, if the person is high risk taker his Equity component will be high else it will be less, every time your Equity and Debt component changes you have to see that it matches your risk profile, if it does not you bring it back to your level.

By bringing Equity exposure from high levels to your level, you are managing the risk you can take and by increasing the Equity exposure to your level back (in case it went down), you are making sure that you don’t miss out the chance.

Other reason is that Debt always increases, Every time your money goes up in Equity from your comfort level, you take that money which is earned by risk and shifting it to a safe place which will rise for sure though with less speed. Equity is linked with Stock Market and they tend to go up and down always and you don’t know when will it happen. So better manage that risk by Portfolio Rebalancing.

Please comment of this article to let me know how you feel about this article, Feel free to comment on anything which you feel is wrong .

Also, the example taken for this article was self made and does not represent any real life situation, but for sure its possible and similar scenarios have happened in our Stock Markets

Importance of Health Insurance

What is Health or Medical Insurance ?

The term health insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs.

health insurance

To understand it in simple words, you pay some amount of premium every year to a company and if some thing happens to you like an accident or if you have to through an operation or a surgery, they will pay for it provided, its covered under the Health Insurance.

Why do I need a Health Insurance?

This is the most common thing you can hear from a person who wants to avoid Health Insurance in India, but its one of the most important part of any ones portfolio or plans. People concentrate on the fact that what if nothing happens to them, but they fail to imagine the situation when some thing can happen.

Body is a complex thing, and no one knows what can happen in future, Even things like accidents is not in your hand, you can take try to avoid it, but what about others, what if some car hits you?

What if accidentally fell from some place? It can happen and it happens, and when you have to pay hefty bill for the treatment, you will realize that its a good idea to get covered by paying a small premium every year.

Consider this :

In Mumbai, businessman Manas Kumar rushed his wife Anita, 38, to hospital in January this year because she complained of breathlessness and shooting pain in the chest. Sure enough, it was a heart attack and Anita had to get an angioplasty done.

The cost of the procedure and stay at Hospital: Rs 1.5 lakh. But he didn’t have to shell out a single coin as he and his wife were covered under the Health Insurance with limit up to 4 lacs.

Why is Health Insurance more important now compared to earlier days?

Yes, Health care cost has increased many fold in last 20-30 yrs, Also now more and more younger people are complaining of Heart and other diseases which were seen in older people earlier.

Because of high stress jobs, bad eating habits and other similar problems, more and more cars in the city, pollution etc, the chances of getting some disease meeting with an accident etc have increased compared to earlier days.

More about Health Insurance

  • You get a good coverage for diseases and surgeries, so most probably you will be covered for most of the things.
  • You have to pay the premium which you can plan ahead and manage it, else if some thing unexpected happens, your finance gets in problem and impact your plans.
  • Also you get tax deduction under section 80D up to Rs.15,000 (Rs.20,000 for senior citizens).
  • You can also go for group insurance, its a ideal thing for a family with spouse, parents, kids … With group Insurance every one is covered and you pay less premium, also its more advantageous because there are many things which are covered in group insurance and not single person health insurance.
  • Make you buy a good cover which suits you, do good research and then choose the product.

Source : Money Today

4 mistakes in investing which you should avoid as an investor to build a healthy financial portfolio

If you want to save money it needs to be invested somewhere. But lot of people makes some mistakes in investing which seems very small at that time but they can prove a disaster to your financial life.

Today in this article I’m going to tell you 4 common mistakes in the investing world that you should avoid as an investor.

Investment mistakes

1. Take inadequate or wrong Life Insurance

This is my favorite, because it is the mistake done by majority of people, Most of the people are highly under insured. By default, a person must be at least covered for 10-15 times his annual expenses. So a person who has a yearly expenses of Rs 2.4 lacs (20000 per month), must have a cover of around 25-35 lacs at least.

But they have insurance like peanuts, 2 lacs, 5 lacs, or 10 lacs. The biggest reason for this is that they take wrong type of insurance. Most of the people need Term Insurance , but they end up with Money Back plans.
to read more at :

2. No Diversification in Investments

Most of the people don’t pay good attention at diversification. They are either in Debt or Equity. They must understand that they have to diversify along different types on investments to minimize risks and also to boost up there returns.
Some people have only FD’s, PPF’s or NSC in there portfolio, then there are people who hold only Shares or mutual funds. While the former misses on the returns, the later on is exposed to high risk. Combining both of them can decrease risk, increase stability of returns.

3. Tax investment because of Last month rush and not Financial Planning

Most of the people rush for tax saving only in the month of Feb-March, when they get a letter from company saying that they need to submit proofs of investments under section 80C, and that’s the reason why people end up taking wrong products, just because they don’t have time to plan there investments. The best thing is to start planning for tax saving right at the start of financial year.

4. Starting Late

This is another big mistake people do, they do not start investing at the right time. A lot of time people actually can save some money but they feel that its not worth to save a small amount, they think that when they will be in condition of saving enough per month, that would be the right time to start, which is far from truth.

Watch this video learn more about 4 biggest financial mistakes:

Consider this:

Ajay Started his career at 22. He has worked for 8 yrs and now he is 30 yr old, He wants retire at 60, and can invest for another 30 yrs. He want to generate 4 crores for his retirement. He has 3 choices

1. 6000 every month for next 30 yrs.
2. Invest 10,000 every month for next 7 yrs and then leave it to grow for another 23 yrs.
3. Invest 20,000 per month for 3 yrs and leave it for 27 yrs.

Guess which choice will give him maximum money , The one where he is investing more for less years !!! . Yes .. The corpus generated is as follows:

1. 4.2 crores
2. 4.59 crores
3. 5.11 crores

So the idea is, start early and invest more … remember:

Start Early, Invest less = Start Late, Invest a Lot

Btw, Had Ajay invested 4,000 per month right from the time when he was 22, and invest for next 8 yrs and waited for that money to grow till retirement, He can generate more than 6.5 CRORES !! That’s better than all the 3 choices 🙂

Also see this example :

Considering return of 15% per annum from Diversified Equity Mutual fund, If you invest 10,000 per month for 10 yrs and then leave it to grow for 20 yrs, your investments worth will be 4.5 crores, But before that if you also invested 5,000 for 5 yrs and then 10,000 for 10 yrs, your money will be 7.5 crores.