Author: Jagoinvestor

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All you want to know about Options trading – For beginner investors

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What is an Option?

Option is a contract which gives buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. An option has an Expiry date, when its automatically exercised if it has any intrinsic value left.

When you buy an option you have to pay some premium at the time of buying it.

options trading

You can buy or sell Options just like you buy or sell Shares. They are traded in real time. An option value depends on some underling, which can be a stock or an index or even interest rate, The scope of this article is restricted to Stock options or index options.

An example of index option is Nifty option, so its underlying is Nifty.

You must know that its a kind of Derivative : Derivatives are any instrument whose value are derived from some other thing, there value depends on some other thing, like In case of options in stock market, there value depend on either a stock or an index.

Futures are also a kind of Derivatives, The minimum money required for trade in Futures are much more than Options. You can trade in options with as little as 2,000 or 3,000 (depending on the option you are trading in).

Types of option: CALL and PUT

CALL option gives you the right to BUY something anytime before expiry at a predetermined price. The value of the CALL option increases as the Price of the underlying thing increases. The reason for this is because you can still buy it at the fixed price and the difference is your profit.

PUT option gives you the right to SELL something anytime before expiry at a predetermined price. The value of PUT option increases as the price of the underlying Decreases. The reason is that you still have the right to SELL it at fixed price and difference will be your profit.

SOME OPTION TERMS

Exercising an Option :exercise an Option means to Buy(CALL) or Sell(PUT) the stock on the expiry date if they are European style else Buy or sell anytime on or before Expiry if they are American Style.

Expiry Date : The date on which an option will expire and then it will be exercised automatically if it has any intrinsic value left.

Option Style : Options are of two styles, American style (It can be exercised any time before or on expiry date) and European Style (exercised on expiry only).

STRIKE Price : Strike rate is Stated Price for which the underlying stock can be purchased or sold on expiry date.

SPOT Price : The current price of the underlying at a particular time.

LOT : Options are traded in lot size, you can buy 1 lot, 2 lot or any number of lots, and a lot has a particular number of shares in a single lot, Like Nifty options have lot size of 50.

Premium : Every option has some premium which users have to pay when they purchase an Option. So for a CALL option, the premium increases when its underlying price increase and decreases when its underlying price decreased and just opposite of PUT option.

How does an OPTION look like?

Example : CHAFER 90 CE 1.95, EXPIRY 26th June

CHAFER is the symbol for a stock called CHAMBAL FERTILIZERS, so its a Stock option. The expiry date of this option is 26th June (current year).

90 CE means its a CALL (C) option, which is European Style (E, can be exercised on expiry date only) and the Strike rate is 90, means that you have right to buy 1 lot (3450 shares, it depends on the option how many shares a lot has) of chambal fertilizers shares at Rs 90 on the date of expiry if you want.

What are the Profit and Losses you can make?

The Losses are always limited to the extent of premium you pay (in worst case you do not exercise the option and you let your premium go), On the other hand the profits are theoretically unlimited, because the option price can keeps increasing when underlying increases or decreases depending on the type of option.

What is time value and option value ?

The Premium you pay for the option has two components
– Time Value
– Intrinsic value

Premium = Time value + Intrinsic Value

Intrinsic value is the true worth of the option (premium) and Time value is the value which is there because of the time left for the expiry, because as the Expiry time comes near the risk of loosing the money is high. So time value keeps decreasing as the expiry comes closer.

There fore you will see that even if STRIKE price is closer to SPOT price, the option price will be very high if the expiry is after many days.

For CALL option price moves towards 0 if SPOT is less then STRIKE price and expiry comes closer.
For PUT option price moves towards 0 id SPOT is higher than STRIKE and expiry comes closer.

Watch this video to learn more details about Options trading:

How does it works?

You can either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.

Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging

Example 1:

Suppose you buy CHAFER 90 CE EXPIRY 26th June, at a premium of 1.95 (you will have to pay Rs 1.95 * 3450 to buy this option), and the SPOT is 78, means currently price of Chambal fertilizer share is Rs. 78, now the price of option will follow the price of the share price.

If price increases to say 85, then the option may increase to 4.5 (depending on demand and supply), and at this point you can sell the option and earn a profit of 4.5-1.95 = 2.55 Per share, profit of 130%.

Now suppose on 26th June (Expiry day), the price of Chambal Fertilizer is Rs 100, then the option will be exercised and who ever has the option at that time will receive the profit of Rs 10 (total 10 * 3450) and the option will not be exercised if the SPOT (current price) of share is below 90, because then he will make loss if exercised.

(Remember, its not your obligation to exercises the option (you exercise if its in profit, or you loose your premium)

When do you buy Options?

Example 1 :

Suppose Infosys is at 2000 today (1st June) and you are optimistic that its price will go further go up 10% or 15% (2200 or 2300). so you buy a CALL option of Infosys which is going to Expire in approx 1 month, say INFOSYS 2200 CE 10.5 26th June is available and lot size is 1000, so you pay 1000 * 10.5 = Rs 10,500 for this option.

Now option price will move the same way as the price of Infosys share. At the end of the Expiry date if Price of Infosys share will be more than the 2200 then the option will be called “In the Money” as it will be in profit when exercised Else it will be out of money.

So suppose Price of Infosys share is 2280 at the end of Expiry then you exercise the option and get 1000 * 80 = Rs 80,000, you can also sell the option anytime before Expiry date if you want to make profit and convinced that the option price has reached at a good point.

Example 2:

You think that Economy is not doing well and markets as whole will fall because of high inflation news and political issues (or for any reason), Suppose Nifty is at 4600 and you believe that it will fall to 4300 in 2-3 months, Suppose current date is 1st June then you can buy NIFTY PE 4300 AUG , assume premium is Rs 15.

Case 1: If markets fall badly and reaches 4500 in 1 month and the premium increase to 330. You can either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.

Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging)

The main use of Options is for hedging, So if you have bought some 1000 shares of company ABC at Rs 20 , and think that price may fall to 15 in one month ,you can ABC PE 20 or 19, and pay a small premium, Now you are covered for the loss you will make on shares, because you have right to sell the shares at 20 or 19 (depends on the price you bought the options at).

Some other important points

1. Options are very risky and very rewarding, it can give returns of even 100% or 200% in day, or can give negative returns of 50% or 80% in a day.

2. Options are very volatile, so its a good idea to be patient with options.

3. Buying Options near its Expiry dates are highly risky, because if they go in wrong direction they don’t have time to come back.

4. Its not a good idea to buy a option with strike price very far from the SPOT price unless there is some good reason for it. Options with more gap between between STRIKE and SPOT have less premium, but very risky (and can be very rewarding too).

5. Its not a good idea to put a Stop loss for your option very near to the current price, because its highly probable that it will come to Stop loss point and then again bounce back because of there high volatility.

6. Its a good idea to set a target to book profits and get out, rather than trying to get maximum out of option. If you don’t exit at a good point, the chances are that value will again bounce back to normal price and you will miss a chance.

(I sold Chambal Fertilizer CALL 90 option when it price went up to 6.5 though 8-9 looked achievable target next day, but i thought its a great return and didn’t miss the chance of booking 250% return in 2 days, Buy price was 1.95).

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

How to evaluate Returns from Investments

Posted on by Jagoinvestor


Which return is better return, 40% or 30% ?

There is no doubt that 40% is more better return. But is it a right way to judge the return just by seeing the number. we ignore another important factor called as “RISK” involved. In most of the cases, people really don’t consider evaluating the return in relation to RISK taken to earn that kind of return.

Which is better?

1. 30% with High risk
2. 20% with moderate risk

In this case , 2nd is better than 1st , as the Return per unit of risk is better than the 1st case. (considering High risk is 3 units , and moderate is 2 and Low is 1 .

So the actual measure of return should be, Return per unit of risk

REAL RETURN = ABSOLUTE RETURN / RISK TAKEN

There are many balanced mutual funds which have given little less return than diversified equity funds , and hence can be called as much better investment tolls because there was much lower risk involved with them , in case there was any fall in markets , these mutual funds would have fallen less than equity funds. Many mutual funds advertise there products only on the basis of returns and don’t care to tell investors that there is high risk involved with the products.

If you are given 2000 for climbing a tree and 5000 for jumping from one building terrace to another , the first choice is much better. In that case you don’t go for the second option just looking at 5000.

If today all banks start giving 12-15% assured return on Bank deposits, Equities investments will fall to great extent , because bank deposits will have much better returns considering the risk involved.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Tax Treatment of Equity , Gold and Debt

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Tax Treatment

Equity Mutual Funds and Shares

Short Term Capital Gain : If you sell it before 1 yr , the profit is called STCG and taxed at 15% (revised in 2008-09 budget) ,So if you make profit of 10,000 on shares or Equity mutual funds , you pay 1,500 as tax.

Long term Capital Gain : No tax

Other Points

– Dividend income from any kind of mutual funds are not taxable.

Profit from Sale of House or Land

Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at 20% on profit.

Your profit = Sale Price – (Cost price after adjusting indexation , as per the cost inflation index)

Long term capital gain tax can be saved by investing the capital gains in some other residential property or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years.

Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.

Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to your income and taxed accordingly.

Short term capital gains can set off against any LTCG or STCG within 8 yrs.

Other Points

– Capital Gains from Agricultural Lands are not taxable.

– A person holding more than one residential property would be liable to Wealth Tax on the market value of the second property.


Profit from Jewellery

Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .

Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)

Don’t know what is GOLD ETF ? Read this article , CLICK HERE

Profit from Fixed Deopsits , PPF , NSC

Fixed Deposit : Interest Earned added to the income and taxed accordingly.

PPF : Interest earned not taxable

NSC : Interest earned taxable

Things you didn’t knew

Posted on by Jagoinvestor

 

There are many things we hear and believe , but they are little different in reality, which helps if we know.

– Do you know that When you take an SIP for 6 months or 1 years or for any period , the first installment (which you make by cheque) is not counted for inside the tenure of your SIP. So if you take a SIP for 6 months , you make 6 payments other than your initial payment with cheque , so total is 7 payments.

– The short term capital gain period is 1 yr , means 365 days , but it does not work exactly that way , its 12th month other than your buying month. Means if you buy shares or MF on 12th May , 2008 and sell on 13th May , 209 it is still short term capital gain , to call it long term capital gain , it must see it after 12 months after May , 2008 (your month of buy) . which means you shall sell it on or after 1st June 2009.

– Suicide is also covered in Life Insurance after 1 yr of policy (atleast its there in my policy with SBI Life Insurance).

– ULIPS : The deductions availed under sec 80C is taken back if you surrender your ULIP before 5 yrs. If you surrender your policy in 4th or 5th year , then all hte premium paid till date will be added to your salary for that current year and you will have to pay tax on that too. ULIPS just put restriction on paying of premium fr the first 3 yrs, but offer tax benefit under 80C if you hold it for minimum 5 yrs.

– If you repay your housing loan by taking another loan , you can continue to claim tax benefit on the interest amount paid for new loan under sec 24.

– Tax deduction is available for the prepayment charges paid for the home loan .

– If you face any problem or defecieny in service from banks, you can complain at www.bankingombudsman.rbi.org.in same as

– Dividend distribution tax is levied on the Dividend which you recieve , and it also affects the fall in NAV . So NAV falls not just to the extent of the dividend declared , but also by the tax which mutual fund company pays to govt (12.5% on dividend + 2.5% surcharge also , under sec 115-O )


I would be happy to read your comments or disagreement on any topic. Please leave a comment.

REMF (Real Estate Mutual Funds)

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Finally many people like me have chance to take take plunge in the rising and booming Real estate sector , Any one who does not have Crores and Lacs to invest in flats , plots etc , to earn the capital appreciation will to be able to invest even small amounts like 5,000 or 10,000.

What are Real Estate Mutual Funds ?

They are simple close ended mutual funds which will invest in Real-estate , as simple as that … The lock in period will be 3 yrs. These REMF will invest in properties and they will be owners of those properties , they will also rent out these properties and pass on the rents to the investors as dividend. And when the mutual fund matures , it sells its holdings and pay us the returns.

REMF’s will be listed on Stock Exchanges and they will be traded just like shares.

How do they work exactly ?

Lets take simple example :

You invest Rs 20,000 in some ABC REMF and one unit costs Rs 10 at the start , so you get 2000 units. many people like you will also invest and Suppose the total money they get from investors in 10 crores. Now they invest this money as per the laws defined for them. Suppose they receive 50 lacs as rental income from their investments in a year and the total investments has grown to 12 crores (because of rise in value of properties and other factors).

From this 50 lacs they will distribute dividend and you will recieve your share for 2000 units and the unit value will be around Rs 12.

Rules and Restrictions for REMF’s

– They will have to invest atleast 35% in completed projects , ready flats , shops , houses etc.

– At least 75% should be invested in real estate and related Securities.

– They can partner with real estate developers and invest maximum of 15% in the project (not in company).

– The NAV will be published on daily basis.

– Most probably they will be in category of debt funds. Tax treatment not clear at the moment.

– Further caps will be imposed on the fund on investments in a single city,
project or securities issued by associate companies and sponsors. Funds are not allowed to invest in assets owned by the sponsor or the asset management company or any of its associates during the last five years the aforesaid entities hold tenancy or lease rights.

– The cities for investment by real estate mutual funds would include 35 cities in million-plus urban agglomerates and 27 under the million-plus category as per the Census 2001

They are still to be launched , keep a watch !!!


I would be happy to read your comments or disagreement on any topic. Please leave a comment.

All you want to know about ULIPS

Posted on by Jagoinvestor

 What are ULIPS?

ULIPS are investment cum insurance products, You take an insurance worth XYZ amount and then you pay some premium every year. Out of your premiums some amount is cut as administrative expenses (Premium allocation) and out of rest the mortality charges are cut for your insurance and the rest is invested in market linked things.

ULIPS

Some important points about ULIPS to note here :

1. You decide the tenure of your Insurance and the insurance amount, depending on which mortality charges are cut from your premium you pay.

2. The Premium allocation charges are very high in initial years (especially 1st year) and then reduces in later years. That’s the reason one should be invested in ULIP for long period to get maximum benefit.

3. The investor can switch between the investment style as and when he wants (max 4 free switches in most of the cases, there after some nominal fees).

4. ULIPS must be considered for long term investment products, so that the high cost in initial years are averaged out over longer period.

Advantages of buying ULIPS :

– The switching over different styles is not costly, you are not charged when you switch, which make them flexible.

– ULIPS are innovative products and suits people who want long term wealth creation with some insurance too..

Disadvantages of buying ULIPS :

– They are not good product for people who require high cover and can pay less cover, because premium depends on the cover. Higher the cover, higher the premium. So these people must take term insurance for there life insurance.

– For people investing only for tax benefit must avoid them as they will prove to be costly in short term because of there high allocation charges.

5 Benefits of investing in ULIPS

1. Tax benefit

ULIPS have sec 80C benefit, but for that you have to pay minimum of 3 years premiums to avail this tax benefit. You can not stop ULIPS before 3 years to get tax saving benefit. You will get the tax benefits at 3 different stages –

  1. Entry level: You will get tax exemption on the premiums you are paying for ULIPS
  2. Switch advantage: You don’t need to pay any taxes if you switch the policy from equity to debt or vice versa.
  3. Exit level: The amount you will be getting after maturity period will also be completely tax free.

2. Goal based investing or planning

ULIPS also helps your to secure your future goals like retirement planning, wealth creation or your child’s education planning.

3. Freedom to choose your cover

You can choose the cover for your policy. In most of the insurance companies, the cover provided is 10 times your premium, however some of the insurance companies are providing the insurance covers of upto 40 times of your premiums.

4. Liquidity

ULIPS also provides you the benefit of partial withdrawal which will help you in case of emergency.

5. Option to choose your investment type

The money actually invested is invested as per your directions … ULIPS have different plans with different risk-return profile. One plan may have allocation of 80-20 to equity and debt, some other can have 50-50 and some can have 20-80 and like this.

ULIPS have become very popular in last some years as agents have put there life and souls in advertising them and making people believe that they are wonderful product. Every product is wonderful for some or the other. If you can take good risk , need less insurance and closely want to monitor markets and economy so that you can switch your investments from one plan to other, ULIPS are great for you … else they are not..

Evaluate yourself and dive 😉

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

8 Important steps to improve your financial planning

Posted on by Jagoinvestor

What is Financial Planning? Its a little stupid definition, but its just planning you finances. You plan your Investments in such a way which meets your financial goals over time.

You must be very disciplined when you do this, you must know from where you the money is going to come to you and how are you going to save or invest it, and in future how are you going to achieve your goals.

Financial Planning

Steps in Financial Planning

1. List down your Goals

Prepare a list of financial goals. It can be any requirement like Buying Home, Car, Child Education, Child Marriage, Vacation, Retirement etc. Along with this there must be a very clear timeline associated with the Goal. Something like “I want to buy a Car after 3 years, which will cost 10 Lacs at that time”.

2. List down Your Cash Flows

Prepare the list of your cash flows, cash flow means, how money is coming and going? Any money coming in is Cash inflow and Any Expenses is Cash outflow.

It it help you understand how money is coming to you and how is is utilized and how much is remaining for investing purpose.

Example (yearly) :

Cash flow

 

By Doing this , you can get very clear of how you are going to get money and how you are going to spend it, and how much you are left with to spend.

3. Understand and figure out your Risk-appetite

This is a very important part of financial Planning, Risk appetite is the amount of risk a person can take while investing. How much money you can afford to loose in order to earn high returns defines your risk taking ability.

For Example:

  • If you are ready to loose 60% of your money , your risk appetite is high
  • When you are ready to loose 25% of your money , your risk appetite is moderate
  • If not at all ready to loose your money even 1% , you are not at all a risk taker.

It depends on you which category you belong in. it depends on individuals Psychology, Family Conditions, Attitude etc.

Generally people in there early age have more risk appetite as they have less responsibilities and more freedom to invest. Later when they get married and have responsibilities, they cant risk money to loose.

4. List down your Financial Goals

At this point, you must be clear with your goals. Financial goals are the list of things for which you need money and you must have a predefined target time.
Example:

Ajay earns Rs 3,00,000 per year with Rs 1,00,000 left for investment, he has moderate risk appetite.

Goals:

1. Buy a Car within 2 years worth 5 lacs.
2. Vacations in New Zealand worth 8 Lacs within 4 yrs.
3. Buy home worth 40 lacs in 10 years.

Here, Goals are not compatible with amount invested per year and with that kind of risk-appetite.

Therefore, Goals must be realistic and achievable, it must not look totally irrelevant.

Watch this video to know the financial planning services by Jagoinvestor :

5. Make sure your Goals are realistic

At this point you must make sure that your goals do not look unrealistic and unachievable. If they do, then you must either lower your goals or increase risk appetite or increase the investible amount per year. This gist of the matter is, Be Realistic !!!

6. Make the Plan

Once you are done with all these steps, Its the time for the planning.

For each goal you must devise a systematic investment plan, by choosing the correct investment instrument. For example: For your child Education make sure you invest in something which is not very risky for the time period you are going to invest in that. You can invest in equities for that, as Equities are not risky in very long term and generate great return.

But for a short term goal like vacation in 1-2 yrs, don’t invest in equities, rather go for a debt fund or a fixed deposit.

In this way, you have to be clear how you are going to invest for achieving your goals.

7. Review and Take advice

Revise your steps and make sure everything is correct. If you are unclear about anything meet some one who is more knowledgeable than you, See a financial planner or a knowledgeable friend.

8. Take Action and keep Reviewing

The last step is to take Action and start executing the plan with discipline and make sure you change you goals, risk appetite as time passes and these things change over time.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

How Inflation affects your investment – compare inflation with the returns of different investment products

Posted on by Jagoinvestor

Do you remember the price of a movie ticket or any or your favorite thing few years back? It is the same today also? I don’t think so. It has increased by some numbers. This increase in the price is known as inflation. In this article I’m going to tell you what is inflation and how it can affect your investment.

inflation

Inflation :

Inflation is the increase in the rate of prices caused because of devaluation of the currency. Is is also known as the decrease in purchasing power of the currency.

Its a tool to measure the increase in prices. If inflation is 6%, it means on an average the prices have increased by 6%, means anything which had cost of Rs.100 last year will cost 106 this year. (Its a average price and not exclusively for some item)

For example:

Considering inflation at 6%, the value of Rs.100 will go down to Rs.53.86 in 10 yrs and to 29.01 in 20 yrs. In order to keep value of you money same, the absolute return earned must be greater then inflation.

Inflation vs returns on different financial products

Fixed Deposit :

Investing in Fixed Deposits just retains its value, but people feel that they get good returns upto 8.5 or 9.0%.

There is a tax of 3.5% on your FD returns and then if you adjust inflation of 6% after that, you will realize that though your Rs.100 has become 109 in a year, you have to pay 3 or 3.5 tax on that, and then if you have Rs.106 after that, you can purchase the same thing which you could have purchased in Rs.100 a year ago.

Hence, FD don’t give returns in real sense, they just keep your buying power. (considering inflation + tax = return from FD)

Gold investment :

Investing in GOLD is considered the traditional way of investment and also it is consider as the best way to beat inflation. Historically Gold has always outperformed inflation. It has generated 13.66% annualized return since 15 years, which is almost double of the inflation rate.

See the graph given below, in this graph the returns of gold investment since 20 years is given. You can see that how gold prices have moved or increased in last 2o years.

how gold price have moved over 20 years

Image source: www.Bemoneyaware.com

Cash in bank :

The worst thing one can do is to keep Cash in Bank account, instead of investing it in any product. The returns generated from this saving can not beat the inflation rate.

For example: Suppose you have some cash in your savings account on which the interest rate applicable is around 4-4.5%, whereas the inflation is around 6%. Here the returns can not even meet inflation rate.

Cash must only be kept to a limit which may fulfill your emergency needs (preferably 3 times of you salary). Any extra amount must be invested.

Mutual fund :

Mutual fund is an investment in stocks so the returns are volatile here but if you consider it as a long term investment product then you will realize that it has given returns way higher and beat the inflation rate by almost double.

So this is the difference between the inflation rate and the returns of different financial or investment products. Now you can compare the returns and choose which product is suitable for you to invest in.

We can help you to improve your portfolio by making a perfect financial planning for you. If you have any doubt or query you can ask us by simply leaving your concern in our comment section.

The impact of bad decisions on your wealth creation

Posted on by Jagoinvestor

“You only have to do a very few things right in your life, so as long as you don’t do too many things wrong.” – Warren Buffet. What should be your motive as an investor? – To earn great return on your investments with minimum risk, right?

bad decisions

We generally take good amount of risk to get more return, and many times we get it 🙂 … It might happen that if we make good profit 2 times , we make 1 loss also because of the high risk we take. And we think its fair getting the losses, and you are right if you think so. We cant get profit always, if we take risk we have to accept losses.

But is it a good strategy?

Its questionable, lets explore on this topic today. Lets try to find answer of a question, what is better?

1. Taking high risk for high return at the cost of losses some times.
2. Avoid getting losses at the cost of just moderate return and not great return.

Case Study :

– Robert do not understand much about investments, but still invests in high risk high return instruments like shares and risky mutual funds. He invests Rs.1,00,000 for 5 yrs and gets returns of 50%, -35%, 30%, -20% and 45% for 5 yrs.

– Ajay does not take much risk and invests in something which gives him better returns than conventional FD’s or PPF, but has risk component much lower than Robert case. he earns return of 8%, 17%, -10%, 20%, 15%.

Who has more money at the end?

Robert : 1,00,000 * (1 + .5) * (1 – .35) * (1+ .3) * (1- .2) * (1 + .45) = Rs.1,47,030

Ajay : 1,00,000 * (1 + .08 ) * (1+ .17) * (1 – .10) * (1.20) * (1 + .15) = Rs.1,56,940

Observation : A fixed deposit will give similar kind of returns 1,00,000 * (1 + 8.5/100) ^ 5 = Rs.1,50,365

Why did this happen?

Getting 0% profit overall is better than getting X % loss after getting X% profit. if you get 40% profit and then 40% loss on your investment of 1,00,000, it will first become 1,40,000 after profit and then it will become 1,40,000 * (1 – .40) = 1,40,000 * .6 = 84,000, which is a loss of 16%.

So even if you get 40% profit, a loss of 28.57% is enough to wipe out that whole profit earned.

If Robert never got those losses and only profit, his final amount would be Rs.2,82,750. Just loss of 35% and 20% ate way most of it. On the other hand Ajay, who put more efforts on avoiding losses on the cost of getting less return way rewarded more at the end.

The return percentage required to cover the losses is more than then percentage loss.

Watch this video by Harsh Goela. In his talk, Harsh Goela talks about the stigma surrounding stock markets. He clarifies how it is different from gambling and how proper knowledge and avoiding reckless indulgence can yield profitable results.

Learning and Moral

What do we learn from this article and the examples above?

The important part of investments are not earning great returns but taking measures to avoid losses. Earning high returns must be secondary goal, the major goal must be to avoid losses at any cost though we have to compromise on moderate returns. Because one loss is enough to wipe out major portion of your profits and the hard work you take to earn great returns.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Importance of financial management – All about investment and different policies

Posted on by Jagoinvestor

Why do we work? Why do we go daily to work and that too for years?

Some people love their work and they enjoy what they do and that’s a good thing. But as per my understanding, every one goes to work for there livelihood, because we want to earn and generate wealth over long term. People want to create wealth, want to buy home and car, they want to go for vacations, they want to accumulate millions in 10 or 20 years.

Financial management

People give 100% time to there work, but not even 1% for the motive behind the hard work they put, which is to generate long term wealth, for buying home, children education.

I have seen people who earn well, but fail to invest it properly, in fact in a wrong way, and hence they loose on that. Whats the use of working so hard if you cant invest it properly to achieve you goals, Is there any use of your working for so many years, and after all we work for money, and if we cant manage that money or don’t take some serious time to manage it, I personally consider it as waste.

One of my friend has taken a ULIP policy to save tax without knowing what it is. The insurance he gets on that ULIP is 1.25 lacs with yearly premium of 25,000 with health insurance premium of 4.5k.

he didn’t pay any attention to what he is buying, Does he really need it, how is it going to be beneficial to him.

One of my other friend took a Endowment policy with insurance of 10 lacs for 15 years with premium of around 90,000, when i asked her, how many financial dependents she had, she was clueless and when I cleared what i am asking she said, “No one”.

People don’t take any interest in knowing/learning/asking about financial instruments from anyone and take idiotic decisions, loosing there hard earned money. It does not take 1 hr / week or 4 hrs/month or 1 day / year to take fair decision (if not best) regarding your finances.

If people start giving 1% time to there investments and finances and 99% to there work compared to 100% time to work, they can do much better. A person earning 20,000 per month can generate more wealth than a person earning 50,000/month, with better investment technique.

“Money does not grow just by investing more, but disciplined and great investing technique.”

What do you think is the biggest reason for people in India for not taking financial planning serious?