Category: General

Your investment must be the way you want your life to be – Simple and Easy.

Posted on by Jagoinvestor

Keep it Simple Please

Lot of people thinks that if they choose complex investment products then they can generate a good return. But then key to successful investment is make it as simple and easy as you want your life to be.

There are many products available in markets , Some are extremely easy to understand and strongest. While others are complex and on an average not very easy to understand by common public.

Simple and Easy Investment

In Life, simple things works best. We all want our lives to be simple and easy, We don’t want lots of complications. In the same way we should use simple products while choosing our investments. Simple things works in the best manner.

There is a tendency of creating complex products because general public feels, that because they are complex and not easy to understand, they must be working very differently and in a smart way. This is far from truth.

Easy to understand products like Term Plans, PPF and Mutual funds works brilliantly. You don’t need ULIPS or product like Jeevan Astha and Endowment plans with lots of stupid clauses.

What happens when u choose simple products?

Your life is easy, you can understand them better, track them better and change it in a much better way.

Imagine a person A with ULIP or Endowment policy for Insurance needs and B with Term Insurance.

What are the benefits B enjoys?

– He understands every things about his products the reason being there is very less to understand. (If you die, your family gets money, if you don’t, you get nothing).

– He can choose to stop his stop his policy any time he wants (if he does not feel the requirement)

– He can change it to some other policy later in life if he wants.

There are many things like this, where as in ULIPS and Endowment policies , people are stuck with no mercy if they cant pay premiums some 2-3 yrs in a row. There are too many clauses and different types of sum assured, and things like those.

What is the Learning?

Take easy to understand and simple products which look Plain Vanilla, Complex products have nothing extra than complexity. Just make sure you understand easy products well and how to use them well. Your investing life would look much like your investments. Keep them Simple.

What can Repiblic Day teach us about Financial Planning

Posted on by Jagoinvestor

India gained its Independence in 1947 . At that time India was free , and ready to grow on its own , with its own decisions . But it was not possible without a set of guidelines to guide the decision making process .

Success comes when you are disciplined and have a decision making process. On Jan 26 , 1950 our Constitution came into effect and now we had laws for different things .

Financial Planning

We knew exactly what we have to do when thing happens . We had a road map to follow. From there on we progressed and have came a long way . We can now say that we are much better than we were at that time and we continue to grow and make better decisions.

We need amendments from time to time and that helps us to change the bad laws and adapt to new situations.

How do we relate it to Investing?

We can learn from anything … really anything . Let us try to map each event discussed above and relate it to our Investing world .

1. Gaining Independence

When we get a job and start earning on our own, we are full of confidence. we are independent, We don’t need to ask for money from our parents. Rather we have to support them. We have responsibilities. There are many goals for us like buying house, car, saving for our retirement, Marriage etc etc.

2. Republic day

This is the day when we understand that we need to do our financial planning and have a set of guidelines to guide our decision making regarding our investments .When we know how exactly we are going to invest to achieve our goals, we have a clear road map and time duration .

We just need to follow it with discipline.

Example : If a young 25 yrs old want to retire at 55 with 2 crores at the end . He can take two approaches .

a) He can try to save money here and there, some month he can invest 10k, and some month he can skip it and down the line, he has a vague idea where is he going and how is he making progress. This kind of approach often leads to failure, because there is no road map and sometime will come when you will have no idea whats happening.

b) Second approach can be very easy . You have to make sure that you understand some thing very well and be clear about somethings. Those are

– Equity outperforms every other asset class in long term .
– Equity in long term has given 15%+ returns and its possible in future too .
– You should have understanding about the power of compound interest.

Now when you are clear crisp about this idea , then you can use a simple compound interest formula to see , how much you need to invest every month for rest 30 years (55 – 25) , which can generate 2 crores at 15% annual return .

The formula is

Final_amount = monthly_contribution * (1+rate) * ((1+rate)^months – 1)/rate

where
rate = monthly rate = 15% / 12 = .15/12 = .0125
months = total number of months you will invest = 30 * 12 = 360

Now you can calculate what monthly_contribution fits the values .

The amount comes to little below 3,000 per month .

Which means if you invest 3,000 per month for next 30 years , you can achieve your retirement target easily without fail. (Invest in Equity Diversified Mutual funds to target 15% returns for long tenure).

When you do this, you go with a plan (constitution) and dont have to doubt your self and you will not get lost. Just follow it with discipline without fail.

3. Amendments

Just like amendments are made in Law , because of change in environment and situations . You also may have to change you plans with market change and new products coming in (this happens rarely , because fundamental things remain same) .

Summary and Learning

What I want to point out here is that just earning money and being independent in not enough and cant make you successful with money , Discipline and proper understanding with good planning will help .

So if you are Independent but have not put your constitution in place , do it soon to really succeed . Make this day as your teacher and learn from it . Don’t be afraid of mistakes .

“Success is a ladder where every step is made up of Failure . If you cant fail !! , Winning will not be easy ” .
Manish

Secure Your Family , Risk Management Part 2

Posted on by Jagoinvestor

Why do we invest ?

Answer : For ourself, for our Family, for there better future , for our kids , for there better life , for financial independence, at last the answer comes down to Our Family.

But, before investing, do we make sure that , do we secure our family at first place against any risk and problems which may arise. You can invest in great things, whatever it is like Mutual funds, ULIPS, direct shares, gold, blah blah blah …

Why Do We Invest

But what if some bad things happens to you and your family is left behind with no money at present, what is your wife, kids or your parents meet some accident and go to hospital. Is that more important or creating your wealth for future.

What is more important is to first concentrate on “Now” and if everything is taken care of, only then think about the future. How do you secure your family.

There are two things :

1. Life Insurance for yourself (assuming you are the bread winner)
2. Health Insurance for your entire family, especially if your have old parents, or going to become old in some years 🙂 .

1. Life Insurance : Read https://finance-and-investing.blogspot.com/2008/06/life-insurance-revisited-one-of-my-good.html for understanding it better .

2. Health Insurance : Read https://finance-and-investing.blogspot.com/2008/07/health-insurance-what-is-health-or.html

Let me talk about a case study .

– Robert is in his 30’s earning 5,00,000/Annam. He is married and has 2 kids .

Robert needs life insurance of around 50 lacs to secure him Family . also he should take a health cover of 4-5 lacs each .

He can take a term cover of 50 lacs for 6367 . He can also take Health Insurance of Rs 4 lacs each for him , his wife and his 2 kids (family floater plan) @Rs 5000 (Check click2insure.in for these quotes) .

Means , he can take both of these things at 21,000 / year . It comes out to be 4.2% of his yearly Income.

Now think , can you spend 5% of your yearly salary for safety and coverage of your Family ? I thing YES !!

Once you do this , you are free of any tension , and now you can use your 95% money to generate long term wealth for your family and there security . You can effectively use your 95% , only if you use your 5% for your risk management .

There can be many cases when you dont cover your family and things can go wrong, like

1. You invest heavily in Mutual funds or ULIP’s or what ever and in 2 years you die in an accident, what will happen then …

2. You invest your money in ELSS (tax saving mutual funds) for last 2 yrs and have life insurance also , but suddenly you wife meets an accident and you require 5 lacs for an operation , but you never took Health Insurance .

Investing your money is important, Covering your risks are Vital !!

Live in the moment, “now” is the truth … Keep you family happy with covering then and yourself now .

Some tips :

– Take a life cover ASAP if you have not taken it yet.

– Buy a family floater plan if your family has spouse and kids, for Parents you need to take a separate individual policy, as parents are not covered in Family floater plans.

– You can also claim tax benefit for this under section 80D.

– Don’t feel that life insurance from other companies (other than LIC) are very risky and anything like that . Insurance sector is now getting mature enough and govt is taking all measures to confirm that the companies which enter Insurance Industry are from great Business families and conform with the guidelines . But its true that LIC will always be the safest (100%) .. but 99.999% is also safe …

Summary

Its more important to cover your Life risk and family Health risks first before any investments for future , when you put your money in Insurance and Health Insurance you are already taking steps for strong invesments for future which is safety of your family , which is of supreme importance . Dont ignore it … Take appropriate cover .

Game of Trading , Risk Management Part 1

Posted on by Jagoinvestor

Lets play a game, the name of the game is “Game of Trading”. I am stock market and you are investor. You have got 2 chances of investing you money, One time I will give you 200% return and other time I will give you -80%, or in reverse order, so it can either be

200%, -80%

OR

-80%, 200%

You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital), you have to decide for both the times in the start only.

Lets analyse different cases.

Case A : You choose invest capital as 100% first time and 20% for next chance

Case A.1 : Return was -80% first time and 200% next time.


Case A.2 : Return was 200% first time and -80% next time .


Case B : You choose invest capital as 20% first time and 100% for next chance

Case B.1 : Return was -80% first time and 200% next time.

Case B.2 : Return was 200% first time and -80% next time.

You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …

What should you do?

100% and 20% choice will always loose in long run, if you play this game over and over again for long run, Understand that in this game, you can make it “high risk high return” Game or “Extremely no risk, low return game”, And your choice of your invest percentage will decide which game is it.

Characteristic of “High return High risk game” : Its possible to make great money in short term, but in long run you will loose.

Characteristic of “Low risk, low return game” : You will Not make great return in short term, but with compounding effect, you are bound to be a winner in long run.

Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order.

Lets choose 25% invest capital :

Case A.1 : Return was -80% first time and 200% next time.


Case A.2 : Return was 200% first time and -80% next time.

You can see that in any case your 100 becomes 120, which is 20% return.

What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself). So what should be the best percentage capital to deploy each time in this game.

I tried to make an Equation, with all variables

p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means, 25% of the capital will be invested at any time)

We want to find optimum T, given any p and l (assuming that the trade will be done 2 times)

So, If you calculate the total capital after the 2 trades (do the math), you will get

Total capital = C (1 + pT) * (1 + lT)

So our original capital is getting multiplied by (1+pT)*(1+lT), and we have to maximize this number.

lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT

If we do some differentiation here with respect to T (people who don’t know differentiation, just leave it), and put dI/dT = 0

2plT + p + l = 0
T = – (p + l) / 2pl

So the best valeuof T is -(p+l)/2pl ..

For our earlier example , p = 2 , l = -.8

we get – (2 – .8)/ (2 * 2 * -.8) = .375

Which means, 37.5% of capital will be invested everytime, and with that our capital will become 122.5 and that is the max you can make without risk.

What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36, means investing capital will be 30.555% always and that will give us max return.

What is the point i am trying to make?

In any given situation of making money, there may be a big risk of loosing it, we should always use these kind of tools and always be safe. Don’t try to be very bold in stock markets.

People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term.

Summary

When you do Investment or do trading, you should never put all your capital into it, one bad trade or investment and you will be ruined forever, better to risk only that much capital which can not take out of of the game, but just hurts a bit.

Take small and risk-less profits if possible, Investing and trading is all game of probabilities. Use math’s and logic to take smart decisions like discussed in this article.

“There are old investors and there are bold investors, but not both”.

Check out this blog for Risk Management Part 2.

 

The Straw That Broke the Camel’s Back

Posted on by Jagoinvestor

One of my friend is fond of shares and options trading , from a capital of Rs.50,000 , he grew it to Rs 2,00,000 , whereas I am almost at the same place from where I had started because I do some thing called “Risk Management” … Every time I take a trade or invest in anything . This is how I go about it .

– Either I don’t take the trade
– Or I take the trade, but work on risk management, I hedge it using PUTS or invest less in that.

Because of these two things I either miss big profits or make very small profits. managing risk involves cost and that’s the cost you have to pay for trying to be “safe”.

Last week we both purchased some thing which gave him 50% return, but gave me just 7-8% return over my investment. The reason was that I also hedged my position and tried to be “smart”, which my friend didn’t Acknowledge.

There are many incidents like this, because of which I always lag behind him when it comes to performance, and I am always ahead of him in being safe which never helped until now.

Jan 7 2008 :

10:30 AM :

Markets were a bit up and things looked good , He bought Satyam’s Calls with almost all of his capital, He has good intuition of which options may work and which may not, but I tried to convince him that buying a PUT on a lower strike price will save him in case he is wrong.

But to my expectation, he was “sure” that it would work, He put SL at 175 just to show me because of the fact that he knew it wont be touched at least today.

11:30-12:00 PM :

Satyam Fiasco news came in and within no time Share was down 30-40%, No surprise that even SL was not entertained … because prices never stopped .. everyone was just in a rush … With in some time Share plunged to 60-70, My friends calls were worthless and It doesn’t look that it will now move up from this point.

In short He is dead … He is out of this game now … He has 20,000 cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 – 5,000.

Price of Satyam 120 PA Jan 29

11:00 AM : Rs.1
2:30 PM : Rs.90

Return : 9,000% in 3 hrs.

What is the point I’m trying to make?

Everybody likes to make big profits and we should but not at the cost of risk of blowing up all our capital. Its not just related to Share markets or options. It also applies to Debt market, Mutual funds.

Do everything you can do to minimize or avoid the risk. Its very true that returns comes with risk. I am not saying “not to take risks”, i am talking about “managing risk”.

“Managing Risk” is the biggest measure you should take if you are in this field.

In some of the next posts we will try to see what are the different kind of “risk management” techniques and its importance.

Tax Exemptions Rules , Who is included and who is not

Posted on by Jagoinvestor

Following is a chart showing the list of people for whom you can claim deductions for tax exemption. For example, if you pay the LIC Insurance premium, you can claim if the got premium paid for.

  • Yourself
  • Spouse
  • Children

For further details … see this table … Click to enlarge it.

To know about the tax slab and an example for calculating tax .. see : http://finance-and-investing.blogspot.com/2008/04/tax-information-for-2008.html

Financial Resolutions for 2009

Posted on by Jagoinvestor

Hi Friends, Happy New Year to all of you. As this new year is coming, Let us discuss some things, they are:

1. Financial Resolutions for 2009
2. The outlook of Asset Classes in 2009 and onwards.

Financial resolution

Financial Resolutions for 2009

Let us all make sure that we will do better than the previous year and make some changes.

#1. Adopt the attitude of Expenses = Salary – Savings instead of Savings = Salary – Expenses

#2. Learn more and more about investing to at least up to a level, where I can take my decisions without any help of others and also be able to help someone else.

#3. Learn all the basic taxation rules and investing rules.

#4. Not take decisions whose Risk/reward ratio does not suit me, even if there is no risk in some investment, its return should at least match your goals.

Person 1: Person not investing his money in any thing (just putting it in the bank) and having a desire of getting a 15% return and risk appetite of the same.

Person 2: Another person investing in Equity for a return of 50% in a year, but he actually requires and can be fine with a 15% return.

Both the people here are wrong and are not doing correctly. They must invest in a way that satisfies both there return/risk ratio.

#5. Will not get trapped in useless products just because someone else thinks so, we will do our own analysis, take suggestions from reliable sources and people with knowledge and only then invest our hard-earned money.

Outlook and suggestions for Asset classes in 2009

Let us see some asset classes and let’s have a quick view of it.

#1. Mutual Funds: The situation now is little under control, with a downward bias for the first quarter, but things should be good by the year-end and then we can see a good rally there after. Better to invest though SIP only.

#2. Direct Equity (shares): Make sure you buy shares only if you have long term view and do not want to speculate for short term .. You can buy some very good shares now and hold it for the next 5-20 yrs, and I am sure they will return fortune. The best time after 2003 is NOW !! But better buy on dips …

If you want to invest 100, make sure you break it in 3-4 parts and invest on dips … its like following SIP on our own. Metals (safe) and Real estate (little risky for short term) can be a good bet for long term investments.

#3. Real Estate: No comments … There are still chances of further correction … But people who do not want to buy it for investment can still invest if it suits there requirement and budget.

#4. Bank FD’s: People looking for short term investments like 6 months – 1.5 yrs can put their money in FD’s… The interest rates offered are good and with inflation coming down, it will be a fair investment.

#5. Derivatives (Futures and Options): There are many people who are now trying these instruments, do not understand the risk associated, Please understand very clearly that these are Atom bombs in the Finance field … You can either kill yourself with it or make a Killing out of it …

If you want to do it .. better learn about it .. prepare heavily and only then enter .. Else defeat is almost certain. Some of the biggest financial companies have gone bankrupt over night because of derivatives.

See:

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly.

There have been several instances of massive losses in derivative markets, such as:

  • The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[4]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[5] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
  • The loss of $7.2 Billion by Société Générale in January 2008 through misuse of futures contracts.
  • The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted.
  • The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998.
  • The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy, the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[6]
  • The Nick Leeson affair in 1994

Also See: https://en.wikipedia.org/wiki/List_of_trading_losses

#6. Gold: Gold has lost its shine a bit now and can not be considered the best investment you can make … Still a small part can be in a portfolio, but not more than 5%.

#7. Debt Mutual Funds: People can invest in these debt funds also if their investment horizon is less than 1 yrs (invest for short term goals).

#8. Insurance: Any one who has still not taken insurance and still finds that he/she needs to take it .. please take is ASAP. There should not be any delay in taking Life Insurance ever.

Some Notes on Inflation:

Inflation may go down below 0% in 2009, because of speedy fall in commodity and crude prices.

Source: https://www.zeenews.com/nation/2008-12-28/494368news.html

Economy and Job Losses:

India may see some effect of job losses and slow down in 2009 … Corporate results are expected to be devastating in the first and second quarters of 2009 at least … But still, India is among the top growing economies in the world. So we must not concentrate on the short term. India’s future is Great and unquestionable.

Summary: 2009 will be a good year, it is an excellent year and we will not do mistakes if we have done in 2008 and before. we will learn more and use our money in a better way from now onwards.

Exceptional Returns from GILT FUNDS

Posted on by Jagoinvestor

During the last 5-6 months GILT funds have given returns like Equity funds … Something around 20-40% in last 5-6 months … And they are almost safe on downside … Lets see more on this

Read : 5 mistakes of my first trade

What are GILT Funds ?

A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt.

To have a look at different GILT Funds see :
http://www.moneycontrol.com/india/mutualfunds/gainerloser/17/15/snapshot/dlong/ab

Risks factors

Gilt funds have different kind of risks associated with it .. Once of them is interest rate risk … There returns are inversely proportional to the interest
rates and the reason for the exploding returns given by most of these
GILT funds or other Debt funds are the result of “interest risk drop in
last 6 months because of the measures taken by RBI” .

However, there are some negatives too to these funds. Bond yields carry
a higher credit risk than G-Secs and in bad times ratings can go for a
toss. Some retail investors don’t understand ratings and are also not
aware of which corporate debt these investments are made in to.

Read about “Why you need Contingency Funds”

In the link http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/03/snapshot/op1/ab/option/dlong/sort/yr1
, If you see the 6 months returns and 1 year returns , they are 41.2%
and 41.8% , Think about what was the return during the 6 months period
before 6 months (Dec 07 – May 08) .. The last 6 months have been
exceptional for our Economy because of drastic decrease in interest
rates in short period of time . This happens rarely .

To get a good idea of actual performance of these funds , you should see
long term returns like 5 yrs returns or Since Inception returns .

Now if you see http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/09/snapshot/op1/an/option/dlong/sort/yr1for annualized returns , No fund has crossed 12% returns CAGR , and most
of the top funds are in range of 7-8% Except the out performers with 10.3
and 12.4% .

http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1921 Shows the snap shot of a fund from the list .. you can clearly see that
the risk Grade is HIGH for this fund , because of the risk associated
with interest rates . (try to click on Portfolio part and see risk
return chart) .

The accepted return from these funds are in range of 7-10% , and they
are better for Liquidity and Tax benefit parameters (just 10% for GROWTH
and 14% for DIVIDEND option) .

8 important ratios to look at before buying shares for long term

What you should do now ? Should you invest in Them ?

Don’t get fooled by the past returns for these Funds , because now there
is no charm left in these funds now . They were excellent funds before 6
months and those who anticipated the interest rates drop made most of it
. So next time where you anticipate there is going to be fall in
interest rates , then you can consider these funds for your DEBT part of
portfolio … These are still good funds if you don’t believe in Equity
investment in these troubled times, but from my side “Equity Investments
are best as of now ” considering your time frame is 4+ years .

Summary

GILT funds are mainly DEBT products , the normal long term returns expected should not be more than 8-10% on average … But still short term opportunities exists when drop in interest rates are expected …

To read more articles : Go to the blog directory (Click Here)

Some suggestions in mutual funds

Posted on by Jagoinvestor

In this market people are facing dilemma whether to invest in tax saving funds or not ? There are lot of tax mutual funds which will appear on the list if you search for best funds . So the best thing is to hear the experts in the field .

Valueresearchonline.com are the most trusted and pioneer in Mutual funds information collection and advice . As per there website , they have rated funds in different categories with 5 star ratings .

ELSS (Tax mutual funds)

1. Magnum Taxgain
2. Sundaram BNP Paribas Taxsaver

EQUITY DIVERSIFIED

1. DWS Investment Opportunity
2. Kotak Opportunities

DEBT Oriented

1. UTI Mahila Unit Scheme
2. Birla Sun Life Asset Allocation Conservative

Source : Valueresearchonline

Some article related to this

https://finance-and-investing.blogspot.com/2008/08/all-eggs-in-single-basket-people-say.html
https://finance-and-investing.blogspot.com/2008/02/all-tax-saving-mutual-funds-are-not_9196.html

The Real face of FMP’s

Posted on by Jagoinvestor

People who have invested in FMP’s should read this … other should also . What is FMP : Read here FMP’s are considered as equivalent of FD’s , with better return , butits not exactly true … They are also risky and “lehman borthers”equivalent in India .. They are investing in sub-prime home loans inindia in the same way like Lehman did in US . Read a good report here : https://www.shyamscolumn.com/2008/11/know-your-fixed-maturity-plan.html Another article from Outlook money can be read here : https://money.outlookindia.com/article.aspx?sid=10&cid=57&articleid=7873 Note : This is just to show that people should not underestimate therisk involved with something … FMP rarely are considered as riskythings .. that does not mean , they can never collapse .. Read about Equity , Debt and Liquid Funds What is CRR and Repo Rate