The 7 Commandments of Investments

Being successful at your investments is not a numbers game. It is a mind game. Successful investing is a play of some basic things which can be practised and followed by anyone. Today, we bring these basic principles together in the form of 7 commandments of investments for our readers.

1. Asset Allocation is the key:

Studies have shown that asset allocation is the primary factor, the biggest determinant of how much returns your portfolio will generate. This is very simple to understand. For eg., if your equity portfolio is just, say 10% of your entire portfolio, inclusive of real estate, gold, bank deposits, insurance policies, etc., then it would not matter how well your equity portfolio performs. Having the right asset allocation is most important in the wealth creation journey over the long-term. And it begins by your understanding and having a proper look over your entire portfolio, not just that part which you can track daily.

2. Investing is simple but not easy:

Many investors often believe that to succeed and make money in the market, one has to be an expert, have inside information, try to best time the markets, predict what is going to happen tomorrow and so on. However, the most important fact to realise is that investing is very simple and based on some principles which do not need an expert to follow. Things like - being patient, starting early, saving regularly, following a right asset allocation, not making too many investment mistakes and staying invested for long or doing nothing are perhaps the most important factors for the success of your investment. Although these things are simple and easy to follow, in reality, they are not easy to follow at all.

3. Investing without goals is meaningless:

Often we invest without any goal or target. Most of our investment is also lying around without any purpose or target or any objective. On the other side, most of our traditional investments are kept aside for say retirement or marriage of daughter without ever planning or knowing the exact requirement for fulfilling those goals. Thus, most of us do not have goals and even if the goals are there in mind, they are rarely properly planned. Proper planning requires very little time or even expertise, however, it can prove to be very critical. Proper goal planning will ensure that your goals are never compromised and you fulfil them. Goal setting can be event specific and even general like wealth creation of say XX amount at YY date in future. Without goals, there is no direction and investments will be at the mercy of many different and less important things.

4. Investor behaviour is the reason for underperformance:

Many studies have shown the markets to deliver good returns but the investors are found to be under-performers by a great margin. The average market returns are always higher than the average investor returns. The gap between the two returns is attributed largely to investor behaviour. Investor behaviour, as per many studies, is found to be illogical and often based on emotion which is not good/wise for long-term investing decisions. An average investor typically buys when the markets are high, over-reacts to situations or short-term market events and sells when the markets are low. We are instantly reminded of the famous cycle of fear, greed and hope which follows every time.

5. A good financial advisor can contribution great value:

There is no doubt that a good advisor/ expert can deliver great value to your portfolio. An advisor's primary role is to manage investor's behaviour or emotions apart from everything else he does. An advisor will make sure that you do not sell or buy at the wrong time. This in itself has the potential to add great value to your portfolio. Further, an advisor is likely to suggest you the right, optimum asset allocation as per your needs, something most of us do not follow. Apart from these things, an advisor normally helps us to make our financial plan, save towards our goals, push us to save more, take proper insurance coverage, help ongoing management of the portfolio, operational support, and so on.

6. Equity is the best asset class in the long term:

From the past equity market experience, this is evident. Long term investment in equities will likely exceed returns from every other asset class. BSE Sensex returns since inception (1st April 2979) till today is nearly 15.8%. Just staying invested in the index would have multiplied your wealth by over 370 times in the past 40 years. However, there have been also many times that in one year the returns have been in negative 50-60%. The instances of negative returns steadily decrease as the duration increases and perhaps over say 10-15 years, the negative return instances (for investment at any point of time) is very rare to see.

7. Mutual funds are the ideal vehicle for investment:

One does expect you to perform like Warren Buffet who had the skills and the patience to identify and hold on to good businesses to become wealthy. Most of us do not have adequate time, resources, skills and information to go and find the winners. That is a full-time task of investment professionals. The next best thing for every one of us is to make use of the fund management team of mutual funds. Mutual funds, in essence, are vehicles for investment and the underlying can be any asset class or products. Mutual funds offer investors the widest choice of investment and many other advantages over traditional investments, including tax benefits and operational convenience and much greater transparency.

Newly married? Congratulations.

After all the music and celebrations of marriage die down, a new life starts and it is time to get back to the business of living like others. For the couple, this is a precious time – time to know each other, understand the family cultures and habits and to commodate to each other's lives. The time spent together learning about each other would be cherished for the rest of their lives.

Marriage is a true partnership between two individuals. As is mostly the case today, both individuals are earning and financially independent. As a new partnership begins, there are certain things to be considered also on the financial front – mutually. An open, transparent and realistic financial assessment and subsequent actions also may be done at this important juncture of life. So what is this assessment and actions we are talking about?

Identifying your financial goals:

The first step is identifying your shared financial goals. What can be these goals? It can be anything like – higher studies, buying of own house, buying a car, vacation plans, repaying existing loans, starting a family and so on. After settling in life, identifying your financial goals is the first important thing to do. However, finalising your goals sounds easy and may rather be difficult to finalise the same. So here is what one can do...

1. Discuss each other's dreams and aspirations and also the priority for same. One should be reasonable in their dreams and also be considerate to the present financial situation.

2. Dig deeper into what exactly is the goal – buying a home may sound ok but it is not. One needs to identify what type of house, how big should be the house, which locality, what amenities, when exactly is it targeted, etc. Only then the real picture can be drawn for the goal.

3. Put out an approximate target value to each of the goals, considering the inflation for the targeted period.

4. After the goals are shortlisted and break down the goals into short – medium – long term goals.

Prepare the financial plans:

After the goals along with time horizons are mutually agreed, the next step is to plan your finances. This starts with sharing the income and expenses budgets for the month between the couple. Estimated household expenses will have to be deducted from the combined income. The couple may mutually share some of the expenses between them. The balance savings will have to be directed towards the goals. You may also like to consolidate all your assets and liabilities to find the true financial picture for both. An expert can be consulted for doing this entire exercise.

Take Actions:

Once the financial plans are ready and you have your savings plan also ready with you, it is time for action. Choose the right asset class and products to invest in. There are a few things you need to keep in mind here too especially beyond financial goals. Every newly married couple should explore the following popular products...

Life Insurance:

Needless to say, life insurance is the most important thing you have to buy for the financial security of your new family. A pure term plan that gives the maximum financial security is a must-buy product. This will protect your spouse and also your family in case anything happens to either of you. Remember to buy the life insurance covers individually for both husband and wife.

The early you buy a life cover, the cheaper it is. Further, any medical condition developing at a later stage will also increase your premiums later. So it is better to buy term insurance of a good amount early in life.

Health Insurance:

Protection against health insurance is also now a big priority for you. With escalating health and medical costs, it will become increasingly difficult to manage affairs in case of medical emergencies. Note that the cover provided by your employer may not be adequate for and/or cover both of you. It is recommended that you buy an independent health cover to cover your family. The amount of cover should be at least 10 lakhs considering medical inflation today.

It is also highly recommended that you cover your parents in some health plans, even if they are financially sound. Medical care for the elderly is becoming very costly and having insurance as a backup plan is highly recommended. Perhaps it may be the right time start health insurance as your parent's age may not be too high now and policies would be available. As they age further and medical conditions develop, the policies will be hard to get by and also may be very expensive.

Sharing /update of records:

Another important activity a couple should do is to share the important financial records and documentation. Records should also be updated w.r.t. say nomination, company records for insurance, etc. Sharing of such financial information would make life easy for your partner to manage the state of affairs in case of any emergency or your absence.

Mutual Fund SIP:

From the savings plan that you have drawn for yourself, a mutual fund SIP is today like a no brainer. Done with a long term investment horizon of say at least 7-10 years, this investment method promises to deliver decent, inflation-beating returns better than any asset class. A SIP is an ideal way to invest for your long term financial goals and also for wealth creation purpose. The sooner you start, the more you save, the better it is for you.

A SIP helps you the best by enabling you to save little amounts every one from your budget. This SIP amount can also be increased automatically at a set frequency (say every six months or yearly) to match with growth in your income. It is important to note, however, that equities are a risky asset class and investments should not be done for a short term.

Emergency Fund:

It is also recommended that you create a small emergency fund for the family. This emergency fund can be an equivalent of say three to six months of your household expenses. The fund will keep you better prepared to manage and handle any financial emergency or temporary shocks you may come across in the short term.

Conclusion:

A marriage is a beautiful creation of society and mutual love and trust can make it even more wonderful. With proper financial planning and timely actions, you would also lay strong financial foundations for the long journey ahead. These financial foundations are not to be ignored as they will prove themselves and make your relationship even stronger as you go out into the world creating our own space.

For many Indians, financial worries are a part of life. Being a developing economy with a very large population living without adequate financial resources, financial anxiety is like a part of life. The largely middle-class families of India have high aspirations and dreams but often feel frustrated and hope of breaking off from the vicious cycle of living hand to mouth.

Financial Stress?

It is at the next level of the situation described above. It is an abnormal situation arising out of something unexpected or a situation which was foreseen but now has aggravated. Events like loss of a job, a medical emergency, loss from business, losing your investments, theft of property, etc, may give rise to your financial troubles. Further, situations like funding for child's education, marriage plans, etc for families without an adequate and stable source of income can also come as financial stress. These are only some of the instances/situations and there can be many more reasons for getting into financial stress/troubles.

The Way Out:

Obviously, the one thing one desires with financial troubles is to get out of it as early as possible. However, being in stress, it is not easy. Perhaps a helping hand, a guide, a logical way out would be of great help to those who do not know where to start. Your financial awareness and discipline will be tested here. We present our own version of the step-by-step guide to find your way out of your financial troubles. We hope that readers can not only use it during stress but also during better times to avoid getting into any more trouble.

1. Get in the right frame of mind: The first thing one has to do is to get into the right mental frame for tackling the problem. This is not as easy as a lot of negative thoughts may be coming to your mind. However, remember that there may be people who have faced much more and have come out of it and nothing will stop you from coming out of this temporary situation. Only you have to believe that it is possible and would require your focus. You have to be positive, committed and focussed on resolving your troubles.

2. Identify stress points and root causes: You have to be honest about everything first. A lot of financial trouble happens when we ignore and reject early warning signs and do not take remedial actions before time. The more honest and realistic you are, the better are the chances of success. With this honesty, one would expect you to first list all your stress points and the root causes behind them. What were the decisions or habits or events that led to such problems? What were the mistakes you did in past? What are the key and immediate concerns/challenges before you? These are the questions you need to answer.

3. List out financial priorities and solutions: The next step is to think and list out the solutions you need that will resolve your troubles. This may take some time or no time at all. Your possible solutions would come from your own situation. The solutions will also give an idea of the decisions you need to take to get back control of your financial life. The list will also need to have priorities attached to every important decision or action plan. This blueprint of priority will be in line with the financial priorities you have.

   Generally, getting out of debt should be the first priority and one should even consider extreme solutions to resolve the same. For eg., if you have an expensive car loan, can you not sell your car and repay the loan? If you have a loss-making business, can you not sell some equity/ bring in a new partner? Can you not sell/lease your the idle jewellery lying at home to get more finances? Be open-minded and explore all possible solutions at your hand.

4. Stay out of any more trouble: This is very obvious, isn't it? If things are not going your way, please do not take more risks. If possible, avoid creating more situations or bringing more complexity to your already stressed finances. Go very conservative on your risk appetite during such periods. If few decisions are unavoidable, try to delay/push the decisions further into the future.

5. Execute and review your plans: Having a plan is one thing but executing it diligently is another challenge altogether. One has to execute the plans ruthlessly, without compromise and within defined time, dates. Treat this as a business challenge or a game that you need to win at any cost. Make no delays, compromises to do what is required to be done. Once you overcome your temporary situation, you will have ample time to think about your priorities and make up for the hard decisions you took.

   On preparing your action plan and solutions, remember that If you are serious about resolving your finances, you will not shy away from making hard decisions. Do not think what your family, friends or neighbours will think of your decisions. If your social stature is dictated only by your money power, it is the least you should care about.

6. Consult your financial advisor: The last piece of advice is to engage your financial advisor and ask him/her to help you out. If you do not have a financial advisor, we advise that you look out for a good one. The importance of a financial advisor cannot be over-estimated. He will bring in his valuable insights, experience, knowledge and a ready action plan to resolve your issues. Those with long-standing relationships with good financial advisors rarely fall into financial troubles.

Action Plan for Personal Finance

An action plan is a road map for the achievement of some important goal. Most of us have some personal goals but we are often found falling short of the action plan to pursue them. With this article, we hope you make å smart action plan of your own and follow it.

Make A Successful Action Plan:

Before we take about the key actions you should explore, let us ensure first ensure that the entire ritual does not fail and the actions we decide to undertake are successful. Here are the four steps that will go a long way in ensuring your success...

1. Consider only a maximum of three actions. Even one to two actions is good enough as too many actions are hard to cope up with and you may lose focus and passion with time.

2. Make sure that the chosen actions are worth your time, holds your interest and passion, is on top or requirement and is also practical and meaningful for you to implement.

3. Ensure that the actions are well-defined, measurable, time-bound and in numbers. This will give you a very definite idea of the target and will help success instead of having to live with vague, subjective interpretations. Note, we have given open-ended actions below which have to be well-defined by you.

4. Make yourself accountable by sharing your actions with others and also maybe asking others to keep track of the same. Your spouse, children, parents and even friends and bosses can be made asked to keep you on track and support you.

Its' time now to explore a few suggested personal finance actions we hope you will make and also follow through.

Invest __ % More:

If you are a regular investor and think that you do enough investments, this year do more than enough. Resolve to invest a certain extra percentage each month this year. For example, if you invest Rs 10,000 each month, invest 10% extra, which is just an additional Rs 1000, which you can manage. At the end of the year, you will have invested an extra Rs 12,000. If you are yet to start saving, this action should be also at the top of your list.

Know that while you can come up with 100 reasons to avoid investing more right now and plan to invest more in the future, you just need one reason to start investing more from now. And believe us, there would be many compelling reasons for you to start saving. However, investing in the right product is also crucial. Equities give us the magic of compounding over a long-term, and its something that you should also explore. Remember, even if you invest a higher amount later, you will not be able to beat the returns of compounding you will generate on the smaller amount over a long duration of time.

Be adequately insured for all risks

When was the last time you carefully looked over your insurance coverage in a comprehensive manner? It is important that you keep on checking on your insurance coverage and making adequate changes in same. Evaluation of comprehensive coverage will require you to assess insurance coverage for life, health, personal accident, critical illness and home insurance. The idea is to protect the financial well-being of your family in case of any death, disease, disability or damage to property. If you haven't explored insurance in depth, resolve that you will do so asap and get adequate coverage.

Keep an Emergency fund of __ months income:

Life is unpredictable. You never know what will happen next and you might need money for some reason. Medical emergencies, unforeseen expenses which are unavoidable, sudden cash crunch, an urgent requirement for working capital etc. Thus, it is important that you have some amount set aside for emergencies. If you don't already have an emergency fund, it's time to start building it and if you have one, add a little more money to it. Typically, an emergency fund of three to six months of your income or expenses should be adequate enough for you.

While we are strictly against money lying in your savings bank account earning nominal interest, we advise you to build an emergency fund nonetheless and keep this money in a liquid mutual fund or a savings account.

Cut expenses by __ %

The main culprit behind low savings and an unhealthy financial situation is often our spending habit. There is often a disproportionately high expenditure on discretionary expenses. Expenses on entertainment, shopping, purchase of gadgets, frequent mobile upgrades, etc play havoc on our finances beyond our imagination. One action that you can explore is to track these expenses on a monthly basis by recording it and then planning the same from next month onwards. We do not ask you to say 'no' to everything, just put a limit in place, relative to your income and your saving plans. With this action, we can easily cut about 10-20% of our expenses every month. Remember, a penny saved is a penny earned.

Cut your debt portfolio by __ %

An easy and hassle-free loan is both a boon and a curse. While the availability of easy loan helps one through difficult times, it might sometimes also lead to unnecessary consumption. This is one of the reasons why people should shy away from taking credit cards. What people actually need to do is be smarter with their consumption pattern. Should you take a high-interest personal loan for a vacation? No. But if needed, should you avail an education loan for your kids? absolutely Yes. This year, learn to make a differentiation between good and bad debts. Good debts help you build assets, improve stature (like home, education) and are of low costs. Bad debt is often towards depreciating assets or intangible experiences (like car, travel, gadgets, etc) and often are of high costs (like CC, personal loans). This year resolve to clear your debt portfolio of all the bad debts first and then good debts, if possible. Being debt free by the year end can be a great action.