Tag - Investment Planning

May 2010

You can SIP in stocks – The 10 Steps

You can SIP in stocks , Systematic INvestment Planning, The 10 Steps, Dollar Cost Averaging, Rupee Cost Averaging, .

SIP or Systematic Investment Planning is a concept. It means that you periodically invest your money. It inculcates discipline, takes out the emotional part of decision making and allows you to seamlessly participate in investing.

However, many people associate or assume that Sipping is available only with Mutual Funds. Thereby, they miss the whole essence of what SIP is all about. Indeed, mutual funds offer automatic withdrawals from your bank account to be invested in Mutual funds. And they promote SIP (albeit, not aggressively, you see, they want you to make the payments upfront and not by SIP).

However, it is to be noted that SIP is a concept and can be applied while purchasing shares or equity as well. Yes, you heard me right, you can SIP in stocks.

There are many cases, when you would want to SIP in equities like – (a) You want to build your own portfolio of stocks with a tilt towards a particular sector (b) You are a Buy-and-Hold type of Investor (c) You are interested in investing in good Dividend Yielding Stocks (d) You do not want to incur the annual AMC charges in the range of 1.75 -2.5% on your portfolio value year after year which all the actively managed Mutual Funds charge. Check this post. (e) You are interested in investing in ETF’s (Exchange Traded Funds) etc.

There could be ‘n’ number of reasons where you are interested in investing in stocks. Once you have made up your mind that you want to invest in equities, you can go about doing a Systematic Investment Plan for your equity investment.

10 Steps to SIP in Stocks :

1. Decide on the intervals (or periods) in which you would like to SIP. eg: Monthly 25th of every month

2. Decide on the periodic SIP amount you would like to invest e.g.: Rs 14,000/- every month

3. Use a Calendar to set reminders. (I am a google addict You can use google calendar) or use whatever means (Physical Calendar, tell your wife etc.)so that you will receive a reminder call about the periodic investment. And you can set aside the funds to be allocated for investments.

4. Decide on the asset classes to invest. e.g.: ETF’s like Goldbees, NiftyBees, Stocks like HDFC, Cipla, BHEL, ITC etc. Debt ETF like Liquidbees (can be used for the for the debt component)

5. Decide the amount to be allocated to each asset e.g.: Rs 2,000/- each.

6. And that’s it you are all set to start sipping. Execute the Plan. Once you get a reminder Just go ahead and buy the assets.

7. Do a periodic review of your purchases every quarter in order to assess the performance.

8. Have a performance yardstick. Aim for good returns (Hey, there is no harm for trying to beat the index by a couple of percentage points year on year).

9. Measure your performance against the returns. Review.

10. Apart from TIME-WISE SIP, you can also go a step ahead. You can also do a PRICE-WISE SIP as well intelligently. If there is a > 10% drop in price of a stock between your two planned purchases, you can go ahead and pick up the stock and skip the next installment of that particular stock.

Eg: You pick up Rs 2000/- worth of Cairn India @ Rs 200/- on 25-Jan-2010. You have plan of picking up Rs2000/- worth of Cairn India on 25-Feb-2010. However , if Cairn India were to drop by > 10% or more in Jan itself , then go ahead and pick up in the stock in Jan and skip the Feb-2010 installment.

There are many Index ETF’s which are available and which are a good, low cost alternative to mutual funds which you can (or rather should) avail.

Understand what type of Investor you are, if You are the Saver Kind of Investor, go ahead SIP in Stocks. Step-by-Step over a period of time you would have created a portfolio of stocks which will generate income for you in form of dividends and which will also appreciate with time to generate wealth over a period of time.

March 2010

Costly Investment Mistakes to avoid at all costs – Part III

Costly Investment mistakes Part 3, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience.

You can also cultivate good habits of investing by avoiding the following mistakes.

This series is in continuation to the earlier 2 posts which contains the first 5 common mistakes committed by investors. You can read posts here at ( Part I and Part II )

This post ( Part III )  will throw light on the following common mistakes generally committed by investors:

#6. Having Unrealistic Expectations from Investments & Wrong understanding of Risk

Indexes (Sensex and Nifty) have gained more than 85% returns from the lows of March 2009. All the TV channels and newspaper headlines have started to focus on this aspect a lot andfuel greedin common people. Similarly just 2 months earlier to March 2009, or so,  when there seemed no end to the global markets falling down, were down more than -ve 50% , the same TV channels and newspapers were fueling fearsinto the minds of the people.

Expecting similar returns consistently from the stock markets is one of the common mistakes. This happens when expectations from the market are unrealistic (like doubling money in 1 year. etc).

The other side is when there is fear in the markets there perception that markets are extremely risky and all investments should be moved to safe instruments like FD’s etc.

Point is :

Markets test patience and reward conviction.

1. Equity Markets cannot keep rising 100% year on year every year & cannot keep falling 50% year on year every year.

2. There are various phases to the markets, long periods of range bounded ness, sudden spurts either up or down due to sentiments, global factors etc.  All this causes violent moves in the markets in short term. In the long run or long periods of time 5yr, 10yr, 15yr the ups and downs and returns from the marketseven outtoyield mean (or average) realistic returns. Being aware of this point is important.

3.Riskin equity marketsappears very highin short period of time. HoweverRisk in Equity markets is reduced significantly when investments are spread over long periods of time.

4. Risk and Returns are inseparable. Once the objective is clear which is get better returns over a period of time, then you must be willing to invest in instruments which carry more risk, intelligently. And marry the risk with passage of time to yield good returns.

#7. Leaving Investments in Auto Mode – No Periodic Assessment, No periodic Re balancing

You do periodic health checkup with the objective of finding if there is any need to take preventive measures to keep the body in good shape. If you are gaining weight and becoming overweight, you need to start taking steps to cut down on the weight. Similarly, if you are losing weight and have become underweight, you need to start taking steps to regain health.

Similarly, periodic assessment of portfolio (once a quarter, every 6 months at least) is necessary. This has to be done with the similar objective of taking preventive measures (if at all required) to keep the portfolio in good shape. Portfolio rebalancing has to be done as per asset allocation.

However, many investors make mistake of leaving the portfolio in auto mode once the investments have been made. Investments is indeed a long term process, but If some investment goes sour, and it is not acted upon in a timely manner,  it probably becomes too late / or too costly to get the portfolio back on track , if preventive measures are not planned and executed.

Final Part to be contd…… You can read the final installment here at Part IV

Costly Investment Mistakes to avoid at all costs-Part II

Costly Investment mistakes Part 2, Investment Planning, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can alsocultivate good habitsof investing by avoiding the following mistakes.

This series is in continuation to the earlier post which contains the first 3 common mistakes committed by investors. You can read the Part I here. (Costly Investment mistakes to avoid at all costs – Part I)

This post will throw light on the following common mistakes generally committed by investors:

#4. No “Homework” before getting into Investments, and learning costly lessons afterwards: Lack of understanding
Doing what’s right is not the problem. It is knowing what is right.

This mistake is akin to putting the cart before the horse. Adequate homework needs to be done before investing in any financial products (eg: Stocks, Mutual Funds, Real Estate, ULIP’s, Child Insurance Plans, PPF or even FD’s for that matter) .

You should understand the products well, understand the risk-reward ratio, understand the expenses

involved, tax implications, and do not easily buy an investment just because someone wants you to buy it. You need make sure that the investment objective and risk tolerance are compatible with your investment goals.

Even the world’s greatest investor Warren Buffet core philosophyis to not investin business models which hedoes not understand. Obviously, being the world’s most successful investor,there is wisdom in what he says.


#5. Not getting the basic difference between Saving and Investments


Many investors do not understand this basic principle. Getting this right is one of the key principles to wealth generation.

Savingis when you try to build funds for some needs, like maybe purchasing a house or going for overseas vacation. Once the adequate target is achieved, you withdraw the whole amount (Capital engaged + Income generated from the capital involved), and then spend it. Then you have nothing left and the process of investment needs to begin all over again.

For building wealth, the above strategy does not work. This is where the process of investment needs to be understood. (This strategy is similar to preached by worlds famous investors like Benjamin Graham, Phil Fisher, and Warren Buffet etc.)

Investmentis when you try to build funds with the help of assets which in turn also produce income year after year. In this you invest in assets like shares and property. The income generated can be taken out whenever needed or reinvested. However themajor portion of the capital stays put. It stays there to keep growing and compounding which in turn producing more and more income every year.

This process will take a lot of time. It requiressolid discipline and immense patience. However , as the years go by , the additional income stream from investments can supplement your earning potential to a large extent.

To be contd Part III. You can read part III of the series here. Click here for Part III

Costly Investment mistakes to avoid at all costs – Part I

Costly Investment mistakes to avoid at all costs , Investment Planning Tips, Financial Planning, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

Life can only be understood backwards; but it must be lived forwards.

In the process of investing, one often makes mistakes. There is nothing wrong in it. However, repeating the same mistakes should be avoided. This is so much easier said then done. Never-the-less, we can always try. So, Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years.

I have been investing since 1997. Earlier part of the investment was when I was in US and then later after moving to India in 2005. I have been investing in both shares and real estate.

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can also cultivate good habits of investing by avoiding the following most common mistakes.

So here goes……..

#1. Investing without a Goal

If one does not know to which port he is sailing, no wind is favorable.

Beginning investors often begin by Casual Investing without any goals. This quite often leads to pain and heartburn because, without any goals, investments are treated as speculation instruments solely aimed at making more money in a shorter span of time, by chasing market performance and acting on market swings, something similar to get-rich-quick scheme. (Speculation is a different ball game and of course, many people do succeed at it. However as in Investments, there are different set of rules, full time efforts, and a different mind set and discipline which needs to be followed.).

Different goals require different strategies. Broadly goals can be divided into three types according to time frames.

Long term Goals– typically 7+ years (e.g.: retirement corpus, child education, child marriage etc.) should invest in Long term high risk/high return growth investment assets.

Medium term goal– typically 2 – 7 yrs (e.g.: deposit on house, planning a sabbatical from work etc.)  Require balanced risk investment strategy,

Short term goals– typically less than 2 yrs (e.g.: overseas holiday, purchase of car, any major house improvement expense etc) require conservative investment strategy.

So, Some of the following questions have to worked upon and answered to full satisfaction before setting out for investment: What am I investing for (Goal)? How much do I need for the goal to be met? What is the time frame of the investment going to be? Where do I need to invest? Should I do lump sum investment or Periodic investment? And so on…

Remember, failing to plan is planning to fail

#2. Not Starting to invest Early enough

This is one of the most common mistakes made by investors. Most of us keep waiting for the right time, or the right price, or the right time to begin investing. Remember, Time in the market and not timing the market is the simple way to success in investing. Please read my earlier post on Invest early, Invest Wise, Utilize the power of compounding.

#3. Emotional Investing , being short -sighted, falling to greed and fear, Not following the Investment Plan

A wise man should have money in his head, but not in his heart. –Jonathan Swift

Investing is a long term deliberate process. Long term investment strategy may not make you super rich overnight, but it will not make you a pauper either.

Getting emotionally involved with the portfolio movement is another mistake committed by many. Becoming greedy when markets rise or fearful when markets drop.Paper Money plays on emotions. Investors begin to time the market. Emotional buying and selling of shares based on sentiments often leads to selling low when market sentiments are bearish OR buying high when market sentiments are bullish.

This often results in additional costs, lost opportunities. And of course, if at all the investment was to meet some goals, and then all of that goes for a toss.

To be contd………. Part II. You can read Part II of this series here. (Costly Investment mistakes to avoid at all costs – Part II)

February 2010

Invest Early, Invest Wise, Utilize Magic of Compounding

Invest Early, Invest Wise, Utilize Magic of Compounding, Time value of money.

If you have built castles in air, your work need not be lost; that is where they should be. Now put the foundations under them. —- Henry David Thoureau, Walden.

In the previous post , I had mentioned about the importance of time value of money. Let us see here the impact of the same over a period of time on investments – And why investing early and then making it work for long periods of time makes such a BIG difference.

In this example , Early Investor starts putting aside Rs 10,000 a year beginning age of 22 yrs until the age of 30 and then decides to stop making contributions. Over this time, he puts aside a total of only Rs 90,000.

On the other hand, Late Investor doesn’t start making contributions until he is 31 and puts aside Rs 10,000 a year until he reaches age 65. Over that time, his contributions total Rs 3,50,000.

In both cases, assume that their account grows 10% a year. Despite the fact that Late Investor contributes  almost 4 times , at age 65 his account is hardly 2/3rd as compared to the Early Investor!!!!

This clearly illustrates the benefit of starting to invest early.

The power of time and impact on the the value of money, the benefit of investing with patience and discipline and the magic of compounding is truly amazing.

Even, if it may be late for some of you to maximize your lifetime investment potential, it may not be the case for your children.So, go ahead, start thinking , plan , and invest for long terms with conviction.

You will find the related post on Time Value of Money as interesting as it is one of the most important concepts in finance.

What is Time Value of Money

What is Time Value of Money

“A bird in the hand is worth two in the bush” – Miguel de Cervantes

The time value of money is one of the most important concepts in finance. Money that is in possession today is more valuable than future payments because today’s money can be invested to earn positive returns in future.The understanding of Time Value of Money leads to better decision making in some of the major financial decisions like — calculating sum assured requirements for your life insurance needs, computing monies which will be required for child education/wedding in future, corpus needed to fund retirement, comparing alternative investment decisions, comparing house lease v/s buy decisions, horrendous impact of carrying credit card debts etc.

What is time Value?What is Time Value of Money, Present Value , Future Value, Compound Interest, Time and their Relationship,

Money has time value. The value of Rs. 1 today is more worthy than the value of Rs. 1 tomorrow. This economic principle recognizes that the passage of time affects the value of money. This relationship between time and money is called the ‘Time Value of Money’.

If someone owes you Rs 10,000/- , it is advantageous to get the money today If you get this money today:
–> You could earn interest and invest it and you will receive this quantity plus some other amount in the future.
–> You can use it to pay your debts and therefore, lower the interest amount paid on your debt.
–> Or you can spend it and enjoy it as you wish.

Understanding Present Value , Future Value, Compound Interest, Time and their Relationship:

A sum of money today is called a present value (PV). A sum of money at a future time is termed a future value (FV).

The time period in between the present and future value can be no of years, no of months, no of quarters or any unit of period. (n).

The interest rate or growth rate in which the present value can be employed . This is the interest rate per period.(i) The effects of value versus time is best usually described by compound interest. Change in Value over time is impacted by factors like inflation, tax rates , discounting rates etc.

Future Value is calculated as follows : Future Value (FV) = Present Value (PV) * (1 + i) ^ n

Alternatively, given a future value then,

Present Value can be calculated as follows : Present Value (PV) = Future Value (FV) / (1 + i) ^ n

Compounding

Compounding is the mathematical procedure for determining “future value” and is virtually the reverse of discounting

Discounting

Discounting is the mathematical procedure for determining “present value”.

Some Examples :
1. If you invest Rs 1,000 today at an interest rate of 10 percent, how much will it grow to be after 5 years?
FV = 1000 * (1 + .1) ^ 5 = Rs 1,610.51

2. If you were given an option to get Rs 1,00,000 , six years hence OR option of receiving Rs 55,000 now. What will you choose.
In this case, you bring down the future value to the present value and then make a decision (or judgement). Let us assume a discounting rate of 12%.

So, PV = 1,00,000 / (1 + .12) ^ 6 = Rs 50,663.11.

Option A Present Value comes to Rs 50,663.11 and Option B is Rs 55,000. And the choice becomes obvious. In this way different rates can be used to make alternative quality decisions and arrive at decisions quantitatively.

3.If you invest Rs 11,000 in a mutual fund today, and it grows to be Rs 50,000 after 8 years, what compounded, annualized rate of return did you earn?

Using the above formula again : FV = PV * (1 + n) ^ i
50000 = 11000 * (1 + n) ^ 8 ; So, n = 20.84 % (Wow!! — This is a good investment)

4. Rule of 72 (Quick!!! — )

How long does it take to double Rs 5,000 at a compound rate of 12% per year (approx.)?

Approx years to double = 72/ i% (Cool!!)

In the above case it will be = 72/ 12% = 6 years. (This is rough, Actually it will be 6.12 years)

Thus, Your ability to measure time value of money can be THE vital difference between your making a good or bad investment decision.