Ask Investment Questions

Investment is the backbone of financial planning. So if financial planning is battle training, investment is the Kargil. This is an ultimate practical experience and while doing this question or query is bound to surface. Hence this is the page where I have collected the common investment questions that arise in every once mind. You are likely to get solution to your query here or else ask me through the comments section.

 

Investment Questions:

  • Should I take loan & invest in Stocks?
  • Are Company Fixed Deposits Safe?
  • What are ETF & which Indian ETF I should Invest in?
  • How much I save for my goals?
  • How to get good returns through futures & options?
  • What about investments made in IPO.
  • What will happen if we are caught in spiral like Japan?
  • What should I expect from my Bank Fixed Deposits?

Leveraged Investment

Question: My Friend who’s a stock broker, advising me to purchase some stocks as stock markets is at very attractive levels? As I don’t have enough money so he’s told me to get a personal Loan. I can pay EMIs easily, but is it advisable?

This is not a friendly advice. Either your friend wants to earn brokerage out of your risk or he’s also not that equipped with knowledge to advise you on financial matters. Stock market is one of the most risky asset classes at least for short term where you can earn or lose the fortune. But even if you want to stay invested for long term and you are comfortable in paying the EMIs then also I would not advise you to enter this investment by taking Loan. No one can guarantee you returns in stock market. Personal Loan is among the costliest Loan available as bank doesn’t ask for any security or collateral along with it. It’s Interest rate varies from 16%-20%p.a. As there’s no guarantee in Stock market so it’s very risky to take loan and invest. Moreover there’s a condition attached with personal Loan that this money should not be used for Stock market Transactions. I advise you to start a SIP in Equity Diversified Mutual Funds with the amount you are comfortable paying as Loan EMIs. This will help you in building up the corpus and also satisfies your desire to enter into stock market.

Company Fixed Deposits

Question: I want to invest in company fixed deposits which are safe and good to invest with fairly good return. May I request your good self to suggest the name of safe company for investment? Period of investment is 3 year.

There’s no company which I can call as safe. Fixed deposits are unsecured loans that companies procure from general Public. If a company defaults and goes bankrupt, fixed deposit investors will be paid second last i.e before Equity Investors. But still you can check those companies which have good rating by credit rating agencies. Rating does not make company deposits safe but at least it helps in gaining confidence on the soundness of repayment capacity. There are some Government companies also which issues FDs. You can consider those also.

ETF or Exchange Traded Fund

Question: Can you please provide me an update on ETF…. What is ETF? How much return do we get? For someone at my age of 25 it is right time for me to invest in ETF? Which ETF should I invest for long term?

ETF or Exchange traded funds are passive funds which follows some particular index be it Sensex or CNX 500. These funds are similar to index funds with only difference that these are listed on exchange – so you can also do transaction any time in the day rather than waiting for end of the day. Returns in ETF are directly linked with index performance so if Sensex will give 12% return in year – you can also get the same amount. My suggestion as India is still a growing economy – there is a scope for fund managers to beat index. So you should make your portfolio through 3-4 diversified equity funds.

How much one should save?

Question: How much percentage of my total Income should one invest and in which financial instrument considering children education and retirement planning?

Actually percentage of income going in goals depends on once age & type of asset class you are choosing. If someone is around 30 years & invest in equities – approx 15% income will be sufficient to achieve these basic goals but he is investing through debt may be 25% of income is needed. But if someone is close to 40 the he needs 25% through equity & 35%-40% in case if debt. But as I said other factors like Job security, other goals also determine the quantum of investment.

Future & Options

Question: Please tell me about how to invest in Futures & Options. How I can earn good returns from it.

Future and options are most common “Derivatives”. Derivatives are financial instruments that derive their value from an ‘underlying’. The underlying can be a stock issued by a company, a currency, or a commodity like gold etc. The derivative instrument can be traded independently of the underlying asset. As per most famous investor “Derivatives are instruments of financial mass destruction”. Why he said this – because derivatives are leveraged instrument & very risky for any investor. Institutional players use these Instruments for hedging their positions but retail investors use them for speculation. Assume that you have capital of Rs 50000 – that you used to buy a future of x company by paying 25% margin. Now if particular stock(underlying security) will rise by 10% in a month you will gain Rs 20000 on your portfolio or 40%. Now think if it goes down by 10% – as retail investor don’t have understanding or control over their investment; they soon lose their capital.

IPO or Initial Public Offer

Question: I have 300 shares of Jsw energy, which is received at the time of IPO offer. I want to know about the future of this share from the point of view of as an investor, I am not a trader. Please give the expert opinion.

Investor often thinks IPO is a good way to make QUICK money and gets attracted towards it. It is true that few of the companies who came up with an IPO have done well but it is not easy to pick the right ones. Do you remember Reliance Power IPO in Jan 2008 & same happened with other power & infrastructure IPOs. Investor thinks that IPOs are good Investment Vehicle but in reality they are against investor’s interest as they arrive in market when promoters are sure that they will fetch good premium. Do you know BSE IPO index which was launched in August 2009 is down by 9% & in the same period Sensex has given more than 25% return? One should stay away from IPOs or be very choosy.

India Vs Japan

Question: What will happen if we are caught in spiral like Japan i.e. correction of 80% & still bleeding though Japan’s companies are not bleeding then why the Nikkei is not giving the returns? I hope u must be getting what i wanted to ask. Please do clarify why we will go on making new highs on index although with ups n downs

There are 2 reasons for what happened in Japan- first when their market topped it’s valuation was almost 5 times of average. Their PE was approximately 100 at that time. Second Japan is now a developed country & in last 2 decades their GDP growth is 2-3% max. Hope it answers your concern. India is still growing economy and the best is still to come. Next 10-15 year will be Golden years for India – you will like to sit out & watch the game or would you like to participate.

Bank Fixed Deposits

Question: What are the historical real returns on Bank Fixed Deposits in India? When will they turn positive?

Real rate of return is when we remove adjust normal/nominal rate of return (like 7.5% on FD or 8% on some post office scheme) is adjusted for inflation. Normally bank interest rates gives close to 1% of real rate of return but if consider taxation actually we are making losses. Last 2-3 years were pathetic for a debt investor as real rates are negative – even RBI is concerned regarding this. India is a growing economy & inflation will always be higher due to demand coming from public – one must hold equities & real estate to take benefit out of it.

In Case you have questions related to investments ask in comment section.

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Hemant Beniwal August 8, 2019 0 Comments

15 Types of Risk that affect your Investments

When someone asks me “tell me some risk-free investment which can generate good returns” or “low risk high return mutual funds” – I get confused. Why? Because according to me there are n number of risks in investing & I am not sure which risk he is talking about. Warren Buffett Said “Risk comes from not knowing what you are doing”  so today let’s risk ourselves to understand different types of risks that are associated with equity & debt investments.

What is Risk ?

What comes to your mind when someone says RISK or this investment is risky? Risk for most of the people has only one meaning loosing the principal amount. In scientific language “Risk may be taken as downside risk, the difference between the actual return and the expected return (when the actual return is less), or the uncertainty of that return.”

Image Credit Onemint

2 most basic types of risk

Investment is related to saving but saving does not mean investment. Investment is about deferring your present consumption for future goals with expectation of security of amount & getting returns. So there are 2 basic risks in it:

Investment Risk – it is about possibility of losing money. Today you invest Rs 5 lakh in equity & get Rs 4 after 3 years. Investment risk can be measured by Standard Deviation.

Inflation Risk – it is losing purchasing power of money. In 2011 you invest Rs 5 Lakh in debt & get Rs 10 Lakh in 2020. But your Rs 10 Lakh is not able to buy you the item which was available for Rs 4 Lakh in 2011.

Check below picture which tells you that with time (in equity) Investment risk is reduced & at some point of time it turns to zero. But on other hand Inflation risk increases with the time & there is no end to it. Or we can say in short term risk is volatility of assets & in long term it is loss of purchasing power.

Systematic Risk Vs Unsystematic Risk

There is one more way to classify financial risk – is risk will impact whole economy or particular company or a sector.

Systematic Risk – it is also known as market risk or economic risk or non diversifiable risk & it impacts full economy or share market. Let’s say if interest rate will increase whole economy will slow down & there is no way to hide from this impact. As such there is no way to reduce systematic risk other than investing your money in some other country. Beta can be helpful in understanding this.

Unsystematic Risk – it affects a small part of economy or sometime even single company. Bad management or low demand in some particular sector will impact a single company or a single sector – such risks can be reduced by diversifying once investments. So this is also called Diversifiable Risk.

Different types of Risk in Investments

We have divided it into 2 parts – risk in debt & other risks. It is a big investment mistake if someone feels that there is no risk in debt investments – people who have ignored this in past have paid huge price.

Risk in Debt Investments

Credit Risk – it is also called default risk. As the first pic of this article shows that people only look at returns & not risk in it. Let me ask if SBI bank is paying some 9% interest & some NBFC NCD is paying 12.5% – which one you choose. If you think 12.5% NCD will be the right choice – you are ignoring the credit risk. Credit risk is when company doesn’t have capacity to pay principal or interest amount. In past there is a long list of companies which defaulted like CRB Capital, Escorts, Morpen Labs etc. Even Bank FDs have credit risk – there is guarantee only upto Rs 1 lakh. Credit risk is close to zero in Government Bonds.

This is most common & most important risk in debt – to understand it better read “Why debt will always give negative returns

Interest Rate Risk – change in interest rate will impact price of bonds (or NCDs). There is negative relation between price of bond & interest rates – if interest rate will increase price of bond will go down & vice versa. This risk can be reduced if you hold bonds till maturity. Interest rate risk also affects Bank Fixed Deposit investor – he was having Rs 5 Lakh & he invests at a prevailing rate of 9%. What will happen if interest rate increase to 10% – he will be losing 1% interest.

Reinvestment Risk – Let’s assume that you made investment in a bond with 9% yearly interest. Interest rate reduced to 7% in 1 year so next year when you received interest & went back to invest it was invested at lower rate.

Liquidity Risk – if you have some bonds that you would like to sell for immediate requirement but there is no buyer or fewer buyers than sellers – you may have to sell your bonds at discount.

Country risk – it is also called sovereign risk. As you read in Credit risk “Credit risk is close to zero in Government Bonds” but close to zero doesn’t mean zero. What about present condition of PIGS – Portugal, Ireland, Greece & Spain. Even in India there have been instances where fixed deposits issued by govt. backed companies deferred maturity payments by issuing additional bonds.

Inflation Risk – as mentioned in starting of the article. Inflation is your biggest enemy.

Other Investment Risks

Exchange Rate Risk – If you invest in debt or equity of some other country you will face exchange rate risk. If some of your US investments earn 10% in one year in dollar terms but the same year dollar loose 2% in comparison to rupee – your actual return will be 8%. NRIs are heavily impacted by this risk & they should make financial decision after considering it.

Timing Risk – I don’t think I need to explain it but only one suggestion – don’t take this risk.

Volatility Risk – equity prices keep fluctuating on day to day basis. This can be measured by standard deviation.

Political Risk or government risk or regulator risk – What will happen if you have invested in a particular sector & government comes out with an adverse policy. This risk can be clearly seen in sugar or oil & gas sector.

Valuation Risk – You may find a great company with great future prospects but if present valuation is too high you will not make money. Infosys was good company in 2000 & great company in 2005 but its price of 2005 peak was less than 2000.

Business Risk & Technology Risk – couple of years back pagers & typewriters were important part of once life but these products are no more there. Same happened with Audio tapes & floppies – what would have happened to these companies.

Execution risk – the time between when you see your price and when the trade actually goes to the market.

Concentration Risk – when you invest in single company (I know a person who invested all his long term savings in Satyam), single fund or single asset management company you are actually taking a huge risk.

Information Risk – This is again a very important risk to understand. You take your financial decisions based on some information – this information is provided either by manufacturer of financial products or agents/distributors/advisors or media. What will happen if this critical information is wrong or not complete? If you think this only happens at the time of buying insurance – you are absolutely wrong. This can happen in any financial product including mutual fund (you see advertisement of 100% return in a year – these are point to point returns & completely misguiding), taking loan (interest rate shown 9% but actually it is 16% – it is game of Flat rate & Reducing rate) or even simple products like tax free infrastructure bonds.

Someone rightly said “If you torture numbers enough, they will confess to almost anything”– read extract from Economic Times about IDFC Infrastructure Bond advertisement:

“IT IS A PLAIN-VANILLA INFRASTRUCTURE BOND ISSUE THAT OFFERS TAX RELIEF AND A MODEST RETURN TO INVESTORS. HOWEVER, THE ADVERTISEMENT FOR IDFC BOND OFFER HAS INVESTMENT EXPERTS QUESTIONING SOME CLAIMS. MOST OF THEM CLAIM THE ADVERTISEMENT IS “GROSSLY CONFUSING”, “MISINFORMING THE INVESTORS” AND “TOTAL MISREPRESENTATION OF FACTS”.

THE BONE OF CONTENTION IS IDFC’S CLAIM THAT THE ISSUE OFFERS TAX-ADJUSTED YIELD OF 17.85% TO INVESTORS. SURE, AS ALWAYS, THERE IS AN ASTERISK, AND A QUALIFICATION THAT THE YIELD IS TAX ADJUSTED FOR INVESTORS IN THE HIGHEST TAX SLAB. THE TROUBLE, SOME EXPERTS SAY, THEY CAN’T VERIFY THE CLAIM EVEN AFTER EXHAUSTING ALL FINANCIAL FORMULAS AVAILABLE IN THE SPREADSHEET.”

*(yes this star) – Do you know what this star is called? Asterisk or Aster-RISK – Aster means Star & Risk means anything or everything that is written in this article. If you find this star somewhere try to find hidden things in footnotes.

There are few other risk which impacts you directly or indirectly – institutional risk, operational risk, event risk, company risk, geopolitical risk, sociopolitical risk, counter-party risk, reputation risk, commodity risk, management risk, principal risk, opportunity risk, prepayment risk, call risk, legal risk and I am sure I have missed lot others….

Oh so many risks & you thought only equities are risky. Now from the next time when you say Risk Free Investment – first clarify which risk you are referring to.

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Hemant Beniwal August 8, 2019 0 Comments

Everything you need to know about NPS

Creating a substantial retirement corpus is a crucial aspect of financial planning. This is to ensure that you have adequate funds to meet your various expenses during your retirement. With this in focus, the Indian government launched the National Pension Scheme (NPS) to provide investors with an opportunity to take care of their life, post their retirement.

What is NPS?

The National Pension System (NPS) is a government-backed pension scheme. It was first launched in 2004 solely for government employees. However, the scheme opened up to every investor in the country in 2009. The goal of NPS is to provide financial security to investors in their old age.

How does NPS work?

Under the NPS investment scheme, you can make investments towards your pension account on a regular basis during your working life. And when you reach your retirement age, you can withdraw a portion of the fund as a lump sum. The remaining portion is used to purchase an annuity so you can benefit from a regular income during your retirement years.

You can join the NPS scheme voluntarily, or you can opt for the plan offered by your employer. If your company provides NPS, it matches your investment and makes an equal contribution to the fund. Professional fund managers regulated by the Pension Fund Regulatory and Development Authority (PFRDA) invest your funds in different portfolios. This includes government bonds, shares and corporate debentures.

Who can invest in NPS?

All Indian citizens between the ages of 18 to 60 are eligible to make investments in NPS. So, irrespective of whether you are a government employee, private employee or self-employed, you can invest in NPS. This includes Non-Resident Indians (NRIs) as well. The only condition for joining the scheme is that you must fulfil all the necessary Know Your Customer (KYC) requirements to be eligible. When you open your NPS account, you are provided with a unique 12-digit number known as the Permanent Retirement Account Number (PRAN).

Pros and cons of investing in NPS

Like all the other investment avenues, the NPS too has its pros and cons. These are:

Pros

  • The NPS is a voluntary scheme open for all Indians adults to invest
  • It is highly flexible because you have the freedom to choose your asset allocation between equity and debt based on your investment requirements
  • You can invest as much as you want each year. There is no limit on the maximum investment limit
  • You can operate your account from anywhere in the country
  • The 60% corpus that you withdraw on retirement is tax-free

Cons

  • No guarantee on the rate of return
  • While there is no maximum limit, you need to make a minimum yearly contribution of Rs. 6,000 to ensure that your account is active

What are the investment choices available in NPS?

The NPS offers two choices:

  • Active Choice: You can decide how the money should be invested in different assets. This includes a combination of stocks, fixed income instruments and government securities.
  • Auto choice: This is the default option where your money is automatically invested in different avenues based on your age.
Age Equities Corporate bonds Government securities
Less than 35 years 50% 30% 20%
40 years 40% 25% 35%
50 years 20% 15% 65%
More than 55 years 10% 10% 80%

Tax benefits

Every investor can claim a tax deduction of up to 10% of gross income under Section 80CCD (1) of the Income Tax Act. This is within the overall ceiling of Rs. 1.5 lakh permitted under Section 80C and Section 80CCE. In addition, the contribution made by your employer is exempted under Section 80CCD (2). You can also claim an additional deduction of Rs. 50,000 under Section 80CCD (1B).

Conclusion

If you’re planning your retirement, you can consider investing in NPS as an option for your golden years. But do ensure that you have a healthy mix of equity and debt in your other investments to help you build wealth.

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Ajit Narasimhan July 24, 2019 0 Comments

It’s an emergency!

Title caught your eye? Picture these.

  • Apple launches the newest iPhone and you just must have it. How will fund your purchase?
  • Your company doesn’t do too well, and to stay afloat, the management decides to let go off some employees. You’re one of them. How will you meet your expenses until you find a new job?
  • You’re having a good time baking a cake for a bake sale. Your oven malfunctions and there’s a fire. How do you deal with the repairs?
  • The paint on your walls is wearing off, and you want to get a paint job done. How will you fund this?

The thing these statements have in common is that all of these require money. BUT there is a difference – some of these are planned expenses that you can save for over time (the iPhone and paint job), and some aren’t. Nonetheless, you need to be prepared for these.

This is where an emergency fund comes in. An emergency fund is money that you’ve set aside to cover any financial surprises life throws your way.

What is an emergency?

An emergency is “a serious, unexpected, and often dangerous situation requiring immediate action.” For example: job loss, a medical or dental emergency, unexpected repairs, unplanned travel.

How much should you save for emergencies?

The rule of thumb is to ideally have three-six months of expenses saved in an emergency fund. You can arrive at this by adding up your monthly expenses and multiplying it by the number of months. While you include regular bills on food, rent, electricity, water, fuel and other expenses, don’t forget to include loan payments (in case you have one or are considering one) and payments you make once a year like insurance.

Where can you put your emergency savings?

NOT your savings account. Why? While your savings are easily accessible, earn an interest and have no risk, it’s not a good idea to use this for emergencies. This is because you might give into the temptation to spend just a little extra every now and then, and this could eat into those funds.

Now, you would want your emergency fund to be an alternate to your savings account – one without a debit/credit card that’ll allow you to spend. Liquid funds are one such alternate. They’re easily accessible, can earn higher than savings returns, and come with low risk. Some liquid funds even come with an instant redemption facility. You may consider ultra-short term funds if your holding period is 3-6 months.

How to build your emergency fund?

  1. Regularly invest– Set up an auto-debit from your salary account to this fund. This way, when money comes in, a part of it is invested for emergencies.
  2. Review your expenses to see what you can do without– There’s a fine line between needs and wants, and even when it comes to wants, you don’t have to give up everything. One cab ride less, or fewer cigarettes a day and you might have money left at the end of the month.
  3. Use spare cash– Reviewing your expenses to see what you can do without can result in having cash to spare. Transfer this to your fund, so it’s untouchable until an emergency.

Benefits of an emergency fund

  1. Keeps you from spending unnecessarily– If you keep your emergency money in the same account as your savings, you may be tempted to splurge a little on frivolous things. Keeping it out of immediate reach keeps you from spending it.
  2. Decreased dependency on borrowing– An emergency fund keeps you from swiping your credit card unnecessarily, or from even borrowing from the bank to meet emergencies. This way you won’t have to worry on paying interest, fees or a penalty on debt.
  3. Lower levels of stress– Building an emergency fund prepares you to meet any financial emergencies, and this way you’ve lower levels of stress than if you’ve to deal with borrowing and interest payments.

Things to remember:

  1. Make sure you differentiate between planned expenses and emergencies
  2. Your emergency fund should fit in with your other goals
  3. Don’t forget to review your emergency fund from time to time, so you can add adequately to it with changes in your lifestyle and keep up with inflation.

If you haven’t got an emergency fund already, start investing for it today.

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Shweta Nichani July 24, 2019 0 Comments

7 bonus ideas you need in your life!

It’s the end of another financial year, and many of you will be receiving your annual performance bonus. Exciting time, isn’t it? I bet you’ve got fantastic plans of how to splurge it. I’ve got them too, with a little boring, but necessary checklist I thought I should share.

I hope that maybe it helps you too. Without further ado, here’s 7 bonus ideas you need in your life.

  1. Pay off debt:Credit card bills, student loans, vehicle or home loans, you could have any of these. It might be a good idea to pay these bills and also set aside some money for any future loans you may be considering. This will minimise the principal amount you owe and you can save on hefty interest payments.
  2. Add to your retirement fund:Your retirement may be a long way off, but no one tells you it’s one of the first goals you should start saving for. Why? Look at cost of living today. If you spend 30,000 a month today as living expenses, 20 years down the line assuming inflation is at 6%, you’ll be spending 1.72 lakhs a month. Start putting aside a little by little with a Systematic Investment Plan in mutual funds to build wealth for your retirement. You can also invest in NPS and PPF for relative safety. Use a retirement calculator to figure out how much your SIP amount should be.
  3. Build an emergency fund:Life is unpredictable. So, isn’t it a smart move to be prepared? You may lose your job, or your company isn’t doing well and can’t pay salaries, or for some reason, there is little or no income. It’s ideal to have at least 6 months of expenses saved in an emergency fund. Do not touch this unless it truly is an emergency. Consider a liquid fund for this. Frivolous purchases are not emergencies and can be planned.
  4. Invest for longer term, big ticket goals: You’ve got a lumpsum in hand, why blow it all up now? You may want to purchase a car in the future, make the down payment on a house, fund your child’s higher education, or even start a business. Whatever your goal may be, no matter how far, start setting aside funds today for it. You can even start a SIPin mutual funds. Time and compounding will work for you.
  5. Get insurance: Ever considered who will take care of your family should anything happen to you? Get a term plan to secure your family financially in case you die. The earlier you get it, the lesser the premiums cost. Don’t delay this until next year.
  6. Buy health cover for your family: Health is wealth, and when your bonus can help you secure your family’s health, why not? There could be a time when your employer’s health cover may not be enough to cover all expenses. Consider purchasing a family floater health plan.

Invest in yourself: An investment in yourself is the best investment. Take a course, learn a skill, join the gym, read! Meet people, socialise, and don’t forget to have fun. You’ve earned it.

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Shweta Nichani July 24, 2019 0 Comments
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