Friday, December 30, 2011
Sunday, November 27, 2011
Sunday, November 13, 2011
Saturday, November 12, 2011
Sunday, November 6, 2011
Tuesday, November 1, 2011
Sunday, October 30, 2011
Thursday, October 27, 2011
Wednesday, October 26, 2011
Sunday, October 23, 2011
Friday, October 21, 2011
Monday, October 17, 2011
Saturday, October 15, 2011
Friday, October 7, 2011
Friday, September 30, 2011
Friday, September 16, 2011
Under the highest NAV guarantee products, customers are guaranteed returns based on the highest NAV a policy has achieved during the entire term of the insurance plan. However, IRDA is weary of the fact the insurers protect the guarantee by appropriately apportioning money in debt instruments. When the market falls the exposure in debt instruments increases and insurers try to sell equities at marginal profits. If there is too much concentration of such products in the market, a large number of insurers might sell equities at the same time to protect the guarantee, leading to a further market fall which leads to systemic risks.
In my opinion the IRDA has done the right thing by putting a stop gap on the so-called 'highest NAV guarantee plans'. Many investors have been lured to buy such ULIP plans by their agents / distributors / relationship managers in the name of providing huge returns based on the highest NAV achieved by the plan in its tenure.
Policyholders should keep in mind that insurance is for indemnifying your risk, and thus insurance and investment needs should be dealt separately. For insuring yourself only pure term insurance plans are appropriate, and while investing you should give due attention to your investment objectives, goals, age, income, no. of dependents amongst others; which is a holistic investment planning process rather than an ad-hoc activity.
Sunday, September 11, 2011
Saturday, September 10, 2011
Sunday, August 14, 2011
There is actually just one simple rule to investing in equities ‘Buy low and sell high!’. However for the majority of the investors in the stock market, it is this same rule which is the most difficult to follow. When the going is good everyone wants to seem to want a slice of the cake and when the flow of news starts becoming negative, investors flee the markets in droves.
To be successful in investing one should focus more on the underlying value of the sticks and less on news plan. Do not get me wrong, I am not asking you to totally disregard the news on the world economy. If you look at an investor in India, the moment he/she switches on the news channel – he only gets to hear negative news – US downgrade, slow growth in the west despite low interest rates, countries on the verge of default, rising interest rates in India with persistent inflation and all those massive corruption scandals. And all these news items are truly causes for concern. However in the midst of all these negativity we tend to overlook the positive impact of falling crude prices which could actually negate a lot of the above negative factors. And how is that? Here is how:
India is a developing country which is a net importer of crude oil and commodities. What a lot of people tend to overlook is the fact that every $20 drop in the price of crude, the country saves $18 billion per annum viz. equivalent to 1.1 percent of GDP. Lower oil prices means lower fiscal deficit, lower inflation and lower interest rates over time.
Indian exports to the US and Europe are only 6 percent of the GDP. And if you carefully look at the kind of exports we have, it is not materially linked to rate of growth of the western economies. Indian exports have captured market share from the existing players in those markets since they were cheaper (the IT industry and generic drugs industry are prime examples). However about 25% of the growth in exports are linked to the growth in the western economies. I would like to quote Mr. Prakash Jain in his article in Business Line – “Exports were materially impacted in 2009 after the Lehman bankruptcy as the crisis was unanticipated, due to a paralysis in bank lending and a consequent sharp inventory destocking.” This is clearly not the case today.
Scandals were already there, that was the bad news. The good news is that they have now come out to the open. In India major change has always taken place in a crisis. Right from the opening up of the economy in 1992 driven by a balance of payment crisis to increasing diesel prices when the subsidy burden was unbearable!
I would like to conclude this article with this chart which shows major debacles/crisis and the kind of returns investors got when they invested in equities during the time others were fleeing the markets.
There are several reasons to be optimistic about the growth prospects and about improvement in governance and infrastructure in India. If growth persists and if PEs (denoting valuations) are low, then equity returns can’t be too far away!
Friday, August 5, 2011
Where can you open a Public Provident Fund - PPF account?
Make a trip to your local post office. You can open it at any head post office or selection grade sub post offices. Visit the nationalized bank in your neighborhood. Selected branches of nationalized banks can also open accounts. Drop by a State Bank of India branch. SBI and its subsidiary banks also open accounts. I have heard that banks are sometimes reluctant to open PPF accounts because they get no additional money to handle these accounts and the money is credited to the RBI the same day. However I have not faced this problem.
Who can open a Public Provident Fund PPF account?
Anyone can open a PPF account, either on his/her own behalf or on behalf of a minor. Being part of a General Provident Fund or Employees’ Provident Fund scheme does not disqualify you from subscribing to the PPF, but at no point are you allowed to have two PPF accounts in your own name at the same time. Doing so will invite a penalty: if the issuing authority (bank or post office) detects two accounts during the tenure of the scheme, you will get only your principal back. Also, two adults cannot open a joint PPF account -- an account has to be opened singly, but can have one or more nominations.It's a good practice to open a separate account in the name of your spouse (or your minor children) and keep contributing to it -- you can even claim the tax benefit from the contribution made to accounts in your spouse's or minor children's names. In this way you could save tax-free funds even for your children and spouse. Consider opening a PPF account even if you are not a taxpayer, and keep it active. When you do become a taxpayer, you will have an account that will mature early. Remember, however, that any change in the interest rate will apply to you too, even if you've been maintaining an old account.
NRIs who wish to avail of rebate on their income in India are also eligible to open a PPF account. Subscriptions, however, will have to made from their NRO account on a non-repatriable basis.
When you open an account, you will be given a passbook in which all subscriptions, interest accrued, withdrawals and loans are recorded.
Term, Minimum Amount and Frequency of Installments to a PPF Account:
The term of a PPF account is 15 years. Even so, the effective period works out to 16 years because you are allowed to make your last contribution in the 16th financial year. Why should this interest you? - Because even if you make a contribution on the last day, you still get the tax rebate, although you won’t earn any interest on the amount.
During a financial year, you can contribute a minimum of Rs 500 and a maximum of Rs 70,000. If you are putting in money in installments, remember that you can't make more than 12 installments a year. There's more flexibility in the scheme: unlike a bank recurring deposit, you don't have to deposit the same amount every month.
Yes. Your account will become defunct if you don't deposit the required minimum of Rs 500 a year. The amounts already deposited will continue to earn interest, which will be paid to you at the end of the term (15 years), but you can't take loans or make withdrawals. You can revive your account by paying a fee of Rs 50 for each year that you default, along with subscription arrears of Rs 500 for each such year. And don't worry if your account is discontinued -- you will not be debarred from opening a new one.
Withdrawals and Loans from your Public Provident Fund - PPF account:
The entire credit balance in your PPF account is yours to withdraw when it matures -- at the end of 15 years. Meanwhile, you can make withdrawals within specified limits. The first withdrawal can be made from the seventh year. Subsequently, you can make one withdrawal every year. You can withdraw up to 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower.
You don't have to wait to withdraw from your PPF account to get some money from it -- you can get a loan on your PPF from the third year. You can get a loan equal to not more than 25 per cent of the balance in your PPF account. You can repay the loan in a maximum of 36 installments.
The interest on the loan amount is 1 per cent a year, but will be hiked to 6 per cent a year if the loan, or a part of it, remains unpaid even after 36 months. New loans are disbursed only after you pay up earlier loans. If you do decide to withdraw money -- after the seventh year, of course -- remember that you cannot take a loan in addition.
TAX Benefit s and other details:
The interest credited to your account, as well as withdrawals from it, are exempt from income tax. The balance held is fully exempt from wealth tax, without any limit. The balance in a PPF account cannot be attached under an order or decree of a court. What that means: if you're involved in a legal dispute, a court cannot attach or question the money in your PPF account -- as it can with your other personal property.
The money that you deposit in the Fund earns interest at a rate that the government fixes periodically. The interest rate is 8 per cent (currently), compounded annually. Interest is calculated for a calendar month on the lowest balance in your account between the close of the fifth day and the end of the month, and is credited to your account at the end of each year. So, to derive the maximum from your investment, put in your deposit in the first few days of a month. The monthly contributions will earn simple interest till the end of the financial year.
As a PPF account holder, you can nominate one or more persons. In the event of your death, the amount in your account will be paid to your nominee or legal heir even before the end of 15 years. However, if the balance is not withdrawn, it will continue to earn tax-free returns. It is advisable to open a savings account of the nominee or nominees in the same bank and mention this number in the PPF account opening form. Also, since a single cheque is issued in favor of all the nominees, it would be prudent for the nominees (in case of more than 1 nominee) to open a joint bank account. The account can be transferred to any scheduled bank or post office in India.
Monday, July 25, 2011
There are three common methods for Gold investment –
1. Buy Gold ETFs (Exchange Traded Funds)
2. Buy Physical Gold in terms of gold bars and coins
3. Invest in Gold funds
Gold ETFs (Exchange Traded Funds) are open-ended funds which track prices of gold. They are listed and traded on a stock exchange; hence, they can be bought and sold like stocks on a real-time basis. These funds are passively managed and they mirror domestic gold prices. By enabling investors to invest in gold without holding it in physical form, Gold ETFs offer a rather unique investment opportunity to investors. You need to have a demat account if you want to buy a Gold ETF.
In September 2008, shareholders in ETF securities were left high and dry - unable to trade popular commodity securities, due to concerns over the future of their backer, insurance giant AIG. Overnight, banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer. In the event of your ETF fund house going bust, you would be left holding illiquid units whilst its value keeps falling.
Physical gold can be converted into cash by taking it to any jeweler. Banks however will not buy the gold bars they sold to you. Physical gold is the safest form of investing in gold.
By investing a fixed sum of money every month, you get the benefit of rupee cost averaging. Gold funds provide you this benefit, where you can invest a fixed sum of money in units of gold fund sailing through the highs and lows of gold. Currently, there are around a dozen gold ETFs listed on the stock exchanges. But barring the gold ETF of Benchmark Fund, known as Gold BeES, and the gold ETF of Reliance, their traded volumes on the stock exchanges are not significant. This raises an issue of liquidity of the investment. In case you invest in gold through gold funds, you can surrender the units to the mutual fund at any time and based on the payment cycle, you will get your money. This ensures that you are able to get your money back whenever you want.
Friday, July 22, 2011
Yesterday during a discussion, my friend told me that Gold has run up to a very high level and people who invest now are never going to make any reasonable profit. It is true that Gold has rallied significantly from the levels it was at since 2000. However, in spite of its spectacular rally, I do not think that the rally of Gold is over or that an investor would face crippling losses if they buy gold at these levels. And it is simply because the reasons that caused gold to rally are still there. Those reasons are:
In the 19th century, paper money was backed by gold. People had learned their lessons in the panics and bubbles of the 18th century. They didn't trust pure paper currencies. Lincoln fiddled the dollar during the War Between the States - inflating the currency to pay for the wars, but it was put right soon after. Apart from that, for the whole period - from the beginning of the 19th century to the creation of the Federal Reserve in 1913, the dollar was stable and reliable; people trusted it because there was real money - gold - standing behind it.
But now, the chief of America's central bank (Ben Bernanke) says that gold is not the best form of money; the dollar is supposed to be money now! His desperation is obvious considering the situation USA is going through now. If dollar loses its status as the preffered currency - its going to be all gloom & doom for USA. And now, the feds don't worry too much about how many dollars they issue. Their primary goal is no longer preserving the purchasing power of the dollar - it's lost 95% of its value since the Fed was set up. Now, they're more concerned with the stock market, with the housing market, with consumer spending, and with the next election!
Thursday, June 30, 2011
What a lot of people still are not aware of, is that the government of India has brought out a scheme where there will be full interest subsidy on educational loans to certain eligible applicants during the moratorium period, which usually extends throughout the course of study and a short grace period allowing the student to get gainful employment. The scheme is effective from the year 2009-10. So if you have paid the interest on the period, it will be returned to your bank account.
Interest subsidy under this scheme shall not be available for those students who either discontinue the course midstream, due to any reason except on medical grounds, or for those who are expelled from the Institutions.
Sunday, June 26, 2011
"Would you tell me which way I ought to go from here?" asked Alice.
"That depends a good deal on where you want to get," said the Cat.
"I really don't care where I get" replied Alice.
"Then it doesn't much matter which way you go," said the Cat.
-Lewis Carroll, Alice's Adventures in Wonderland
Financial Planning doesn't require a jargon spewing financial adviser but is essentially a simple 6 step process.
Financial Planning doesn't require a jargon spewing financial adviser but is essentially a simple 6 step process.
1. Identify and list down your future needs/ objectives
The very first step as you begin to plan on how to save/invest your surplus money is to - take a sheet of paper and write down your future and immediate plans/goals. Different people have different goals in life, some may want to buy a house, a car, save for children’s education and marriage, retire early to pursue a hobby or to do social service and many other long term and short term goals. Once you have listed your goals you should assign them a certain priority depending on how fast you want to achieve these goals and how crucial these goals are for you. Clarity in this respect would be the starting point to help an individual work out the journey on the financial road which needs to be followed.
You have to physically list down your goals and not just run them through your head. Seeing it in physical form on paper or on your computer screen actually helps you think clearer about your goals.
2. Convert your personal goals into financial goals
It is very important to convert each of your personal goals to financial goals. Two components go into converting the needs into financial goals. First is to evaluate and find out when you need to make withdrawals from your investments for each of your objectives. Then you should estimate the amount of money (how much) needed in current value to meet the objective today. Once you have estimated the amount needed today, then you should apply an inflation factor to project how much would you need in the future.
For eg. If you want to purchase a house 5-6 years from now and if an apartment costs Rs. 30 lakhs in the locality you are looking at and if the cost of housing is rising at about 10% annually, the total amount required at the end of 6 years would be Rs 48.32 lakhs.
3. Get clarity on your current financial stage
The next step to financial planning is to list down your income and monthly expenditures. This enables you to get an idea of the pattern of cash outflows (expenses) during the year. Accordingly you can plan to keep adequate money liquid for the necessary expenses during the course of the year. All Loan EMIs (equated monthly installments) paid should be kept separate under the monthly expenses head, as after a finite number of years they will no longer be part of your regular living expenses.
The most important information that you get from the above study is your current annual cost of living (that part of expenses which supports your current lifestyle). An analysis of the above figures would enable you to understand the amount of savings (income less expenses) that you are left with on an average. This in turn will give you an idea of surplus regular money available for investment. This is the savings that will take care of you and your family when income from your work stops.
4. Risk Planning:
Before you start thinking of various instruments where you could invest your money to achieve your financial goals, you need to focus on the oft neglected area of risk planning. India is a severely under-insured country. Most people have not fully grasped the full impact of improper risk planning and the most people consider insurance as a ‘waste of money’. An insurance product aims at financial protection from risk of death or illness (the two major risks). A suitable health insurance cover is worked out after taking into account the situation of the family and information about the availability of any cover from the employer. The next step is to estimate the amount of life insurance cover required. Loss of income in case of death of an earning member may put the rest of the family into financial discomfort (especially where he/ she may be the primary bread winner). The role of insurance is to take care of this financial discomfort. The most suitable life Insurance cover for this is a term cover. To read more about insurance, please visit the Insurance section on this blog.
5. Determining allocation of your surplus among different assets for investment
Different assets classes like debt, equity, real estate, etc. grow at certain natural growth rates over the long term. You have to work out an investment strategy to invest the saving across various asset classes in a suitable ratio so that you meet the targeted return as per the financial plan. If a higher return is needed then accordingly a higher exposure to higher growth assets like equities is needed. Discipline in maintaining the asset allocation is the key to achieving success in the long term.
A lot of individuals invest into an investment option without understanding its overall long term impact on their lives. Due to this reason they may find out that they are left with inadequate financial resources during their later years.
To read about the popular common investment options, please visit the different sections in this blog.
To read about the popular common investment options, please visit the different sections in this blog.
6. Monitoring and evaluating your investments and your financial plan
Financial planning does not end as soon as investments are made. It is a continuous process where regular monitoring and periodic evaluation is necessary to ensure that things are happening as per the plan. It is essential to ensure that planned contributions from your savings are happening towards your investments. In addition to this the returns being generated, the investments should be monitored and rebalancing of investments should be made as per the asset allocation strategy. Based on the above evaluation the financial plan should be fine tuned if necessary.
Wednesday, June 22, 2011
To start with, it is a known fact that stock markets and ‘guaranteed returns’ do not go hand in hand, yet the fund managers of such plans claim to have found some magical formula through which they could perform this impossible task. However Highest NAV guarantee plan is based on the constant proportion portfolio insurance (CPPI) model. Though it is a fancy name, according to this model, the fund would invest in fixed-income type of securities in order to maintain a certain minimum unit value. When the fund value exceeds this floor value, the surplus is placed into stocks. With constant rebalancing of the portfolio, the aim of the fund manager is to not let the unit value fall below a certain base value.
Similarly, the proceeds in highest NAV guarantee plans would be invested in equity, fixed income and money markets instruments. However, in such plans, there is no specific asset allocation that the fund manager has to adhere to, unlike a mutual fund or ULIP. Since such plans are a new product, there is no historical data to evaluate the performance of the said funds.
As the policy guarantees you the highest NAV, a fund manager may follow a conservative approach and allocate the money into money market and fixed income instruments and ensure that you get the highest NAV without much trouble. Also you don’t get the highest returns from the stock markets but rather the highest NAV reached by the fund. Besides the returns from these funds lie between 9-10%, viz. slightly higher than the 100% debt funds. Again, if you decide to surrender the policy after 3 years or you die within a couple of years of starting the policy, you don’t get the highest NAV but the current value of your investment.
The insurance component in highest NAV guarantee works merely as a supplementary portion to the entire plan as these plans provide limited cover (normally 10 times the annual premium viz. pretty low compared to a term plan). Secondly, the highest NAV guarantee terminates past the grace period when you stop paying your premiums (got this info from the net). The exit from the plan or partial withdrawals is possible only after 3-5 years. Also, there are no options for partial withdrawals or surrenders (which attract a high exit charge).
As with any other ULIP, highest NAV guarantee funds have the following charges:
1. Premium allocation charge
2. Mortality charges
3. Policy administration charges
4. Fund management charges
Having said all this, my advice to an investor is to avoid these funds. Paying high charges for modest returns doesn’t make any sound investment sense to me! And remember that guarantees and stock markets do not work together. So view any plan which promises you guaranteed returns from stocks with scepticism.
Tuesday, June 14, 2011
1. Identify funds whose investment objectives match your asset allocation needs:
Just as you would buy a car or a laptop that fits your needs and budget, you should choose a mutual fund that meets your risk tolerance (need) and your risk capacity (budget) levels (i.e. has similar investment objectives as your own). Typical investment objectives of mutual funds include fixed income or equity, general equity or sector-focused, high risk or low risk, blue-chips or turnarounds, long-term or short-term liquidity focus. (Check the mutual funds tab for a quick overview on these different types)
2. Evaluate past performance, look for consistency:
Although, past performance is no guarantee for the future, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various long term periods, say 1 year, 3 years and 5 years. Shortlist funds that appear in the top 5 in each of these time horizons as they have thus demonstrated their ability to be not only good but also, consistent performers.
3. Diversify but don’t Over-diversify:
Don't just zero in on one mutual fund especially if it is a thematic fund (to avoid the risk of being overly dependent on any one fund). Pick two ideally and pick two diversified funds. Picking two diversified funds from two different fund houses would give you all the diversification that you need. But remember that if you start thinking that you need to diversify further and start shopping for more funds, you would end up diminishing your returns. Check out the article – ‘The Problem with (too much) Diversification’ to know about the problems with too much diversification.
4. Consider Fund Costs:
The cost of investing through a mutual fund is not insignificant and is important especially when it comes to fixed income funds. Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards other annual expenses should be acceptable. Carefully examine load the fee a fund charges for getting in and out of the fund.
5. Invest, monitor and review:
Having made an investment in a mutual fund, you should monitor it to see whether its management and performance is in line with stated objectives and also whether its performance exceeds or lags your expectations. Unlike individual stocks and bonds, mutual fund reviews are required less frequently, once in a quarter should be sufficient. A review of the fund’s performance should be carried out with the objective of holding or selling your investment in the mutual fund. The article on the blog on ‘When should you redeem your Fund’ discusses this in more detail.
Investing in mutual funds is not just a decision but is more a process. It requires more of discipline in adhering to the process and a certain amount of simple research.
Thursday, June 9, 2011
There is a lot of news about the state of several real estate companies in India. Some are embroiled in telecom scams whilst some have huge debts on their books & projects which have not kept their schedules. All these notwithstanding there is no doubt that at the time of writing this blog, there was definitely a lot of construction going on in India and in spite of rising interest rates, residential demand was still strong. This article is the first of a series on Home Loans and on investing in ‘homes’. This article specifically tries to highlight the key steps a potential home loan candidate should keep in mind while taking a home loan.
There are various lenders for housing loans and to get the best deal and to have a smooth process, one should spend time and put effort into researching to arrive at the right lender. To have a hassle free housing loan process, look into the following details:
Sunday, May 29, 2011
For most people the decision of the redemption of a mutual fund is as daunting as that of picking the right mutual fund. Again if you try to run a google search on ‘when to redeem your mutual fund’ it returns a lot less relevant results than when you search for ‘how to select a mutual fund’! And I have heard an investment manager once remark on TV that it takes a certain degree of expertise and proficiency to redeem your mutual fund investment at the right time. However, it is not all rocket science and all it takes is just basic common sense decisions. This article is not on learning how to ‘time’ the market and redeem your mutual fund but on when to redeem it since it is no longer prudent to hold your mutual fund. There are several reasons as to why you should redeem your mutual fund but the most common and top reasons for the same are as follows:
1. You have achieved your investment objective: Every investment is made with some specific objective like paying for your child’s education, marriage, purchasing a house or any other objective. If your fund is performing more or less on expected lines and you haven’t met your investment objective then it makes no sense to redeem your fund. However if you have achieved your investment objective or are close to achieving your investment objective, then you should slowly start redeeming your fund, so that you are completely liquid in cash by the time you would need to pay for your goal (like purchasing a house).
2. The Star Mutual Fund Manager has quit: The performance of your mutual fund is inextricably tied to the capability and investment acumen of the fund manager. A lot of investors check the track record of the mutual fund manager and not just the performance of the fund which is indeed a wise decision. However, in the mutual fund industry, you would see a lot of churn amongst fund managers and trying to follow a star fund manager may result in you having to switch among fund managers quite a bit. Unless you are sure that the fund manager can give really significant results with respect to others, it makes sense to invest in process-driven fund house since this is a more reliable way of investing.
3. Your mutual fund is not performing: I have heard several people complaining about the performance of their mutual fund. However most people tend to look at the performance of their fund in the short term. Evaluating a mutual fund in the short term would give you an erroneous view of the performance depending on the state of the markets. To correctly understand the performance of a mutual fund, you should consider its performance over a period of at least 3 -5 years. However, even after all this you are convinced that your mutual fund’s performance is below par, then it’s best you redeem it.
4. You have invested in a thematic fund: In one of my earlier articles, I had mentioned the dangers of investing in a thematic fund. The problem of investing in thematic or sectoral funds is that if the whole sector is hit by some macro economical or regulatory factors, your mutual fund performance would dip significantly. You should not invest in a thematic fund unless you have sufficient knowledge about the particular sector and you have good reasons to believe that the particular sector is poised for considerable growth. Most investors do not have the necessary skills and resources to track the underlying sector/theme. They only got invested in them either because everyone they knew was investing in them or their agent made a compelling marketing pitch for the fund. Either ways they are invested in the fund and want to know when they can redeem. If you are one of them, then the right time to redeem your thematic fund is when the stock markets give you the opportunity. A market rally is an opportunity for you to sell that thematic/sector fund that you always wanted to redeem but could not because of unsuitable market conditions.
For example: Several people had invested in Telecom Sectoral funds 3-5 years back when the telecom sector was booming but currently due to the intense competition and a price war in the sector, the companies and the funds in that sector aren’t doing too well.
5. Your mutual fund has revised its investment process/mandate: Mutual fund managers have certain guidelines’ about how they should manage their funds which is commonly known as the fund mandate. A mandate has been formally stated and hence a lot of investors choose funds based on this mandate. Sometimes mutual funds revise their mandate, if they believe that they can perform better following another investment process. In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any). So if you had invested in a fund because of a certain mandate and if the revised mandate does not interest you, then you should redeem your fund.
I had lunch with an old friend of mine last week whom I was meeting after a couple of years. My friend, a young hardworking guy, had recently made a smart career move and was now thinking of settling down and during my discussion with him, we were reviewing some investment decisions he had made a few years back and he was telling me about how he felt that his ‘savings’ weren’t satisfactory enough. However I noticed throughout my discussion that my friend was using the words ‘investments’ and ‘savings’ interchangeably. However I discovered that a lot of people confuse between the two and there are some similarities between the two, however they are two very different entities with different objectives and characteristics.
Savings is defined in the dictionary as ‘The accumulation of money for future use’ while an Investment is defined as ‘the laying out of money or capital in an enterprise with the expectation of profit’. Dictionary definitions aside, an investment is where you can grow your money at a significant rate after taxes. The current inflation in India is at about 8-9% which is pretty high. There are a lot of people who say that this is an aberration and in the long term inflation would settle down at about 5%. I do not know what the future holds or when the inflation would settle down at a more reasonable rate but what I do know is that if you keep your money in your savings bank account, you are losing the purchase value of your hard earned money which is akin to losing money. If you have put in your money in some financial instrument which earns you a ‘real’ return which exceeds the inflation rate, I would say that it has the characteristics of an investment.
A ‘saving’ is basically the accumulation of a certain amount of money in your ordinary savings account or even debt funds or in your piggy bank to fund some big ticket purchase like a swanky vacation, a car, a higher education degree, an iPod or that new plasma TV! (Cars, LCD TVs etc are not investments since they start depreciating in value the moment you step out of the showroom!).Your savings rarely return more than inflation after accounting for taxes.
Investments usually employ two methods through which they grow the invested money
1) By giving a regular cash flow like rent from real estate, royalty from books or art etc.
2) Value appreciation of the assets purchased (eg. Value appreciation of stocks, real estate, gold and other commodities)
Most investments are based on value appreciation, since the opportunities for cash flow are limited. Investments which give a high return in the long term (like shares or equity mutual funds) usually carry a certain amount of risk. However it has been historically proved that no investment can beat the returns that equity can give in the long term.
Investments are for your future while savings are for your present needs. It would be prudent to keep at least 40% of your surplus cash in investments which by their very nature are for a long term holding. Keep some amount as savings also to meet your planned purchases and any unexpected expenses (like hospitalization or an unforeseen expense). The more you are able to invest, the more corpus would you have in your future. The more you have in your long term fund, the more stable our future is financially.