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What is this Ebook ?

This is just a dump of my blog http://www.jagoinvestor.com in PDF format , Itsnot formatted well and created manually by me by copy pasting it . So pleasebear the unclean posts and no proper formatting . Posts are from New -> Old .So you will find the new articles in the start , If you are a new Reader , you cango through it from back , Even if you read it from Start , it wont be a muchproblem as I have linked it back to my blog whereever required .

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http://www.jagoinvestor.com is a leading Personal Finance website whichprovides education in field of Financial planning and Stock Markets relatedtopics . To be associated with http://www.jagoinvestor.com in future , I wouldrecommend you to

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Mobile.

Questions and Answers , Part 3

Here are a set of 4 questions and answers asked to me on "Ask a questionsection" . These questions are on the topics on Insurance , Stock market andFutures and Options , UL IPs and Motivation. You can also look at otherQuestions and sections part here at Part 1 and Part 2

Question 1 # by Vishnu

I am 25, single and my parents are my only dependants. My Dad is aged 65 and mother is aged 55. Ihave a Group Health Insurance Plan from my company which is given as a part of mycompensation package. The insurance cover is for 4 lakhs (2 lakhs for self, one lakh each for mymother and father). Given the features of the plan and my current need, the coverage of 4 lakhs issufficient. But, I don't have any other health insurance plan. Should I go for an additional plan,personally? I also assume that I would be given similar health policies in all my future jobs.

Answer

This is often a question in people mind , you say 4 lacs cover is sufficient , what if you had 10

dependents ? , then each one would have 1-2 lacs cover and would you say 10-20 lacs is

sufficient , what you must see is how much is "each person" cover, For you , its 2 laks , and for

your parents its 1 lakh , now this logically , what is chances of you getting any health issue

than your parents who are old (55+)

So the real situation nails down to this . Parents has 1 lakh of cover each and they are Old

(probability of health issue drastically high compared to you) . Now there is another issue ,

which is psychological , people think that chances of bad things happening to them is low than

others , which is totally baseless . God forbid , but suppose there is some surgery or any health

issue , you can imagine how much does it cost these days .. Lakhs of rupees .

Conclusion : U should seriously consider covering your parents , Because of old age your will

face some issue getting health cover now , also the premiums will be high (good enough) , now

its you who have to decide if you want to save those premiums (which can go waste , as some

logical people declare) or pay the high cost of Hospitalization or Surgery or whatever when it

comes , but save those premium . your call :)

To get SMS Alerts from Jagoinvestor , Click Here

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Question 2 # by Taranprit Singh

I am beginner in this stock world and doing trading just for earn money, money and only money. Ican say I am doing good in intraday trading of equities. Now I want to enter in future and optionsbut the problem is I have ZERO knowledge about them, so please it's my humble request to giveproper guide for the same by which I can understand FNO easily.

Answer

I want to congratulate if you are making money in markets with intraday , Keep it up . But !! ,

if its just 1 week or 1 month that you have made money then wait , It can be because of luck

or market may not have shown its real face to you . I would suggest you to keep trading for 1

yr and see all the faces of markets , beleive me , 1 yr is minimum time you should trade to see

if you can do it consistenly :) . take the greed out of your mind to make lakhs and crores using

F&O . I am experienced enough to say that it would kill you badly if you jump into it .

I would suggest you this .

• Keep trading the way you are doing and see if you can do it consistenely for 6 months

• Once you succeed in that , then keep trading and slowly learn F&O , buy books and

read on Net , practice a lot .

• Paper trade F&O trades , dont jump into it with money

• Once you succeed , then do some real money trades with small money , Grow slowly :) ,

Its like sex , forplay is important ;) .

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If you are a Fan of Jagoinvestor , Fill the Fan book to tell how much you like it

Question 3 # by (Name not allowed to Disclose)

have taken a new Aviva Lifeline,whole life plan(its still in free look period),i want your opinion abtit... details, Annual premium:Rs.25,000 Premium Policy Term:20years Policy term 72years (i m 28years - 100 years policy max years) Invested Amt(for 20 years) Rs.5,00,000 Expected Return at 6%is Rs.8,00,000(at the end of 20 years) is this plan good from normal middle class person(of salary ofRs.15,000 per month) point of view.?

Answer

Lets not ask a question "Is it good or Bad" , let us ask a question , Can we do better than this

ourself with simple things .

Equity Returns over long term have been more than 17% . Good Mutual funds over 10 yr of

history have returned somewhere around 20% . If we think about future and assume even

12% return over long term , Your investment of 25k per year will become 20 lacs after 20 yrs .

>>> 25000 * (1.12)*(1.12 ** 20 -1)/.12

2017468.

If you think aggressively and assume 15% , it would be 29 lacs after 20 yrs

>>> 25000 * (1.15)*(1.15 ** 20 -1)/.15

2945253

At 6% , it comes out to be 9.7 lacs

>>> 25000 * (1.06)*(1.06 ** 20 -1)/.06

974818.

Learn the Calculation in this Video

The reason why you were told 8 lacs is because of the charges and may be some mortality

charges for penny insurance you might get there . Check it yourself .

Even if you take a term insurance of 30 lacs yourself now , it will not be more than 10k per

year, remaining 15k you can invest in 2-3 good mutual funds for long term . at the end of 20

yrs , you will have at least 12 lacs assuming 12% return . Apply logic and maths and thats it ,

you are your own financial planner :)

So my suggestion : Break this policy before the free look up period , and take what you get

back , the amount spent on medical exam if any will be deducted .

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Question 4 # by Vikas

I am 35 and havent had much opportunity to invest till 33 yrs. I have now invested some funds inMFs (DSP Equity, Magnum Contra, DSP TIGER, HDFC Prudence and Sundarm Tax Saver).

I dont have an established career and have taken any suitable opportunity that came along my way.Off late, I am jobless but have strong desire to start something independently of my own. Howeverthat "something" is what I am searching for. I have to start small with no doubt due my financialrestraints, but I know I have special liking for computer related jobs, exports, something creativelike handicrafts etc.

Could you please suggest some books or articles or links or your own opinion how to translate this "virtual something" in my mind to "real something". I am absolutely sure if i strike the right chord,nobody can stop me, I have worked so hard for others in my regular job so I dont see why I cant putmy "everything" to get that elusive "something" :-)

Answer

Great .. All the mutual funds u have are nice ones and keep continuing in them . Regarding

converting your "virtual something" into "real something" , I have this to say confidence in

yourself is amazing and worth appreciation . To find out what you want to do , you may have

to try out various things which may fail in start , but you need to have enough reserve of

confidence to tell yourself that you will get it someday . "Making mistakes is a privilege which

Unsuccessful people don't get in life" , I said this one day to my friend and realised what a

nice quote I made :) . Believe in it . Most of the people are doing jobs which they hate or cant

excel at , just because they dont have that guts to start some thing on their own or change

their jobs, you are much ahead of them , congrats on that . Meet new people , try some ideas

and make a list things "which you dont want to for sure" . Prune out the things you dont like .

That would be a better way for finding what you want to do .

One important thing , We many times think that just because we have lot of confidence and

desire to do something on our own will make u succeed , but there are something which have

no substitute like Hardwork , spending time reading about what we like , Jagoinvestor was

not build in a day , or a month , It needs work and patience and confidence that it will succeed

. There have been instances when I wrote 20 posts in a row after doing so much reading and

hardwork , writing in night , but there no was comment which said "Nice job" , that is kind of

heart breaking sometimes and makes you feel that "You are going no where" , but what you

need is that "belief" that things will turn out well at the end , just do your karma and results

will come , and when they dont come , just get out and accept it and be ready to move one just

like it happens in Trading or Relationship . Its all the same thing at the end .

I did Trading in Markets (options) and failed like anything . I am still learning and my

confidence and belief in myself does not allow me to quit . Best of luck to you in trying to find

your way . Dont get underestimated by the failures . Failures will come and they will teach

you more than your success . Its only the times when you feel like quiting is the tim when you

really need to keep up yourself . "Difference between Coal and Diamond is that Diamond

takes a little extra pressure" ,So dont let that extra pressure make you quit :)

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Wednesday, August 19

List of Best Equity Diversified Mutual Funds for 2009

Which is the best Equity Diversified Mutual Fund ? . I am going to list down someof the best Mutual funds which I have figured out from Valueresearchonline.com .I am listing down 6 Equity Diversified Mutual Funds and 3 Tax-saving Mutualfunds . I will highlight the main points of Mutual funds like its History , itsperformance and its Portfolio Allocation.

Best Equity Diversified Funds

These funds are suitable for people who are looking for long term investments and are ready to takethe risk of mutual funds .

DSPBR Equity -G

• 12 year old fund , Return Since Launch is at an excellent : 24.6% • Strong 5 yrs return at 33.4% beating its benchmark by impressive 8.4% • 50% Portfolio in Small and Mid cap Companies (Risky Fund, with High Potential)

DSPBR Top 100 Eqt Reg-G

• 6.5 year old fund , Return Since Launch is mind boggling : 36.8% • Strong 5 yrs return at 30.6% beating its benchmark by 6% . • 80% Portfolio in Large and Giant Companies• Looks less risky Fund compared to DSPBR Equity-G

HDFC Top 200

• 13 year old fund , Return Since Launch is excellent : 25.3% • Strong 5 yrs return at 31.8% beating its benchmark by 7% . • 65% Portfolio in Large and Giant Companies and 30% in Mid caps . Well Diversified Fund• One of the best funds available with long term Track record . Must Have

Magnum Contra

• 10 year old fund , Return Since Launch is excellent : 27.6% • Strong 5 yrs return at 35.86% beating its benchmark by astonishing 11% . • 55% Portfolio in Large and Giant Companies and 35% in Mid caps and Small cap .

Reliance Regular Savings Equity

• 4 year old fund , Return Since Launch is 21% even with the bloody market Crash.• Strong 3 yrs return at 21.5% beating its benchmark by 12.5% speaks for its potential in

Future . • 45% Portfolio in Mid caps and Small cap makes it a Risky and Aggressive Fund .• With minimum investment required of Rs 500 , It can find a small corner in one's Portfolio• Only for Risky Investors , Its a new Fund and hence does not have Strong and Long track

record like its seniors .

Sundaram BNP Paribas S.M.I.L.E. Reg

• 4.5 year old fund , Return Since Launch is 22.5% even with the bad markets.• Good 3 yrs return at 16.5% beating its benchmark by 7% . • With close of 75% Portfolio in Midcaps and Small cap makes its Fund with heart of real

Risk takers . Don't get into this if you don't like messy markets . It can take your heart our ofyour body and play hide and seek with it .

You should see this Video to understand how to choose a good mutual fund on your own

If you are fan of Jagoinvestor or Manish , you might like to Fill up the Fan Book

Best ELSS Mutual funds (Tax Saving Mutual Funds)

These are tax saving Funds , used for saving the tax under Sec 80C upto Rs 1 lac . Suitable forinvestors who want to invest for long term and also require tax saving .

Sundaram BNP Paribas Taxsaver

• One of the oldest Tax saving Funds with 10 yrs of Strong Track Record• Return Since Launch is 22.3% .Strong 33% return in last 5 yrs beating its benchmark by

impressive 6.5% .• Very good performance in last 2-3 years in falling markets with 17.3% return in last 3 yrs

which is almost double of its benchmark returns .• Well diversified amoung Giant , Large and Midcap companies makes its a Good fund .• A little aggressive fund with 55% portfolio in just 3 sectors of Energy , Finance and

Construction , betting on India's future .. • A very flexible fund know for its adaptability with any situation makes it suitable for every

kind of investor.

Canara Robeco Equity Tax Saver

• One of the oldest Tax saving Funds with 16 yrs of Good Track Record• Return Since Launch is 15% which is decent enough in such a long term .• Very good performance in last 5 years with 30.5% return beating its benchmark by

impressive 7% .• Mind Boggling 60% return in till date in current year (2009) shows that some great potential

is building in this fund .• Well diversified amount Giant , Large and Midcap companies makes its a Good fund .• High Concentrating in midcaps (around 50%) makes it a risky Fund .• Minimum Investment of Rs 500 makes it an attractive choice for Risky Small Investors .

HDFC Tax Saver-G

• This one is the quite genius who does not shout much about its achievement . Not muchappreciated among its peers but has one of the best long term track record which has abilityto put all the tax saving funds in shame .

• One of the oldest Tax saving Funds with 13.5 yrs of excellent track record.• Return Since Launch is 34% which is an unmatched achievement in itself .• Close to 29.5% returns in last 5 yrs beating its benchmark by 6% .• It is now becoming more aggressive by increasing its allocation in Midcap funds .

Note : This is not an exhaustive list of Good funds . There are many good funds which are not here .Its just a Compilation of funds which I personally feel are good ones and have ability to perform inFuture . All the funds have high Equity Allocation and can be very risky . You should invest in theseonly after understanding your Asset Allocation and Risk-appetite to handle the ups and downs of itsperformance .

I will come up with the compilation of some good Sectoral Funds , Debt Funds and Balanced Fundslater . Watch for it :)

Comments Please and let me know which fund is your favorite and why . If I had to choose 1 fund, it would be Sundaram Tax Saver because I did a detailed Analysis of it myself and It went ahead ofSBI magnum which had number 1 position from long time .

Source : ValueResearchOnline

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Tuesday, August 18

New Mutual Funds Charges from ICICI

ICICIDirect has revised its brokerage charges for Mutual funds Investments . Some time back SEBIabolished mutual funds entry load , In this post we will see the new charges by ICICIDirect andanalyse if its good or bad . The new revised charges look good to me . In case you don't know whatis SIP , Read here

So ICICI Direct came up with this Rule . If your Mutual Funds portfolio with them is

Your Mutual Funds Portfolio Above 8 Lacs with ICICI

So , it means you can just invest through ICICI Direct website and your brokerage would be Nil andyou wont pay any thing in charges .

Your Mutual Funds Portfolio is Below 8 Lacs with ICICI

You will have to pay lower of Rs 30 or 1.5% of the amount each time if you go for SIP . On a lumpsum investment , you will pay Rs 100 .

Is it Good or Bad ?

If your SIP payment is High

This revised charge structure will be very good for you if you are making Higher SIP payments like10,000 . In that case your charges would be Rs 30 each time , which is 0.3% , which is 87% cheaperthan earlier cost (2.25% entry load) . Even with 5,000 SIP , your charges would be .6% , which ismuch better than what you were paying earliar and this all with the convenience of doing everythingonline yourself .

Read why SIP is best for salaried class people

If your SIP payment is Small

If your SIP payments are less than 1,500 , then your charges would be 1.5% , which is near 2.25% ,what you earlier paid, you are still benefiting , but not to great extent . Now its you who have todecide

• if you would like to go with direct Mutual funds investing yourself (without any charge atall)

• You can find some other agent who charges less than 1.5% • You are ok with 1.5% charges and comfort is more important to you .

Suggestion to people who have lot of Mutual funds in your portfolio

In case you have too much mutual funds in your portfolio and your SIP payment in each of them is

small , the better thing would be to prune out most of them and consolidate your mutual fundportfolio to maximum 5 funds and better to more payment in each , for example if you have 15mutual funds of Rs 1,000 each , change it to 4 mutual funds with 4k payment to each or Somethinglike that . It will help in management of funds also and also help you reduce the charges .

There may be some other agent or web portal who are not charging at all for mutual fundinvestments through them . For people who are yet to open a Demat account and also looking forMutual fund investments , Opening a ICICI Direct Demat account may be worth looking into .

What is most Important

Don't try to put too much thinking in this , less charges are good , but its not the main thing , youmust concentrate on your Asset Allocation and Portfolio Rebalancing and choosing a good mutualfund for you . So if you getting a good advice , its worth to pay good fees for that , don't try to savethat small amount just for saving it .

Please comment what do you think about this ? Do you know of some other alternative routethrough which the commission will be better than this .

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Monday, August 17

My Interview at Ranjan Varma Blog

Ranjan Varma , conducted a small interview on Personal Finanace and Financial Planning andpublished my Interview on his blog here : http://ranjanvarma.com/manish-jago-investor/ .

Please leave your comments on what do you think about what I said . Ranjan loves to write on

similar topics in personal Finance . Check out his blog to read some nice stuff :)

Saturday, August 15

How to Avoid psychological biases when investing

The following is a guest post by Sajid Karsan. Sajid regularly writes for Barel Karsan, a sitededicated to discussing value investments and avoiding psychological biases when investing.

While mutual funds can serve as a useful mechanism to get returns on one's capital, manyindividuals prefer to invest directly in the stock market. Unfortunately, there are manypsychological tendencies humans have which prevent them from obtaining the best returns possible.While investors like Warren Buffett and Mohnish Pabrai have already mastered the psychologybehind investing, the rest of us would do well to learn them ourselves to improve our investmentreturns.

Charlie Munger is Warren Buffett's right hand man at Berkshire Hathaway. In this post, we'lldiscuss a psychological tendency Munger has termed "Contrast-Misreaction", as by understandinghuman tendencies, we better equip ourselves to avoid psychological biases when investing.

"Contrast-Misreaction" causes people to take actions which are potentially detrimental, becausethey appear insignificant or appear positive when compared to other actions. Munger uses ananalogy of the human eyes to illustrate how this tendency works: humans only see items whichcontrast with their environment. In the same way, humans find it difficult to differentiateperceptions where there is little in the way of contrast. For example, a man may buy a $1,000leather dashboard for a car, even if overpriced, when considered in combination with the fact thatthe vehicle cost is a much larger $65,000.

While the above example is one with relatively minor effects, Munger points to some exampleswhere this tendency can have detrimental and long-lasting problems. In business, Munger has seenmarketers use this practice to their advantage. For example, real-estate brokers may show clientsawful properties at inflated prices for the purpose of closing a sale on merely a bad property at amerely partially inflated price. This practice is also seen frequently in mainstream advertising, withservice/product providers asserting a phony price for a product and then promptly offering a'discount' on that price. Munger argues that even though consumers recognize this practice, it stillworks! Therefore, being aware of psychological ploys does not prove to be a perfect defense!

While a minor mistep caused by this tendency is on its own not disastrous, Munger argues that aseries of seemingly minor misteps can lead to disaster. This can occur because each step representsonly a minor deviation (i.e. low contrast) from the current situation. Munger uses the example of thelive frog that boils to death because it never jumps out of a pot of slowly heated water, not realizingthat the temperature is changing because the changes are minute.

Ben Franklin said that a small leak will sink a great ship. Munger argues that this is due to the factthat the brain often misses the small leak in the large ship.

If you enjoyed this post, you may be interested in reading some of the other human tendencies thatMunger has discussed. You may also subscribe to the Barel Karsan blog if you prefer to read aboutthese tendencies in your RSS reader!


Thursday, August 13

What is Direct Tax Code and How does it impact common person

There is going to be some really big changes in Taxation laws if "Direct Tax Code"comes into existence year 2011 . There are some big changes proposed in the Draft ,which if implemented will be the biggest ever change in Tax laws and will impactpeople in a big way .Let us see what are the changes Proposed and How they willaffect you .

What is Direct Tax code ?

The Finance Ministry has released a new draft direct tax code, which is a document containingchanges in Exemptions , Tax slab . This will be a big change to four-decades old Income Tax Act .As per the proposal , the new tax slab would be

• 0% : Less than 1.6 lacs • 10% : 1.6 - 10 Lacs • 20% : 10 - 25 Lacs • 30% : 25+ Lacs

This sounds really amazing , almost 98% of Indians will them pay 10% or less tax because majorityof people taxable income is below 10 Lacs (thats very obvious) . We will see a comparison at theend . Dont worry :)

If you are a Fan of Jagoinvestor or Manish , you might want to fill up the Fan book

Other Major Changes which can affect a Common person

1. Tax Exemptions upto 3 Lacs

At present we get exemptions upto 1 lac under section 80C . This may be raised to 3 lacs . This willencourage people to invest and help .

2. Proposes tax on Maturity amount from Insurance Policies , PPF, EPF and GPF

This is a big turnoff . So as per the new draft , the amount you get on maturity from your PPF , EPFor Insurance policies will be taxable, just like NPS right now . As per the proposal , the amountaccrued till 2011 will be non-taxable , thsi will be applicable to all the proceedings after 2011 , Sosome relief here .

3. Interest you pay for housing loans cannot be exempted and your tax burden increases.

I know it can spill water on your plans to buy home, but thats true . If new proposal becomes a law ,you will then be paying tax on that 1.5 lac which you could have saved . Business Pundit has a

view that Removing the tax benefit on Home Loan Interest part is positive news and will impactpositively . Read it

4. Recommends Long term capital gains tax to be reintroduced and Short Term Capital gain

tax to be added in Income

Enough is Enough , is what you may be thinking :) . But tax on long term capital gains may beintroduced , which means that you will have to pay some tax on that profit from Mutual funds orShares which was tax-free after 1 yrs . Short term capital gains will be added in Income and taxed atapplicable rate . Also Short Term capital gain would be before 3 yrs and Long Term capital gainafter 3 yrs . Long term Capital Gains will be less than regular tax slab , I think around 10% or 15% .

5. Suggested abolishing the Securities Transaction Tax (STT)

So the STT which was paid while buying shares will be abolished , currently when you buy sharesyou pay a small tax called STT which is included in share cost by your Share broker , this will be nolonger there :)

6. Perks now will be included as a part of the income for purpose of tax calculation, so tax

burden may be sightly more.

All the perks you were getting from your employer like interest free loan , free lunch etc will getadded to your income and taxed .

7. Lowering Corporate tax to 25% from 30%

This will cheer up companies as their tax burden would reduce . I am not sure about its impact oncommon person .

Comparison of New Vs Old Tax Code

Lets see an Example

Name : Ajay PatelSalary : 8 lacs per yearInvestments : Investment of 30k in Mutual funds , 30k in EPF , 20k in PPF and 20k in InsurancePolicy .Home Loan : Taken a Home loan and pays 80k as Principle and 1.4 lacs as Interest .

Tax as per Current System

Amount Exempted = 1.4 lacs as home loan interest + 1 lac in 80C = 2.4 Lacs Taxable Income = 5.6 lacs Tax = 14k (10% from 1.6 to 3 lacs) + 40k (20% from 3 - 5 lacs) + 18k (30% on 5 - 5.6lacs) = Rs 72,000

Tax as per New Tax Code

Amount Exempted = 1 lac from (mutual funds , PPF , EPF , Insurance) + 80k as Homeloan principle = 1.8 lacsTaxable Income = 6.2 lacsTax = Rs 44,000 (10% on 1.6 lacs - 6.2 lacs)

Note : Your Tax Liability will be totally different and can vary a lot depending on the your condition, Dont take this one personally , This example is just for demonstration Purpose .

Is New Tax Code Good or Bad

This is an important and good question , I will classify this tax code as a good one , the biggestthing to note in this is that the tax slab is just 10% for income from 1.6 lacs to 10 lacs There aremany changes in the new tax code which may look bad and hurting , but at the end you will gainfrom it , because the tax charged will be just 10% , So your taxable salary will go up because ofsome changes but your tax liability will actually reduce . It will not reduce too much though , butsurely it will be a reason to cheer .

Your biggest doubt will be that over long term if my Maturity amount from Mutual funds ,Insurance policies and PPF will become taxable , then yes that true , but now you will save more toinvest . So even if we assume 20% tax charged at the end , we need to invest 25% more than what

we usually do to gain , which will happen I believe .. Anyways , this is now a debatable topic andcan be argued upon .

Download the Full Direct Tax Code Bill 2009 ,Click Here

Conclusion

This was just an analysis if new Proposal comes into effect , for now Its just a proposal , do dontpanic, lot of debates and discussion will happen on this and this can take totally new direction ormay be it does not happen at all and we continue with currect tax system .

Comments Please , I would like to hear your views on New Tax code and how can it impact you ,Do you think its a right thing to do and what are the issues involved with it ? Did you like it ?Looks like you missed watching TV today at home , Here I bring some this small news clip aboutDirect tax code if you want .



Question and Answers , Part 2

This is second post for answers to Questions asked to me in "Ask a Question" Section . The FirstPart of Question Answer section is Here . This section has questions and answers related to topicslike GOLD , Real Estate , Term Insurance , Mutual Funds , "hiding Information from

Insurance Company" . See the questions ans answers below .

Question 1#

I have a requirement of physical gold after 1 year or so. I just got back some money from an old investment.Is it ideal to buy the gold now at this price. Or do I make an FD for 1 year so that I can buy later. What do yousee the price of the gold in another year's time.

Answer

GOLD is near its support levels , so i am not sure if its a good idea to buy it for short term . Its hardto say what will be in a years time frame ,but if its just 1 yr , better to put money in FD and buy goldlater .

Other alternative i would suggest is buy it every quarter with 25% money each time .

Question 2#

Have one general question... I was reading "Rich dad Poor dad recently".. Some interesting concepts butwas not sure how it will applicable to indian scenarios. 1. Kiyosaki tell's that Real estate is the safest way forwealth. But in India (expecially in Chennai and Blore), it is not only the value of land we need to worry aboutbut also the reliabilty of the land owner (Same land is being sold for multiple people), Fake papers, Even ifeverything is alright some political party/Gunda can stick a flag and claim the land. 2.Is it feasible to have aseperate business on top of our regular job? 3.Or should just mind our job and invest our money wisely(Stocks/MF e.t.c) What are your thoughts?

Ans

1. Real Estate is the safest way for wealth , I dont agree with it .. Real Estate is a good Investmentover long term , and you can get benefitted in short term also , but for long term , i still recommendEquity . Regarding the reliableity of land ownership , that risk is always there , but you can minimizeit by taking precautionary measures from your side and by "not acting" foolish and greedy like manypeople do .

2. Regarding Second business on top of business , yes you can . but if your current job agreementsays that you cant , then you cant , because you have agreed with them by signing the documents :) .However I dont see any issue in regular jobs . Go ahead .

3. There is no one answer to it .. There are other things than making money .. If you like you job justbe with it and enjoy , you can side by side do good investing too . But you like investments as acareer you can enter the field and have full time job in that .

Question 3#

Hi , after a study of analysis , i am planning to take term insurance policy of 50 Lacks but am facing difficultyto choose which one is better, as i see LIC Amulya jevan premium is 17k per year,(35 years)-50 lacs BajajAllianz Life - New Risk Care is 13.5 k (40 years)-50 lacks and also having some accidental,critical benefits.please suggest me,can i take single policy of 50 lacks or split into 25lacs,25 lacs, and to safe side chooseeither LIC only or any another company like bajaj,kotak ,etc for same tenure who ever offering less premiumneed to take??

Ans

Well.. you have done 95% of the job by choosing to take term insurance , now to Find the best one isjust 5% , because in a way its not too important .. I like SBI and Religare .. you can go with others

also . Term Insurance is a simple product and all companies have it with almost same rules , so the bestone is the one with least cost most of the time :) . Riders are your choice , you pay extra if you takethem , they are not free .Divide the policy in 2 atleast , If you are too emotional with LIC , you canhave it as one of the insurers .. But there is no issues like Public or private companies.. read myarticle on this .

Question 4#

I invested in some mutual funds through SIP in FY 2007-2008. My current balanace in these mutuals fundsis:- Fidelity India Special Situations Fund - Rs 10000 Fidelity Tax Advantage Fund - Rs 24000 SBI MagnumGlobal Fund - Rs 10000 DSP Black Rock Fund - Rs 24000 I must admit that I had no idea about mutualfunds and invested as advised by a friend who was an agent in a Investment company. Till early 2008 , allwas looking good and the value (combined) was approx. 12000 more than Cost value (if I rememebercorrectly). But now for the past 1 year the value of these funds(combined) is less than the cost value andcurently I am at a loss by 7500. I am not sure what should I do about these funds. Should I withdraw mymoney? or should let them be as they are in hope that their value will increase someday? Many Thanks foryour help

Ans

DSP Blackrock Fund : EXCELLENT funds , Keep it , increase the exposureSBI Magnum Global Fund : RISKY and seems to be fine (its a midcap fund) , decrease the exposureFidelity Tax Advantage Fund : Good , ContinueFidelity India Special Situations Fund : Its a new fund , STOP this and take some old Winner :)

You entered at bad time , dont worry its normal .. Review your Mutual funds (you may use mysuggestions if you want , Take your call , i am not responsible) and prune out the bad ones andcontinue with the good one , Equity performance very good if you keep continuing investments andgive it some enough time to it to perform .

Equity have risk and hence you are going through the time when you should be calm and controlyour "mind" which is concentrating too much on Losses :) .

Question 5#

I have LIC Jeevan Amulya Plan for 30 lakhs @ premium of 7.5k. During enrollment, I had a medical checkupincluding blood test. My policy was confirmed after a month, i.e. after positive medical test result. Duringmedical checkup, there was a document given asking questions about existing health problems. I had aminor surgery during my childhood (age of 5) and a tonsill surgery at the age of 15. But, I missed to mentionthose. Now, when I read some case studies in personal finance articles, I see that hiding such informationwill create problems later during insurance claim. What should I do now? Should I inform the LIC about thesame? Or, do I need to stop the insurance and start afresh giving correct information? Please suggest.

Ans

You should inform them about this as soon as possible , Premium of Life Insurance depends on theRisk involved and Right now , The company is charging premium based on your information , If laterthey come to know that this information was hidden from them , the claim can be rejected and It willbe a right thing from companies point of view , You should inform about this , Your Premium May ormay not be revised . Even if its revised , its ok .. :) . Thats a fair thing

No point in stopping this policy and taking a new one , because any ways you will declare this toother insurance provider . Only in one case you will benefit , if new insurance provider has thepremium less than LIC , which i think many will have , do your investigation .

Please leave your comments on this section , If you have some question , please post

it HERE


Monday, August 10

What is IRR and XIRR and how to Calculate it

How do you calculate your returns when you every year you invest different amount and at the endyou receive your Money back ? Suppose your invest 5,000 , 10,000 , 6,000 , 4,000 and 6,500 in 5yrs and Get 53,000 at the end of 5 yrs , what is your Return ? Its 17.4% . The concept is called IRR .Read below to understand more ..

So Here we will learn two things IRR and XIRR

What is IRR and How to Calculate it ?

IRR is Internal Rate of Return , Its used to calculate the returns given some amount at a fixedinterval . For example On after every 3 months or after every 1 yr . The only thing which matters isthat there should be equal distance between two installments . We will learn how to Calculate IRRin Excel Sheet . You would also love to read what is NPV ( Net Present Value) .

How to calculate ?

• Enter your Investments (amount which you paid) in each row (you have to put "-" beforeeach value)

• Enter the Amount you Received at the end (put "+" after that amount)• Formula : =IRR(values) , in place you values , put the range of cells which contains values)

, see below .

Use this Spreadsheet to calculate IRR for yourself

Things to NOTE

• The values need to be a set of Positive and Negative Values .• The last value is the amount you received . • Any amount Invested will be Negative , so if you invest Rs 10,000 , put -10000 • Any amount you Receive , will be Positive , you if you get Rs 5,000 , put +5000• All the payment or receiving of money are equidistant , Like 1st of every month OR May

15th Every year . • All the payments are assumed to be yearly by default , If its some other time frame like

monthly or quarterly , use XIRR and put specific dates .

In the above example , the CAGR return was 17% . See this video post to understand how tocalculate CAGR .

What is XIRR and How to Calculate it ?

IRR does not solve one problem , And that is when the payments are at Irregular interval , In thatcase we use XIRR . So in a Spreadsheet , we put the date and the value both . See the examplebelow .

How to Calculate

• Put Date and Value for each row• At the last row , put the Date and amount you received . • Put the formula as : =XIRR(values , dates) , values and dates are the cell ranges , see below .

Use this Spreadsheet to calculate XIRR for yourself

In the above example , the CAGR Return was 38.96% (I have multiplied the return by 100 , theactual value will be .3896 )

Real Life scenario when you can use it .

Scenario 1

Suppose you Invest in a Mutual Funds per month on your own , you invest on 15th of every monthin year 2006

• June 15 you invested 5000• July 15 you invested 6000• Aug 15 you invested 3000• Sep 15 you receive 5000 (dividend)• Oct 15 you invested 4000• Nov 15 you invested 12000• Dec 15 you Sell everything and Receive 35000

You can use IRR in this case and calculate your returns , the values you will be -5000 , -6000 ,-3000 , +5000 , -4000 , +12000 , Calculate the IRR and put it as comments , lets see if you arecorrect or not ?

Scenario 2

You can also compare two business ideas using the XIRR , and decide which one is better thenother . In any business concept you have to invest money and you get back some return , but thesereturns can be irregular and different amount every time , In that case you can use XIRR andcompare the returns of both business and decide the one which has better XIRR

Note : the formula can give answers in a but different ways on Excel , OpenOffice spreadsheet ,google docs or Zoho Spread sheet . Use this Spreadsheet to calculate IRR and XIRR for

yourself . The spreadsheet is shared , so please dont make any changes other than "values" and"dates" .

Comments ? I would love to hear if these concepts are of use to you or can be of any help to you . isIRR a good way of measuring returns ?


Saturday, August 8

Financial Planning and Stock Market Seminar in Bangalore

We had a Free session on Personal Finance and Stock Market Basics on last Sunday , 2nd Aug .There were total of 17 participants , I talked about Basics of Investing and Insurance principles

along with a live case study , where I proved why one of the participant was severely underinsured ,I told them How to calculate the Insurance Requirement .

Another Friend Trilok also talked about Basics of Stock market to get new people learn the basicsterms and get them ready for Stock Markets in case they plan to trade . Some of the importantpoints I noticed overall are :

• People do not understand basics , but they can understand it very well if they guidedproperly

• On an average level there is too much need of good Financial Education• Most of the people have money but little knowledge to invest it wisely and correctly

I had put the information about the session on this blog and I expected some good number ofregistration , but I got just 4 people from my side . I am not sure if people missed it or are notinterested in ruining their Sundays for a personal Finance talk . Let me know .

We are planning to do some more more sessions on weekends , but we really require some thingsfrom people who come . Interest to learn and Some Time :) . If you are interested please Fill this

form to put down your Name . The session will be in JayaNagar 3rd Block , Bangalore . Check outsome pics from last session Below .

Manish giving some knowledge about SIP and its Importance

Me trying to Prove why Endowment Policies are not the Right Answer to Insurance Trilok Explaining from Basics of Stock market and Trading , check out this Ebook on How anewcomer should Start in Stock Market .

The wonderful Audience we had

Note : The session will be totally free , you just need to COME :) .


Wednesday, August 5

Why to open a PPF account even if you dont need it right now

"When preparation meets opportunity , Luck happens" . In this article wewill see why one should should open a PPF account even if one does not need itor have no intention of putting his money in Debt , It may look idiotic , but wewill see why it would make sense . We will also see an example which will helpyou understand things . But Manish , I don't know what is PPF account ? you will

say , Click here to Understand what is PPF account .

Imagine a situation , You need to invest your money in some debt product which gives you assuredand good returns , but you don't want it to get locked for long period , the maximum you want is 3-4yrs of lock in . Is it possible right now is the question you need to ask ? NO!! is the Answer

• If you invest in PPF right now , the money will be locked in for 15 yrs (partial withdrawalsallowed)

• If you invest in NSC , it will be locked for 6 yrs , but the interest would be taxable and henceyour post-tax returns are again very less .

• Fixed Deposits are again not helpful , because there post-tax returns are not attractiveenough . Even if you Choose the best Fixed Deposit , it wont help you .

• Debt funds are again not answer , because again there post-tax returns are less .

So how does opening a PPF account now helps us ?

Well, Definitely it cant help us at this moment , But imagine future , Lets say after 11 or 12 yrs , youneed to invest some money for short term , at that time , you can put money in your PPF accountand it will get matured in next 3-4 yrs and whole maturity amount would be Tax-free and earn youinterest of 8% .

And it costs just Rs 500 per year for account to be active . So If you need the PPF account right now, Open it now and if you don't need it right now , still Open one right now so that your Lock Inperiod goes down by 1 every year . Also once in a while when ever you feel that you need yourmoney to go in your Debt component , just use PPF and put your money into it . Read an article on

Asset Allocation to understand the good mix of Equity and Debt Component.

So here is what I would suggest , Open PPF accounts on your name , your Spouse name , and yourChildren name at the interval of every 2-3 yrs , so that after 12-13 yrs , you have each PPF accountmaturing in a period gap of 2-3 yrs and you can use it as a investment product which gives 8%assured tax free returns :) .

Note : PPF returns are subject to change and is fixed by govt every year also .

Please comment to let me know if you think this does make sense to you , Is there any issuesinvolved with this with i have not covered , your comments are valuable .

Question and Answers , Part 1

You might have noticed that I started "Ask a Question" Section on my blogwhere anyone can ask any query to me , I will try my best to answer thequestions , but please don't expect instant reply . I am sharing the answers herefor some questions asked by readers , this will help others to gain moreknowledge about stuff .

Question 1 :

Hi,i am new learner in derivatives trading !any good web site to understand in detail , and my very specific question is when to be in Futuresand when to trade in Options !many thanks,Umesh

Answer

There is no single website for understanding this . You have to search different sites for differentthings . What i would suggest is clear your basics by reading some books and some articles on web .and then trade your self . Download my ebook :http://manish.pucsd.googlepages.com/A_Small_Guide_For_Newcomers_In_Stock.pdf and follow it.

Regarding choosing between Futures and Options , The best answer what excites you ? Futures orOptions ? I like Options , so i trade options (not doing it from some weeks) . Basically Options aremore leveraged products than futures . Options are more difficult than futures . There are differentstrategies in Options which can be applied at different times . Dont trade derivatives if you are notable to trade equities successfully . move gradually from Equites to Derivatives . Dont jump directlyto Derivatives .

Question 2 :

If I have to choose ONLY ONE equity mutual fund for a time horizon of 10 years - which ONLYONE fund should I choose ? What about DSP TOP 100 EQUITY FUND ? Is there any better thanthis fund ? - RAJIV

Answer

ok , this is tricky . The one i would suggest is "Sundaram Tax Saver" . Now comes the best part . Ifyou had asked me this question before 5 yrs , The answer would have been "SBI Magnum or HDFCtaxsaver" and answer will keep on changing , There are different cycles in mutual funds life cycle ,The best mutual fund today may not be the best all life , So the best time frame you should look atis 3-4 yrs and then evaluate back and shift money in another mutual fund as per the situation .

For now take Sundaram , invest through SIP and maintain your asset allocation . Look at thecomparision i did between SBI and Sundaram here : http://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html

DSP top 100 equity is an excellent fund , This should be good enough to invest in , Dont look forthe best mutual fund , there is nothing like that . It depends on your risk profile and other factors ifit suits you or not .

Question 3 :

Me and my wife both are working in MNC's. We both are in the age of 27 and don't have any kidyet. We both also don't have any dependent. We both are getting cumulative 8 lakhs medical coverfrom our company. I read a lot of places that it is good to have your own medical policy. Can you

please suggest that should I buy and medical policy for me ? and if Yes ..what should be th criteria.- Manu

Answer

8 lack is a good cover . But i think it would be 4 lacks each , not 8 lacks for one person . even 4 lacsis good for one person . The reason why extra health cover is advised is because

- You can loose job or move to another job and may be "without Health cover" for the gap which isnot a good thing . - Health cover does not mean "everything you can think of realated to health" , There are manythings which group health cover wont cover, digg out more on that . See what is the most importantthing for you and your wife and if your Company covers that or not . It wont hurt to take a goodFamily Folater cover for 4-5 lacs for you poeple , it would be 8-9k per year . Cover your self well..

There is nothing like the best policy , its not "the policy which suits your requirement" , the policywhich is best for me , can not be best for you .

You may also want to look at a term cover for a small amount (20-30 lacs) , i know you people arenot financially dependent , but i am sure it would help if there is loss of income because of someunfortunate event .

Question 4 :

My question are1) If I have invested in a ULIP for more than 3 years as of now, is it better to continue on thatULIP ? I think the commision , other charges etc are negligibly small after three years of policy .Any amount I invest from now on will be invested in equity markets. Please let me know yourthoughts2) In case of term insurance policies , money that my dependents get is taxable or not ?( ofcourse ifI die during policy tenure) :-(3) I read in one of your blog post that it is better to split life insurance into two or three companiesto that it will give us a flexibility to stop one or two later at some point of time. In case of my death, will my dependents get claims/money from all my policy ?4) If I have health policy in different company , can i claim the refund from all policy or just one .Will those be taxable?

- Aby

Answer

Find the answers in line .

1) If I have invested in a ULIP for more than 3 years as of now, is it better to continueon that ULIP ? I think the commision , other charges etc are negligibly small after threeyears of policy . Any amount I invest from now on will be invested in equity markets.Please let me know your thoughts

For this you need to see what is the current situation of your total fund value . For last1.5 yrs markets have done very badly , so there would be significant change in fundvalue compared to normal years . Other charges are not always negligible after 3 yrs ofpolicy . I think you can either link your ULIP with your long term goals , or start a SIPfrom now onwards .

2) In case of term insurance policies , money that my dependents get is taxable or not ?( ofcourse if I die during policy tenure) :-(

Its not Taxable , however when they invest that money somewhere and when they startgetting yearly income from that , then that yearly income will be taxable .

3) I read in one of your blog post that it is better to split life insurance into two or threecompanies to that it will give us a flexibility to stop one or two later at some point oftime. In case of my death , will my dependents get claims/money from all my policy ?

Yes , your faimly will, get money from all your policy , If you take Insurance of 30 lacs, 20 lacs and 25 lacs from different insurers, they will get it from everyone , so total willbe 75 lacs . However , you can not use this to your advantage and take crores ofpolicies, because insurers ask for your previous policies and if they think that yourinsurance has crossed the limit which you should have , then they will refuse theinsurance to you .

4) If I have health policy in different company , can i claim the refund from all policy orjust one . Will those be taxable?

No , You can only get the refund upto the expenses occured . So if you have takenHealth insurance from more than 1 insurers , they will share the cost betweenthemselves in the ratio of sum assured (this is basic rule , there can be some differentrule here and there) .

So if you take Health insurance for 5 lacs and 10 lacs , and your expenses are 3 lacswhich you want to claim , you will get 1 lac from 1st insurer and 2 lacs from 2nd . Theamount is not taxable , because its not something extra you are getting ,its just the sameamount you have spent and getting it back . So for you its 0 profit 0 loss .

Question 5 :

sir.,thanks for this service.i am working as a agent for mutualfunds.from today onwards there is noENTRY LOAD so no commission. yesterdays conclusion from our trade is to request(!) the sameamount from the customers.Is it possible to receive cash favour directly from clients?some clients are happy with our service, and some were not at all !!!

- srinivas

Answer

So what if 2.25% entry load is scrapped . Clients are ready to pay for quality advice and goodservice . If you advice them well and help them take good decisions for there investments , I amsure clients wont mind paying you 2.25% commision (even more than that) . You should take this inpositive way .

I hope you are AMFI registered and have good grip on Mutual funds and how to choose best onewhich suits your clients needs . I hope you are not just choosing the "top 5' from some rating

website (though its fine sometimes) . Research your clients needs and suggest them good mutualfunds and let them understand why it suits them . Trust is what they should have with you . Oncethey trust you and your advice , this IRDA rule of 2.25% thing will make no sense to you and otheragents .

As I said earliar , This may look like a Disaster to you, but its your chance to start all over again andmake things work for you , adapt to changes :) .

Do let me know if you like this section or not .Please note , that the question and answer are made public only after confirming it with therequestor , If you want that your question and answer are not shared , thats fine with me .

If you want to ask a question to me , Click here


Monday, August 3

Why people dont like Term Insurance and why they are wrong

"We have no desire to make anybody look like a blithering idiot, but we do love itwhen they do. " -- Stephen Colbert . One of reason why most of the people donot take term Insurance is because "They don't get anything back at the end" . Inthis article , I will show you why this is psychological issue. Even if you get yourmoney back at the end of the tenure , it wont make much difference . In this articleI will prove that the argument that "Term Insurance is waste of money because

you don't get anything back" is amazingly idiotic .

What is the main Issue with People not liking Term Insurance

Why people don't like Term Insurance is the question , The answer is simple, because you don't getanything if you survive the whole tenure and hence the amount paid as premium is wasted , this isclaimed by millions . Fair enough . The first thing is , these people do not understand or appreciatethe Importance of Life Insurance . Now lets see this situation from a different angle . Assume youget the money at the end in your Term Insurance . Lets see a case study of a general Family . Howdoes a family look like .

Manish is 28 yrs old and got recently married (oops!!) . He earn close to 40,000 per month . Hismonthly expenses is around Rs 25,000 overall and he saves 15,000 per month (heh) . He also havehis parents dependent on him financially . He is 30 yrs away from his retirement . He calculated hisInsurance Requirement and it was close to 50-60 lacs minimum . Lets take it as 50 lacs forsimplicity for now . Get more of Insurance Articles from Archives section .

Analysis of Case Study

Now is the fun part , his current monthly Expenses are close to 25k, How what will it be hismonthly Expenses when he retires after 30 yrs ? So the average inflation for last 30 yrs was 6.5%(based on past data) , lets assume it will be 6.5% for next 30 yrs on an average . Then the monthlyexpenses after 30 yrs would be 25,000 X (1.065)^30 = 1,65,359 (1.65 lacs) . If he takes a TermInsurance at the start , his yearly premium per year for 50 lacs cover would be Rs 11802 for 30 yrs

tenure from Aegon Religare . Do you know how you can do your Retirement Planning in 6 steps?

Read-ErrorRead-ErrorRead-ErrorRead-Error

Which means , he is going to pay total premium of 3.54 lacs in his entire life . How even if he getsthis money back at the end , How much will it benefit him ? How many months can he survive onthis money ? 2 months is the answer !! , With expenses of 1.65 lacs per month , the money he gets

back from term insurance is enough for not more than 2 months , Lets take maximum 3 months .That's it !!! . Are you confused with Calculations, See this Video presentation by me where I explainhow to do important Calculations in Personal Finance .

So Following are the questions needed to be asked

• Do you want to put your Family at Financial Risk because you are not getting 2 monthsworth of expenses back ?

• For a small amount you "don't get" at the end , are you not being childish to Secure yourfamily.

• Don't you think you are seeing Term Insurance from a wrong attitude ? • Are you not concentrating on "what you are not getting" rather than "what you are getting" .

We already have "Return of Premium Term Policies", but they are themselves idiotic because theyare again designed to just exploit the weakness of people who feel that term insurance is waste ofmoney because they dont get their money back . Read this to understand why Plain Term Insuranceis better than "Return of Premium Term Insurance policy" .

Reason why Indians dont like Term Insurance

Reason 1# : Most of the people concentrate on number and explicit data , like the money they arenot getting back or its a waste of premium if nothing happens to them . They fail to look internaladvantage which term Insurance provides

Reason 2# : We are emotional with Money , we are more concentrated with Growing money andgetting money back rather than what value it provides in our life .

Reason 3# : Most of the people think that the probability of dying is much lower than an averageperson which is again totally idiotic . We just don't want to visualise a bad situation and hence donot concentrate on that situation .

Conclusion

In life we don't appreciate things like Health , small moments of happiness , nature , time spendwith our loved ones which are most wonderful and real things in life. Term Insurance is one of thesimilar things in personal finance domain . You just need to shift your focus of view from "what youare losing" to "what you are getting" , once you do this with Term Insurance and your Life , Bothwith become wonderful .

Please comment on what do you think about this and do you agree with it . are you victim of suchmindset ?



Friday, July 31

How Builders are Not keeping their Promises in Real Estate

D eepak Shenoy came up with a very nice article on How Builders are notkeeping there promises while delivering the Residential Properties . He shareshis views on Why it does not make sense to buy Residential Propertiescurrently at idiotic prices level currently . He also links to another article of thiswhere he compares Renting Vs Buying a Flat

My take on the Subject

I am not a big Real Estate expert my self , but from Financial Planning point of view I have to saythat Buying Home is an Important decision and we should look forward to it , but never at the costof putting our self in a situation which can become disaster for our self . If you earn 50,000 permonth , it does not mean you go next day and buy a Flat where you EMI is 40,000 . Most of thepeople do not concentrate on Long term and have a short term view . Buying House needs planningand consideration of various factors . You need to find Value in the property which you are buying ,just dont see the value . A property worth 40 lacs may look Cheap , but its worth still be less than itsprice . Do you know the Formula to calculate the EMI on home loan ?

Given the uncertainty of Stock Markets in near term and no big improvement in Real - Estate sector, I am myself still not excited in Buying anything in real-estate (the main reason is that I dont havemuch money) .

Mohit Satyanand says

"I wouldn’t put money into real estate unless it fulfilled three conditions—

1. It is a property I would be happy to live in.2. I could put down at least 25 per cent of the total cost;3. The EMI is less than half of my monthly savings.

With those conditions, it would be unlikely that I would exit the investment; not findinga tenant would’t upset me; and with the balance of my surplus income, I could continueto build a nest egg of other assets. Read full Article "

This view can look like a pessimistic views at first , but in the long run , these things pay off . Don't

take much risk that you are not alive next time to take another is the Funda you shouldRemember .

Please comment on what do you think about the Real - estate sector currently in your City .

Also do share what is the most important thing one should look at before buying a Flat ?



Wednesday, July 29

Register yourself with Jagoinvestor

Readers , Please use this Form to Register yourself with JagoInvestor . In future I will be startingFull fledged Financial Planning services . I want all my dedicated users to be registered with Me ,So that they can benefit . Give your 2 min , to fill in the basic information for registering your self .

Also dont forget to take up a small survey on Financial Planning , it will take 57 seconds .


Tuesday, July 28

What is Jagoinvestor

"Money can't buy you Happiness, but lack of it can certainly make you

Unhappy"

We have not come in this world to make Millions !! , We came here to lead a happylife , To do what we enjoy , make friends, enjoy little things in life and then diepeacefully. Everyone wants to do this in their life , but most of us just never getthere . Why ?

We study , we join companies or start our business , we work , we earn and wait ... then we justkeep earning , earning and earning all our life , We are married , have kids , All our life is gone inplanning for them , managing it . Everyone has to do this and one cant escape from this . But howmany of us do it smartly and without much hard work .

Please take some time to Fill this Survey to let me know what readers think is Fair Fees forFinancial Planning

What Happens Currently ?

In our country , most of the people mess us with there Financial decisions, because of followingreasons .

• Little or No awareness about Finance and Investing related Stuff• Inability of take our financial decisions (actually any decisions)

• Wrong attitude towards Money • No ability to judge right or wrong because of our analytical (in)ability .• Unprofessional way of dealing with Financial Stuff • Low motivation for spending less than we need . • No analytical ability to calculate important things on his own .

What is happening from Last many Decades ?

• So called Stock markets experts decides the shares we buy.• Websites and Magazines decides which Mutual funds we buy.• Our Uncle or Cousin (who is LIC agent) will decide which policy we will buy. • Agent who calls us on phone will decide which ULIP suits best for us • Stock market crashes decides that we also think about Debt component in our portfolio.

Where are we in this scene , Where are we in this decision making process ? Why are we not takingour decisions ourselves ? Why are we not giving Importance to this "extremelly Important" Partof our lives , our Nation . I know Money is not important in Life , and it wont help you get wantyou want in life , but having good amount of money and good financial life can leave you withenough time and peace of mind , so that you can look after what you want in life . Having yourFinances in place is Critical .

What is JagoInvestor all About ?

Jagoinvestor is a Movement , a small vision which wants each person to know what he is doing .To understand how things affect him . It aims at empowering everyone with ability to judge what isgood and what is bad for him . It wants people to understand the critical elements which arenecessary to succeed financial in life , It does not mean , that we are making you millionaires , theonly aim is to take care of what you have in a best way . To achieve your financial goals in the bestpossible way .

• You should not be like the Family who lost 50% in a ULIP just because of not knowing theproduct .

• You should not be like one of my friend who has taken lot of Insurance without having anyFinancial dependents .

• You should not be the one having 50,000 as monthly salary , Parents , wife and 2 kids with8-9 lacs of insurance (believe me , this is exaggeration) because you think Term Insurance iswaste because it does not provide any return .

• You should not be the one who invests money to double in Stock market because you haveto pay your brother MBA fees next year , and you think you can get a cut from a bull run .

• You should not be the one who invests in LIC endowment policy just because the agent isyour "Uncle" and has good relations with your Father and you cant say "No" to him . (I hatethis one) .

• You should not be the one who is putting most of his money in Fixed deposits from last 24yrs .

Financial Planning is one of the most important aspect of one's life . Most of us do notacknowledge this and don't want to work upon it. This part of your life is the one which is invisibleto you , but everything is connected to it . If your Financial life is messy , Other parts will Stink ,believe me and it would be very late by the time you can fix it . See Why you need a FinancialPlanner .

Be a part of Jagoinvestor and take part in improving your Financial decisions .

What do you think about this article , please share your views , what is your idea of "Being aInformed Investor" ?



Monday, July 27

ULIP charges restricted to 3% by IRDA

Does God Exist ? I don't know, but IRDA exists !! and hence finally it has actedas GOD to the investors :) . On 22nd July, IRDA capped the ULIP charges at 3%. Let us see in this article how this will affect Investors and how will it impactinvestors and what will be the implications of this on Investments and InsuranceSector . The decision will be effective from Oct 1 2009 .

IRDA rules for ULIPS

Gross yield: This is the yield generated by the ULIP before all charges are deducted.Net yield: This is the yield generated by the ULIP after all charges are deducted.

1. "ULIP charges" here would include allocation charge, administration charge, mortality chargeand all such charges by any other name.

2. For Products whose Maturity is less than 10 years

• "The difference between gross yield and net yield cannot exceed more than 300 basis points"(100 basis points = 1%) .

• "In this case , fund management charge cannot exceed 150 basis points"

3. For Products whose Maturity is more than 10 years

• "The difference between gross yield and net yield cannot exceed more than 225 basis points"(100 basis points = 1%) .

• "In this case , fund management charge cannot exceed 125 basis points"

4. The IRDA has made PAN card mandatory for all policies where annual premium is more thanRs 1 lakh OR there is investment in Capital Markets . IRDA said this norm is to be implementedwith immediate effect and all insurers are to comply not later than August 1.

Look at this Video

What will be the Implications

• Ulip products will see a decline in commission paid to agents. Its very logical , IRDA isgiving nightmares to Agents for some time . First it was abolistion on Entry load frommutual funds and now its capping the charges on ULIP . Agents are now going to getcommissions which will be very very less compared to what they used to get earlier (likeupto 35-40% in first year) . Bad month for Agents in India .

• Now Agents would really be confused on whether to work hard on Selling Mutual Funds ORULIPS ? Both are going to provide them almost same kind of Commissions now ! .

• This move will help in investments in ULIPS , as the hardcore Mutual fund investors canthink of Investing in ULIPS too . But still dont forget to ask him the most importantquestions before buying the ULIP .

• Mis-selling will be reduced in ULIPS as the primary motive of "High Commission" iscrushed by IRDA .

• Though ULIPs are still long term Products , I don't recommend common man for short terminvestments in ULIP , Investors who think they are smarter than average investor can investin ULIPs for short term , considering you know how to manage ULIPS well and reap thepotential of switches (this mainly to churn the portfolio fast and save the short term capitalgains tax) . Read how to use losses to save your tax .

• This Rule does not apply to traditional Policies, so its not a very good news for allconsidering Traditional Policies from LIC still dominate the Insurance Market :( .

What will happen to Existing Polices ?

As per IRDA , All existing products that do not meet the requirements of this circular should bewithdrawn or modified by December 31, 2009 . I can only imagine the state of Agents andInsurance companies which created ULIP mess all these years . IRDA really nailed them hard thistime . Many agents which were getting fat commissions from so many months will be sad on this .

How much will this help Investors in reaping benefits from ULIPS

This is a good move from IRDA , and investors will be benefited , But how much !! ?

Earlier most of the ULIPS charged heavily in First and Second year and then reduced the charges toNIL or very very less in later years . Because of which the charges were heavily skewed in InitialYears, but the long term average charges were still in range of 3-5% . Now after this new Rule fromIRDA , Almost all the ULIPS will charge for every financial year (that what i think) . Hence thelong term charges will now be evenly distributed over long term , but still the average charge overlong term wont come down drastically !! .

Read a nice article from Deepak Shenoy on "Tactics used by ULIPS to hide the charges"

Can you Invest in ULIPS now !!

ULIPS for me has changed its status from "Ugly" to "Average" product now . For long termInvestors , ULIPs can now serve as a good product. Charges wise its much better in long term now (2.25% max) and the best thing is if you need immediate money and want to close the policy , youwill not he hit hard like earlier . Take the policy after Oct 1.

Some Internal Information

Just before writing this Article, I was chatting with Pradeep (name changed), an internal source whois himself an ULIP agent. See what he has to say

Guest_7FF767C0: attened a sales talk by XXX for their new ulip ... XXX whichguarantees highest nav for the next 10 years !!!!

Guest_7FF767C0: all ptvt. life companies are worried about mandatory PAN for annualpremiums of rs one lac. and above.today smart money(black) is routed through ulip cashpayments on binami names.

Guest_7FF767C0: but sir! IRDA may kindly look at the very very high incentives to thesales team(policy expences).sebi from aug 1 st declared no entry load for mutual fundsso no early commissions to agents which is only 2.25% where as 40% plus in life!

So according to him , Due to the mandatory PAN for more than 1 lac premium . Lots of blackmoney is coming through Benami Accounts now. see The Benami Transactions (Prohibition)Act, 1988 High Net worth Clients do not want to share there investments with Govt to save tax ,but because of the "mandatory PAN" rule , the money is being diverted through "Benami Accounts". This is totally unethical and unprofessional , but this happens at the top ladder, Looks like IRDAstill has some more work on this plate .

Conclusion

This move will help investors and it will check the mis-selling going on for last many years . It willalso help in making Insurance sector more mature in India . IRDA is coming up with solutions nowand Jagoinvestor sees this move as a friendly move which will help in achieving the goals of"Making each Indian an Informed Investor" . Thanks IRDA .

Readers , what are your views on this Rule by IRDA , How do you think investors will take this ?And Is it helping you in any way. Please leave your Comments on this .


Tuesday, July 21

6 Steps of doing Retirement Planning by yourself

In this post in will teach how to plan for retirement . We will use simple tools likeMutual Funds and PPF for building Retirement Corpus . We will also see what arethe factors you should take into account when you plan for retirement . There canbe other ways of doing this and can be very complex with very advancedcalculations . But in this post we will look at it in a very simple way which acommon man can understand .

So you are finally deciding to plan for your Retirement . You need to understand following

steps .

• How much is your Current Yearly Expenses • How much will be average Inflation figure in coming years• How much would you need at your Retirement• Finally coming up with the corpus you would need at the retirement.• Calculating how much you should save per month.• Understanding Where to invest it .

We will see all the points and also go through an Example Side by side to understand the process .Let say we are taking an example of Ajay who is married and has 2 kids below 6 yrs . He has amonthly salary of Rs 40,000 per month . His age is 32 yrs and he wants to retire at age 60 .

Step 1# : Calculating you Current Yearly Expenses

Take a piece of paper (do it now , as you read this) and make a note of your expenses, things likeRent , House hold expenses , Children fees etc etc . You should have a rough idea of what is theminimum amount you require per month for living a good life . You should also try to Save a part ofyour Salary every month , Ask your self , Can you live with 90% of your Salary ?

Ajay calculates his expenses.

Rent - Rs 10,000House hold expenses - Rs 11,000Medical Expenses : 1,000Entertainment and outing : Rs 3,000

Total Monthly Expenses : Rs 25,000Yearly living Expenses : Rs 3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs 50,000

Total Yearly Expenses : Rs 3,50,000

Step 2# : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement , I calculated the averageinflation from last 28 yrs (1990-2008) . the CAGR inflation was 7.3% Source . Considering a bettereconomy in future I expect the inflation over next 20-30 years to be 6-6.5% . Lets take 6.5% . However you can assume your numbers , depends on your understanding .

Step 3# : How much amount would you require in your Retirement .

By this we mean how much money will provide you same standard of living as of today . This willdepend on Current Yearly Expenses , Inflation expected over the years and years left for retirement.Just like we require Rs 105 to buy something of cost Rs 100 in 1 yr at 5% inflation . The same waywe can cost how much is is needed after X yrs . So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number ofyears left)

Ajay has already calculated his yearly expenses as Rs 3,50,000 . He has 28 more yearsat hand . He calculates his retirement yearly expenses .

Retirement Expenses = 3,50,000 * (1+ .065)^28= 20,40,000 (20.4 lacs approx) .

Now one can tweak this figure depending on weather you want to have a more better lifestyle thanearning years or more simpler life . You can decrease it or increase it to the quantum of yourcompromise . You wont have to compromise on your Retirement if you are a Early Investo r.

Step 4# : Finally coming up with the corpus you would need at the retirement.

Here you may want to receive the monthly income for whole of your life and preserve the capitalfor your Children or any nominee . So you need a corpus which if you put in Bank or invest in some"guaranteed return fund" , you should get an amount per year which is equal to your ExpectedExpenses per year .

So suppose you expect to get a return of 7% per year . Then you need X amount at theend where 7% of X is = your yearly expenses .

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay , the yearly expenses expected was Rs 20,40,000 and return expected is 7% .so we the amount required for Retirement is 20,40,000 / .07 = 2,91,00,000 (2.91 crores) .

Note : You can also buy an Annuity for a fixed number of years till when you want to receive theincome ( which also means you should have an idea of when will you die , which is not easy ) . Sofor example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs) . Thefollowing formula will be used . See this Video or this article on Net Present Value to understandthe calculations and Concept .

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)

r= Rate of interest you expect to get

n = Number of years you want the Yearly Income .

So at the end of this , you will have the Amount you need for your Retirement .Do you calculations online just now Here OR download the excel sheet Here

Step 5# : Calculating how much you should save per month

Here comes the interesting part , Here there are two things

• How much Return you expect to earn in long term • How much you can afford to invest per month

Both are related to each other. If you expect more return , then you need to invest less every monthand if you can afford to invest more every month , you need to generate less returns for yourinvestments .

So which is the better way ? What should you decide first ? The returns expected or monthlycontribution you can make ? . I would recommend the other way , better we first decide how muchwe can invest per month, because that is what we can control better way . We cant control returns !!. I have this monthly contribution calculator to calculate how much you need to put every month togenerate Rs X after Y years if you expect R returns , please feed these inputs there and get yournumbers , To understand how its calculated you can see this video which explains some importantformula's in Financial Planning .

So here is the process

• You figure out how much you can save• Then you find out how much return you need to generate .• Then you decide where to invest to generate that return.

You can also go the other way deciding how much return you can generate and based on that howmuch you need to save . But i prefer the first way because then you control things in your hand . butyou can go the other way too .

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 - 25,000) . And hethinks that he can easily invest 10,000 per month at least over a long term . So the returnhe needs to generate per year CAGR for 28 yrs to generate his retirement corpus of2,91,000,00 comes out to be 12.25% , see the calculator mentioned above .

So now you got to know how much you need to get per year in returns .

Step 6# : Understanding Where to invest it

This is the last step as per our article , So you got the CAGR return number which you need togenerate over a long term . This number will decide how much risk can you take and where can youinvest depending on your time frame , See below to understand which are the suitable products youcan invest to get your returns .

Understand the ground Rules

• Higher the return expected , higher the risk you need to take • More the Tenure , Lower the risk

Above 15% : Direct Stocks , Sectoral Mutual Funds , Equity Diversified Mutual Funds10-15% : Equity Diversified Mutual funds , Balanced Funds8-10% : Mix of Balanced Funds Debt FundsLess than 8% : FD's , PPF , Debt Funds , Balanced Funds [ find out which FD is best ]

However , If the tenure is more than 10 yrs , you should always go for Equity Funds . Never go forFD's or Debt funds if your tenure is long enough , Understand the Chemistry of Equity and Debtplease .

So in our Example of Ajay , he requires a return of 12.3% CAGR in 28 yrs, so for this ,he can invest in Equity Mutual funds through SIP , he has different ways to achieve thislike Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP inmutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds . Yougot to be creative in this :) , there are endless ways of doing it .

Conclusion : Here you go !! , you just did your Retirement Planning :) . You can do your retirementplanning yourself easily , A financial planner will look into more details and will do perfectplanning for you which would be best, But this is pretty much great way you can adopt your self .Involve yourself in this journey of Financial planning and you will be amazed to find how muchFun it is .

Please comment on how did you like the post and what do you think can be an additional step

of Retirement Planning .



Thursday, July 16

Power of Asset Allocation and Portfolio Rebalancing

What is better ? Equity or Equity + Debt . In this article i will show youhow always maintaining your Asset Allocation with Discipline helps you inlong term . We will See examples of Asset Allocation with PortfolioRebalancing with Charts and a small Presentation . At the end we willconclude that Having A small part of Debt in your portfolio is better thanhaving no debt . Note : Make sure you read this article in one go , not in parts.

Data Collection and Making the Case Study

I gathered the NAV of SBI magnum Taxgain ELSS fund (click here to see which is the better fundthat SBI Magnum) for last 10 yrs for each quarter . NAV are for 1 Jan 2000 , 1 Apr 2000 and so onfor each quarter (getting them each one by one from moneycontrol was really time consuming) . Sowe have 38 NAV values from Jan 1 2000 to July 1 2009 .

Scenario

• Total Capital Invested : 1,00,000• Debt Return : 8% per/year , 2% per quarter (for simplicity) .• Equity Return : Calculated for per quarter (if Nav rose from 10 to 12 , return was 20%) .

Now I am comparing Two cases with and Without Asset Allocation and PortFolio Rebalancing .

Case 1 : Money was Invested One time in Equity and then it was left for Growing .Case 2 : Money was Invested and Principles of Asset Allocation and Rebalacing was also used .

We are trying to Study which one of Case 1 and Case 2 is better . I did a Small Study and calculatedthe returns on different values of Asset Allocation like 20:80 , 50:50 and 80:20 etc . Here are thefindings .

Let us first look at the chart with Asset Allocation 80% Equity and 20% Debt , which personallysuits me and almost anyone in below 35 yrs age . (click to enlarge)


The Green Line is growth of investments with Asset allocation and Rebalancing (case 2) , and Blueline is Growth of investments with no asset allocation (just equity , case 1) . See how After 2quarters , The Green line always was above Blue Line . Also see that final Value of Investments washigher in case 2 , than case 1 .

Also see, Magic of SIP , why SIP in mutual funds is best for long term .

The final Value of Investment kept increasing when Equity Allocation was raised from 0 to 70-

80 and then started reducing when further increased it above 80 .

See the Graph Below , This is a small presentation with each slide of separate Equity Allocationstarting at 0% in equity and then increase by 10% every time . So first slide is 0% equity 100% debt, second slide is 10% equity and 90% debt and so on, it goes up to 100% equity and 0% debt , Itbeautifully demonstrates the shift and change in value of Investment caused by Equity Allocation ,to view it in the best way , just have a look at each slide in one go and it will appear as a small video;) . Guys , i worked hard on this .

Asset Allocation Effect (make fullscreen if you want)

View more documents from manish.pucsd.

In a time span of 38 quarters (10 yrs approx) , Case 2 consistently outperformed Case 1 . ie. If

you see, In how many quarters Value of Investment was higher in Case 2 compared to Case 1 ,

Case 2 beats case 1 .

Below is the chart which shows In how many quarters Value of Investment was higher in Case 2than case 1 . i.e for each quarter the case (case 1 or case 2) which has higher value of investmentwill get 1 point . You should also look at IV Ratio .

It was found that Case 2 always had higher points than Case 1 and Case 2 points kept increasingwith higher Equity Allocation . The minimum Case 2 had was 19 points , when the asset allocationwas 0% equity and 100% Debt . See the chart Below


Returns Were going up with higher Equity Allocation (around 70-80) and then fell further .

The final value of Investment was increasing for higher Equity Exposure till it was 80:20 , and thenit started Decreasing . See the chart below (click to enlarge)


To go deeper , I calculated some other returns .

Case 1 (Only Equity) returned

• 13.2% CAGR in 9.5 yrs , see this video to learn how to calculate CAGR and otherimportant formula's

• Value of 1,00,000 bacame 3,24,946 .

Case 2 (Asset Allocation) returned

• 13.1 % with 30:70 • 15.11 % with 50:50 • 15.67 with 70:30

In case you are new to Stock Markets , Download this Ebook on " How a Newcomer should Start

in Stock Markets", check out the Download Page for more .

What Does This Teach us

There are some important Learning's here which We must understand well and have it deep rootedwithin us for our entire Life . This will help us in long term . Following are the Learning's

Learning 1# Equity Returns 12-15% over long term .

We can expect better returns from Equity in Long term , Also average return over long term fromEquity is around 12-15% , as we saw in our case . So don't expect returns like 30% or 40% everyyear . once in a while you can get it . But if you try harder and harder for it , you tend to takeunneccessary risk and hence screw your self . So better follow a disciplined approach andpeacefully get 12-15% over long term . This does not apply to Traders and whole time participantsin Stock Markets . They can/should/deserve to make more than 25-30% a year from stock markets .

Learning 2# Debt is extremely Important !!

Debt is an Important and vital component of Financial planning and your Investments. Love equity ,Adore Equity and Worship Equity , but *don't* forget Debt , Debt has eternal powers !! . EquityCombined with Debt can produce far superior returns over long term. In our examples above , Thebest returns we got were for Equity and Debt ratio of 70-30 or 80-20 range .

Learning 3# Have a long term view , It takes time to give results .

People who have recently started investing through SIP , ULIP or Direct Stock Investing need tounderstand that it takes time !! . If you are doing right things like Asset Allocation , PortfolioRebalancing , Diversification , Investing with Discipline and control over your self in not makingstupid mistakes , you need not worry at all . At the end you are the winner for sure. It will take time, but things will show up .

You might see some person making 30% this or other year minting money from markets or fromother investments , and this can make you feel that you are left out , but don't feel bad , what youforget is that the other person is also exposed to extra risk which will kill him someday , while youwill be safe .

Learning 4# Returns is not Everything in Investments (my Favorite)

This is very important and you need to get this into your head . Just like Money is not everything inlife and there are other things like love , health , Nature etc etc . The same way , in your financiallife, you should have peace of mind . For which your investments value variation should not be wildenough to drive you crazy . You should "aim for" and get "stable and good" returns which meetyour financial goals , thetas it . Anything more than that will be a "treat" for you and should cometo you without compromising your Needs in Life .

Suppose your money invested gives you returns of 30% , -20% , 50% , -40% .... With these kind ofunstable and wild returns , what will happen to your state of mind. It will always be worrying overit and you will make mistakes in your financial decisions .

On the other hand if you get returns like 12% , -5% , 9% , 20% , -10% etc . It will not bother youmuch because there are no wild swings in your Investments value . At the end , b0th will give yousame kind of returns. The average returns would be same , but the former case has higher varianceof returns which "may be" good for your account , but its "not good" for your Mind and soul . Youwill also notice in the charts above that with 70:30 equity : debt allocation , in 36 out of 38 quarters, the investments in case 2 were more than investments in case 1 , which means that 95% it

outperformed .

Learning 5# You should Start Early In Life

Ramit Sethi writes an excellent article on Why NOW is the best time for you to do anything , Be itearly Investing , Travelling , Meeting new people , whatever !! . If you start early , you give enoughtime to your investments to grow and work for you . Its also less risky if you start early , becausethen the volatility is erased out in many years .

Partha shares a link for a study done on Similar subject at Accretus Solutions , Looks great link tome :) .

** What do you think about This article , please leave you comment and suggest how did you likethis article and what are your suggestions on making the investments in a much better way .

With this i will end this article , and dedicate this article to all the readers of this blog .I wasworking on this article for last 2-3 days , gathering data , doing calculations, creating charts ,writing this article etc etc . It has come from hard work for some days , but the motivation behind itis my wonderful readers . Believe me or not , The person who has/will learned most from thisarticle is ME , Thanks to you all - Manish

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Tuesday, July 14

How much Risk you should Take ?

Are you a High Risk taker ? In this post we will talk about risk-taking in yourInvestments . Be it share investing or mutual funds investing or any kind ofinvesting . Taking low risk is equally disastrous as taking high risk . So in thisarticle we will discuss how much risk you must take as an investor .

Financial Goals vs Risk you take

First , we have to understand what is Risk-appetite ? As retail investors we don't understand theseimportant issues of risk-taking . We blindly invest in something without considering if it suits ourrisk-appetite or not . We have financial goals in our life which we want to achieve in a defined timeframe like "Buying a Rs 5 lac car in next 4 yrs" OR "Generate 20 lacs for my daughter education innext 15 yrs", and we figure out how much we should invest every month or year to meet our goals .

Depending on our Greed or Fear , we choose the products to invest. Some choose Mutual funds ,Some choose Shares directly , where are others may choose PPF or Bank Fixed deposits (Read howto find out Best Fixed Deposit for you) . So it may happen that we either take risk which does notsuit us . This risk can either be over-risk or under-risk . Both are equally bad for us . You shouldread How Equity and Debt provides returns .


Problem with Over-Risk

Taking Risk much more than we can afford or take can lead to a situation where we are not able tomeet our financial objective . This is a very bad situation . We in hope of getting better than"required" return take unnecessary risk and increase our chances to meet failure . Failure is ok , butyou should be ready for it . Taking higher than "required risk" can lead to this kind of situation .These issues happen because most of the times investors forget the first step of Financial Planning .

Example

Ajay wants to generate 5 lacs in 5 yrs for his Daughter Education . He can invest around Rs 6,000per month (See this video presentation to understand how its calculated) . To meet his goal he needsto get around 12% return annually . There are different ways of achieving this like

• Investing in Balanced funds • Combining Debt Funds and Equity Funds • Some Direct Equity + Bank FD's + Mutual Funds

But what if he decides to invest his money in Sectoral Fund like Real Estate or Infrastructure orinvests directly in Stocks without much idea of how things work ? This can either make him Muchmore than 5 lacs , may be 10 or 15 lacs OR it can be disastrous and he can loose his money and maynot be able to generate even 3-4 lacs depending on the circumstances . Now this goal wassomething very important , He can not take risk for his daughter Education . If it were a car or avacation goal , I would have said "ok - go ahead" . But Education is a Need of life . He has tounderstand Difference between Needs and Wants . He has to understand where to take more riskand where to take less .

Problem with Under-Risk

Just like Over-risk , Taking less risk has its own issues . Most of the people who invest inEndowment Plans or Bank FD for years suffer from this virus . If you take very low risk , you maynot be able to achieve your goals at the first place . Read Why Endowment plans are bad to invest in

Example

Robert wants to generate Rs 1 Crore for his retirement , He has 30 yrs and He can invest around Rs2,000 for this in Mutual funds with SIP and this should be possible with Patience . He can takemoderate risk , but he thinks that equity markets are too risky and its something he should be awayfrom . He is a fan for Endowment plans and traditional Bank Deposits , So he invests in these twoinstruments . He generates Rs 15 lacs from his Fixed deposits (before tax) and Rs 13-14 Lacs fromEndowments plan with his 1,000 investments in each of them .

So at the end he has total of less than 30 lacs as Retirement Corpus . He has 30% of what he needsat the end . What are the issues here? He has to Compromise with the life Style and he cant enjoyhis Post-work life as he wanted because of severe financial pressure . Because of fear andreluctance of taking "required" risk , he has done un-repairable damage to his financial life .


Conclusion

Its very important to take the investments with our risk-capacity , taking high risk can lead tosituation when our returns are less than expected . Because of greed we sometimes take extra riskand only concentrate on the rosy picture and forget the part which looks bad . Its an Irony , but mostof the people think that somehow there are less chances of bad things happening to them .

The same way , taking too low risk can lead to under performance in returns and hence after youfactor in Inflation and taxes , you may be in a financially fatal situation , you might have lost allyour life , believing that you are gaining (like in the example above) . Hence , You must take riskwhich is required for meeting your financial goals and also which you can take if things go wrong .Taking Over-risk is same as taking Low-risk . The best way to find if a Product Suits your Needs orNot is to Find the GFactor of that Financial Product .

Q. What do you think about "Required Risk" , How should a investor estimate how much risk oneshould take ?



Monday, July 13

Some Nice links to Read

• Some trading Wisdom • Myths about NFO's • Process of Transition


Posted at 11:36:00 AM 2 comments ShareThis

Sunday, July 12

Presentation for Newcomers in Personal Finance

Below is the presentation which i gave to the new joinees in my company . The presentation istargeted at people who are totally clueless about Personal Finance and taxation .The Agenda is

Basics , Section 80C , HRA , LTA and Medical Exemptions , Tax Calculations , Tax Slab andexample , Power of Investing Early , Understanding Equity and Debt , Investments Options, Whatis Insurance , Insurance Options , 4 most important things .

Presentation for Newcomers in Personal Finance

(Make it Fullscreen if you want)View more presentations from manish.pucsd.



Friday, July 10

A Perfect Example of ULIP Misselling

Recently I saw a perfect example of mis-selling of ULIPS . One of myfriends parents gave their money to a close friend who was working forsome Investment firm and assured them of doing great investments ontheir behalf . The total money involved was more than 10 Lacs . I don'tknow what else he did , but he bought a ULIP from there money and itsthe perfect example of mis-selling here . Lets see in detail .

So this agent buys a Canara HSBC ULIP .

• The total premium yearly was around Rs 3 Lacs . • Premium Allocation charges are 48% in the first year.• The policy was stopped after 1 yr by the Family .• The Allocation chosen in the start was 70:30 (Equity : Debt) .• Charges were not communicated while taking the policy .• No statement was sent them for next 8-9 months .

So may be they were not aware of important questions they should have asked a ULIP Agent .

Some Points

1. Now 48% goes in Premium Allocation charges , Rest of the money will grow at moderatereturn , because it was mix of bear and bull market which the money was invested .

2. Why was it invested in ULIP first of all and that too Rs 3 lacs as premium !! . This is one ofthe costliest ULIPS in market and has to track record . Why was family financial needs notconsidered before investing ? Why was their risk-appetite not considered ?

3. What kind of agent is this ? He takes advantage of trust and invests in something whichgives him maximum commission . There was no proper communication about charges andno statements reached them on time .

What is mis-selling here ?

Giving "Wrong-Information" is not a big issue, the bigger issue is not giving "any information" .One of the reasons why this kind of things happen is lack of accountability on agents side . You takethe product and sign the documents means you are responsible for your decision. While that is truelegally , its totally unacceptable morally .

The only thing the investor can do here is make an issue out of it and tell the Insurance companythat's agent mis-sold the policy to him and did not tell him about the charges . Worst thing isinvestors don't even know about the "Free Lookup Period" , which is 15 days from purchase ofpolicy before which Investor can cancel the policy of they don't like it or change their mind .

UPDATE

This is an update after my friend Rishi , whose case we are discussing commented on this article , Iam putting up some more thoughts in this below . In case he takes some legal action on this matter.I can think of following things which will be useful and important to quote .

1. As everything was done legally , documentation and signatures taken from investoretc etc . The one thing which can make your case stronger is "explaination" from HSBCpeople that on what grounds "that Ulip" suited your needs . How did they come up thatthis ULIP was the best choice for your family , i hope being the "trusted" and "portfoliomanagers" they think of your profits and hence they must have figured out why thisULIP was the best in the industry for you guys .

2. How do HSBC products best for you people (i hope 70-80 products they choose wereHSBC products)

3. per IRDA "it is the moral obligation of the insurer to maintain the ethics and spirit ofbusiness across its workforce" . The mere fact that premiums were stopped after 1 yrand now your people are not happy with this shows that obviously you people were notinformed well about the cost structure in the start .

Finally this is more of a matter of "Unprofessional Behaviour" than mis-selling per se . Iam not sure how much HSBC will help you , as they generally pass the buck on "agent"and "investor who invested" , You might have to take this case with IRDA . You mustfirst talk to Bank , agent etc and then after you are not satisfied with them , you shouldgo complain at the IRDA ombudsman : http://www.irdaindia.org/ins_ombusman.htm

The ground of plea should be based on monitory + psychological loss" .

You can read here Confession of an Insurance agent in his own words

Please share if you think there is a good way for getting justice on this matter . Your comments arevaluable ? Should this is taken into court ?



Monday, July 6

How to Start in Stock Markets

This is the 4th and last part of the series on Stock Markets articles Newcomers.In other parts we discussed some important things which newcomers shouldknow when they enter Markets. In this article we will see how a new comer instock market should start. Go through other 3 parts before this to get maximumout of this article .

Part1 : Why Stock Markets Attract and Look EasyPart 2 : Understanding What exactly you want to do in Stock MarketsPart 3 : 8 most Important Rules in Stock Market

"Small babies like Teddy Bears, and Market Bear likes Babies (newcomers) in Stock markets"

There are 5 things a new comer has to do , I will call it CLOPS model of starting in Markets .

• Calm Down • Learn • Observe • Practise• Start Small

This model of learning is totally obvious and logical and applies to all the areas of life. StockMarkets are no different . Lets see each of them separately and what they mean in Stock markets .

Calm Down

The first thing a newcomer has to do is calm down and not rush . Just be where you are . Most ofthe people come in stock markets and its totally a new place for them and every things looks like agreat "get-quick-rich" opportunity to them and they want to make most of that once-in-a-lifetime

opportunity . They don't know its every-day thing in stock markets. Markets are like a wonderlandfor them. Markets are no going anywhere and its more true for the opportunities they provide . Sothe first thing is to just calm down and do-not rush to get in, There are other important things youhave to do before you get-rich-quick. most of the mistakes which newcomers do is mainly becauseof excitement and getting in without preparation , not because of lack of skill or because of thereabilities . When you calm down first and don't get excited, you are doing an important thing , whichis not jumping in without thinking and making yourself ready for another important things whichare discussed below.

Learn

The next step is to Learn , Learning is an ongoing process which will never stop as far as Stockmarkets are concerned ,but before at the starting level you need to learn lots of basic stuff , Readhow Stock markets are structures , what are different indices , what is Nifty and Sensex ? , What arethe factors affecting markets, How do analyse a company , what are important things to considerwhile investing . Read books , Read blogs, Read anything you can get on the subject. Some of thegood resources are

Books for Value Investing (Thanks to Rohit Chauhan to provide the names)

• Intelligent investor by Benjamin Graham• Common Stocks and Uncommon Profits by Phil Fischer• Warren Buffett Way by Robert Hagstrom

Blogs for Value Investing

• Rohit Chauhan • Shyam Pabbati

Books for Trading

• The Psychology of Trading by Brett Steenbarger• Come into my Trading Room by Dr. Alexander Elder• The Disciplined Trader by Mark Doglas

Blogs for Trading

• Brett Steenbarger Blog• S udarshan Sukhani Blog• Timamo Blog

Observe

After learning, the next thing is to Observe the markets. See markets movement, watch how pricesare behaving on each news or with volumes , see what kind of patterns are developing on charts anddoes it behave every time in almost same way. Look at how market behaves in relation with NiftyPE in this post .

When you observe things , you will develop some understanding on relationship and you canvalidate those with what you have learned so far . A good amount of time should be given to this ,markets have different faces and you need to see all the faces , just one good up move is not enough, see at least all different kind of moves . Up-move , Down-move , trading in range . All of these indifferent time frame .

You can actually start this early and do it side by side your learning . Collect charts for each day forlater reference so that you can see it later . If you know some programming , make a small programwhich can download the charts from yahoo customised to your purpose . I have downloaded 15,000daily and weekly charts for all the Nifty , Midcap stocks and Asian Indices. I can go back to themand test any of my strategy on those charts . Keep History to learn about the future :) .

Practice

Now come the fun part and very important part , Practicing what you will do in real . So you havelearned things and observed things , now is the time to practice . Before you try out anything instock market with real money , just see if you able to make any money with practice or not . I wouldrecommend just have an excel sheet and put all the transactions there like

- Buy price- Sell price- Profit- Profit percentage- Time of holding the position- Average Loss per trade- Average Profit per trade- Average profit per trade

These are the statistics you should keep and see how you are progressing each week . Don'tconcentrate on each trade too much , better have a weekly target while you are practising . I wouldrecommend at least 2-3 months of practice . This step is important because when you get intomarket to trade , its totally a different thing . Your reactions to markets movement will be toodifferent than what you had thought . If you jump in markets without practice, you will do lots ofmistakes . Better practice before getting in real . Important thing here is that even with practice(without money) . It wont help you a lot but will give you good idea of things . The fun part comeswhen you start with money , then you truly get idea of your behaviour :) . Anyways this is important.

Some people think practice is taking all the time and they are loosing all the money, which they"could" have made . this is a wrong way of seeing things . though it looks like a opportunity loss ,you are in learning mode and the best part is that you are not "loosing" anything and getting readyfor making money . There is a chapter on Practicing from a book "Enhancing Tradersperformance" on this post article by Brett Steenbarger , download it and read, its copyrightedmaterial so i cant put it directly here .

Start Small

Now after you have learned things , Observed things and Practiced , here comes the last part ,Starting Small , Start putting money in markets in small quantities , Grow gradually . View your selfas a small baby who has just born , first start moving , then crawl , finally stand up one day andwalk , once you can walk with speed then try Marathon . The same thing applies to Stock market .But most of the new comers just want to win the marathon and start running fast withoutunderstanding that there body is not ready for marathons . they need to first know how to crawl andthey want to win marathon .

You will fall a lot of times , have losses and make money too . But if you don't start small , one bigloss will wipe you out of markets . In the start it would be difficult for you to control your losses ,have string of losses , the best way to tackle the situation is to start small and put little money in

markets , so that even a series of bad trades don't hurt you much .

lot of people may go for learning and practicing part , but when they start with real money , theystart too big , and that's because of there over-confidence that are now ready to make money. Firstcrawl baby, Marathon is long way to go . Make yours legs healthy first, then dream of running .

Conclusion

Each and every newcomer in market should understand that Stock markets are places and fromcenturies , people are trying to make money from it consistently , but very few people are successful, this profession has very less success rate if you compare it with other professions like Medicine ,Engineering , Computer Science etc etc . There has to be some reason why you need to give time toit and learn things here . Take it as another professional course like any other and work hard on it . Ithink one should seriously give around 2 yrs for learning purpose .

See it as a career , not just another place to get-quick-rich, that doesn't happen in Stock Markets . Itsa gradually getting rich place rather than get-quick-rich place . There is a famous quote in marketsthat "There are old traders and bold traders in stock markets , but not both" . that's true

Launch of Jagoinvestor mobile website

Good News

Now you can read all posts of Jagoinvestor from your mobile also , The mobile version ofJagoinvestor.com is http://jagoinvestormobile.mofuse.mobi .

I have not tested it yet and not sure about the issues involved with it . please try it out and let meknow in comments or mail me about the issues if any . I am sure this will add value to Readers .



Thursday, July 2

Is filing Tax return mandatory ?

A lot of people are confused about this simple question of when to fileyour tax return , In this short article lets see what are the conditionsunder which you need to file your tax return . People say that if youdon't have to pay tax , you don't have to file returns which is not truetotally . Lets see the simple rules .

Rule : You have to file your tax returns if your Total Income forthe year exceeds the exemptions limit . That's it !! , This is theonly rule which applies .

Exemption limit can be different for male (1.5 lacs) , female (1.8 lacs) or senior citizen (2.25 lacs) .So if your Total income for the year exceeds your exemption limit, you have to file tax . Do you

know how to calculate your tax ?

Should I file tax return even if I don't have to pay any tax ?

Dint you read what is said above :) . The only rule is already mentioned above . You don't have topay tax . this can happen in two cases .

Case 1 : Income itself is below exemption limit

In this case you don't pay tax and don't file your Returns .

Case 2 : Your Income exceeds your Income , but not taxable income

Though your Income exceeds your Income , but After all the exemptions and deductionslike 80C investments , HRA , Home loan interest exemption etc etc , your taxableincome is below your exemption limit . In this case you dont have to pay tax , BUT !! ,you have to file tax returns because your income (not taxable income) was above theexemption limit .

What are the other cases when I have to file the returns ?

There are other cases also when its more than paying tax . lets see those cases

• If you have some form of losses carried forward in subsequent years to write off againstprofits in future , in that case its obvious , that you will have to file a return so that you cangive this information .

• If Govt itself gives you notice to file tax return , it may happen that you are cheating thisnation and making black money , then tax department can ask you for details and you willhave to file tax return .

• If you want a Tax refund because of TDS (Tax deducted at Source by your company) . Thishappens with people who do part time jobs for some months or with Interns in the companywho are there for 3 months or 6 months and TDS is cut . So in order to get back the amountyou have to file a tax return .

See some videos on Mumbai Terror Attack , they are awesome .

Read more article related to Tax here



Monday, June 29

Can you live with 90% of your Salary

Answer this Honestly . Don't rush , think about it and then answer this veryimportant question . If you get a salary cut of 10% and you have to live with 90%of your salary , how will it affect you ? In this article we will see some importantinsight on spending habit and psychological issues .

Most of the people do not save anything at the end of the month and the biggest reason is that they


are not left with anything (as they say) . "Supply creates its own demand" , This applies to Personalspending also . when we have money in our hand we will come up with all the reasons why we haveexpenses and why we cant with any money less than that . Answer these following questions .

If you get a salary cut by 10% , will you be able to

- Pay your Rent- Meet all the household expenses- Pay your children fees- Spend on all the important things like Entertainment , eating out , occasionalsplurging etc etc .

I can bet that most of you will have answer in YES !! . If people control and prioritize theirspending , It totally possible to live in 90% of salary. Just close your eyes and imagine a situationthat you are now earning just 90% of your regular salary . Small savings can make up large chunkof investments . If you try to answer the above questions , the answer would be a YES for almost allof you . There can be some exceptions , but i am talking about majority .

For some people , they may require cutting on totally useless stuff and reducing expenses onsomething which can/should be reduced . Some of the examples are

• If you see go out 5-6 times a month , reduce it to 3-4 • If you see 5 movies a month , reduce it to 4• Anything where you can do with less spending .

Does saving 10% means that you start living a Frugal life

Please understand that Saving money does not mean depriving yourself . The only thing i am sayingis We Indians especially in Metro cities have slowly started going the American Way, ie. Spendingmore than what they can earn. From last couple of years , we are using to much of credit cards inwrong way .

We are a nation which saves but do not invest properly , and now we Indians have started spendinglike never before . Spending is good , Spending on useless stuff or stuff we can do without can belike cancer . It will not hurt you immediately , but kill you some day .

Now after you have realised that we can really live with 90% of our salary , what can we do with it .SAVE IT !! , what else . I believe (and i can prove) that saving 10% of your salary is only what youneed to do to achieve all your goals in Future , provided you Start Early and Have realistic goals .

A person who is 25 yrs old and earning 40,000 per month if saves 10% will his retirement(60 yrs)would be having anywhere from 2.3 crores to 6 crores if he earns anywhere from 12%-16% in longterm which is totally acceptable . See how to calculate this in this video .

What to do ?

Next time you get your salary , take 10% out of it and deposit it in some other bank account . Justtry to see if you can do with 90% of your salary . I bet you can do it . Saving 10% of your salary canhave drastic effect on your investments . You can create nice wealth using Equity in long term .

One of the readers Ramjee comment is worth notice . Please see his comment .

That was on the bulls eye. A little bit of decrease will not effect lifestyle much, but has alasting impact on your wealth. I have an automated schedule put to transfer 15% of mysalary (a fixed amount every month,which is revised if sal.changes) to another account.

at end of 6months it feels good to see the lump sum which can go in for furtherinvestments. "

What he did is worth appreciation . I hope people learn from him .

Conclusion

We dont save because we think we cant save . Whereas if you try its totally possible . Just to try dothis next month

- When you get your salary , take 10% out of it and deposit it in some other account and try to livewith 90% of your salary , see what all your are missing and if you are facing some difficulty or not .

To see more tips on savings and spending , you can refer to Ramit Sethi's blog .



Saturday, June 27

Ask a question from Jagoinvestor

You can use this Form to ask me any Financial Query you have . I will try my best to reply to

it .

Continue Reading


Friday, June 26

8 most Important Rules in Stock Market

In this article we will discuss 8 key points which a new comer has to understand . May be youalready have all this in mind and understand them at subconscious level, but lets go through themand discuss these very important points . This is part 3 of "How a newcomer should start in StockMarkets" series , Read Part 1 and Part 2 Before reading this . We have some cosmic rules in StockMarkets which if broken will eventually ruin you someday if not immediately . Lets see them verybriefly.

Don't put all your money in stock markets

Never Ever, put all your money in one go in stock markets. If things go wrong you will be ruinedfor ever. If you have 50 Lacs, and you choose to put all your money in markets because "you aresure that its going to double in 4 months" , You are also saying that "I am ready to get ruined if thiscrashes and goes down to 10 lacs.". Most of the people like to see the first picture but don't expectsecond one to happen even though probabilistically the second one is more likely. Better look for"low risk-or-good" returns, rather than "fatal-or-exceptional" returns. A money which you want tothrow in trash can be used for such high risk Investing or trading.

Cut your losses Short

I know telling you this wont make sure you follow this. It takes time to understand this by makingmistakes over and over again and learning from that . But still, "Cutting your losses short" is the"Rank 1" Rule in Stock Markets, one who can master this single rule can rule markets. When youstart making losses , your emotions come into play and it says to you "Its coming back and once itsback to Rs XXX , I will get out". Don't listen to it . The simple rule is "You were wrong , accept itand get out and look for something else" and its damn to tough to understand this in start. Mistakesin Stock markets are fantastic if you learn from them . They are more valuable then the right thingsyou do in markets.

Getting your priorities Right

This means having clarity about who you are , what you want to do in markets , Read part 2 : "Understanding What exactly you want to do in Stock Markets" for this .

Do not fight the Trend

We know that markets move in zigzag fashion, up-down-up-down like this and its true. But somepeople wire this in mind in such a way that they always try for force market to reverse from its pathand justify that it moves in up down fashion . If markets are going up, in their subconscious mindthey feel like markets will now reverse "because they move in zigzag fashion" and hence it shouldnow reverse, this belief entices them to invest or trade in opposite direction. The interesting thing isthat people don't understand what encourages them to go against the trend, My one and half years oftrading experience(not very beautiful one) tells me that this is the reason why we do against thetrend. And once we control this, it can change our luck . There is no luck in stock markets ,its yourthinking . "Change your thinking, your luck will change"

Everything is Probabilistic here

"Buy RELIANCE above 255 , Target 273 , Stop loss at 245" . Now our Mr. Newcomer will read

this in newspaper or listen it from the GOD a.k.a "Markets Expert on CNBC" and take the trade,things will go weird or may go the way predicted . but most of the times things will go wrong . Hewill be wondering who is wrong ? Market ? That expert on TV ? His Dog ? Mr Obama ? who ? Willwill blame everyone in the world but not himself ,He will never look inside himself. Everything isprobabilistic here , Out of 100 times , things may work 60-70% (depends) of time and not work restof the times . When it does not work, you have to control yourself and accept that its not workingrather than forcing markets to work for you.

Don't listen to Stock Markets Experts on TV

Why do I say this? Markets "Calls" are least important things in Stock markets (i believe) , and youonly get that least important information from TV experts . What you don't get is vital things likepsychology to trade , Money management rules, Discipline to follow every time you take the trade .Those calls are in isolation , They are not generated by a consistent rule , you can get calls fromhere and there and all of them will be kind of random to you . Other problem can be that you don'tknow the time frame of the call . If you don't understand all this what I just told , the easy way tounderstand is to answer this

• "If listening to TV experts was really worth , Why am I not making money"

• "How many people do you know who make living or earn exceptional returns by

trading what experts tell them"

At last , the point is not that there calls and advice works or not ? They may work , but not for you.There is lot more than getting calls and acting on them . Another important thing why you shouldstay way or listen less to them is because most of their calls are for "forcing you to trade more" ,which will eventually generate more brokerage and commissions for trading companies , Read thisarticle from Shyam Pattabi to understand more on this.

Question : Why do experts give more of BUY calls and very less of "SELL" calls My

Answer : When some one "SELLS" , he is out of trap , he is out of stock market , hepays commission once . But when Someone "BUYS" , he is trapped in markets , Healready paid once and has to pay one more time to get out , so SELL = Commission 1time and BUY = Commission twice for sure :) , Ohh.. Did I discover something here :)

Have realistic Expectations

One of the important reason for failure in stock markets is unrealistic goals , you see 100% made ina week , 50% in a year , 10% in a day , and you think like this , If 10% is possible in a day or aweek . than 100% in a year is a child's play OR you think like if I buy this I will sell only after itstripled . once again I say "We learn from History that we do not learn from History" . Have youseen what is the best long term returns from stock markets all over the world . That's around 15%-20% . That's it . I am not saying that you cant get 50% in a year ever , you will get it and everybodygets it , but sometimes . Over long term you should have expectations of 5-10% more than whatsafe instruments return or have a target of 4-5% more than what markets give . So anywhere from12%-20% is good return to expect from long term . In short term there will be chances where youget exceptional returns like 50% in a week or 500% in a year . But let them come to you , dint forcethem to happen . Unrealistic Expectation force us to meet them by hook or by crook and that whenwe do mistakes and take unnecessary risk to achieve them and burn out hands badly .

"Want to understand markets, have a girlfriend and try to understand her psychology,People who are already in relationship (males) have an edge I think as Markets andGirls are very much same"

Be ready to Make mistakes and Learn

Some of the best Traders and Investors who are successful today and are multi-millionaires didn'tbecome one overnight. They Failed miserably in Markets and but never quited . They learned,learned and learned from there mistakes. Markets like Life give us opportunity to make mistakesand learn. As I like to say "Making Mistakes in a privilege which unsuccessful people don't get inlife". Making mistakes is Great, if you are ready to learn from them .

Part 4 : A small Guide for newcomers in Stock Markets

Don't forget to comment on which one was your favorite and why ? I am sure we can learn a

lot from individual comments :)



Thursday, June 25

Ebook on Basics of Technical Analysis

I came up with the first ebook on "Basics of Technical Analysis" . For now I have used the data ofmy earlier posts only for this ebook , but it has all the data at one place and hence will be good forreaders who only want to concentrate on Technical Analysis . Download Link

Please let me know how is the Ebook and If you are finding any difficulty in downloading it . Alsofeel free to share the ebook with your Family and Friends . No issues .

I hope to come up with another Ebook soon , on "Basics of Financial Planning for New bees" .

As always , Shyam Pattabi came up with an excellent article on his blog where he shares his viewson how mis-selling happens in India and why people fall in trap of "advice" and "calls" from agentsand other financial services companies , And his analogy on he post is excellent . I came up withsimilar topic some days back on "Why do you need a Financial Planner" , have a look on that too .



Tuesday, June 23

How to find out Best Fixed Deposit

I want to invest Rs 1,00,000 in a Fixed Deposit for 2 yrs in apublic Sector Bank . I come in 30.9% Tax bracket .Which is thebest Bank for me which will provide me the maximum return ?How do you answer this question ? I also want to get all theinformation about a Bank in India at a single place , which is thewebsite I should checkout ? In this short article we will see a veryuseful website which gives you all the information on FixedDeposits and Banks in India .

How to find out Best Fixed Deposit

Have a look at http://www.way2goals.com/Project2/chooseBank.html . This website givecsexcellent information on Fixed Deposits based on different parameters given by you .

So if you want to invest Rs 1,00,000 for 2 yrs and 3 months in a Public Sector Bank and you belongto 30.9% Bracket . It will filter out the the list of best Banks for you , which provide best return toyou , It will also tell you what will be your final profit after paying tax and what will be your gainafter factoring in Inflation (based on your expectation of inflation percentage) .

See the following screenshot for the above figures. (click to enlarge)


It gives tells you that the best FixedDeposit will be from "State Bank of Patiala" which offers 8% interest . It gives other informationlike

• Maturity amount• Interest Earned • Interest After Tax • Gain After Inflation

Currently The information on the website is updated twice a week .

Information about a particular Bank

If you go to http://www.way2goals.com/Project2/interestRatesByBank.html# . You can get all thebasic information about a particular Bank at one place . It will give you information about

• Website of the Bank• Contact• Interest Rates information for Different Tenures

Also checkout this link to learn some basic stuff . Way2Goals Software India Pvt Ltd is thecompany behind http://www.way2goals.com/ .

Conclusion

This is an excellent tool dedicated to Banking Information especially information on Fixed Deposits. Way2Goals is one stop destination for any information on Banking Sector , There is scope ofadding lots of things , but I believe it will come with time as any other thing in Life . Great tool !! .

If you come up with tools like these please share it with others here :) .



Monday, June 22

Understanding What exactly you want to do in Stock Markets

Today we will discuss the important aspect new beginners must understand what they want to doexactly in stock markets . In this post we will see what are the different types of things they can do .In this first post , "Why Stock Markets attract and looks Easy we saw the reasons why StockMarkets attract new people and the issues related to it . In this post lets explore what are thedifferent options available for you .

So, you are new to stock markets and you have heard lots of people make good money . You jumpin , open a trading account, read some blogs online which claim to have 80-90% success rate andyou jump in to buy some stocks . You make money or loose money , doesn't matter in short run ,What you are concerned is long term is you are serious , if you are not serious , i would recommendgo somewhere else, if you take stock market as hobby , its a costly hobby i am telling you .

Below is the way how New comers behave in Stock Markets, click on the pic to enlarge .

Lets see some of the mostimportant things a new comer should ask himself/herself .

Who am I ? A Trader or an Investor ?

This is one of the most important question you have to answer .Are you are Trader or an Investor ?

Investor is someone who buys the stock for long term . Investing it self is a word which means thatyou are putting your money in something and you expect it to grow over time . This has to take withfundamentals , company's potential , long term prospects . Cash flow , profit and losses. See it asowning the firm , where will u put your money in ? Its has to be something which will grow overtime from its current levels . You are not concerned about its short term movements .If the company share prices are providing value over its current price , and it has consistent trackrecord , has good future prospects and many more things like these , you will buy it .

Trader on the other hand is someone who buys and sells the stock for short term . He is notconcerned about long term prospects of a company's much . He is more interested in what stock willdo in short term . His decisions are more based on news , technical analysis , gut feeling and thingslike those .

What will i Trade/Invest In ?

Another important question to ask is What you want to trade or Invest in ?

If you are an investor you can choose from Large Cap companies (NIFTY companies) , MIDCAPcompanies or very small penny companies . Each of them offer different risk and rewardopportunity . But you have to be clear with what you are going to invest in . Because once you areclear with it , you can make some strategy for it and follow it , juggling from one to another willlead to confusion and is not recommended .

If you are Trader , you have to choose from Stocks , ETF's , Futures or Options . Each of them aredifferent from each other and require specific knowledge about them . Its a critical factor to knowwhat you are going to trade .

Once you know what you are going to be involved with you have a clear road map and then you canmove forward to next thing .

What will be my Time Frame ?

Another important thing to consider is the time frame for you .

For Investors It can be very long term (10+ yrs) . Medium term (3+ yrs) , Short Term (1+ yrs) . Itdepends on your personality , your ability and time to be involved with stock markets . Somethingwhich works for a person with short term view may not work with long term view person . So eachtime frame has its own advantage and disadvantage . you just have to choose one and be clear aboutit .

For Traders , you again have to choose your time frame and your style of trading . You can be

• Positional Trader whose holds the trades from some weeks to some months • Swing Trader (few days) • Day Trader (Buy and Sell on the same day)

You can trade

• Stocks • ETF's • Stock Future's • Index Futures• Stock Options• Index Options

Understand that each time frame is different and each will yield different result . Two people withdifferent view on market and different time frame can both make money .

Example :

You are bearish on market and you say that Markets are going to fall soon . I say that Iam bullish and markets may go up . for next 3-4 days markets move up and I makemoney based on my judgement and then markets fall heavily and you can make moneybased on your judgement .

So the important thing here is no one is wrong , the only thing is different time frame ,So before listening to anyone you also have to understand their time frame . Manyanalysts on TV channels will give calls like "BUY RELIANCE at 2130 , with target of2200 , SL 2100" , Don't go and buy RELIANCE next day because you have no ideaabout the time frame of the person , what is the analysis behind it and what are the riskin it . It may work once in a while but its a recipe for disaster for long term .

Conclusion

" A person who wants to do everything eventually cant do anything "

Stock Markets have different kind of things and offer different ways of making money. If you arenot clear on how exactly will you do things , Its a tough game then , the first important step is toIdentify what you want here , just like in Life we must be clear of what we want to do and then begood at it , learn about it and just consistently improve in it . the same we must do in Stock Markets.

Part 3 : 8 most Important Rules in Stock MarketPart 4 : A small Guide for newcomers in Stock Markets



Friday, June 19

SEBI ends Entry Load on Mutual funds Schemes

Cheers !! .. SEBI now says :

"Investors will not have to pay an entry load for investing in mutualfund schemes anymore. They will instead pay a commission to theirdistributor or advisor directly and the quantum of the upfrontcommission would be mutually agreed upon."

More Competition and hence little cheaper for Investors

Now agents will not get commission from Mutual Funds companies which means that now there isdirect competition among Agents , The agents can only ask for more if he really gives good serviceto buyers else they have to settle with a low commission which will be decided by customers. Thismeans now we can bargain with the agent on commission percentage and if he is not ready withwhat we offer him/her , We can look for someone else who is better and fits us .

Higher Quality of Service and more transparency in Market

Now agents will have to deliver much better quality of service and be more transparent withinvestors as there bread and butter is directly linked with Investors and not Mutual funds companies.

Lots of agents will now move to sell ULIPS rather than Mutual Funds

This move will also force lots of mutual funds agents to shift their focus on ULIPS and similarproducts which have commissions linked with premium paid by customer rather than fees basedmodel like we now have in case of mutual funds . Means more mis-selling in ULIPS on the cards .

See the following New Video To understand

Update : thanks to income.portfolio for this .

AMC's are allowed to use 1% of redemptions in mutual funds for commision toagents and all the marketing costs . its the money from exit loads which has to beutilized in commisions and other marketing costs . Most of the mutual funds have lessthan .5% of 1% of exit loads at this point and with this rule of SEBI , it can not goabove 1% in future . also it can be "upto 1%" . So this 1% will be used for every typesof costs incurred by mutual funds .

Now most of the funds will have exit loads only if investors getout in short term like 6months or 1 yrs. Hopefully it will not be after 1 yr . so its a concern for those who areshort term investors . Its not a matter of concern for long term investors as far as i think.

Also , Now there is no need for PAN Card for investing in mutual funds upto Rs 50,000through SIP now , as per SEBI new rules .

I am out for a 2 day weekend Trek to Kumaraparvata , So no article till monday morning . I willpost the 2nd article of "How a newcomer should start in Stock Markets?" Read Part 1 Here .



Thursday, June 18

User Reviews

Jagoinvestor is one of the simplest blogs that you can find to kick start yourinvesting.There is such a nice variety of posts that all individuals can get benefits fromit.Manish Chauhan the blogger behind it seems to spend a lot of time making his blogperfect for his readers.It is no surprise that his blog is so popular.It is a constantreference for all financial basics, explained in a very light manner.Whether you are ablogger, an investor,analyst or just someone passing by it is definitely worth spendingsome time here. -- Sumayya Shaikh

Jagoinvestor is a great blog on investing. It is extremely rich in content, some of theposts are written extensively. The interesting part of this blog is most of the queries areanswered from different posts present here itself. And by the way he’s a great cook…soyou can expect a treat J -- Charu Gupta

Jagoinvestor blog is an excellent one stop destination for understanding basics on avariety of topics in money management and stock markets.The content is presented in away that is easy to grasp avoiding the complex lingo that usually scares awayreaders.This helps in a big way to get those crucial money matters fixed in one's lifewithout becoming too dependent on other advisors. -- Saif Shakeel

This is one of the best blogs i have come across which explains the nuances of financialplanning and investing in a way which everyone can understand.Especially the articleson financial planning, compounding power of money and endowment plans are real eyeopeners. This blog really help me avoid many pitfalls and I have educated my friendsalso.In a nutshell ,it is a one stop blog for anyone who wants to reap good harvest fortheir hard earned money. Keep going Manish !! -- Swathi Kota

This is a great website ! Thanks for all the information. This website has provided awealth of information for me and i really appreciate it and look forward to learningmore. Now i know no agents can fool me anymore. Thanks Manish for the great job. --Anu Lopez , Dubai

Discover tips on saving money, investing smartly, managing your finances and getting

the most for your hard earned money from the Smart Investor blog by Manish Chauhan.

This would be the one website I would suggest to anyone who is new to investing or

just starting up. -- Skandhakumar

It is a must read for the people who want to plan their personal finances using a rangeproducts available in market.You would be wrong if you think it is a stock market blog.The title 'Smart investor' perfectly suits this blog -- Sandip Naidu

I just happened to see Manish's blog few months ago accidentally while reading otherlinks in famous TA analyst. Manish brings out very simple but important issues onpersonal finance, stock market, insurance, interest rates etc. I am an Accounts Managerby profession but i never looked in to these aspects in my personal financial planning.After following his blog regularly i could review my financial planning and advise mypeers. I appreciate Manish's efforts -- Venkateswara Ravi Prasad

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Wednesday, June 17

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Most of the people come to an awesome site or blog and they read some good stuff and like it thattime thinking they will come back again in future . But its very rare that you will remember all thewebsites you came across . Book Marking it will also not help because its you who need to comeback and you may forget and miss all the awesome content a blog has to provide . So you shouldsubscribe to it to get notified when there are any new contents on your favorite website . Make sureyou do not miss all the future articles . Subscribe now through RSS !! Read what is RSS ?

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Tuesday, June 16

Important Links

Insurance

BimaworldInsurance News

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Why Stock Markets Attract and Look Easy

This is going to be an important and useful series of article . Today we will discuss how a newcomer to stock market should start . In these series of article we will discuss following things .

• Why stock markets attract and look easy • Understanding what you want to do exacty • What are important things when you are in stock market ?• How a new comer should start in stock markets ?

Why it Attracts ?

You must have heard lots of stories about people who got millionaire over night or in a short span oftime from stock markets, there are two kind of people who make money from stock markets

- First kind are the people who make money because of luck. They buy some thing , itgoes up and they think it was your skill . Next time they buy something again andwooo!! .. it makes money again , and now they are the king !! . Then comes one daywhen there "best time in the market" is over and they start loosing money , this time its"bad luck" as they say !! and they keep on trying and trying to prove that they areknowledgeable . At last they go bust and return from where they came from . Smartpeople in this category are those who make money once or twice because of luck anddon't come back , I appreciate their smartness .

- Second kind of people are those who are real game players , they have done theirhome work , failed lot of times , learned from their mistakes and worked hard to makemoney . They know the rules of stock markets and take it seriously . They are successfultraders or investors .

People hear that lots of people make lots of money in short span of time from stock market and howeasy it is to just open your trading account , choose some stock , buy or sell and magic !!, you makemoney . Far from truth !! .

This thinking that "Lots of money can be easily made from stock market without much hard work"is the main reason why stock markets attract lots of people .

Why it looks easy ?

"BUY OR SELL" , that's all you have to decide ? Either you will Buy some thing or you have tosell something , One of the renowned trader Larry Williams says this is the reason why most of thepeople think that its an easy thing to make money in stock market because they have very lessdecisions to make ie. BUY or SELL .

This is a human psychology which tends to believe that anything with less decisions is easy and onecan do it . Everyone thinks "I am different" , "I know all these people where not able to makemoney , but i understand things , and I can do it" , this thinking is appreciated . but , untill itbecomes over confidence . its true that you are different and you can do it , but each and every areahas some ground rules and unless you follow it , its almost impossible for you to succeed.

What you must understand ?

You have to understand that you are a newbie and a small player , a new born baby ,who cant evencrawl in world of stock markets, but dreams of running a marathon and that too on one leg ;) . Eachprofession needs specialization and experience and Making money from stock markets is no

different , Just like becoming a Doctor, Engineer or anything like that demands extreme study ,experience , knowedge and other things specific to that profession , stock market also demands that, those people who want to make money without doing it can not sustain for long and will hurtthemselves very very badly . We will discuss more of this in 4th part of this article "How a newcomer should start in stock markets ?" .

Here are others Parts

Part 2 : Understanding What exactly you want to do in Stock MarketsPart 3 : 8 most Important Rules in Stock MarketPart 4 : A small Guide for newcomers in Stock Markets



Reliance and RNRL , What to do now ?

RNRL wins the court case against Reliance Industries on gas supply issue. Now Reliancewill have to sell the gas to RNRL at a price lower than the government approved price of$4.2 per mmBtu, it would affect their profit margins .

• RNRL shares gained 24% (heavy volumes)• RELIANCE shares lost 7.5% (heavy volumes)

What should you do with these two shares ? Lets first see the charts of these shares for 3months

RNRL


Short Term : BUY for short gain

Long Term : BUY

RELIANCE


Short Term : SELL below 2100 on closing basisLong Term : BUY on Correction



Sunday, June 14

Why do you need a Financial Planner ?

In this post , we will discuss why would you require a Financial Planner to doyour Financial Planning . Each and every area has its own dedicated professionals. Just like we have Doctors , Engineers , Lawyers etc , we have Financial Plannersfor Financial Planning . Don't confuse them with Mutual funds agents orInsurance Advisor ? No !! .

Let us see some Important Points on why we need a Financial Planner ?

They see your Financial situation as whole , not in Parts

One of the major issue with our country is that here each thing is seen separately and not as a wholething . An Insurance Advisor will just suggest you a policy without understanding what is yourInsurance Requirement, They will just suggest your Insurance Requirement as 8-10 times of yourAnnual Income , which is not so cool way of calculating the Requirement . Mutual Funds adviserswill just pick some Mutual fund for you without understanding your Risk-Appetite and your FutureGoals . They don't take care of your Tax planning , Estate Planning (wills and Legal Documents) ,your Cash Flow etc etc .

A Financial Planner on the other hand is a Doctor of your Personal Finance , who will very closelystudy each aspect of your Financial Life , He will understand your Risk Appetite , Your FutureGoals , your Future Needs and Requirements , your Insurance Requirement , your Investment needsand finally come up with a Financial Plan and Recommendations which will take care of eachaspects in total .

Financial Planner will Educate you

Financial Planners will make you understand reasoning behind every suggestion he gives you , Hewill make sure that you agree and understand everything , so that in future you can take similardecisions yourself . Has any Mutual funds advisor told you why SIP is better for you Or Why Youshould expect great returns in long term from Equity ?

Has Any Insurance Advisor told you What are the important things you should be aware of beforebuying a ULIP ? Or why you you should avoid Endowment Polices for Long term wealthCreation ? I doubt there are many of them giving any genuine information.

Financial Planner wants to make your Financial Life Better

Financial Planner goal is not limited to Insurance planning or Investment Planning . In fact aFinancial Planner is trying to make your overall Financial Life better and paving a smooth financialpath for you , on which you can start walking . Your overall Financial life is made up of differentcomponents Insurance Planning , Investment and Retirement planning , Estate Planning , TaxPlanning etc etc . He will take care of all these things .

Financial Planners are Certified or under Certification and have deep knowledge

How many agents or any kind of Advisor you have seen is competent enough to advise you ? Whatis there relevant experience in that field ? Most of them are just under there respective company'sTraining .

A Financial Planner should be a CFP or undergoing CFP as his Study . CFP is the highest level ofcertification all over the world in field of Financial Planning . You can also look for people whohave deep understanding of Financial Planning and are undergoing the course , As CFP is new inIndia , there are many students who are under the learning process and are very good FinancialAdvisers ( You can count me if you like ) .

They have good network base

Good Financial planners will have excellent network of Agents and Other professionals who can behelpful to you . Like for example , If he recommends you to go for a Term Insurance , he may alsorecommend you some company's Term Plan and may recommend you to some good and trustedAgents , This will again be an important thing which you should consider . A Financial Planner mayor may not have share in the Commissions .

What is the general Process Financial Planners Follow ?

The first step they will follow is to get out each information out of you , which will help them tounderstand your situation in depth, They will try to capture each aspect of your Financial Lifethrough a Questionnaire , Its like a Doctor trying to get every information about you to give you aprescription . Then they will analyse each aspect and come out with the Plan and recommendations .

They will not simply come to you and recommend you some mutual fund or insurance policyunderstanding if you need it or not . They will do your Financial planning in the same way as youwould have done yours if you were a Financial planner :) . They can also assist you in future inmonitoring your Financial plan depending on your agreement with the financial planner . Just likeyou have your dedicated Family Doctor , see him as your Family Financial Planner .

See 8 steps of Financial Planning

I have enough knowledge about Products and Financial Planning, I constantly Read Financial

Magazines and Blogs and keep updating my knowledge. Why should I hire a Financial

Planner in that case ?

Great !! . If you are doing this , its much appreciated . You have to understand thatFinancial planners are dedicated Professionals in that field , They have undergone tough training inthat field and may have much better detailed understanding nitty-grittes of Financial Planningwhich you may lack . You may have good knowledge and understanding and you may your self takecare of your Financial life to great extent ,Its you who have to answer how your Financial Life mustbe , "Not Bad" or "Excellent and Perfect !!" .

Also it may happen that its your myth that your understanding is very good , you may have goodunderstanding in one field , but what about other fields , A financial planner may also have goodcompetence in understanding of Financial markets , Derivatives Markets , Law governing tax etc ,and these keep on changing and one needs to be updated with the information .

However If you great interest in Personal Finance and already have great understanding andknowledge, You can enroll for CFP and start a new Career !! , Dont forget to keep in touch withme !! :)

What about the Cost ?

Everything comes with the cost. Definitely, and if you need Quality , you need to pay quality costfor it . But don't be horrified by the fees you pay to Financial planners , you have to understanddifference between Price and Value, Just seeing the numbers may make you feel bad, but when youconcentrate on the value it adds to your life, you will be amazed . If you pay Rs X as fees toFinancial Planners, you will save many times of that because of him .

Its like this, If you are sick , you pay for medicine .No questions asked !! . Either pay and saveyourself and be happy OR just live in hope of it getting cured by itself ,, but it will actually getworse and one day kill you .

But my Financial life looks great to me , I don't see any issues , my insurance cover is fine, my

Investments are great .. ?

Baby, you don't know a lot of things in that case .. Life is waiting for you . There are many peoplewho think they are totally fine and at last they are diagnosed by Cancer and most of the times its atthe last stage , don't wait so long , get it checked now !!

My Family and Friends are forcing me to see a Financial Planner ? what should I do ?

No ! , You should only see a Financial Planner when you yourself realise that you need it . This isan issue with our country , Most of the people do not know and do not realise that their FinancesStink !! , Only when it goes out of control ,. they will realise that time has come , and by then its toolate. What is stopping you to at least get your financial checkup done by a Financial planner , Hewill make you realise first that you need it badly and once you agree you can hire him to fix it .

Conclusion

Most of the Indians are totally clueless about Financial planning and only in recent years there has

been some awareness about it . Most of the people try to fix there finances on their own withoutaccepting that they are not competent enough to do it, they need a professional , Don't you pay toDoctor or Lawyer or any other Professional , then why not hire a Financial Planner ? Go for it !!Jago Investor !!

• Note : For people who need my Financial Planning services can mail me



Friday, June 12

Consumer Complaints and Grievances

What do we do when we face some issue with Banks , Mutual Funds , CreditCards , Insurance Company and such things ? The first thing we do is to file acomplain with them for our problems and then we wait for their answer . What ifwe are not satisfied with there reply and want more justice .

We can then lodge a complain with their regulators Ombudsman and grievancecells . Let us see this in more detail .

What is Ombudsman ?

The ombudsman is the internal complaint department for socially responsible organizations(governments, companies, societies, etc.). The ombudsman has complete access to theorganization's records and personnel, and the knowledge to understand how things work internally,in order to investigate complaints made against the organization.

So we have Bank Ombudsman , Insurance Company Ombudsman and Mutual funds companiesOmbudsman etc .

When should you Approach Ombudsman ?

You should first contact your Bank , Mutual funds , Insurance company and file a complain withthem , Only after some specified limit of days , when you don't get any answer or satisfactoryanswer you can complain with Ombudsman .

What If Obdusman do not reply or take Action ?

All the Ombudsman bodies comes under the purview of Right to Information Act (RTI act of 1995). They are legally bound to reply for any complaints made by them ,considering its as per the statedrules .

Banking Operations and Credit Cards

Regulator : RBILocal Ombudsman : http://www.apnaloan.com/home-loan-india/Banking-ombudsman-area.htmlWhere to Complain : http://www.rbi.org.in/Scripts/bankingombudsman.aspx

Mutual Funds and Stock Market Related

Regulator : SEBIWhere to Complain : http://www.sebi.gov.in/Complaint.htmlTrack your Complaint Status at : http://www.sebi.gov.in/ComplaintStatus.jsp

Insurance

Regulator : IRDAWhere to Complain : http://www.irdaindia.org/ins_ombusman.htmFor more see : http://www.irdaindia.org/rti_act2005.htm

Note : Ombudsman are the next level of bodies to complain , first try to resolve matter personallywith the Bank or Insurance company which is creating problem for you .

Continue Reading


Dont underestimate Compounding power

There once was a king whose daughter was very ill. The kingannounced to his people that whoever cured his daughter can marry theprincess and ask for another reward. One young man came and curedthe princess with his family owned secret remedy. The king was sohappy that he anxiously asked the young man what else he wantedbesides marrying the princess. The young man pointed to a chess boardwith 64 squares on it and said just put one grain of rice in the first cubeand two in the second, four in the third, and eight in the fourth, and soon until the 64th square is filled up.

The king laughed and confirmed with him , if he really wanted rice grains and not GOLD !! . TheKing did not realise what he agreed to at that particular time . By the time they reach 32nd cube , allthe rice reserve of his Kingdom was exhausted , It was staggering 214 Crores grains itself .. Each ofthe subsequant cubes required the King to double up the grains . King had to ask other Kingdomsfor Grains and till he reached 45th cube , Rice Grains of all the kingdoms finished ... Eventually theking had to handover his entire kingdom to this clever person . Thats Power of Compounding !!

Whats the Moral

There are many people in our country who underestimate power of compounding and benefit ofstarting investing early in life . A thousand mile journey starts with a small first step . A hugefortune is made by starting small .

At first it may look small , but with patience and discipline in investing a sizable corpus can be builtover long time . The secret of building huge corpus is to "Start" and "Keep doing it" .




Thursday, June 11

Moneyworks4me.com, A Tool for Value Investors

This is a guest post by a fellow blogger Sumayya Shaikh , where she discusses howMoneyWorks4me.com can be a useful tool for value investing . In this post she will introduce youwill the website and its features .

I believe moneyworks4me.com can be a great tool for hard core value investors who like to donumber engineering with company statistics .

Apna Sapna Money Money

We all dream about living a luxurious life, a nice huge house, good education,etc. etc. basically a lavish lifestyle. Don’t we? What do we do about it ? Workhard and earn money! So far so good…but what follows next, i.e. the bigquestion of what to do with our savings??? This question of “How to safely growour hard earned money?” usually leads to a lot of confusion in the first place,tension in the second place and under utilization in the third place.So what is the solution? Let me tell you one thing. The main objective here is tofulfill our basic needs first (adobe, education, decent living, etc.) and then takecare of the luxuries (nice big car or a bike, expensive clothes, a lavish lifestyleetc.).We have to understand difference between Need and Wants . So we justdon’t want our savings to grow safely but also give us a handsome return. Don’twe? You should invest your hard earned money in a wise manner. We all knowthis, but the question is how? Stock markets are considered to be the riskiestand highest investment option. Note the word ‘considered’ I did not say it is theriskiest option. Sounds contrary to the common belief? Yes, you are right. It iscontrary to what you’ve heard till now. The reason why it looks Risky itIgnorance . To eliminate this risk of ignorance, we should educate ourselves.Again it’s a big task. Don’t worry, there’s a solution. To make it simple, there isan easy-to-use web portal – MoneyWorks4me.com. What is it ? This website will serve as a platform that enables individuals to be well informedand take charge of their own investment decisions, thus making them anindependent sensible investor. The approach used in this portal is inspired bythe all-time-famous Value Investment methodology maintaining simplicity. This website takes care of the issues I mentioned earlier. How? By means of itsEVALUATE tool - it provides distilled and precise information, uniquely colourcoded 10 year financial data showcasing a company’s performance at a glance,easy to use calculator to arrive at sensible valuations.

It also has a sensible community ready to share its wisdom through Blogs,Forums and Wiki reports. You also get three wise managers. I’m talking aboutmanagers who’ll manage your Watchlist, Shortlist and Boughtlist and yet giveyou all the control. You can do SIPs for stock investments by setting the amountyou want to invest each month in your shortlist manager! You don’t get simplereturns; you get to know the CAGR you earn on your sensible investments. Andthis is not all. There’s a lot more. Hey did you realize that you’re getting all thisin one place? Isn’t it convenient? For those who are new to the world of Value Investing, welcome aboard. Gothrough An Easy Interactive Guide prepared especially for the first time stockinvestors.

• They can first learn the method through a game and an interactivemodule and then

• To Gain Confidence - Build a virtual portfolio of stocks to get confidence• To Reap the Benefits for a Lifetime - Start with a small budget and

skyrocket on your growth pathStock Markets have the potential to give the highest returns, because here yoursavings don’t just grow, they compound! Those who know the magic ofcompounding know what I’m talking about. If you’re not able to comprehend theimportance of compounded growth rates, I recommend you read a bit about it. Boss, if your dream is same as mine, i.e. to make my money work for me andgrow big and huge, then what are you waiting for? Go ahead and make yourdream come true. Bole to apna sapna money money!!!

For any specific comments , Author can be reached at [email protected] .



Wednesday, June 10

Why to avoid investing in NFO's , Beware !!

Here comes a new NFO !!!

In this post we will discuss why one should really be cautious aboutNFO's and why in general its better not to invest in an NFO . Have youheard about NFO's and IPO's hitting the markets while markets are doing


bad ? Why dont we !! ? this is a question we must answer .

The reason why most of the NFO's and IPO's hit the markets when markets do extremely good is toexploit the emotional buying of investors . Its a common thing that investors tend to get in in risingmarkets then falling markets . So when markets are flying high , all kind of NFO's with fancynames (some good funds and some junk funds) will hit the market claiming how different they areand how they will be successful .

If you are a new reader , you may like to read some terms and terminologies

Understanding NFO's

No Proven Track Record

Every NFO will come with its own idea and logic, but investing is never easy and you can see truecolors only after few years . They can be success or failure , So why to go for something which caneither fail or succeed , Why not go for some existing fund which is already proven its mettle , whichhas given superb returns over long term , has excellent management . These funds have highprobability to continue there performance .

Its like this , would you like to take risk of marrying someone you don't know orsomeone who is already a good friend and you know him/her over years .

Cheap NAV of Rs 10

Most NFO's offer comes with NAV of Rs 10 , and the biggest myth of investors is that its a cheapfund and hence better than a fund with NAV of 20 or 100 . NAV growth is nothing but growth ofinvestments and it does not matter what NAV is . Rs 10 NAV mutual funds and Rs 100 NAV mutualfund will grow with same rate if there investment quality is same , there is no reason to invest inlow NAV fund .

Myth of High Dividend from Low NAV Fund

Lot of our "Educated" Agents will tell you that buying low NAV fund will help you in getting moreDividend (if you choose Dividend option) , because Dividend is declared on number of Units held .So you will get more units of mutual funds if you invest in low NAV funds , whatever he says istrue , but he himself does not know that Its investors money coming back to him and NAV valuewill again go down by that much value . So in real money terms there is no benefit of dividendoption . See difference between growth and Dividend options

Agents will market is very well and try to push the NFO's for Sale

Everyone wants to make money !! , What else can be better for a mutual funds agent than anNFO !! . Agents get High commission on selling NFO's and hence they will do anything for sellingit . They will spend money aggressively for Marketing as its taken back from Investors only , notthe AMC . Beware !!

Does that mean all NFO's are Bad ?

No , Every existing mutual funds was NFO once upon a time, If you go through the NFO offerprospectus and you find it interesting and logical enough for you to invest in it , then you can go forit . But just understand that only a handful of all NFO's become good funds , So out of 1000 mutualfunds , only a few like 20-30 will be extremely outstanding funds , So the decision is yours , Do you

want to take the chance ? Or you want to wait and let it show its true colors before you get into it .

Which is the new hot NFO in the Market ?

Reliance Infrastructure Fund is the new name in the market these days . All the things which Italked above applied to this too . Before Investing in it , read about it in detail . I will provide myshort view on this .

Reliance Infrastructure Fund is a Sectoral Fund (Infrastructure) . This sector looks attractive overnext few years . The picture would be more clear after the Budget when we exactly know what isGovt plan in this sector . If its a bad news , then the stocks in these sector will take a hit andsuddenly it can become a reason for suicide for its investors . Why not wait till budget then ;) .

We also read have some good Infrastructure funds in the market with proven record like UTIInfrastructure Fund and TATA Infrastructure Fund . It depends on you now what you want to do ?The Fund will also put money in derivatives segment , which can again make the fund more riskyand rewarding . Read more about Reliance Infrastructure Fund NFO details.

Conclusion : Investing in NFO's can be like shooing in dark for retail investors , the better idea forthem is to invest in something which had more probability of performing . NFO's can be extremellysuccessful because of there unique idea or investing style , but its too tough to choose themsuccessfully . Better to avoid them .

Here are my 2 day trek pics , Have a Look . I am putting the best Pic taken by me :)

Before anyone asks , I must tell that its taken by a normal point and shoot camera :) , Its just a resultof Interest and Willingness to take some good pic + Macro Mode :)



Monday, June 8

"Value Investing" vs "Growing a Tree"

Investments are like small plants , they need some time to grow .Most of the people make mistake of not giving enough time totheir investments to grow . If you think about how you plant atree , and manage it well for years before getting the fruits out ofit . Making investments in shares and mutual funds is the sameway . Lets take each case and see the similarities between them .

Growing Tree

You take a small plant (baby tree), put it in soil and then water it , monitor it , take the weeds out ,clean the plant and take care of pests which might be destroying your plant .It takes patience for theplant to grow and become a full grown tree. Then it servers you with the fruits which you deservefor your hard work and patience .

Imagine a different scenario now , You pick up a plant and put it in soil , 10 days later you go to seeit expecting you will get some fruits out of it . Obviously it cant give you any fruit and you thinkthat either something is wrong with the plant or soil . You take out the plant and put another plant ,10 days later you come to see the plant again , nothing happens . you take it out and put another andanother and another and then you realise its not working . Now you think that the culprit is soil ,you take the same plant out of the soil and put it at anther place which you think has better soil . Butnothing happens , because you are concentrating on wrong things . It will definitely not grow if youdon't give it enough time to settle , its root need to get hold of the soil , adapt to the conditions .There will be different cycles of weather which will challenge and threaten the plant growth andyou will have to take care of those scenarios . But one thing is sure that you have to give enoughtime to it .

Making Investments

When you invest in a share for Long term , the biggest mistake most of thepeople do is to not give enough time for it to grow , If it does not move up

soon or as per there expectation , they tend to think that they picked a wrong

share , they sell it and again invest money in some other "better looking"share . This keeps happening , the prices of the share moves up , then down

and this keep on happening . The volatile movements in share price gives sleep

less nights to the investor and makes them believe that it might go in loss andhence its a good idea to liquidate it , and finally shareholder sells it and takes

the money out , then again buys some other share . This buying and selling

goes on and he never gives one share enough time to grow . I am not sayingthat buying any arbitrary share and keeping it for long term will make you

profits . Picking good fundamentally strong stocks are a separate topic . here

we are discussing about the scenario when assuming the investor has put hismoney in good stock , but he just needs to give enough time to let is grow .

Later if the investor sees back and analyses his previously picked stocks , hewill find that most of them has gone up or more than his expected levels . He

then realises that the only thing he missed was to give enough time for his

investments and sit back tight without doing anything .

Case Study

Imagine a person who invested Rs 10,000 in Wipro in year 1999 . What do you

think the stock prices were in next 3 months or 6 months . What if the investorhad sold the shares within a year because of a small loss or some good profit .

In 1 or 3 yrs he might have got excellent returns ,which is fine . But the best

returns comes when you give an excellent stock enough time . What do youthink the stock was worth for in 28-29 yrs .

Rs 10,000 invested in 1979 was worth 200 Crores in next 28-29 yrs . The pickwas good , no doubt . but it was the patience that was rewarded .

What is it difficult for investors to keep patience with thereinvestments ?

Since our birth , we are taught that life is about winning , getting right , notmaking mistakes , being perfect . This has got inside our brains and its just not

acceptable for us to be wrong , we want to achieve success , being right .

When you invest in a share and it goes up in price, the first thing which comesto every mind is , "I should book it now and take the profit, else it can again

go down and I may go in loss" . Actually in out mind we are saying "I should

be out of this investment , so that I can show others that I made a winninginvestment, else I will make a loss and hence a looser" . Have you faced this

situation? , when you buy something at Rs 100 and it goes to Rs 99 . Its so

difficult to sell the share at Rs 1 Loss (that's 1%) . You just want it to come toRs 100 back and then sell , so that you are a winner ,and not a looser , but

you only find it drop to Rs 90 and then Rs 80 and so on .. you are just helpless

about it . Investments and Trading is not about Winning , its about makingmoney and loosing a little in case you are loosing . Stop thinking in terms of

Winning and Loosing !! . Think in terms of Keeping your losses at minimum

and once you are in profits , let it run till you find a reason to sell the share ,Selling a share just because its in profit is not a wise thing to do , you can

make some profits out of it, but wealth is created by letting your profits run

and run for enough time .

Note : This article from me was also appeared on Valuenotes.com .



Friday, June 5

Video Presentation on "Investing and Growing Wealth"

Today we will see a video presentation on "Investing and Growing Wealth" . This presentation willbe divided in two parts .

Agenda

- Importance- Some Good Mutual Funds with Example- Understanding Inflation and Risk-appetite- Products Available- Advantages of SIP and Why it makes Sense for salaried People- Case Study with SBI Magnum Tax Gain (G) Mutual Fund- Learnings and Main Points to Remember

Apologies for bad quality of Video . I am trying to find some good software for Linux , Help me !!:) . I am out on a weekend trek to M M Hills to Naaga Male . So no post till monday now .

Note: I have already posted this presentation earliar on some post .

Value Investing by using Nifty PE

Let us see some analysis of current market conditions . Most of thepeople are rushing to buy now for long term . but this may not be amarket to buy for long term . I am myself Bullish now , but for short termnot long term .

I would not be surprised to see markets rise by over 10-15% more overnext 1-2 months till the Budget . But sooner or later I expect

- A nice correction if this is another bull market .- Bull rally coming to an end in the strong bear market

The simple analysis is with a simple and strong tool called PE ratio. PE ratio tells us how expensiveor cheap is the current underlying . In other words what kind of value does the market provide us ,irrespective of the price .

Historically Nifty has been considered and shown instances of being oversold in range of 10-13 andoverbought in range of 20-25 . Nifty has had a crash after after getting in the range of 20-25 andhave rallied after touching the range of 10-13 .

OVERBOUGHT MOMENTS in Indian Markets


Click to enlarge , Data for last 10yrs (Jan 1999 - 31st May 2009)

You will see that whenever nifty crossed 20 , It was time to be cautious . its not exactly the time togo short sell , but at least book your partial profits and be cautious with further buying for long term.

Current situation : As I write this, Nifty PE is around 21 . Its not a very good situation to madlybuy for long term . Its a time when euphoria is at high point and it can take markets a little further.So you can jump in now with short term perspective , not long term !!, because markets may fall insome weeks or months . Expect it . but dont force it !! .

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OVERSOLD MOMENTS in Indian Markets

Who all missed the current Rally ? I missed it . there are two reasons , I am a trader not an investorfor long term (at least currently) . So I do not concentrate on it . But you could have not missed it ifyou had read this concept earlier and had the guts to go against the so called "experts on CNBC"who were talking about 5k or 6k for NIFTY some months back .


Click to enlarge , Data for last 10yrs (Jan 1999 - 31st May 2009)

If you see the chart , you can see that after touching the PE levels of 11-13 , markets have ralliedback as it was too oversold !! . Again , just touching these levels of PE does not signal a BUY , itsonly a signal to be cautious and make your mind for long side , and start the accumulation processwithout fear . Markets will still make lower levels and experts on CNBC will still cry over economyconditions and world coming to an end . But market rewards the "risk assumption" , not the actionson obvious facts . You also have to decide how much money of your portfolio would you like to putin stock market after considering your risk-appetite .

What can we learn from this PE Concept ?

"We can learn from history that we do not learn from History"

This is true for almost 95% of the long term investors all over the world . They do not learn things,they do not do any research , they do not go and read blogs or tons of informational sites , they justwant tips from others and make money . the mathematical expectation of that kind of investing isnegative and cant work for long term. Lets develop a simple concept of PE based Investing . here itis

BUY Signal : Once PE crosses below 13 .

When NIFTY PE reached levels of 13 , start accumulating the stocks and invest yourmoney in 4-5 installment over some months. Make sure that markets are going up anddown and moving in a range . If PE crosses below 11 , its a must BUY !!

SELL Signal : Once PE crosses above 20 .

Book the profit once NIFTY PE crosses above 20 , Don't book all profits at once . Bookit in parts . PE crossing above 20 does not mean markets has to fall , its only an

indication that markets may be oversold and now "smart people" will starting sellingthere shares to mad public . Short sell the shares once PE and Markets start falling downfrom PE levels of 20 . If PE crosses above 25 , its a must SELL !!

There have been cases of PE going up to 25-28 levels . That will happen at the peak of strong bullmarkets like Jan 2008 . In very strong bull markets you have to understand that PE will cross evenabove or below its extreme points . That's the risk part of stock markets from which not even GODcan save you from !! :) . this is the time when your buying in parts and putting capital which youcan afford to loose will help !! .

Anyone who puts 100% of there money in stock market at once on one single time on a single bethas a secret affair with financial disaster which he/she himself is not aware of . So dont put all yourmoney at once . Only put a part of your capital at any point .

Where do you get the PE data for Indices (Nifty and other Indices)

NIFTY data : http://www.nseindia.com/content/indices/ind_histvalues.htm

PE data : http://www.nseindia.com/content/indices/ind_pepbyield.htm

Note :

• I have divided Nifty Value by 100 to make the graph look the way it is . In graphs , so on Xaxis if you see 40 , then read it as 4000 for nifty . but exact 40 for PE .

• PE value will be separate for individual stocks as PE ratio for stock can go up or down formany other reasons . So if you are doing Stock analysis , see its historical PE values and findsome pattern yourself . Innovate !!

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I have added sms channel with this blog , subscribe it to get updates on your mobile whenever anew postin there or I put some message for you .

Now if this time I don't see any comments , I will suicide and then no posts from nowonwards . please save me ! . and Who is gonna tell me how this now improved bloglooks like ?

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Surveys

Welcome to Our Survey Page

Please spend some time to take surveys which will add value to Jagoinvestor in Knowing thingsbetter . Below are different Surveys , take one whichever you like .

• Hiring a Financial Planner Survey

• Registration with Jagoinvestor Survey

• Ask a Question to Jagoinvestor Survey

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Sunday, May 31

Short Review of few Mutual Funds

I did a short and crisp review of some mutual funds for afriend . thought of sharing this here.

Franklin India Prima Fund - Dividend

151/208 138/157 61/75 are the ranks for 1 ,3 and 5 year .Not a great one to cheer about .Risk Grade: Above AverageReturn: Grade Average

Tata Infrastructure Fund-G

Not a very old fund , but a good one . Infrastructure space can be a big hit considering 4-5 yrs timeframe and with blessing of UPA . should be continued . better diversify money in this space withsome other infrastructure mutual fund .With 25% CAGR returns since launch , its looks good .

Franklin India Flexi Cap Fund - Dividend

Numbers look good , but there are better funds .

Birlasunlife Frontline Equity Fund-Growth

Extremely good fund in portfolio , with strong performance in all the time frame of 1 ,3 ,5 yrs and30% CAGR return since launch , Better to stop Franklin India Flexi Cap Fund and redirect themoney to this one .

HDFC Equity Fund - Growth

Again a good fund to have in portfolio . Everything is fine .

What would I do If I were at your place .

- Stop Franklin India Prima Fund and- Stop Franklin India Flexi Cap Fund - Dividend (5k)- DSPBR Equity or DSP BlackRock top 100 or HDFC Top 200- Increase your Exposure in Birlasunlife Frontline Equity Fund- Share your 10k in UTI Infrastructure and Tata Infrastructure

Do you know difference between Divident and Growth options in mutual funds ?

List of 5 star mutual funds from Valueresearchonline .

General Recommendation

• If the investment is for long term wealth creation , dont go for Divident option• Monitor and review your mutual fund once every 6 months .• Not sure if you are allocating money in mutual funds after understanding your Risk-appetite

or not . Check that out . No Debt side ?• Do not have more than 5-6 mutual funds• Look at other sectoral mutual funds on banking and financial sector with long term view .

look at a video explaining how to choose a mutual fund .

Subscribe to jagoinvestor SMS channel to get updates on your mobile .

Disclaimer : Information taken from valueresearchonline.com and analysis and views are personal .Continue Reading


Friday, May 29

Most important questions you should ask a ULIP agent

When an agent comes to sell you a ULIP product, you should ask following are thequestions you should ask him . Before doing any thing he should tell you What is aULIP . Following are 6 Important questions you should ask an ULIP agent beforebuying a policy from him .

1. What are the returns offered by this ULIP ?

As per the rules of IRDA , an agent should only give illustration assuming 6% and 10% returns,However If he says that in long term its safe to expect more than 10% , It would be fine . But if hestarts claiming that It "will" return 18% , 20% or million % returns , be cautious , He is not the rightagent .

2. What are the Charges in this ULIP ?

He should give you detailed Information on all the charges of ULIP ,the main one called PremiumAllocation Charges . If he tries to hide any Charge from you , I am sure its not because of hisdishonesty and no other reason . Ask him the company brochure mentioning the exact charges .

3. How does it suit my Risk Profile and fit in my requirement ?

Before suggesting you the ULIP , the agent should have asked you all the details about your Cashflow (salary , Expenses) and your future goals with ULIP investment should address . He shouldalso try to understand if you can take the risks associated with ULIP . If he does not ask you thesethinks , ask him back why he has not asked you these questions . Get the word out of his throat .

4. How is it better than other ULIPS ?

Ask him what is unique with his ULIPS , make sure he does start all non-sense of Sec 80C benefit ,high returns and all .. Every ULIP has it . Ask him what are the special features with ULIP and howdo they address your requirement . If he claims that his company ULIP is best and no other ULIPcan match it , ask him for references if any states that . Just a plain claim from agents will not do.An agent must have enough knowledge to make you understand how to make best use of yourULIPS .

5. How does it score over Term Insurance + Mutual funds combination ?

ULIPS are combination of Insurance and Investment product , There is no point in taking it, if itcant perform better than Term Insurance + Mutual funds SIP . Switch benefits in ULIPS are themain benefit in ULIPS. He must put pressure on that point , If not he is him self not aware of it .Refrain from taking the policy if he starts claiming that returns from ULIPS will be much higherthan Mutual funds .

6. What was the performance during Market Crash ?

Agents generally try to put up rosy picture and hence refrain from disclosing the funds performance

in bad markets. If the fund has done bad , that is acceptable . Its investor responsibility to take careof switching and asset allocation . So there is nothing wrong in performing bad in bad markets .Agents will first try to avoid the confrontation , but finally may tell you that they did bad andreturns are very low . Ask him for exact number in return and try to find out how other ULIPSperformed .

My personal Experiences

I have never come across any ULIP agent who has tried to sell the product in a professional manner. This has its own reasons like meeting Sales Target pressure or poor training to Agents. Anyways,its not acceptable and can not be accepted . For so many years , Mis-selling is happening in India .

Conclusion :

Your hard earned money should go in proper investments . There should not be hurry in takingaction , So dont feel shy in asking questions once or twice or thrice , understand the product and itssuitability with your requirement.

No product is good or bad , its only bad or good depending on your requirements . So be informedInvestor and dont fall prey to Idiotic agents .

Dont do mistake done by tons of investors who took ULIPS for 3 years

- To save tax - To make exceptional returns from Stock markets .- To make them self believe its a happening product because it looks so complex .

Please share with me if you have taken ULIP for wrong reasons- Do you think that ULIPS will have any success in future .. I feel yes

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Tuesday, May 26

Difference between Needs and Wants

One of the important aspect of Financial planning is spending money wisely .What does it mean to spend Wisely ?All the money we spend can becategorised in two categories of Needs and Wants.Improper handling ofmoney happens when you spend too much of money on your wants and noton your needs .

The first aim should be to spend/save money for your needs and then take care of your wants . Onceyou prioritise all your expenses/goals in these categories , its much easy for you .

What is the Difference between Need and Want ?

Needs : Need is something which is essential for you irrespective of your financial conditionsThese are the things you have to take care first and only then comes other things which you can dowithout .

Needs Example

- House Expenses- Child Education- Saving money for Retirement- Medical Expenses- School/College fees and expenses- Family Vacations and outings (in limit)

Wants : These are things which you wish to have, but they are not above your Needs . For example, A Car is a want , when compared to your Child Fees or Education saving . You can live your lifewithout car , but Child Education is Vital and cant be compromised .

Some people wants can be Need for other and vice versa . Its all depends on personal life style andattitude .But the main point here is that You have to differentiate between your Needs and Wants atshort to medium time frame and Long term .

Wants Example

- Extra Vacation- Expensive clothes above your normal requirement- Expensive Car or any vehicle above your budget .

Note : Understand the point that , Wants are not something which you should avoid , but yourNeeds can/should not be compromised because of your Wants .

Why is it Important these days ?

These days almost everyone lives their life in a unplanned manner , especially thier finances areUnplanned . People spend first and think later/late about it . But money spent once will not comeback .


Once you prioritize things well and have a proper road map on your spending pattern , you can takecare of your Needs first and move towards your Wants .

Let us take a case Study

One of my friend spends his money in pathetic manner . He earns around 30,000 per month and isalready in job for last 2 yrs . He spends a lot of money with his friends on parties on weekend . Hebuys branded shoes which he is very fond of . Great ... , He does not understand the value of whatsmall savings can do.

just before the year end , he asks me how can he save the tax and wants to invest some money .

On further enquiry , I come to know that this person's Parents are dependent on him (though he isnot sending any money at this moment to his home) . So he needs good amount of Insurance , Hehas no savings till now . Finally he is not left with any money to even pay insurance premium thisyear (2009), not invest any money in some mutual fund .

What is the point ?

This person has spend his money on all the things he wants , and nothing on his needs , which areessential . He has violated fundamental rules of Financial planning which will affect his very badlyif some thing happens to him .

After you spend and take care of your needs fully , and you are left with surplus , I will myselfencourage you to spend your money on your wants like hell !! . But first comes important things ,You can live without your Wants , but not without Needs .

Imagine you are going for Golf Games and you are not left with enough money so that you can takeyour Family out sometime on vacations .

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Thursday, May 21

First Step of Financial Planning : Planning

This post will tell you why Taking action of Investment is second step , the mostimportant is the first step , planning it well before taking action . I have seen manypeople pinging me about there investment plan or decision to take Term Insuranceor Investment plan through mutual funds for next 10 yrs through SIP.

I would like to congratulate them on there decision and action . They are ahead ofmost of the people .

“A good plan today is better than a perfect plan tomorrow”

But is it enough ? Is that all ? Is that the initial step everyone should take ? The answer is NO !! . Alot of people have go to the second level and left the first level , which is Planning .

First Step of Financial Planning

The first step not making investments but planning for everything and then executing it , Why is

planning important ? Most of the time people concentrate too much on action and not planning . Ifyou take actions without planning things , there will be lack of clarity ,and it will bring doubt inyour mind about investment .

A friend of mine invested in mutual funds through SIP . For 6 months markets did goodand his portfolio was up , then markets crashed and he stopped his payments . I askedhim why is he not continuing his SIP , his answer was markets are going down . But healso said that he don't need this money any sooner , he is making investments for hisChild Education which is 12 yrs later and his investment is for long term in stockmarket .

His decision of starting investments is great , but investing without any planning and knowingexactly why you are doing it is like driving without knowing were to go . You will eventually gosomewhere , but that may not be your destination .

so what are the steps before the action of Investment

Knowing your Goals : First plan, why are you investing , what is the goal associated with yourinvestment . Is it Buying Home ? Buying Car ? Vacation after 3 yrs , Retirement , Child marriage ?etc etc

Knowing your time frame , when you need money : This is very important , because this willdecide a lot of things

- The product you can invest in ?- The risk you can take ?- The amount you need to invest per month or year ?

This will make your path very clear , after this you just have to follow it without any doubt in mind.

Action and monitoring : Now you just have to take action and dont doubt it again and again ,because you have cleared everything before .

Case Study

Case 1 : Unplanned Investment

Ajay is a regular reader of jagoinvestor and after reading some articles on this blog , hedecides finally that he will invest k per month through SIP .

He starts a SIP with a mutual fund and now he is happy that he has been investing finally . Heinvests for 2 yrs and markets have gone up and down and at the end his investments are at sameplace where it started . So there is no appreciation in value . He decides to take half the money outof his investments and uses in buying a car which was his plan from many years . Markets finallystarts recovering , but as usual he realises very late that this is a time to put money in markets (as allthe general public realise this very late) .

He starts his SIP again and now continues this for some years . He periodically takes money out ofhis investments on many occasions like for his vacation and his child education .

What is the problem with this approach ?

- No predefined goals and hence no clarity on investment plan - No idea of how investment shouldbe divided for different investments . - No investment as per risk-appetite and goal's importance

Conclusion : He started investments which was a good idea , but Ajay jumped on the second ladder, The first step was to first plan for things .

Case 2 : Planning everything

Ajay now knows that he can invest 20k per month , and have to plan how to channelise thisinvestments . He identifies his goals , and how much he would need for it .

He comes up with following things .

To do your own calculations , do it here

Now he exactly know that for which goal where he has to invest . There will be no distraction inbetween by equity markets going up and down or any other factors like those , because in the startonly he has factored in all the possibilities. In short Now he has a clear path and he know how fastor slow he has to walk on it . At the end , if he keeps on walking on it the way he planned , Successis guaranteed .

Conclusion

Planning your finances can be boring, but its vital and most crucial part of financial planning , Aperson who gives much time planning things , has higher chances of achieving it , Take action issecond step . Planning things in advance reduces doubts about certain things , provides clarity infinancial life and hence reduces a lot of issues .

Question :

How much difference do you think will happen without planning as per your view ?

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Tax Exemption limit may be raised to 1.7-2.0 lacs

Today in morning newspaper , I read that in this budget Tax exemption limit may be raised to 1.75-2.00 lacs . What will that mean to a common person like us .

It simply means that we will be left with some extra surplus every year .

A male who has taxable salary of 4 lacs per year and has 1.5 lacs as exemption limit , pays around40,000 as tax . Now , after the exemption limit is raised to 2 lacs (assumption) , there can be 2scenarios .

Read How to calculate Tax and tax slab for year 2008-2009

Scenario 1 : Exemption limit is raised but tax rates are not . Current tax rate is not

10% for 1.5 - 2.5 lacs

20% for 2.5 - 5 lacs

30% for 5+ lacs

In this case , he will have to pay 35,000 as tax (assuming tax rates for 2008-2009) . This means

a saving of 5,000 on tax from previous year .

Scenario 2 : Exemption limit is raised and tax rates are also adjusted . A common sense guess

would be

10% for 2-3 lacs

20% for 3-5 lacs

30% for 5+ lacs

It must be something like that , this is the minimum we will/should get

In this case , the tax would be 30,000 , and savings would be 10,000 per year.

What can this small amount do ?

So we can save in range of 5,000 or 10,000 or someother amount depending upon the changes .

What can be the value of this for us as investment point of view .

this money can be invested in a mutual fund through SIP monthly for next 30 yrs ,

5000 can make

14 lacs at 12%

29 lacs at 15%

10,000 can make

29lacs at 12%

58 lacs at 15%

Assumption is that the money can be divided in 12 equal installment and can be invested per

month .

What do you think about this ?

Did you check video post for Basic formula's in Personal Finance and How to choose Mutual

funds ?

- Subscribe to jagoinvestor google groups

- Follow me on twitter

- Please leave your Comments/suggestions/disagreements .

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Tuesday, May 19

Monthly Contribution Calculator

I have made a calculator which will help you plan your monthly investment requirement for yourdifferent plans .

The first step of financial planning is to determines your goals and and what will be the investmentsyou will do for it . Then comes action (actually doing them) .

You must be knowing exactly how much should you invest for each of your goal so that you areable to achieve it .

Example : I have 4 plans

• Buying a Car• Vacation • Retirement• Child Education

Following is the total calculation for each plan .

Do your own Calculations Online Here

Download the Calculator from Here

Note : The monthly contribution will automatically come , you just have to put amount needed ,interest expected and tenure in years

Did you like the Calculator ?

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\

Archives

By Category : Find best posts in each Category

Financial Planing

• 8 Steps of Financial Planning • What makes an Excellent portfolio • Can you live with 90% of your Salary ? • What is the first Step of Financial Planning ? • Why do you Need a Financial Planner ? • 5 things you must have in your Portfolio

Early Investing

• Early Investor , Smart Investor • Power of Compounding and Early Investing • How small Savings can make big corpus

Mutual Funds

• How to choose a Mutual Fund • How to compare two mutual funds • Why SIP works well in Long term • Why to avoid NFO's • Difference between Growth and Divident Option • Video Post Explaining "How to choose good Mutual funds"

Insurance

• Important of Life Insurance • How to calculate Insurance Requirement • How much does Securing your Family Cost • Are Private Insurance Companies Safe • A Presentation on Insurance • Health Insurance and Its Importance

Taxation

• Tax Treatment of Equity and Debt Mutual Funds • How to use Losses to Reduce your Taxes • How to calculate capital Gains and Tax on it • Tax treatment for Equity , Gold and Debt • Why to plan your Taxes in the Start of the year

"How to" Tutorials

• How to do Portfolio Rebalancing ?• How to do your Retirement Planning in 6 Steps ?• How to Hedge your Portfolio using Derivatives ? • How to compare two mutual funds ? • How to calculate Insurance Requirement ? • How to use Losses to Reduce your Taxes • How to calculate capital Gains and Tax on it

• How to choose a Mutual Fund • How to use Losses to Reduce your Taxes • How to calculate capital Gains and Tax on it • How to manage ULIPS • How to Calculate NPV (Net present Value) ? • How to find best Fixed Deposit for you ?

Investing Wisdom

• Difference between Needs and Wants • How much Risk you should take ? • Understanding your Risk Appetite • Understanding Difference between Price and Value • Power of Asset Allocation and Portfolio Rebalancing • Creating Long term Wealth using Equity

Market Product and Knowledge about Concepts

• What is a Mutual Fund ? • What is PPF and EPF ? • What is SIP and its Importance • How Inflation affects you • What are Gold Mutual Funds ? • What is CRR and Repo Rate ? • What are Debt and Liquid Fund ? • Importance of Contingency Fund • What is Nifty Beas ? • Keep in Simple Stupid • LTA and Medical Reimbursement • What are RBI Relief Bonds ? • GFactor , A tools for Evaluation of Product Suitability • NPS , New Pension Scheme • What is Super Annuation Benefit and how to check it ? • Why to Avoid NFO's ? • How to file Consumer Complaints ?

Stock Market and Technical Analysis

• 5 mistakes of my First Trade in Stock Market • What is Long Term in Stock Market • Is Direct Equity for You ? • Value Investing using Nifty PE • 8 Important Rules your should never forget in Stock Markets (Full Ebook)• How a newcomer should start in Stock Market ? • Ebook on Basics of Technical Analysis

By Date : Find Each post by Year and Month

2009 : | Jan | Feb | Mar | Apr | May | June | July | Aug | Sept | Oct | Nov | Dec

2008 : | Jan | Feb | Mar | Apr | May | June | July | Aug | Sept | Oct | Nov | Dec

Also have a look at :

• Download Page

• Reviews Page

• Surveys

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Monday, May 18

Video post on Basic Formula in Personal Finance

This is a Video post by me , where I have tried to teach some basic formula's for starters who

should know important calculations using which they can calculate important stuff like

Maturity value of Investment when they make SIP payments , or one time payments .

I am getting some questions like "I want to invest 2k per month for 10 yrs in mutual funds , Can igenerate 20 lacs" type of questions . Seems like many readers do not know how to apply and usesimple formula's to calculate these stuff when they calculate how to generate wealth for long term .Often you might have felt that you have to depend on others for calculations , because you don'tknow it themselves .

I have made a video myself where I explain 3 important formula's which everybody should know .

1. Compound Interest

2. Annuity

3. CAGR

Lot of you might have learned this school , but many have forgotten it . So in this video post I haveexplained it with examples . I hope that it will help beginners or new readers . I am also giving aCalculator below the video where you can do your own calculations , If it gives any error , pleasego to the link I provide and calculate it there . I will also put presentation here , so that people whohave very low bandwidth can view the presentation at least .

Presentation

Important Calculations In Personal Finance

View more presentations from manish.pucsd.

Embedded Calculator (click here if this gives some error)

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Posted at 7:56:00 PM ShareThis

Saturday, May 16

How different Products can yield different post tax Returns

This post will teach you how to take advantage of different productstax rules keeping in mind your income tax bracket. Differentproducts can yield different post-tax returns for people in differenttax bracket . FD's return can be 7.2% post tax for you , but may beits 5.6% for me :(

Lets take an example to understand this post .

Two of my friends Ajay and Robert asked me what should theyinvest in for 2 year . They have Rs 1,00,000 to invest .

I recommended following products to them :

Ajay : Fixed DepositsRobert : FMP's ( Read what is FMP's )

You must be wondering why did I suggest different products to them ? Both have same risk-apetite ,Age etc .

The answer lies in there tax bracket . The post tax returns depends on your tax bracket too . Lets seehow .

Ajay Case

Ajay does not earn much , His annual income is less and he falls in 10% bracket .

Tax treatment of FD's interest : Returns are added to your income and then its taxedas per your tax slab rate .

Now it means that tax on FD's for him would be just 10% . Considering 8% interest.

Interest Received = 16,000Total Tax paid = 10% of 16,000 = 1,600Total Return = Rs 14,600

Robert Case

Robert earns well and falls in 30% tax bracket, hence FD will not be best for him , He will have topay 30% tax on the Interest for FD .

Tax treatment for FMP's : For Long term capital gains (more than a year) , the returnsfrom FMP's are either taxed at 20% after Indexation or 10% without Indexation


Assumption : Lets day FMP's provide indicative returns of 9% and lets also assume that theyactually provide that return . then

Investment = Rs 1,00,000Interest = 18,000Interest = 10% of 18,000 = 1,800Returns = 16,200

Note : I have not considered tax after indexation , please do it yourself . read this , Anyways it willbe more than what he is paying without indexation .

Read What is Indexation Benefit ?

Why FMP's were not better for Ajay ?

you might think that Ajay could have gone for FMP's too . The returns are almost same and tax isalso same, But you have to realise that FMP's returns are not guaranteed ,they are just indicative.Also FMP's carry Default risk , then why to take extra risk , The only advantage he would have gotis .5 or 1% extra returns but at the cost of the risk , which is not worth .

Why FD's were not better for Robert ?

Now this you know , obviously the tax to be paid on it would have been 30% as Robert tax bracketis 30% and hence he might have paid 30% tax on the returns from FD's

Conclusion

So now you understand that a product can yield different post-tax returns for two people in differenttax bracket . So when you do your investment planning , you must take these small details about tax, If you choose your investments considering your post-tax returns , you can make much betterdecisions , how ever this should come after an investment passes the 4 most important aspects ofinvestments and GFactor basis .

I have started active blogging on my Technical analysis and options blog , I have suggested to golong in Satyam , Please read it .

- Go long in Satyam- Detailed Analysis on Satyam

I came across a very good article called "What the IPL taught me about Investing"


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What is RSS

RSS is a technology using which you can get get notified about the contents of a website or a blog .So you need not go and check every time a website to find out if there was a new article or any newcontent . Once you subscribe to RSS of a website , you get notified automatically about new articleswhen they are published . See this Video to understand more

What are different ways of Subscribing to RSS ?

We have a total of on RSS . Increase this by ONE by subscribing through followingways .

Through Email : You can subscribe to RSS through Email . In this case you will get the postsemailed in your Inbox Directly and you can read it directly from there. You can unsubscribe from itanytime you want , So there is no loss !! Subscribe to Jagoinvestor RSS through Email Now

Through RSS Readers : There are many RSS Readers like Yahoo , Google or Bloglines etc ,where you can read the contents of the blog or website for which you have subscribed . So if yousubscribe to 50 different RSS feeds , they all will appear on your RSS Reader page . It would belike a customized website for you where the content changes as per the change in some website youhave subscribed to . Subscribe to Jagoinvestor RSS through Readers Now

Go to our Subscribe Page to find out other ways of Subscribing :)

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Wednesday, May 13

What is Super Annuation Benefit and how to check it online ?

This post will explain how to check your

Superannuation Balance if your employer

maintains it with LIC .

I will share with you an important thing today whichone of my friend Subbu has figured out himself .Credit goes to him.

A lot of employees do not care to check thereSuperannuation amount , or they are not even awarethat it exists. Knowing the amount of yoursuperannuation can be helpful , because then youknow that you have that much saving and hencewhen you plan your investments , you can factor inthis information and take better decisions . Thissmall amount make big chunks of your portfolio .

What is Superannuation Benefit ?

Superannuation is a retirement Benefit by employer . It is a contribution made by employer eachyear on your behalf towards the group superannuation policy held by the employer. This is animportant part of creating wealth for your retirement .

Some other points are :

a) Superannuation Fund is a retirement benefit given to employees by the Company.

b) Normally the Company has a link with agencies like LIC Superannuation Fund,where their contributions are paid.

c) The Company pays 15% of basic wages as superannuation contribution. There is nocontribution from the employee.

d) This contribution is invested by the Fund in various securities as per investmentpattern prescribed.

e) Interest on contributions is credited to the members account. Normally the rate ofinterest is equivalent to the PF interest rate. Read what is EPF and PPF ?

f) On attaining the retirement age, the member is eligible to take 25% of the balanceavailable in his/her account as a tax free benefit.

g) The balance 75% is put in a annuity fund, and the agency (LIC) will pay the membera monthly/quarterly/periodic annuity returns depending on the option exercised by themember. This payment received regularly is taxable.

h) In the case of resignation of the employee, the employee has the option to transfer hisamount to the new employer. If the new employer does not have a Superannuationscheme, then the employee can withdraw the amount in the account, subject todeduction of tax and approval of IT department, or retain the amount in the Fund, till thesuperannuation age.

Source : http://www.citehr.com

What is the SuperAnnuation Amount ?


Interest Earned : This is interest paid by LIC every year on the contribution by employer .

Rules of Superannuation on Maturity

Once the employee completes 3 years of service and works till his/her retirement,he/she can make use of superannuation balance as a form of pension. He/She canwithdraw 1/3rd of the accumulated balance after retirement and the rest can be availedas monthly pension till end of life.

Steps for checking Superannuation balance online?

1. Go to licindia.com

2. Register for a user id and password.

3. Login.

4. Click on 'Group Scheme Details' tab.

5. Click on 'member' radio button.

6. Get the group policy number for super annuation from your company's payrolldepartment and enter '' in the policy number text box and click ok. (Talk to your financedepartment for getting the group policy number , this will be unique for all theemployees of a company).

7. It will ask for LIC Id no and Date of Birth fields.

8. To get LIC Id no, call LIC branch with which your employer has a super annuationaccount and inform that you are calling from your company and provide your name tothe LIC official. They will give your LIC ID No.

9. Since most companies had not furnished the date of birth details to LIC, enter'01/07/1960' / '07/01/1960' (forgot the order, try both n check) in the date of birth field.

10. You will get the policy enrolled and you can click on the policy number to view thedetails. The details will contain the accumulated balance till the last financial year. Italso shows contribution made by your employer i the current financial year.

Are you able to see Superannuation Balance for yourself ? Were you aware of it ? Please share withus on comments section . Also please share if you find any discrepancies with the steps .

Note : Some data for this post may be out of date , If one comes to know about it , please let usknow ,so that I can make the changes .

Last post was a video post where I talked personally about "How to choose mutual funds" usingvalueresearchonline.com site .

Continue Reading


Monday, May 11

Video Post explaining "How to choose a good mutual Fund"

I am trying out a video post for the first time ,I am sure you all would like it . I have talked aboutHow to Choose Mutual Funds . Have a look . I have explained how to look for mutual funds andhow to compare them with other . Make sure you choose the full screen button to have a full view .Do let me know through comments how was it and if you liked it .

People with slow connections please let it buffer first and see in one go instead of see it breaking inbetween .

I have explained the same stuff in my previous posts - Steps of choosing a good mutual fund

Also look at : Some important Ratios while comparing Mutual fundsContinue Reading


Saturday, May 9

New Template and Design of Blog

Hi Readers

From last some days I have been making changes to Blog design and make it much better in allaspects . Now I feel people are happy with this new look . Some readers told me that this look isgreat and it looks much cleaner and better than past .

I have done some changes like :

- "Term of the Day" section : I have added a "Term of the Day" section at the top ofthe page . Here daily (i will try daily) I will put on term which i will explain in oneparagraph , That will help people to keep updating there knowledge base. I will keep apage also where all the term of the day will be stored , so that anyone can go back andread it :) . You can also mail me any topic .

- "Continue Reading" Button after every Post , This will allow readers to quickly gothough posts and read only those which look interesting to them .

- Top Bar : If you see just below the header , you will see a pannel which gives links toimortant places .

- Dedicated pages for Author , Contact Me Page, see the top pannel .

I am sure this new look will habe better user experience . I am sorry for Horizontal bar issue whichmany readers faced for long time . I hope its fixed now :) . Incase of any issues , please Contact me .

Please keep updating me with your suggestions on what else can i change in the blog .

There are some things I want to clear to Readers, about this blog .

This blog is a Personal Finance Blog . It deals with things like Investments , Insurance , InvestmentPrinciples , How to think about your money and things like these . Its not a dedicated Stock marketrelated blog . Because Stock Investing is part of Investing and its my favorite topic , I try to writearticles on that too . But you have to understand that it will be occasional and not frequent .

If you have already not joined our google group , please join it . That way I will have record of allreaders and can communicate fast incase I need to tell you all something. (please leave a messagetelling me who you are and how old reader are you) . On Jagoinvestor google groups , I willoccasionally give some calls too .

I will try to write more about technical analysis and Options and stock investing on my AnalysisBlog (I have changes the name) .

How can you contribute to this blog success ?

At the last of the page , you will see lots of bookmarking sites like delicious , Stumbleupon , Diggetc . You can bookmark the links there on that site , just click on the link and then most of the thingswill be done automatically .Also , please recommend the blog to other friends of yours .

My main focus will/should be content of the blog and the education I can provide . Looks and feelare important too , but I want to restrict my focus on that part .

In coming days I expect to do add more creativity on blog and posts , so keep tuned in .

Thanks

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Friday, May 8

Contact Me

Use this form to contact Manish . Your email will be read, and I will try my best to reply to

your questions and concerns .

- Please try not to spam - Please dont ask for Stupid stock recomendations - Please have a look at list of all articles to find out if your question can be answered :)

Your Name :

Your Email :

Subject :

Message :

Image (case-sensitive):

Live Chat : You can also talk to Manish Online (depends on availability)

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Send

Thursday, May 7

How to Calculate Net Present Value (NPV) and how to use it

In this post we will talk about How to think and calculate Net Present Value of a transaction

involving Financial Payment , and why its important to understand the concept .

Consider the following Example :

You have to lend Rs 1,00,000 to one of your friends and He is offering you following choices .

Choice 1 : He will pay you Rs 18,000 per year for next 10 yrs .Choice 2 : He will pay you 13,000 per year for next 15 yrs .Choice 3 : He will pay you Rs 8,000 per year for whole life .

Which one should you choose ?

Here you have to take a decision of choosing from one of the choices . The logical decision herewill be to go for choice whose Net Present Value is Highest . You have to understand the time valueof money . Rs 10,000 received today is much more valuable than Rs 10,000 received 10 yrs later,even Rs 15,000 received after 10 yrs .

So you have to see that which choice has the highest worth if you calculate its Value today .

So how do you calculate the Net Present Value in this case , where you have Rs X receivable everyyear for n years . Here you also have to consider present rate of returns which you can assume at8% .

So We have 3 variables

X : Amount received per year

n : Number of years

r : Present rate of return

NPV = X * [(1+r)^n - 1]/[r * (1+r)^n]

Calculating through this formula , we get the NPV of the choices as

1. 120781

2. 111273

3. 100000

Net Present Value of the last choice is simple , how much money do you put in bank today that

will fetch you 8,000 per year forever ? If X is the amount than at 8% interest you get 8,000 , so

8% of X = 8,000

.08 * X = 8,000

X = 8,000 * (1/.08)

X = 1,00,000

If you see the total amount received in all the cases you will realise that the choices with lesser

NPV will give you have higher Total amount .

For Case 1 : NPV = 120781 , Total amount received = 1,80,000

For Case 2 : NPV = 111273 , Total amount received = 1,95,000

For Case 3 : NPV = 100000 , Total amount received = Infinite (The amount is paid forever)

Calculate NPV for your self , see this calculator

But you have to understand that "Total amount received" is not important . What can you do

with the money is more important ? So the real Indicator is Net present Value of Money . You

have to understand the Difference between Price Vs Value . Price is what you pay , Value is

what you get . Value is important not Price .

Real Estate Case

If you go for a home which cost Rs 50 Lacs @9% Interest for 20 yrs . Your EMI will be

around 45,000 per month .

I found this amazing Apna Loan , EMI calculator , Its nice

You will actually pay total of 45,000 * 12 * 20 = Rs 1.08 Crores .

Now you may feel that the cost of house is Rs 50 Lacs ,but the amount outgo is actually 1.08

Crores and may feel bad for this , But this is ridiculous . Because you are not paying 1.08

worth of money in your entire tenure , 1.08 is just a number .

Its worth is still 50 lacs only spread over 20 years and the numbers sum up to 1.08 crores .

If you calculate NPV of the Home loan money which you are paying , its exactly 50 Lacs .

Calculate it with (.75% interest and 240 as tenure , as its a monthly and not yearly) .

Note : There can be other situations also where we need to calculate Net present value with a

different formula , but for this post we are only discussing the examples and scenarios where

you need to pay or receive a fixed amount after every fixed period for some tenure .

You can also look at Video below to learn other aspects of NPV and IRR (I have discussed it in

the post : How to manage ULIPS ?

Conclusion :

You can also use this concept for taking decisions in scenarios where you have different

choices of payments , choose the one which has lowest Net Present Value , like in the example

we took , For the friends its more beneficial to go for the 3rd option . So the moral of the story

is that dont pass this post link to your friends with whom you have financial relations :)

Questions ?

Should Banks state net present Value of the money customers pay as loan , so that people

come to know that they are getting fair value for there money ?

Read interesting note on Home Loan EMI , Read how Home Loan EMI is Calculated ?

Readers , are you getting a horizontal scroll bar when you view this blog ? If its irritating for

many people I will fix it ? It depends on your computer resolution how does it look to you , for

me , it works fine .

- Subscribe to jagoinvestor google groups

- Follow me on twitter


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Wednesday, May 6

Trading Call for Markets

On May 4, 09 , I had given a trading call on our jagoinvestor google groups .

hi all

I am giving a trading call in this post . Please understand what I amsaying and take your decision .

Nifty was moving in a trading range from many weeks and finally Niftyhas broke out from 3520 levels and now its a very strong supportpoint . At the time of writing this , Nifty has already moved up to2630 and hence now its showing positive momentum on upside .

People can buy Nifty Futures or Options If Nifty comes back to 3550levels back , That would present a good opportunity to BUY . Pleaseunderstand that It does not guarantee that Nifty will go up again ,but probability favours it and from Risk/reward point of view , its agood Trade . So be patient and wait for it to come back to 3550levels . If it comes then BUY , else forget it .

People who dont understand Derivatives can buy or sell Nifty ETF's .

- Dont be greedy and put limited capital , dont sell your home and putall your money .- Be Patient and wait for this to happen , If it doesn't happen , leaveit and look for another opportunity .

Manish

Markets did move anywhere on 5th May and on 6th it went up and corrected back to levels of 3630. From this point it can move any side .

Learn Technical Analysis Basics

Either to 3500-3550 levels OR 3750 levels . Markets will give clear indication about the directiontomm (May 7) .

Today I updated the trade on the google groups and sent this message .

Update on this Trade

Now Nifty has made a good upmove from 3620 levels (two days earliarclose) and made a high of 3700 levels today and finally came theprofit booking . People who wait patiently are in a good position totake the trade now .

Look at Nifty

On 5 day charts ,http://in.finance.yahoo.com/q/ta?s=%5ENSEI&t=1d&l=on&z=l&q=b&pg=e50,e200&a=v,m26-12-9,ss,r14&c= . you can see that prices didn't break

yesterday's low and found good support to close above that . This is ahealth Sign . RSI and Stocastics are in oversold region and hence wecan consider it as a good dip .

Plan to tomorrow

Markets are uncertain , we should have a view but should have theflexibility of changing our view as and when markets tell us .

- If markets open strong or flat tomm and starts rising , Wait for 15min and go Long with SL below the day low .- If markets starts Declining , WAIT again with patience and go Longonly when markets starts rising , When do we say prices have startedRising ? Ans : When MACD is above 0 .

Momentum is up and its very strong , so it would be wise to avoidshort position . though you can miss a big profit , but the ultimateaim is "not to loose" , If you dont loose , you are already a winnerin markets .

- People who dont trade regularly or who are new to trading , shouldtrade very lightly , dont put big money .- Use SL strictly , markets dont love people who dont put SL in theretrades.- If trade fails and it goes against you , just get out with smallloss and dont feel bad . It happens . Accept it .

Discipline and Money management is what you need while trading .

Manish

- People can trade Nifty Futures or Nifty Options (Call 3600 or Call 3700) .- People who dont understand derivatives can trade with Nifty ETF's

Previous Post : How to calculate Capital Gains and What is Indexation ?


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How to Calculate Capital Gains and What is Indexation ?

In this post we will learn How to calculate Capital Gainsor Losses .

A lot of people make mistake in this . If you buy a house in1995 at Rs 10 lacs and sell it at Rs 20 lacs in 2009 . Onhow much profit will you pay the tax ? If your answer isRs 10 lacs , you have no idea how to calculate capitalgains . Read ahead to understand .

What is Capital Asset ?

Capital Assets are the properties which can be held by a person . Some examples are Real Estate ,Shares , Mutual Funds , Gold and Debt Funds . FD's and other fixed returns Instruments are not partof it .

Taxation

For taxation of Capital Assets , read this : How to use your looses to Reduce Tax

How to Calculate Capital Gains ?

Most of the people think that

Capital Gain = Sell Price - Purchase Price

But , Actually the real formula is

Capital Gain = Sell Price - Indexed Purchase Price

What is Indexation ?

Indexation is a technique to adjust income payments by means of a price Index , inorder to maintain the purchasing power of the public after inflation. We must understandthat prices in general also rises, so the actual prices should not be used while computingthe profits , rather It should be Indexed as per Inflation in the country ,so that people canget the real value from sale of there assets . Indexation is used in Tax treatment for Debt, Gold and other asset classes

What is Cost Inflation Index (CII) ?

Year CPI

1981-82

100

1982-83

109

1983-84

116

1984-85

125

1985-86

133

1986-87

140

1987-88

150

1988-89

161

1989-90

172

1990-91

182

1991-92

199

1992-93

223

1993-94

244

1994-95

259

1995-96

281

1996-97

305

1997-98

331

1998-99

351

1999-00

389

2000-01

406

2001-02

426

2002-03

447

2003-04

463

2004-05

480

2005-06

497

2006-07

519

2007-08

551

2008-09

582

How to Calculate Indexed Purchase Price ?

Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year ofpurchase)

Once you have Indexed Purchase Price , you can subtract it from Sale Price and get your capitalgains .

In some products Long term Capital gains is around 20% without Indexation and 10% with

Indexation . In Equities Long term Capital Gains is exempt from Tax .

Let take an Example

Purchase Price 1000000

Year of Purchase 1995

Sale Price 2500000

Year of Sale 2008

No of Years 13

Purchase CII 281

Sale CII 582

Indexed Purchase Price 2071174

Capital Gain 428826

Tax with Indexation 85765

Tax without Indexation 150000

I hope the above example is clear . Below is the calculator I have created for you to calculateCapital Gain tax for your self. Just play with different numbers . Just enter the year of Purchase andSale and It will figure out the CII (incase it does not, please put CII yourself)

Capital Gains Calculator

I have made a Calculator for you : http://public.sheet.zoho.com/publish/manish.pucsd/temp

Capital Gains Tax with Indexation and Without Indexation

There are some asset classes where you have the choice of using Indexation or not . This is true fordebt funds and FMP's . So the current rate is either 10% with Indexation or 20% without Indexationfor Long term Capital Gains .

For Tax without Indexation , you simply find out normal profit (sale price - cost price) and thencalculate the tax .

So you can calculate tax using both ways and then choose the one which is lower :) .

How to save your Capital Gains Tax ?

For people who are miser and do not like to pay lot of taxes , govt has provided some relief to them. Govt says that If you dont want to pay tax on your capital gains , you can do following things tosave your taxes .

Invest your Capital Gains in Real Estate : If you invest your Capital Gains in Realestate within 2 yrs , you will get the the exemption .

Invest in Capital Gain Bonds : There are some specific bonds issued under sec 54EC ,some of them are NHAI or REC bonds . You have to invest in these bonds within 6months. Generally the lock in period is around 3+ yrs . interest on NHAI or REC bondsis around 5-5.5% .

Tax on Capital Gains can be different for different People

Please note that Capital Gains tax can vary from one person to other person depending on which taxbracket he/she belongs to . It will also depends whether Tax with Indexation or without Indexationworks out to be cheaper for him or not .

Note : For calculation purpose the Financial years are business year from April - Mar , Not Jan -Dec . If you buy in June 2009 and sell in Jan 2010 , you are in the same year not 2 different years .

Conclusion

So , In this post we learned how you can calculate capital gains and also take advantage of taxbenefits for saving your taxes on capital gains , Your aim should be to understand the process andlearn about it, so that you can take informed decisions in your financial life . No one should takeadvantage of your ignorance and also to take quick decisions and make rough calculations whenthere is a need. If you know these rules , you can take better decisions

Questions for you

Suppose you are age 30 . - In June , 2000, You buy 20 lacs Home - In Aug , 2007, You buy stocks worth 10 Lacs - In April , 2008 , your sell your house at Rs 30 lacs- In June 2008 , your stocks have gone down in value are worth Rs 3 lacs now .

What should you do to avoid paying any tax on capital gains made from House ?

In previous post I have discussed "What is NPS , New Pension Scheme" by Govt of India . Read it

Continue Reading


Saturday, May 2

NPS , New Pension Scheme , A detailed Explaination

Today we will be talking about the "New Pension Scheme" Launched by Govt. of India.

What is NPS ?

Its a pension system recently launched by Govt of India from 1st April, 2009.. You can regularlyinvest your money in this and get a lump sum at your retirement and a fixed monthly income for thelifetime . It will work almost the same way as Private Pension Schemes .

Until now the pension schemes was available to Govt employees and employees of Big companieswho has Provident fund facility . Any other person had to go with Private Pension schemesprovided by Insurance Companies . IT as not a govt scheme for common person , With NPS now itsa common person gateway to Pension Schemes .

Read previous post which was a guest post by Nooresh Merani on "How does a day trader lookslike"

Features

- No upper limit of Investment - Minimum limit of 6,000 per year (Rs 500 per month). - Annual Fees of .00009% (90 paisa for Rs 10,000) for Manging the fund.- Tax benefit under sec 80C .- Any Indian citizen between 18 and 55 years can invest in NPS .

Read other details below .

NPS Bodies

- Regulator : The one who will regulate the NPS System .- Fund Managers : Who will invest the money - Point of Presence : Responsible for Sales and Marketing .- Central Record Keeping Agency : Responsible for all the document Keeping work (RecordKeeper)

Lets see each of them In detail now .

Who will Regulate NPS ?

PFRDA (Pension Fund Regulatory and Development Authority) will monitor and regulate all theactivities under NPS . It checks how your money in invested and makes sure that the fund managersare following the rules and guidelines . Its just like "SEBI for Stock Market" .

Who are the Fund Managers ?

There will be 6 Fund houses appointed by Government to manage the funds under NPS . You canchoose any one of them to be your Fund Managers . They are :

1. SBI Pension Funds Private Limited.

2. UTI Retirement Solutions Limited.

3. ICICI Prudential Pension Funds Management Company Limited.

4. Religare Pension Fund Limited.

5. IDFC Pension Funds Management Company Limited.

6. Kotak Mahindra Pension Fund Limited.

They will take all the decisions of where the money received under NPS should be invested in thebest possible way considering all the rules and regulations set by PFRDA .

Who are Point of Presence ?

The following entities have been approved by PFRDA for appointment as Points of Presence(POPs) under the New Pension System for all citizens other than Government employees coveredunder NPS .

1. Allahabad Bank

2. Axis Bank Ltd

3. Bajaj Allianz General Insurance Co Ltd

4. Central Bank of India

5. Citibank N.A

6. Computer Age Management Services Private Limited

7. ICICI Bank Ltd

8. IDBI Bank Ltd

9. IL&FS Securities Services Ltd

10. Kotak Mahindra Bank Limited

11. LIC of India

12. Oriental Bank of Commerce

13. Reliance Capital Ltd

14. State Bank of Bikaner & Jaipur

15. State Bank of Hyderabad

16. State Bank of India

17. State Bank of Indore

18. State Bank of Mysore

19. State Bank of Patiala

20. State Bank of Travancore

21. The South Indian Bank Ltd

22. Union Bank of India

23. UTI Asset Management Company Ltd

Who will be the CRA ?

As per the website of PFRDA there is a Contact of negotiation is underway and NSDL is expectedto be appointed as the CRA . there were other bodies too who wanted to be CRA , but the mostsuitable of all is CSDL . You can see them as the back office for maintaining records ,administration and customer service functions .

What are the Steps of Investment ?

1. Visit a point of presence (PoP), fill up the prescribed form with the required documents.

2. Once registered , CRA will send you a Permanent Retirement Account Number (PRAN) .

This will be unique to every person .

3. Select your Amount and Investment Option .

Investment Options and Structure

Structure wise they are very similar to ULIP's or ULPP's from Investment Point of View . You havedifferent kind of funds options with different exposure to -

- Equity Instruments - Corporate Debt- Fixed Income Instruments- Govt Securities.

Different Options

- Risky option : The higher allocation in this option will be in Equity .To decrease the risk , Equity Investment is allowed only to invest in Index funds which tracksSensex or Nifty . Also the equity exposure is caped at 50% .

- Moderate : IN this options Main exposure would be Corporate debt and Fixed income securitieswith some exposure in Equity and Govt securities . It will be moderately risky and rewarding .

- Safe : In this option mainly the investment will be done in Govt securities , and very little will beinvested in Equity .

There will be a Default option , under which the allocation will be decided as per your age, whereEquity Allocation will be high in the start and then it will come down as your age increases . Youcan also decide your own asset allocation as per your Risk appetite

Cost

There are different kind of Costs in NPS .

- Fund management charges of .0009% per Annam , which is excellent if compared to ULPP's orMutual funds charges .

- Annual Maintenance charges of Rs 350 and Rs 10 per transaction to CRA (soon , it will be Rs 280per year , Rs 6 for per transaction) .

- Rs 40 for registration with PoP and Rs 20 per transaction with them .

- There are other small costs too , lets leave it for now .

Taxation Issue

Sadly , As per the current law , the amount received at the end from NPS would be taxable , PFRDAis trying hard with govt to exempt the tax . You will get the 80C benefits on the amount invested inNPS .

UPDATE May 3 , 2009

"Under following circumstances your account may be closed before attaining retirement age?

- death- account value reduces to zero- change in citizenship status.

Thanks to Viral for bringing up this point "

Read NPS FAQ here

Conclusion

As per my views , Its a good initiative from Govt to introduce a Pension Scheme which will givecommon people a chance to invest in Pension schemes which is from Govt . One important thing tounderstand and note is that Even though its a pension scheme , the returns are not guaranteed . Itcan vary drastically depending on your asset allocation and how you choose the fund options .

Other Negative point at this point is that the amount recieved at the end would be taxable whichcan have adverse affect on the return potential . But I am sure soon govt will make the final amountreceieved non-taxable .

Currently I dont rate it at par with PPF or EPF . At this point it would be wise to invest money inthis if you have any money left over after your PPF and EPF contribution . Waiting for somemoretime before taking a call on this would be worthwile . Overall NPS passes :)

Question for you

- Are you personally impressed by NPS and will you invest in NPS ?- What else govt can make changes in NPS to make it attractive to you ?

Previous Post : Nooresh Merani Guest post on How does a Day trader looks like ?


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Profile of a Day Trader

This is a guest Article from a fellow blogger friend and a very

good Technical Analyst , Nooresh Merani . This is an

interesting article where he presents how a profile of a Daytrader looks like . A part of this article was published in May14th Issue of Money Today Magazine . I hope it would be agood read for everyone , Even If you are not related to Trading, you will come to know what is Day trading and how it can bea full time profession and very rewarding one . Read the articleBelow .

THE JOB = Day Trading

Job description: 6 hours a day / 5 days a week which requires hardly any physical activity apartfrom grunting or swearing in anger or thumping hands, tables and chairs in happiness.

Desired Profile: The desired candidate should be good at accounts and quick at using the computerkeyboard or mobile keypads. No formal education or age bar.

Company Profile: It’s one of the oldest organizations (BSE is formed in 1875!) which is open to allcandidates provided they have capital to trade with.

Remuneration:

The salary has no upper limit but the candidate has to forego a small amount as brokerage/ taxes onthe transactions.

The above job description seems a dream job!!

The profile of a day trader is not as rosy as it seems as they don’t have a fixed salary, instead theyhave to risk a security deposit (trading capital) paid up with the company (exchanges/brokers)which may be blown off in few hours, days or weeks or years.90% of Traders pay salaries for therest 10%.

Trading is one serious business and a highly disciplined profession but, a large section of traderswho don’t have this attitude get thrown out of the system very quickly. A trader learns from themistakes, accomplishments through his trading career and by honing his technical and intuitiveskills. Every traders goes through the initial grind (sometimes recurring) of losses, depression, self-realization and more.

A must Quote for every traders’ desk, “People who learn from their own mistakes are Wise, Peoplewho learn from others mistake are Wise and Lucky and, those who do not learn at all are Traders(Suckers)”

So, to be successful in trading, the most dynamic profession, where even a richest man can’t affordan hour’s lunch break (the Gujarati Thali would cost somewhere in Lakhs!!), one needs to learn,evolve, adapt and be disciplined. Always learn from the past, apply it to the present so that you cangain in future!!!

A Traders Day!

Pre-Morning:

First thing a trader checks is how Dow Jones, European indices performed overnight and the currentsituation of Asian markets. SGX Nifty in Singapore opens up much before India so a trader getshint of Nifty opening.

The trader makes modifications to the stock lists and observations made for the day. Technical,Pivot and data traders are ready with a list whereas system traders rev up their mechanical engineswhich generally don’t deliver much.

Trading Hours:

Although every trader has to see the ticker on his computer monitor for prices, but, there is a section

of traders who only rely on ticker reading, which is a study of price & volume fluctuations. For bestresults, a combination of intuition, ticker reading and knowledge of technical analysis is a must.

Indian markets are one of the most volatile ones and it’s a common saying out here - Nazar hatidurghatna ghati (Moment you get your eyes off you will meet with an accident). So a trader has tobe attentive and nimble footed to make split-second decisions and follow the personal tradingstyle/rules.

Post Trading Hours:

This is the best time for the trader to catch up on a snack or freshen after finishing of thecalculations and noting down the open trades or the profits made in the day.

Analysis and Self-Evaluations:

The amateur traders don’t realize that this part of a trader’s life is equally important. Technicaltraders go through their charts; mechanical traders test their system to come out with a list ofpossible stock trading ideas for the next trading session and evaluate the current positions.

Trading as a profession has the most ups and downs with terribly bad trading sessions and equallyhigh performance sessions. Every trader needs to keep evaluating, modifying and optimizing theirtrading styles to stay in the loop or the market knows a way to kick you out.

Latest Experience with the Screen!

Although I and many of us traders do follow the above plan but human nature is frail and one doesmake mistakes. One thing I have realized with experience is if you make a cheap mistake (smallloss) early you would make a killing next time around by not repeating it.

The last mistake I made off late was to pre-empt and anticipate a big down move in 2nd week ofMarch which didn’t come but luckily got saved because of stop losses and the screen. The next timearound I did the simpler thing of re-acting to the ticker sense.

My one such encounter with markets was on 15 April 2009 when Indian indices outperformedglobal indices. Many traders were yet again caught on the wrong side of the trade by watching theperformance of Dow Jones overnight.

The index opened lower and drifted lower. But, ticker did not show signs of weakness and out ofindex counters continued to gain strength. What lot many traders missed out was, that Hang Seng(Hong Kong) was up 600 points on 14th March, the day Indian markets were closed due to aholiday. Any technical analyst would confirm Hang Seng bears the closest co-relation statisticallywith India. So, this simple observation kept my bias bullish though the index was negative to startwith.

The ticker was purely biased towards the mid cap segment in the last few sessions so my focus wason them. We kept on holding to the previous open positions (namely Crompton, ks oils, guj nre, gtlinfra, ghcl). Also, seeing the momentum, added on to my technical picks Dishman Pharma, Everonn& Crompton for the day at higher levels then opening which gave awesome moves of 10% + in theday!!

Sensing that the up move was backed by nervous morning sellers squaring up, we booked out ofprevious positions to reduce the risk exposure and raising stoplossess to cost to conserve gains. A

combination of aggressive buying along with disciplined money management did the trick as indexclosed 200 points lower the next day.

The learning from above experience was “Respect the Screen & Markets are Supreme”. A Traderlooks for intuitive hints from the screen and doesn’t ask why it’s performing so, but, just follows iton the path to making money.

Above all would like to end this with few words of wisdom in Gujarati – Market Ni kamai marketma samai – (Money made in the market, stays in the market). A wise trader makes money and takesit home regularly!

Happy Trading!

Nooresh Merani , Analyse India

Blog: http://nooreshtech.blogpost.com

Website: www.nooreshtech.co.inEmail: [email protected]


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Thursday, April 30

What is a COW !! , A truth about Indian Financial Sector

Do you know what is a COW !!!

Keep reading , dont think its not related to Personal Finance , After youread the paragraph below and read further you will come to know .This posts talks about the state of knowledge of indian ulip and mutualfunds agents

The Indian Cow

"HE IS THE COW. "The cow is a successful animal. Also he is 4 footed,And because he is female,he give milks,[ but will do so when he is got child.]He is same like-God, sacred to Hindus anduseful to man.But he has got four legs together.Two are forward and two are afterwards.His wholebody can be utilised for use.More so the milk. Milk comes from 4 taps attached to his basement.[horses dont have any such attachment.What can it do? Various ghee, butter, cream, curd, why andthe condensed milk and so forth.Also he is useful to cobbler, watermans and mankind generally.Hismotion is slow only because he is of lazy species.Also his other motion.. gober] is much useful totrees, plants as well as for making flat cakes[like Pizza ] , in hand ,and drying in the sun..Cow isthe only animal that extricates his feeding after eating. Then afterwards she chew with his teethwhom are situated in the inside of the mouth. He is incessantly in the meadows in the grass.His onlyattacking and defending organ is the horns,specially so when he is got child.This is done byknowing his head whereby he causes the weapons to be paralleled to the ground of the earth andinstantly proceed with great velocity forwards.He has got tails also, situated in the backyard, butnot like similar animals.It has hairs on the other end of the other side.This is done to frighten awaythe flies which alight on his cohesive body hereupon he gives hit with it.The palms of his feet aresoft unto the touch.So the grasses head is not crushed. At night time have poses by looking down onthe ground and he shouts.His eyes and nose are like his other relatives.This is the cow. "

source : Arun. K. Mukherjee blog

Most of the agents in India who sell Mutual Funds or ULIPS talk in the same way about it . Theyknow very little about it , only to an extent which can make ignorant people feel that these agentsknow a lot . They have no understand ing of How to choose a good mutual fund or How to manageUlips effectively And these agents work for big houses , I have often came across agents who explain me mutualfund or ULIP in the same way you read "what is COW!" . They dont have communication skills tosell a product or convince a person who knows something about the product .

If you are slightly informed person , just call an agent and ask him internal questions about theproduct . you will see in how much water they are in .

What should be Done !!

There should be strict accountability from agents . Though you can never put all responsibility onagents for any loss of yours , at least there should be some quantifiable measure for the standard ofthere recommendation .

I am not saying that all agents are like this , but majority are . Some of the agents are very nice . likethe one I dealt with while buying for me for the first time .

Apart from this , the biggest responsibility lies with you , you have to be well informed yourself . Ifyou are your self an idiot , agent has all the right to make you one . So be informed , knowledgeableand understand what to do . You have to understand how to Find out if a product fits you , (Lookat GFactor )

Question for you :

Do you think that eliminating agents (one who recommend products) will make situation better orWorse !! .

I think it wont affect a lot in current scenario !! , what do you think ?

I wrote a post on how does a common man think about money , read it Continue Reading


Wednesday, April 29

A common Man's Dream about Money

How much do you want to earn ? What kind of Financial life

do you want ?

Dont we claim to lot of people that Money is not important to usin life ? We want happiness , We want time to do things whichwe "like" . We are interested in health , happiness and peace ofmind , We want to spend time with our family , play with kids,take our spouse for a world tour and a lot of similar things .

Average person thinking

Most of the people will claim that money is not the biggest thing in there life , but still we see mostof the people working consistently for 50-60 hrs a week , some work 70 hrs+ . We are free only onweekends and that too goes in household chores and planning for next week and may be oneevening which one can claim to be the way "they wanted it to be" .

The truth is most the people can achieve there financial goals but are not fully commited towards it .This may be true because of lack of knowledge or attitude towards this .

We all have desire to achieve our goals in life , and that will happen only when we are financiallyindependent , No wonder that we will have to work in the starting period of our lives . Every willhave to do that , but better financial management can help in achieving your goals earlier thanaverage .

So take out some time to work on your personal finance , thats what you are working for wholeyour life !! , incase you dont know :)

People Invest and then forget

Most of the people invest or take decisions and then forget about it , they feel that there job is done .this may be because of the fear of loosing money or coming to know that they made a wrongdecision .

How many times it happened that you took a share , mutual fund or a policy and it didn't work foryou , didn't give you returns as expected and actually made losses . Did you care to find the reasonfor making a mistake , did you take any step to confront the situation and take meaures to fix themess . Or you just left it to destiny saying "I will just give it some time , it should be fine in 1 yr orso"

Successful people take hard decisions , they work for there money , they read , they go to websitesto find out things , they take out time to contact people and get information about it .

I took a Term Insurance from SBI (SBI Shield Plan) last year . It was the best plan which suited me.After some months there was news that term insurance premiums have come down and there is anew entrant "Aegon Religare " in the market . I calculated back and saw that Reliage premium wasRs 1,000 cheaper than SBI (for my policy) .


I contacted my Agent and asked him to provide me the numbers (premium) for this year and toldhim straight forward that I will surrender the policy this year I I dont get a good deal . Atleast I willnot choose them for my additional Insurance cover .

I don't think many people care to find this out and take the "pain" of doing it all over again for thesake of small money . remember that its not small money ... Small is Big !!

People make fortunes by investing regularly small chuck of money . So if get a chance to save evena small bit , do it . It will show in future .

What to do ?

Money can be generated but with discipline , you have to understand this and act on this . Investsystematically for a long period of time and use well know principles of Asset Allocation andPortfolio Rebalancing (read what is it) , portfolio rebalancing .

Just like we have lots of data , confusion and noise in Stock market , in the same way we also haveit in personal finance . There are thousands of products claiming to be better than others . There aremutual funds who claim to give 25% consistently (there are many which have actually given) .

You have to get out of the noise , and understand that you dont need much to make long term wealth. You just need better than average returns .

Let us see some components required :

- Strong Planning- Stick to the plan and follow it with Discipline

- you dont need 20% or 30% returns (and don't even look for it) . Just 5-6% above inflation is goodand that's what you should expect .

So plan your finances well in advance , have a path to follow and then just follow it withoutdeviating in between . Dont get greedy .

Please let me know how do you like this new look for the blog , I am sure many like it , It givesbetter look and feel .

Answer me following question

- Do you have any financial plan for future ?- What kind of returns do you expect from your investments as per your thinking ?

Serious students of Charting and technical analysis can look at my new blog :http://nsedailycharts.blogspot.com/


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Monday, April 27

Current market condition , positive news from companies

Suddenly the results from companies is coming positive

This post will give my views on stock markets current situation .

Exide Industries net profit rises 9%

Tech Mahindra Q4 net grew 5 pc

Bank of Baroda net profit soars 172% q-o-q, stock up 6%

Triveni Engineering net up 10 pc to Rs 37.77 cr

Indian Bank posts 23.45% rise in net profit at Rs 1245 cr in FY-09Jaiprakash Associates Q4 net soars 83%

There are some bad news also , but still we didnt see there effect like dip in profits from ICICI bankand Reliance .

Current view of Stock markets

Markets started there rally from 2550 levels and ran up till 3500 non-stop . Then they lostmomentum and a small correction came upto 3300 . We should not try to find out if this is start of anew bull run or a bear market rally , I personally feel this is more of a bear market rally (perhaps abig one) .

Did you read about GFactor , in my earliar posts ?

So better to go with the flow , its not the investors market , its a trader market for now .

Let view this small correction and temporary slow movement in markets as the rest in the upmove .Also we are near the expiry week . Along with political uncertainty , markets are bound to bevolatile and will not show clear trend for some more days .

With positive news coming from corporate world , the bias is on upside .Its a BUY if it break previous high of 3520-3530 levels .

Go with the trend .

I came across a houmourous presentation , look at it

Mens Rules


I have discussed about CFP as career option in the last article , read it

CFP , A new career option in FInancial Planning

This post is for people who want to make career in

Financial Planning . I will be talking about CFPCM

Certification here .

What is CFP Certification ?

CFP or Certified Financial Planer Certification

programmes in India are offered mainly by Financial Planning Standards Board India. Its a

certification after doing which you will be a certified to be a Financial Planner and take different

roles in the area of Financial planning .

What is FPSB ?

Its Financial Planning Standards Board India , The board authorised to give CFP certification in

India . FPSB is a Public–Private Enterprise and a Professional Standards Setting body for Financial

Planners in India. FPSB India proactively guides the development and promotion of standards for

Financial Planning professionals to benefit and protect the public in the country.

Who should do CFP ?

Its for people who want to enter the field of Financial Planning , People are interested in the subject

and recognise the huge potential and rewards this area may benefit . There are many other courses

in Finance like CA , CFA , ICWA or MBA (finance) , but they are totally different from CFP . CFP

mainly deals with planning of Finances in area of Investment , Insurance , Taxation . So its more

inclined towards financial planning for individuals .

People who are working professional in other industries and want to switch there career in Financial

planning can also go for CFP , its easy to complete the CFP certification while working .

Is it worth doing CFP , What is the Future of this ?

My take :

India has 1 billion+ population ,where financial awareness is almost non-existent , People here save

money but do not understand how to invest it or take care of it in the best way . They dont even

know the basic steps for Financial planning . Currently there are handful of CFP's in India who are

in great demand . In days to come CFP professional will be the most sought after and highly paid

professional's in area of Finance and overall .

So CFP is the next big thing all over India . That is my personal opinion .


How easy it is to do CFP , Is it too costly ?

How to register : There are many Education Providers (colleges) in India certified by FPSB to offer

the study material , you have to enroll with some EP of your choice and do the course , They may

offer the course through classroom coaching or Distance learning , you have to decide what suits

you.

Giving Exams : The exams are conducted though nseindia.com just like NCFM exams , you have to

register for an exam date , pay the fees and give the exam. thats it !! .

See

CFP Syllabus

CFP Prospectus

Cost : Its not at all costly compared to other courses in same field . There are 6 modules you have to

clear . Following is the Fees structure

FPSB fees : 10,000

exams for 5 module per module : 13000 (2000 for 4 modules and 5k for last module)

EP Fees : 20000 (that is average , Many charge from 10k to 1 lacs)

So In total it should be around 45,000 - 60,000 .

Its one of the best career options in India currently at this cost .

people who want are in Bangalore can go for "MANDAR Learning Acedamy" as there EP .

To get more details , go to http://www.fpsb.co.in/Scripts/RegisterForCFPCertificationProgram.aspx

When do you become a CFP ?

You become CFP only after passing all the CFP module exams and having experience as per CFP

criteria , Its either 3 yrs experience in Financial sector or 6 yrs experience in Non-financial sector .

For details see there site .

Note : The information given on this post if not 100% information , I just gave a brief idea

about CFP . for details you must see fspb site .

See my previos post of GFactor

Conclusion :

CFP is one big thing for India . Indians badly need right financial planning for them and in this

country of 1 billion , CFP's will be the king of future . So if you have interest , time and and some

money , go for it .


- Please leave your name in the comment .

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Friday, April 24

GFactor , A decision making tool for Financial products

This Post will talk about a concept developed by me called GFactor , which is a score system forany Financial Product . You can input 4 factors and get a score for a product . I am writing a lot forstock markets and trading from so many days , lets get back to personal finance now for sometime .I came up with an idea of measurement of a goodness/badness of a product.

I will call it GFactor , ie : Good ness factor .

What is goodnessfactor , Its a rating on a scale of 0-1 . 1 means excellent , 0 means worse . What allfactors do we consider when we design this formula for calculating GFactor .

- Trap Factor (Liquidity)- RR Factor (Risk/return Factor)- Complexity Factor- Need Factor

btw , I have posted some charts on my analysis blog and did some very basic Technical Analysis .have a look .

Trap Factor

This will be a score based on number of years you are stuck in the product before you can freely getout , Like in ULIP you are stuck for at least 3-5 yrs , only after the 5th year , you can get outwithout any penalties . For term insurance there is no trap factor , you can stop the policy any time .

Trap factor score will be like this

years of Trap and Trap Factor

No Trap : 01 yrs - 3 yrs : .24-10 years : .510-15 years : .7515+ years : 1

Risk/Return Factor

This will be the factor which will determine the Return Potential considering the risk potential . Forthis you have to know what is the money you can expect to get and how is the money you canexpect to loose in the product .

Mode of calculation : (Average Return - Average Risk)/Average Return

example :

For ULIP : Amount you can expect to get = 50%Amount you can expect to loose = 30%

So RRFactor(ULIP) = (50-30)/50 = .4

For FD : Max positive return over long term = 8%Average Risk = 0%

RRFactor(FD) = (8-0)/8 = 1

For term Insurance , the return will be the max amount you can get and Risk would be amount youcan loose all , which is total premium over many years.

Complexity Factor

This is a score on the scale of 0-1 which you have to assign for your self . If it looks toocomplicated for you give a higher score , ifs you understand it well , assign lower score

For a normal person I would say ULIP is complicated , so we gave give a score of .7 or .8 or 1,depends on you ,and term insurance is extremely easy to understand , so it will get 0 or .1 , Mutualfunds would be .3 or .4

Need Factor

Its a score given on the fact that how badly you need or require the product and will it be the bestthing for you. One person may need it more than other , so it will be different for different people.For a person who is in his 26-27 age and just married and has some financial dependents , His scorefor term insurance will be around .9 or 1 .

A person who is 45 , for him/her NeedFactor for Health Insurance would be .8 or .9

A person who is Extremely High risk taker and understands equity investing well , his need factorfor NSC or FD would be low , say a score of .2 or .3 .

Now Lets construct the formula

Variables

TF : Trap Factor

RRF : Risk Return Factor

CF = Complexity Factor

NF = Need Factor

GFactor Formula = (NF * RRF) - (CF*TF)

Let us take some examples , below is the chart which calculates GFactor for some productsconsidering me as a user , Please understand that these numbers are for me , it can change for you .


If GFactor value is more than .7 , you can consider that product as "Excellent for you" .

If its more than .4 , you can consider it as "Good"

If its more than .1 , you can consider it as "Average" or "Can be taken , but as the last choice"

And if its less than .1 , then you must avoid it.

GFactor Calculator

I have made a calculator for you at : http://sheet.zoho.com/publish/manish.pucsd/gfactor-calculator

GFactor of a Portfolio

GFactor of a Portfolio is average of GFactor of all the products in a Portfolio .

You must be knowing that I personally have following things in my portfolio , Lets see what is theGFactor for each of them for me .

Term Insurance : 0.954 ELSS : 0.434-5 shares : 0.3510 gm of Gold ETF : .72EPF contribution : 13 months of Cash : 1

So average of all the GFactors = (.95 + .43 + .35 + .72 + 1 + 1)/6 = .742

Which is a good Score for a Portfolio , But I can do better than this .

Whats your Portfolio GFactor ?

Conclusion

There are 4 main factors which matter when taking the decision regarding a Financial product , Theabove concept is my own thinking and It may not fit everyone criteria , but I am sure it would be

true for most of the people , If you have disagreements , its fine .

We subconsciously understand how there 4 factors affects our decision making process , but theidea is to put it into formula and get a Score out of it , so that we can compare and know how goodor bad a product can be for us .

I have posted some charts on my analysis blog and did some very basic Technical Analysis . have alook .

Question

- Can you design a better formula for GFactor which makes more sense that what I have given .- Do you think GFactor can be useful to general investor to take decisions .- Please share with me GFactor of your overall Portfolio .

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Wednesday, April 22

The Internal Analysis of Akruti Crash

Numbers and Graphs Speak.

I thought of starting my articles from some Analysis onAkruti City Crash .

In this article we will learn , how can we before hand getsome idea about events like this and have clear picture ofwhats going on .

See my previous posts on Warning about Akruti City : Post 1 , Post 2 , Post 3

- Lets see 2 yrs old chart first


If you see the chart you will see the steep rise in prices in last month , you can also see that its wasnot a normal price movement , when compared with previous movements .

For a closer view , lets see 3 months charts


If you see the chart you will see ,that prices moved up crazy and then crashed in two stages .

First Downmove : This happened because of the news that SEBI is excluding it from F&Osegment . (If you dont know F&O , dont worry) .

Second Downmove : Second downmove came near 25-26 Mar , when it was F&O expiry . Whathappened ? Lots of positions were built up in F&O and after a sharp upmove , everyone rushed toget out as fast as they can , at any price . So selling pressure came in and prices tanked 45% .

See High Volumes in the month of March (3rd half of the graph) . Suddenly there was so muchparticipation . Most of the buying which was happening on this stock was not for long term basis(delivery basis) .

What is Delivery Basis : delivery buying means , people actually get the stock in there demataccounts , it simply means its delivered physically to there account , But when you buy in the

morning and sell the stock in evening , then its not delivery basis . you just make profit or loss sameday .

Lets understand an important concept called "Deliverable Percentage" , which simply means ,percentage of shares out traded shares which are actually delivered . So if its higher , it means thatmost of the buying and selling is happening for delivery basis and people want to keep it with themfor some time , When its too low , it means lot of trading (speculation) is going on to catch the piein the price movement and hence its not sustainable most probably .

Example :

So , for some XYZ company , if volume is 100 shares and and deliverable % is 50% , it means that50 shares where delivered and 50 were speculated , which is normal ..

But if its 20% or 10% , then things are fishy , there is no value buying happening and shares are justexchanging hands from one to another where each one wants to sell it at higher price , also there arepeople who want to buy the shares at higher price , because they know that there will be some idiotwho will buy from them at much higher price to continue the madness . And when it ends then whathappens , There are no buyers !! , every one has sold at lower prices and then suddenly the sellingmadness comes in and the bunch of people who get out first (at higher prices) make the most money. And in this pressure everyone is ready to sell at a lower price than someone else .

You can easily imagine that day price movement , see 26th Mar downmove of 45% crash .

So how do we find out that this is happening , Is there some place we can get data from , and theanswers is nseindia.com website , it has all the information on needs to know .

Source : http://nseindia.com/content/equities/eq_scriphistdata.htm

Go here , choose 3rd radio button (Security-wise Price volume & Deliverable position data) , andchoose share name and dates for which you want data . You will get all the data .

You must see "Price" , "Total Traded Quantity" , and "% Dly Qt to Traded Qty" , you will getgood idea at looking it .

But I will not leave you with boring looking numbers . I have taken the AKRUTI data for 3 months(Feb 1 - Mar 27) and then smoothed it with 5 period moving average for each of them and thenplotted it on graph , so that you can get the picture pretty well . The points do not represent theactual value , it only shows you the relationship of each other . see the below graph .


If you enlarge the chart , you will see this relationship

Price : Prices picked up and start moving up . (Orange line)

Traded Quantity : You will see how it started moving up wildly and picked up a pick high speed inMarch (3rd half portion) (RED line)

Deliverable % : you will notice that it started going down and down , which indicated that eventhough Traded quantity is going up and up , the delivery is not happening , which means lots ofspeculation , which is an indication of a building of Bubble which can burst anytime .

So whats the learning , If you see Price movement in one direction and see Rising Traded Quantityand falling Deliverable % , you should suspect the move . It is normal to some extent , but an extraordinary move is truly suspectable .

And whats happening now to Akruti ? from last some sessions there is no buyer , only sellers arethere and from the peak price of 2100 levels , its now down to 380 (at the time of writing) . I hadalready warned of this long back , dont take it as any success in prediction of stocks :) .

If you see the current Volumes of Akruti , it was 2137 on NSE , where as average volume was at 4.5lacs !! , Which means that this down move is not supported by volumes , (watch volumes in 2ndchart , you will see nothing) .

Its just the fear of handful traders who have no idea why they are selling . So we can again expectsome wild moves on upside in future when prices starts picking up .

Conclusion : When you see prices moving in one direction without any great fundamental changeor significant news , You can use the numbers and see there relationship and you will see somethingwhich most of the people have no clue about .

Disclosure : I had learned this technique from Mr. Sunil Saranjame blog , timamo.blogspot.com ,an excellent market reviewer as per my thinking . So credit goes to him .

Please join jagoinvestor google groups , see the upper right area at the start of the page , I will besending instant notifications about the post and we can also share options trades there or some otherstock trades when there is good opportunity . Also who all have not left there comments/suggestions, please do so on the suggestions/comments post

I also Introduced my self in the last post , see My Introduction

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Tuesday, April 21

My Introduction

From : Robertsganj , Uttar Pradesh (near Varanasi)Studies from : Varanasi , PuneStudied : BCom , MCAWorking at : Yahoo India !!

My Dream : To see each Indian take informed Financialdecisions and have ability to judge what is right and wrong forhis Hard Earned Money .

What am I doing currently ?

I am a student of Trading in stock market . I like to tradeoptions and its the most amazing thing I can imagine in Stockmarkets (people who trade options would know this ) .

About Me

A very simple and humble approach towards life . People liketo define me as Humorous , Ever-ready to help , Interesting .

My other interests

• Cooking• Vedic Mathematics• Trekking and Nature Hunting• Vegetable Farming (I have done some my self)• I like to study Ants and read more and more about them (I have 15 GB of videos) , do you

know about Ant slavery ?• I like Photography too

Connect with me on

• Orkut • Facebook • Twitter • LinkedIn • Flickr

My Pics : Here at FlickrMy Friends Writeups for me : Read it on my Personal Blog

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Sunday, April 19

Suggestions/Review and Request

Hi All

Its has been a long journey for me till now . I am constantly writing on personal finance from last 1-2 yrs and I hope people like my articles . But I have not idea how its impacting people and howmany people are interested in reading them . There has been increase in traffic to this blog but notas expected . One of the reason can be that people are still not aware of the blog even if they areinterested in the subject .

I want to connect to as many as readers I can . but I see only hand full of readers putting commentson the articles . There are many who are constant visitors but I am not aware of them and also theydont put much comments .

I would like to have 2 things from my readers .

1. Put a comment below and Introduce yourself to me in some lines . Let me know where are

you from and Why do your like this blog , How this blog has contributed to your knowledge

and what else do you expect from this blog .

2. Next thing is a request , This blog needs much bigger audience and there are many people

who need to read on the subject , but dont know about this blog . I want your help to spread

the word . I request you to do any of the following thing you if possible for you

- Incase you have a blog/site of yourself , you can put a link back to this site . It will help to getsome new readers .

- You can send all your friends an introduction about this blog and ask them to visit the site statingwhat all this blog has to offer .

Let me know If its possible for you to do any of those and if you can be helpful in spreading theword .

I have started a google groups http://groups.google.com/group/jagoinvestor , please join the groupto become a registered member of the blog , I can use it as a mailing list and also to share stuff withyou people if any . It will also help in tracking the readers and communicate anything to all of you .

Take this small post as a channel to connect , and put all your queries and views as commentsbelow.

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Friday, April 17

Some good read for the weekend

Some external links for you to read

The God's Ratio in Finance : Shyam Pattabi talks about the one ratio which you shouldconsider as supreme when investing in stocks for Long term , like your retirement . In hisexcellent and simple article , he says that "return-on-capital" is the key ratio you have tolook at to find the winners over long term . Read the article here

Where to Invest in FY10 : I consider him the best , the hidden gem in theworld of stock and sector analysis , Mohit Satyanand , in his recent article in

Outlook Money talks on some Macro Economic Analysis and hence you should

stay away from banking stocks , How Real Estate is going to be in trouble forsome more years and why IT Stocks can be a good picks now . Read the article

here

What is the meaning of Financial Freedom : Scott Young Discusses his

views on what is meaning of Financial Freedom . He talks about simple things

which already understand subconsciously , but still struggle to do . Read thearticle here

I wrote a article on 3 M's of successful trading , read it Also Read : How to make use of Oscillators to make buy or sell decisions

Comments please .

Also let me know if you people like when I out external links like there on the

blog , Sometime I dont have any stuff to write on , he he :)

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Tuesday, April 14

3 M's of Successful Trading

In the last Article , we had seen an Introduction to trading . Inthis section we will see what are the 3 M's of Successful Tradingas per Dr Alexander Elder .

I will give brief introduction of each of it , Its your responsibilityto take it further and learn it in detail . take this as just a startingpoint .

The 3 M's are :

- MIND

- METHOD

- MONEY

MIND

This part of Trading is most important . It deals with Psychology . When one enters Tradingbusiness , he/she has some beliefs about the environment , about markets . They have to understandthe importance of Discipline , How people think , how greed and fear affects investors . There aresub-parts to this

- Individual psychology of traders : You have to understand how to control Fear and Greed . Howyou should take rational decisions and not fall pray to your emotions while trading .

- Mass psychology of the markets : You also have to understand how mass psychology works .Why most of the people do what they do .

- The rules for maintaining personal discipline : You also have to understand the importance ofSelf Discipline , why you must be always consistent with your trading . You must never violate yourrules . because in long run your discipline in one thing which will make you most money , not yourknowledge or your skills .

METHOD

This is the part which deals with your knowledge about market , technical analysis , other toolswhich you can use to make Entry and Exit from any trade . This part is percieved to be the mostimportant aspect and most of the people run after these a lot , but these are the least important partof your trading . Let us see part of this .

- Technical indicators : These deals with the tools available for making decisions , for example ,MACD , RSI , Stocastics , OBV and other 200 weird words .

- The best chart patterns : Then you must know different types of patterns , which gives someidea about future action and how masses are thinking , some examples can be double top , Head andshoulder pattern etc .

- Developing a trading system : Then finally after you are done with knowledge part , you shouldbuild up your trading system . what is trading system ? Its your rules for buying ,selling , booking


profits and cutting losses .

For learning on some technical tools you can see my series of articles on "How to be a better than

average Investor"

MONEY

Now this part is an amazing one and my favorite :) . What this determines is how will you manageyour money , it decides how much money will put in market at any given time , and how much losswill you take maximum on any given trade . How much will be your maximum loss on any onetrade, things like that .

Basically this part decides how long can you in the game of trading if things would go wrong . Thispart is extremely important . Without proper money management no can can survive for long inTrading . Lets see some basic and widely accepted views .

- The 2% Rule for individual traders : This rule days that on any given trade your loss should notexceed 2% of total capital . So if you have Rs 1,00,000 , first time your loss should not be morethan 2,000 . This rule makes sure that even if you make long series of loosing trades , still you are inthe game . Even if you make 10 consecutive loosing trades , your overall loss will be 18.3% ,Though this will be rare , still you take care of this situation .

- The 6% Rules for every trading account : This rule says that your monthly loss should not crossmore than 6% in a month . Sometimes when you trade it may happen that there is some problemwith your analysis or some issue between you and market which can not be explained , you keeptrying to win , but dont succeed , that time you have a great urge to revenge trade and get yourmoney back . The best thing at that time is to stop and get some rest , go for vacation and comeback with fresh mind . This rule will make sure that if your chemistry with market doesnt fit , youstop after loosing 6% of your capital . You can choose your own percentage amount . I would like tochoose 12% for me . it all depends on your risk appetite and stubbornness ;)

You might be interested in my previous money management example

- Essential record keeping for success : This part says that you should always keep all theinformation regarding each trade . Buy price , sell price , date of purchase , how many days youcarried , Reason for buy , reason of sell , what you learned from the trade , chart at the time ofbuying , charts at the time of selling etc etc .

Why do you do this ? Record keeping makes sure that any day you can go back to your records andsee what kind of mistakes you have done, why some trade failed , why you succeeded in some trade? you can get lots of information from your records , you need to analyse your performance overdays/months/years .

Its extremely important , after a series of trades when you look back to your records , you may beable to find out some pattern , some particular aspect or mistake which you do with each loosingtrade and hence can take corrective measures .

So , finally we are done with 3 M's of successful trading . Professor Van Tharp , in this legendarybook "Trade your way to Financial Freedom" talks about how the weightage they would give onthese 3 M's . According to him in Trading the importance factor is like this

Mind : 60%

Money : 30%

Method : 10%

Its totally opposite of what people perceive it to be , general people think that having all marketknowledge and technical analysis is most important . nothing is far from truth , It wont be tooambitious to say that you can make money in market by simple coin toss if your have sound moneymanagement Techniques and Great control over your self , you need to cut your loosers shortwithout any emotion and let your profits run till they can by sitting tight and doing nothing .

Conclusion

So finally if you want to start learning Trading , Work hard on your Psychology part and moneymanagement techniques , Technical analysis and other knowledge is important but not vital !! .

Some other article's you might be interested in :

- Options Trading- Trading , What is it ? - Swing Trading Presentation by Mr. Sudarshan Sukhani

you might also be interested in simple technical analysis example given by me with charts at myanalysis blog

Continue Reading


A Small tutorial on "How to start Trading "

What does it takes to be successful in Trading ?

We are going to see 2 articles on this subject , this is Part 1 .

In this part I will give introduction to Trading and tell youwhat exactly is it and how should you approach it (if youwant to do it) .

Dr. Alexander Elder , explains in his legendary book "Comein to My Trading Room" , the 3 M's of Successful trading ,which I will touch upon today and will explain it in my ownway to you . In the second part we will see the 3 M's in my way of explanation .

Let us first see what exactly is the difference between Trading and Investing and then we will goover the explanation .

Difference between Investing and Trading

Investing means buying a stock of financial instrument for a long period of time,typically over several years. Assessing good investment opportunities often makes useof fundamental information, such as earnings, but can also use technical analysis todetect long-term trends.

Trading means buying and selling stocks or other financial instruments for shorterperiods of time, typically less than a few months. Assessing good trading opportunitiestypically makes use of trading systems or chart-based techniques to detect short-termpatterns.

The main advantage of trading over investing is that it provides the ability to makemoney regardless of the overall direction of the market or the price of an individualstock. The general consensus is that You can make more money in bear markets withTrading than Bull markets . Because bear markets provide steep movements comparedto bull markets .

How Risky and Rewarding is Trading ?

Risk : Trading is considered as one of the most risky business you can ever do . Trading can wipeout your entire money so fast that you cant even imagine . As per the data , every 19 person out of20 who does trading eventually looses . So the success ratio is not more than 5% , even out of this5% , 3-4% just make small money , actually big money is made by 1% of people .

Reward : If done correctly and successfully trading can make you enough money you cant imagine. Most of the successful traders make more money in a month than people who are considered as"making good money" make in a year . but this numbers is for highly successful traders .

The other reward for successful trader is Independence . Once successful , you are your own boss ,can work whenever you want, trade from all corner of the world while travelling .

For people who want to try there skills in trading can try mock trading on moneyvidya.com , Justbuy and sell stocks and see how much money are you able to make in 2-3 months , It will give yousome feel of trading . You can also read past my article on MoneyVidya .

Should you try Trading ?

Well , Just anyone who thinks that trading is a "get rich quick" thing , is doomed to failure , this isthe biggest reason why people fail , they start or see trading with wrong attitude , they want to makemillions (if not billions) in just a month or a year from Trading , They underestimate the Risk partand over estimate Reward part of Trading and eventually fall pray to Market's anger .

Just because its "BUY" or "SELL" , they think its easy . and they need to read a little bit andbecause they are so successful and smart in whatever they are doing currently , they will succeed inTrading too . The approach Trading in a wrong way with totally unrealistic expectations .So the main question still is "Is it for you ?"

you have to ask your self this some question ?

- Are you ready to take Great risk of losing money ? - Do you have time and energy to learn the stuff required to Trading ?

- Do you like Markets , numbers and what ever required for Trading ?

- Some of the thing which "does not matter much" in Trading are :

- Are you highly intelligent person ?

- How successful you have always been in whatever you have done earlier in your life ?

Conclusion :

Understand very well that Trading is a very very risky business and not an easy thing , you have tolearn it just like any other profession like Medicine or Software and it takes time . But , now a daysI would say Trading is much easier compared to earlier days , Now with the online trading and lotsof data available on Internet , there is lot of scope in Trading now .

In the next post we will quickly see 3 M's for successful Trading . here is Part 2

Disclaimer : I am myself a student of Trading and still in my learning Phase , I have lost good

money in Trading and still struggling to break even . But Eventually its going to happen, because Ihave not lost the confidence and still on fighting in the battlefield (Markets) .

Continue Reading


Monday, April 13

MoneyVidya.com , A boon for new stock traders

Hi Readers

I can see that a lot of you are interested in Stock Trading . But as thisis your learning phase (mine too) and considering that Stock tradingis not every one's cup of tea . The best thing is to practice the gameof trading for some months and only when you are comfortable with trading and start seeing thatyou are making some progress in making money in practice , only then you should get into realmoney trading .

I would like to introduce http://www.moneyvidya.com/ Its a stock picking community .

Let me tell you what all things you can do with it .

Predict movement : You can put a BUY or SELL rating for a specific stock and also mention yourreasons for it . Along with it you can also set the target price , target time and Stop loss for thestock. One of the best thing about it is that you can also mention what is the minimum price whereyou want to buy it . this will enable you to pick a stock only at a price which you feel is reasonablefor it . With this feature , you can practice your stock picking skills and also analyse yourperformance. One of the todo's for MoneyVidya will be to enrich the site with tools which can givedifferent type of performance measures .

Polls : Other nice thing is Polls ,you can create a poll and all the registered members will put therevote , using this feature , you can get a general idea of what majority of people think about a certainthing , Which can be helpful in your decision making .

Learning : Its a one stop place for learning things about Stock market , Technical Analysis andother expert subjects . you can see the learning resources at http://www.moneyvidya.com/blog ,currently , its in the starting phase , after some months you can expect plethora of learning materialon the blog .

Sound Tips : There is a rating system for each member , so depending on there performance , eachone gets a ranking and hence you can follow tips given by the top ranker's . I would recommend ,not just blindly following any ones tips , but taking the tip and then analysing it yourself and filter itfrom your decision maker system .

Go through a MoneyVidya video tour

Area of Improvement

Inbuilt Technical Analysis software : If they can add some inbuilt TA charting software , it wouldbe a great addition , by TA charting system I mean a charting system where people can viewindicators and also do there analysis like Drawing of Trendlines , Fibonacci retracements etc etc .

Detailed Analysis of Portfolio and rich User Experience : One of the things would be to give lotsof analysis on individual pick and overall portfolio , also they can device a system which can tellthere members what could they have done in there pick to make it better .

For example , If i pick ICICI and it does not meet my target and sells at loss , they can tell me something like

"It was not a good entry , because at the time of my entry the charts should a bearish Engulfingpattern and the RSI around 55 , so its was not a good time to BUY "

If they can develop a system like this , It would be great . Though these things important , theyshould come later .

Derivatives : Currently the site only deals with stock and not derivatives . I hope in future , traderswill also be able to pick BUY and SELL signals on F&O .

Overall , MoneyVidya looks cool !! , and everyone should start using it .

I have written a article on Why should you plan your taxes in the start of the year , read it

FYI, I am one the member of there MoneyVidya Blogger's team , so you may find some of my

articles on there blog too.

Continue Reading


Friday, April 10

Why to Plan your Taxes at the start of the Year

Most of the people take care of there 80C at the end of the year around Jan-Mar .Ideally it should be at the start of the year . Let us see why its should be done at thestart of the year itself . Following are the 4 most important reasons for Planning yourTaxes in start of the year .

Easy on Pocket : If you plan your taxes at the start of the year , you can then put small amount ofmoney each month . Otherwise you will have to cough up all the money at the end of the year ,which can be little difficult on the pocket .

For example :

If you want to invest 60k for this year ... you have two choices , either plan your taxes in advanceand invest 5k per month , or invest 60k at the end .

No Headache last moment : Another important point to consider is the tension and headache yougo at the last moment because of the rush , there is sudden confusion at the end on what to take ,where to go , where all the money will come from and all those things . planning the taxes in thestart of the year ensures that you do in correctly and without and headache for the last moment .

Correct products : If you plan your taxes in the start of the year , you can do your research welland plan for products which you actually need and then go for it . I have seen most of the peopletaking all kind of wrong products which they don't need , because there is just no time to thinkabout your requirement , you just have to "invest to save tax" .

Conforms with principle of "Investing Early" : Also when you plan our taxes early you areputting your investments early, that way you are ahead of most of the other people .

Conclusion

An important aspect of Financial planning is to plan your taxes early . Why procrastinate when youknow you have to do it anyways ... Best of luck .

I have written a series of 4 articles which talks about "Buying Stocks Smartly"

You can read them here : Part 1 , Part 2 , Part 3 , Part 4 Continue Reading


Thursday, April 9

How to use Oscillators to BUY an SELL

Hi

This is 4th part of the "How to be a better than average Investor" series of articles . Today's lesson ison Oscillators .

What are Oscillators : Oscillators are the indicators which move from overbought to oversold area, generally from 0 to 100 . when they are nearing 100 it means stocks are overbought and"expected" to go down now . when they are nearing 0 , it means , stocks are in oversold area andfresh buying can come and move the stock up .

hey .. wait a min , did you vote on the poll upper right side , I have asked on what all topics do youwant me to write . Please select topics from them , so that you also get to read your favorite thingsome time :) cheers ... go ahead ..

I will discuss just 2 oscillators which Investors can use to make better BUY AND SELL decisions .

Let take a time frame of 6 months and see how indicators gave signals of buy and sell . We will see2 indicators here RSI and Slow Stocastics (SS) (Read what is RSI and What is Slow Stocastic ) .

Rules

When its overbought , we SELL the share .When its oversold , we BUY the share .

SS BUY signal = when blue color line crosses down the Red line .SS SELL signal = when blue color line crosses above the Red line .

RSI BUY signal = when RSI has moved below 30 and starts moving up .RSI SELL signal = when RSI has moved above 70 and starts falling down .

To make signals more stronger , we will use both the indicators signal and take BUY or SELL onlywhen both shows same kind of signal .

OVERBOUGHT = when RSI and SS both are overboughtOVERSOLD = when RSI and SS both are oversold .

Note

At any point of time, markets may be in any of 3 state .

- Uptrend- Downtrend- Side ways Movement

Understand that these signals work best in range bound market , like we had for last 6 months .When market were moving in range of 3100-2600 . If markets are in strong Uptrend or Downtrend ,these indicators will generate many false signals .

Hence , In different markets we have to use different strategies .

Uptrend Market : IN Uptrend , you should avoid selling the stock , when there is small correction, Indicators can fast move in oversold region , that is the time you should BUY . But not SELLwhen prices are in over bought market .

Downtrend Market : In Downtrend , you should avoid Buying the stock , only SELL when theindicators are in overbought region .

Sideways Market : In this market , you can buy and sell both .

Lets see some examples for last 6 months . This was a Sideways market (but still downward biaswas there , so be careful with BUY , you can take SELL easily) .

DLF Chart


ICICI Chart


RELIANCE CAPITAL


Some Important things to NOTE (very important)

Oscillators should not be used in Isolation alone , You should also confirm it with other things likeSupport and resistance to make your BUY or SELL more stronger .

For example : If prices are near the Overbought , but you see that prices have broken the resistancepoint , its tells you that you should not BUY . because Oscillators are secondary thing , prices areprimary .

Also , If prices are near support and not breaking it , and oscillator are in over sold area , then itssafe to BUY . Never rely just on Oscillators , they are only helping tools used with other signals .

Lets see one Chart of JaiAss for testing what you have learnt .

Questions for you

- Tell me where are the buying and selling opportunities .- Tell me where you should have avoided the signals .- What according to you can help along with these oscillators . - Can you come up with some other oscillator of your own which can measure some important thing)

JAIPRAKASH ASSOCIATES CHART


ok , So finally we end the 4th part of this series of articles on Technical Analysis . I hope you havelearnt some things from me .

Earlier Posts

Part 1: What is Fundamental and Technical Analysis and which should be used When

Part 2 : How to use Support and Resistance to BUY and SELL ?

Part 3 : How to use Trendlines to find Support and Resistance ?

Understand that we are not learning how to trade , we are learning some trading tools which can beused by long term traders to make better Buy and Sell decisions .

Incase you want to trade stocks/futures/options just after learning from these 4 articles , I must tellyou have you have not learned even 1% required for trading . 99% is still there to be learned andover all knowledge of markets , technical analysis blah blah is just 10% . 90% is Psychology , yourattitude and your Discipline .

Trading is risky and not easy to do for long term .

Leave you comments / thoughts / suggestions / and answers to test question .

hey .. wait a min , did you vote on the poll upper right side , I have asked on what all topics do youwant me to write . Please select topics from them , so that you also get to read your favorite thingsome time :) cheers ...

Manish Continue Reading


Wednesday, April 8

How Panic BUY OR SELL happens in market !!


cheers .. credit goed tohttp://picasaweb.google.com/noorrock2002/TechnicalViewByNooresh#5040708262024007122

Continue Reading


Asset Allocation presentation

I am putting a small presentation prepared by a friend Subbu . This talks about asset allocation atdifferent stages of life .

Investments At Different Stages Of Life


Incase you have not looked at "How to be a better than average Investor" series articles . You canlook at them

Part 1Part 2Part 3

These articles talk about use of Technical Analysis to find support and resistance levels to makebetter BUY and SELL decisions . Please share them with others too .

Continue Reading


Monday, April 6

How to use Trendlines to find Support and Resistance

Hi Readers

This is 3rd part of "How to become Better than average investor" Series . Read

Fundamental and Technical Analysis , What and When ? : Part 1Using Support and Resistance : Part 2 .

Let us today discuss how can we use Trendlines to use Support and resistance levels and makebetter Entry or Exits .

What is a TrendLine ?

A trend line is a straight line that connects two or more price points and then extends into the futureto act as a line of support or resistance. In the Uptrend , we join two low prices points and inDowntrend we join two high prices and extend it further . Next time when prices approach them , itshould probably act as Support or resistance point .

Let us see one example of each of them.

Example of trend line while DOWNTREND


You can see in the chart how Two high prices were joined and the line acted as Strong Resistance infuture , 3 times prices touched it and broke down again , These are good price area where either onecan go Short (sell) , or book there profits . You can see that now prices are again Approaching tothis Resistance line ,so once prices reach this point , it may provide a good opportunity to sell .What will happen exactly , better not to predict and let market decide .

Understand that we are not saying that prices has to necessarily touch the Resistance line and thengo back down , the trend line only provides Resistance , it may again go back much before touchingit .

Example of trend line UPTREND

Below if the 2 yrs chart of HIND LEVER , Let us try to make a trend line which acts as support .


If you see the chart , i have connected two low prices and extended it in future , you can clearly seehow it acted as support area and prices went back up from there , At the end , you can see howprices are again approaching this support area , most probably this will again hold and it should be agood BUY :)

Let us see one more example for Trend lines . This example will show us following things :

- Resistance line using trend line .- Breakout- How Resistance once broken became Support

- Resistance line using trendline for shorter time frame .

Let us see a 2 yrs chart of JAIPRAKASH ASSOCIATES


You can see here how i joined two HIGH Points and extended the trendline in future , and howprices reacted to this Resistance line . Recently Prices broke out of this resistance line and then thissame resistance line acted as Support line and prices bounced back from there .

Also you can see a small trendline , which was made joining the low points . you can see how pricesbounced up as this support line held the prices . So , we have seen some examples of Trend linesand how they can act as Resistance or Support lines (as per situation) .

Some of the important points to note are :

- Its more of an art to make a trendline , it depends how you make them using HIGH PRICE ,CLOSE PRICE etc .

- You can make Trendline for any time frame.

- Its not necessary for prices to touch trendlines , you should not expect it .

- Its a wise decision to BUY OR SELL using trendlines . If trade goes in your favor , let your profitsrun , if it fails, cut your losses short and accept it . there is no problem with being wrong . even thebest in Industry fail .

- Trendlines will be of no help unless you control your GREED in markets . dont put all your moneyin a single trade . Keep adequate cash for bad times .

- Once trendlines are broken , take it seriously , it has happened for a reason :) .

- Make sure that the two points used to make trendline are not very near , there should be some timegap between them to believe in them .

- More times trendline is touched by the price stronger it becomes , And stronger is the break outfrom that trendline .

Test for you :)

Below is a chart , and I have drawn several trendlines in different time frames , I have marked somepoints with 1,2,3,4,5 , please tell me what are each of them and comments on each point . please doit individually . Let me see who comments correctly on each of them . Also tell me if there is anyother trendline which could have been made , but i have left it ?


People who are good with Videos can watch following videos

Please comment on this article , did you like it ? Was it easy to understand ? Is it too difficult to useTrendlines ?

Conclusion :

So we end this Article here , We saw Importance of Support and Resistance and how to maketrendlines and use them . In the next part (last part) , we will see how we can use some of theIndicators from technical Analysis to make decision better .

Also , we can see that even by visual inspection we can get some idea about which area is supportand resistance area .

For people interested in learning these things in detail , I would recommend a book "How to makemoney trading with Charts" by Ashwini Gujral .

Continue Reading


Even More Interesting Photos

Check out this SlideShare Presentation:

Even More Interesting Photos

View more presentations from ronaldl.

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Friday, April 3

Return of Premium Term Insurance , Is it Worth !!

T erm Insurance is the best form of Insurance , but why not take"Return of Premium Term Insurance" Policy , which is same asTerm Insurance , but with return of all your premiums back , incase you do not die :) , Which is better is a common questionnow ? Let us do simple maths and analysis our self . If you knowlittle bit of maths , you can be far better than many by analysingthings your self . So how do we find out which is better ? "SimpleTerm Insurance" OR "Return of Premium Term Insurance"

Its too simple to find out . Just try to come up with a plan which beats or does better than "Return ofPremium Term Insurance" , If you can beat it , than Simple Term Insurance is better else its not !!

Let us take an example scenareo ...

ING Vyasa has a "Return of Premium Term Insurance" plan called as "ING TERM LIFE PLUS" ,click on the "Benefit Illustration" link in the middle of the page and it gives a following example forregular premium .


Company also provides two types of payements :

a) Mid Term Benefit: On the Life Assured surviving to half the policyterm, the Company will return 40% of the regular premium or 20%of the single/limited premium, as the case may be, excluding theextra premiums if any paid by the Policyholder.

b) Maturity Benefit: On the Life Assured surviving to maturity, theCompany will return the total premiums paid without interest,after deducting the policy mid term benefit and extra premiums ifany paid by the Policyholder


So the numbers look like this :

Age : 35 yrsTotal Duration : 20 yrsCover : 12,00,000 (12 Lacs)Yearly Premium : 10,653Maturity Amount : 213060 (amount he paid during 20 yrs , 10653 * 20)Death Benefit : 12 Lacs

Can we achieve the same thing or better with 10,653 per year ?

Lets take a simple Term Insurance + PPF combo

From Religare Aegon , I got that Insurance premium for 35 yrs old for amount of 12 lacs andduration of 20 yrs is Rs 3721 (after tax) .

So if we pay 3721 out of 10,653 for Insurance , we are left with Rs 6932 (10,653 - 3721) .

If we invest this Rs 6932 per year in PPF for 20 yrs , @8% , we would get 3.4 Lacs . Which beatsING amount of 2.1 lacs . Now this is the safest way of beating it . No questions behind it !! .

With SIP in mutual funds

For a investor who can invest it in Mutual funds through SIP , assuming a acceptable 12% return , itwould be around 6.9 lacs in 20 yrs .

Now the question is what is the benefit of "Return of Premium Term Insurance Plans" ?

Ans : No benefit , Now a days Insurance companies have realised that people are understanding theimportance of Term Insurance , so the next idea for them was to build something on top of TermInsurance , give a "feel" to customers that "they don't loose on premiums also" and present aproduct which looks "irresistible" to them . But they forget that there is something called as "Maths"in this world .

Conclusion : So If you have to take Insurance , Just go for plain Term Insurance , Dont go forReturn of Premium Term Insurance , There premiums are too high .. its always better to use extramoney to make other investments :)

That's all for now ...

Comments/doubts/disagreements !!

Question for you : How will you deal with an agent who wants to sell you this product ? Or Howwill you even convince your friends who fell in the trap of these products ?

I have posted articles on Technical Analysis which teaches some simple things investors can use toBuy and Sell stocks , you can read Part 1 and Part 2 . I will soon come up with Part 3 and 4 .

Final Note : The best products in this world are "Simple" . I consider Term Insurance as product ofthe Century !! , nothing can beat it !! :) . Do simple maths with idiotic products which comes inmarkets , you will know if its worth or not .

Continue Reading


Thursday, April 2

How to use Support and Resistance to Buy or Sell Stocks

This is Part 2 of the How to become abetter than average Investor series , seePart 1

In the last post we discussed theimportance of Fundamental andTechnical Analysis . Now we will seeone of the most simple , easy andpowerful thing called Support andResistance .

This is for people who have no ideaabout what is it and have at most heardabout it .

Let us see both of them one by one .

Support : Support for a price is a price area where there are lots of buyers ready to buy the stocksrather than sellers . At that price point , the general perception is that its a good buy , and lots ofbuyers come to buy it . Hence buyers outnumber sellers and there is a higher possibility that priceswill bounce back from that point . This is a point where Buying has less risk .

In other words , at support levels demand is thought to be strong enough to prevent the price fromdeclining further . Please understand that Support point is not a place from where it will for surebounce back , Its only the higher probability that it will bounce back . Also understand that its notexactly a fixed price which should be considered as Support , generally its a range like 98-100 or560-570 ..

Which point is Support point : Every Low made by the price can be considered as Support Area .

Let see Example :

Support Example 1 : Below chart is for Jaiprakash Associates (click to enlarge) , It made a low ofRs 53 (closing price) on 27th Oct 2008 and then bounced up from there . Now Rs 53 is the supportpoint , Prices went up from that point and after reaching Rs 90 , it again started heading down , Youcan clearly see in charts that it reached Rs 53 levels , but could not break down from that point andagain bounced back from there .

It was a very good "BUY" around Rs 53 .Understand that buying around Rs 53 , is only a less-riskytrade , not a "no-risk" trade . Prices can break down from there also .


Support Example 2 : Below is a chart of RPL . Here you can see thatprices made lows of Rs 70 around Dec 1 , 08 . That became a support point , and then pricesreached thought levels around first week of Mar 09 , It bounces back from that point , It was a lessrisk trade around Rs 70 .


Resistance : Resistance is just opposite of Support , At this price levels there are more sellers thanbuyers and with high probability prices reverses from this point . At this point there are enoughsellers in the market to prevent it from rising further .

Resistance point is the High made by a price . All the high's will act as some kind of resistancepoints .

Lets see examples :

Resistance Example 1 : Below is Reliance Charts , You can see that reliance made a high of Rs1400 around Dec 2008 , After that you can see how it reversed from that point 2 times in Jan andFeb 2009 . It was a wise decision to sell at those points .


You can also find many examples like this if you investigate yourself . Try to see other charts if youare interested , you can look at charts at ichart.in or http://www.bazaartrend.com/index.php , findyourself)

Important Note : When prices are near Support or Resistance levels , you should be more alert . Itdoes not mean that you just jump onto market and buy or sell , Be patient to see the actual pricereversal , Though you will loose some part , that would be a better trade . Also there are severalother factors which should be considered , but for now lets not touch upon them . lets keep it simplefor readers .

Lets also look at some important points

Break Down : Always remember that when prices dont hold support and break them and fall

further , it tells that buyers are not strong enough and Sellers have taken over them and prices willmake new lows , When support is broken , Sell further .

Example :Below is the chart of RPL , which shows how it broke down its support point and thenmade further lows .


Break Out : When prices dont hold resistance points and break them on upside , prices thenindicate that they are going to make new highs . Better to buy at that point .

I have put a post on my analysis blog for Reliance Break out : please see it :http://manishanalysis.blogspot.com/2009/04/reliance-break-out-target-1800.html

Some Other points to remember :

1. Support and Resistance points are places where you should be more alert and look for othersignals to buy or Sell, just dont buy because prices have reached near support , buy it when it startsrising and there are positive signals .

2. Support once broken becomes Resistance for next time , and Resistance once broken becomesSupport point for next time , use this knowledge . See :http://candlestickmania.blogspot.com/2008/07/resistance-becomes-support.html

3. Many times there are false breakout and breakdown , So it will many times happen that you getout at important levels and miss the large movement , thats fine , you can always enter after gettingout .

4. This is most important point , Everything I talked about in this article can increase your chancesof making more money in trading , but remember that you are dealing in Markets , and if you dontcontrol your GREED and emotions , your failure is guaranteed . Use strict Stop losses and useMoney management techniques (it means not putting all your money at once , if you have 10 lacs ,put only 1 lac , dont be greedy enough , else someday you markets will punish you badly , then noTechnical analysis or any thing will help . have good amount of cash with you always ).

All technical Analysis and knowledge are of no help if a person cant control his greed and emotionsin Market . TA and your knowledge will contribute not more than 20% of your success in long run .

This was end of Part 2 of this series , In next port (Part 3) we will see how to find support andresistance levels using TRENDLINES . wait for it .

Comments please , Its sometimes disheartning to see no comments after I put up a post after somehard work . I dont want "good post or Great Article kind of comments , but at least share what youhave learned and ask questions , make it little interactive please .

Question for you all :

Question 1 : Do you think this support or resistance thing works , or can you add anything else howto buy or sell and what things to observe at support and resistance levels , which can make buyingand selling more successful ?

Question 2 : What do you think about Chambal Fertilizrs at this point , see the charts at :http://www.bazaartrend.com/index.php?symbolname=CHAMBLFERT (click on the upper leftbutton to make it full screen) . Suggest what should be done at this point of time ?

I came across very nice video , about difference between winning and success , a worth watch . Seeit below

Note : All the things discussed here are available on net with great detail . learn more of it yourself .

Continue Reading


Monday, March 30

Fundamental Analysis and Technical Analysis , What and When !!

I am starting a series of articles which will deal with "Howto invest in stocks efficiently" . This post is Part 1 .

There are two important questions which you have to answerwhen you want to buy shares ? They are "What to buy" and"When to buy" ?

You may be familiar with Fundamental Analysis ,Fundamental Analysis answers the question "What to buy" ?. It a study of companies Financial statements , cash books ,markets study to find out the future prospects of a company.It answers the question "Will this company be a good buy forlong term" ? , "Will it be more valuable than what it is now "etc etc "

But !! , Even though you have picked up some excellent companies for your long term investments ,That's not the end of the story . Now the biggest challenge and question you have is "When to buyit" ?

You should not just go next day and buy the share , that's not the right approach . There can be aprice area where buying is best in terms of risk/reward .

Technical Analysis is the study of charts , price and volume patterns and other indicators derivedfrom price and volume . Technical Analysis gives us hint on what can happen in future , understandthat it only gives you chances, not a guarantee . So everything should be taken with crossed fingers ,Decisions taken on basis of TA only increases your risk/reward scenario .

I will give you an example :

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :) ) .

On Feb 1 2009 , Ajay and Robert want to invest Rs 1 lac in Reliance for long term . Both of themunderstand that Reliance is truly long term buy . Ajay invests in Reliance on Feb 1 , because shareis going up and he feels its a good time to enter other . He buys the stock at Rs 1360 . After somedays Stock starts falling and reaches around Rs 1,150 . Roberts buys the stock at that time .

see the chart here

Here you can see that Robert has got the stock at 15% lower price , which means his profits willalways be more than Ajay's by that much . What did Robert do ? Robert used simple TechnicalAnalysis concepts and entered in the stock with better prices , It does not mean it will alwayshappen , but there are good chances for getting better price .

In the above case of Reliance , there is no significant price difference , but there can be cases ,wherethere can be drastic differences , and it would be really worth to use basic Technical Analysis .

Dont be scared , I will tell you some very basic things of technical Analysis in some of next post .

I will talk about

Part 2 : Support , Resistance

Part 3 : Trend Lines

Part 4 : Simple Oscillators to use for short term investments .

Watch out for second part soon .

Please share any real life example which happened with you , May be we all can try to find outwhat could have been done to make a better entry or exit from stock .

cheers :) Continue Reading


Saturday, March 28

Some flaws in Investing by retail Investors

"People who take some pain eventually Gain"

Have you invested in the peak of bull run (Nov Dec 2007 orJan 2008) or in middle of this downturn (Mid of 2008) andnow sitting on heavy losses .

In this article we will discuss how and why should we avoidit . This article mainly covers investors who invest theremoney in some share for relatively short term like 6 monthsto 2 years , even though its applicable for all kind ofinvestors .

btw , If you have still not voted for the poll above , please doit .

Robert bought 100 shares of Jaiprakash Associates around May 2008 , at Rs 300 .His reason

was simple , The stock has fallen "a lot" , "how low can it go? " , " What if I don't buy it and

it goes up again , I will miss the profits" .

Does it sound similar ?

Then stocks moves upto 350 , and he is so furious that why he didnt out more money . within somedays stock comes down to 250 . Now he feels that he probably made a mistake and madeinvestments at right decision . He was sad that he is now in loss , he says to himself , that he will getout at cost once it moves up to 300 . Now it comes down to 200 , He is not thinking why didint heget out at small loss ? He is not ready to get out at 250 , and he is determined to get out . But itnever happens and stock tumbles down to 160 , Now he tries to play a trick with market , and wantsto prove his point that he is also smart .

He triples his shares by buying additional 200 shares by buying the share at 160 and averages hisprice to Rs. 207 , He can now get out once shares move to Rs 200 or 210 and he can get out at costprice or may be he can make some profits also .

But stocks still goes low and reaches low of 45-50 . At the time of writing this article , the price forthe share is around Rs 90 . Probably it will take at least 1-2 yrs for this share to reach Rs 200 levelsand that will happen once overall markets stabilizes .

You can see JAIASS chart here :http://in.finance.yahoo.com/q/ta?s=JPASSOCIA.NS&t=1y&l=on&z=l&q=l&p=&a=&c=

Does all this sound similar to you ?

What are the wrong decisions Robert made ?

1. Trying to Time the Market : The one reason was that he was trying to find out if share hasmade a low . He believes that share has lost a lot of value and will not go further .

Learning : There is an old saying , "Dont catch Falling Knives" , When a share has started its down

move , the chances that it will move more down is more than its going up . The overall mood is bad. There is no MRP of shares , there is only market value . Prices are governed by emotions andsentiments , Dont try to get in middle buying them . Rather short sell it or wait more .

2. Patience : The other problem was no patience , Just imagine if this person had more patience ,What if he waited for stock to go as low as possible and then start its journey upwards and then buyit . I am not saying , its a right time to buy , but current scenario provide much better risk/rewardratio .

Learning : Dont go against the trend , if markets are falling like hell . dont mess with it by buyingin between . Have patience , No profits are better than losses I guess . Always try to be with thetrend , A stock has more chances of going in the same direction of the trend rather than countertrend . On the day Satyam bad news came in , I dont know why people bought shares in between itwas falling , It fell from 170 to 40-50 , But people bought it in between around Rs 120 levels ,thinking , "How low it can go" . Eventually some people bought it at 20-25 levels and many havedoubled there money in weeks . Patience helps .

3. No Stop loss or Targets set : Often people emotions come in between there trading or investing ."If only it comes back to Rs XYZ i will get out" , Once it goes up by Rs PQR more , i will get out" .

People invest without knowing there risk capability , They dont invest with some target , once yourshares rises by 20% in 1 month , you may often think , what if it goes up to 50% , then I will missout those profits .

They also dont want to take losses , they only want profits , once prices go against them , they arenot ready to get out at small loss . They want there money back. Then prices move a little moredown and then this vicious circle of "If only it comes back to this point , i will get out " continues

Learning : Do you invest to be right or to make money . What is your goal ? I guess its to makemoney . So dont feel bad if you are wrong some times , it happens with everyone . The mostimportant thing is to not let it become so big , that it becomes pain . Have a stop loss , When youbuy something at 300 , say to your self that if it comes down to 250 , i will take Rs 50 loss andaccept I was wrong and move on to find out a new opportunity . And also tell yourself that if itmoves to Rs 500 , I will get out , take my "excellent profit" and then find out some thing else . Dontbe too greedy . It hurts in long term . "just a little more" is a not a good idea .

You can a similar article where i discussed 5 mistaks of my First trade :http://www.jagoinvestor.com/2008/12/5-mistakes-of-my-first-trade.html

Conclusion : The main idea of investing is to make money , dont try to prove market that you werecorrect and no one can make you wrong , keep your emotions at home , If you are wrong , you arewrong , Just accept it , take small loss and try to find out new opportunity . Dont waste time withthe lossing trade and give all your time and effort in that .

Know some rules and stick to it . Mainly this is applicable to traders whose time horizon is very lesslike day or a week , but this also applies to investors . Even if you are investing for long term like10-20 yrs . Buying a share at low cost can have dramatic affect on your corpus . Just imagine this :

Ajay invests 1 lac in Unitech at Rs 150 just after it fell from 900 levels in Jan 2008 . His investmentafter 30 yrs was 66 lacs .

But Robert waited patiently to let this share go as much down it can be and after markets shows

some strength and signs of recovery bought it at Rs 30 , His corpus would be Rs 3 crores .

Just imagine the difference of having some patience and respecting some ground rules of investing .It pays .. believe me .

Keep coming to the blog as in coming days I will post an article about how a common person canuse basic technical analysis to make his investments more powerful and less risky .

Question for readers : What do you think Robert could have done better ? Or How what are theother mistakes which i have not mentioned ?

Please post your views/comments/questions . Make it interactive .

I hope you have read my article on : How to use your losses to reduce your taxes

Thats all for now .

If you liked this post , follow me on @jagoinvestorContinue Reading


Thursday, March 26

Can you beat Warren Buffet ?

May be Yes , May be No !! , but certainly you can invest in a similar way as he does , By makinginvestment decisions the way warren buffet does , you can make some of the best investments forlong term .

Shyam Pabbati , shares some of Warren Buffet investing Philosophy and principles in his article athis blog , Read it .

If you are a serious long term investor, Its a must read for you .

I have discussed about Akruti City crash in my previous article , read it

I have also discussed how should you make your investments in current market , read it .

Akruti crashes by 50% , Finally it happened

Akruti crashed by almost 45-50% today . This happened inspite of strong global clues and strongrally in markets which touched 3100 levels on nifty .

From the levels of 2250 some days back , today its near 900-950 levels .

This crash was due anyways ... Some days back I had warned that there was a Evening Star seen onthis stock charts and It should be seen as a shorting Stock on every rise . read it here :http://www.jagoinvestor.com/2009/03/akruti-city-plunges-25-in-early-trade.html

Read my previous post how to invest in this market

Evening Star shows you the shift of power from bulls to bears . Markets were near expiry and allthe punters who were holding the stock from the time of strong rise which started , had to clearthere positions and hence a sharp selling was expected . No Surprise that it happened today , Asmarkets were rising , every short term long holder wanted to clear his positions , this resulted inpanic selling and stock went down so much .

Now it has come to its normal levels and with this strong rally , it has good chance to move up incoming weeks . Dont over invest incase you want to invest .

You can put 10% of your capital in this and liquidate half position after you are in 20-30% profit . Itcan give some quick gains later . Dont be greedy , sell in profit once you are in 50%+ profit .otherwise one fine day again it will drop heavily and you will be left crying .

Why am I now suggesting to invest in this , last time I said stay away ?

Investing or trading should be done on high probability trades . This stock went up heavily and thencorrected a lot to come back to normal levels now . This is a ideal time to take calculated risks , Therisk/reward of this trade would be worth taking .

It does not mean , you cant loose from here , why not !! , but its worth taking that risk , becauseprofit potential is very good . Have a logical stop loss and once its hit , get out with loss .. first lossis the best loss .

Did any one make profits or loss on Akruti ? Share it with other readers , so that everyone comes toknow about it .

Read my previous post how to invest in this market Continue Reading


Sensex Touches 10000 , Nifty 3100

Markets are rallying for last many days because of global clues . The biggest confusion withInvestors now is to invest or not . This can be the start of new bull run or it can be a bear marketrally which might reverse and there can again be a low made .

My views : Though markets have come long way from 2500-2600 levels , and if you have notinvested at that time (before some weeks) , then you have missed some good rally .

But anyways , markets are roaring even now and there are chances of markets going little more up ,after which it may again head down and then move sideways for some time or do down again .

If you have to invest for long term now , you must now wait for a dip , and then you can buy yourstocks , with tight stop loss around 2850 levels of Nifty (to make it simple)

If Markets move up : Book profit on some position and keep half shares with stop loss at buy price.

If Markets go down : Get out at the SL price and take a small loss , then wait for markets to movedown and when there are signs of strength again , then buy fresh , dont forget to participate thattime because of fear . Watch moving averages .

Last Notes : Until there is any fresh bad news from US or world economies , chances of Niftygoing down 2850 looks bleak, but expect surprises always :)

If I had money , one of my choice would be to buy Reliance (on dips now) .

Please share your comments on what else we can do and what are the good stocks to pick this time .Which one according to you can be next Bull market King .

Read how to reduce your taxes using your Losses hereContinue Reading


Monday, March 23

How to use losses to reduce tax

Are losses good ? Do they have any benefit ?

When you make a loss , do you feel it has nothing to provide or not atall beneficial .The answer is NO! , losses are bad, but our tax lawsgives us a way to utilize them in such a way that we can reduce ourtax liabilities . Lets see how :) , don't worry , we will start fromscratch and will explain in detail so that everyone can understand .

Let us talk about capital gains in detail today and let us understandhow should we utilize it to minimize our tax liability. Things we will discuss would be stocks ,mutual funds , Gold , Debt funds , Real Estate etc .

Understanding Terms and Rules

Capital Gains and Loss : Any profit or loss aris from the sale of capital assets is capital gain orloss . Capital Assets Include Shares , Mutual funds , Real Estate , GOLD etc .

Short Term Capital Loss and Profit : STCL for Equity (shares and mutual funds) is when you sellthem at loss before 1 yr , for Real estate , GOLD its 3 yrs .

Long Term Capital Loss and Profit : LTCG for Equity is when you sell it after 1yr , for Realestate , GOLD its 3 yrs .

Following is the chart showing the tax treatment and time frame for short term for each asset class.Click on the chart to enlarge it .


General and Carry forward Rules :

• Short-term capital loss can be set off against any capital gain (Long-term or Short-term)• Long-term capital loss can be set off only against long-term capital gain.• A long-term capital loss will have no value in a case where the long-term capital gain is

exempt from tax . For example, In case of shares or mutual funds after 1 yr , LTCG isexempt from tax , so If you hold a share for more than 1 year and then take a loss , ThatLTCL will have no benefit . This loss cannot be set off against any other income.

• A capital loss can be carried forward for next 8 years .

How can you utilize the losses ?

As we know that capital losses can be offset with capital gains , we can utilize this advantage toreduce the tax liability .

The main idea is to create losses to offset any profits . There may be the cases where there is ainvestment on which you are loosing , but still you have not booked the loss , but you can book itand use this loss to offset a profit on which you may have to pay the tax .

Let us see some examples

Example 1 :

Ajay had invested Rs 5 lac in GOLD in 2005 and currently in 2009 he sold it for Rs 10 Lacs , Nowhe made a profit of 5 lacs and it will be considered as a LTCG , as its after 3 yrs . and it will betaxed at 20% indexed (If you dont know what is indexed , just forget it , dont worry ) . The taxwould be around Rs 1 lacs .

Now Ajay also had invested Rs 10 Lacs in Unitech Shares in Apr 2008 . His investment has comedown to Rs 4 lacs now . But he thinks that it will go up and he wants to keep it and not sell .

Good !! , I appreciate his belief that it will go up again . But what is stopping him from selling ittoday and then again buying it next day .

What will happen if he does that ? If he sells his shares and takes a loss of Rs 6 lacs , He now hasmade a STCL of Rs 6 lacs and law says that he is allowed to offset it with any STCG or STCL . Sonow he can offset his 5 lacs profit with this 6 lacs loss and hence , he can save his tax of that 1 lacwhich he had to pay , also he can carry forward a loss of remaining 1 lac which was not offset .

He can again buy his favorite Unitech share the next day . The only loss he will make is thebrokerage charges and any fluctuations which may occur in prices , which will not be much , maybe it has gone down and he can buy them later at better prices .

So the point is to generate the loss by selling a loosing investment and again buying it back in some

days . This will help you cook up the looses which then you can offset with existing profits andhence reduce your tax liabilities .

Let us also see one more example

Example 2

Robert had invested 5 lacs in mutual funds in early 2008 or end of 2007 and currently has a goodloss of 2.5 lacs (1 yr is still not complete) . This is currently every one state , most of the peoplehave burnt their fingers and made huge losses .

Now he is sad that he made losses , He also had bought some shares before some months and madea profit of 50k . Let us also assume that next year his mutual fund will rise to 4 lacs from current 2.5lacs , which he sells next year .

Now he has 2 choices to make , let us see 2 cases .

Case 1 : He does not book the loss and holds it .

In this case , he will have to pay profit of 15% STCG on his profit of 50k , and next year he willhave his current investment at 4 lacs . When he sells it , it will be a loss of lac which will be LTGL(because he had hold it for more than 1 yr) .

Case 2 : He books the loss of 2.5 lacs and then again buys it back the same day or next day .

In this case , he has made a STCL of 2.5 lacs (bought at 5 and sold at 2.5) , Now he can offset his50k profit with this loss . Then he would not have to pay the tax and he can then carry his loss of 2lacs carry forward .

Next year , he sells his mutual funds for 4 lacs and makes a STCG of 1.5 lacs (because he has re-bought this mutual fund and 1 yr is still not complete) ..But he can offset this profit of 1.5 lacs withthe carried forward loss of 2 lacs , and still carry another 50k worth of loss forward .

So whats the advantage of case 2 ?

The advantage is that you can save tax on the existing profit and also generate STCL which you cantake forward and save tax on future profits .

There are many people who make losses and dont bother to show it in there returns , if they dontshow it in returns then they will not be able to use it for offsetting purpose in future .Note , The wayi have shown the examples have there own benefit and problems , Its you who have to decide whatyou want and how to utilize the tax rules to your advantage .

Its smart use of knowledge , not cheating :)

I wish you have got some knowledge out of this article , please put yourcomments/corrections/suggestions so that we can do more discussion .

Also, dont forget to put your vote on the poll at the top of this page .

Continue Reading


Sunday, March 22

Importance of small profits in your Trading

Bill Craft discusses a very important aspect of trading in stock markets . It says that trading successcomes from taking small profits often . There should be small losses , small profits and big winners. These small profits will take care of small losses and give you over all profits only , and the bigwinners will give you more than average profits .

Its totally unrealistic to expect big winners each time you buy some stock , Have a reasonable targetand take the profits . Once in a while a situation will come when you will get exceptional returns onsome trades .

Read this article :http://marketfn.com/blog/2007/07/i-wish-i-could-always-know-which-stocks.html

Continue Reading


Friday, March 20

Introduction of Saurabh Maheshwari

Hi All

I would like to Introduce Saurabh Maheshwari to you all , Saurabh is a Banker by Profession and hewrites about personal finance, investment planning, debt management, retirement planning . Hisblog link ishttp://themoneybees.blogspot.com

You can read a very nice article from him on 10 Commandments of personal financial Planning . Inthis article he discusses 10 most important point you should follow to manage your personalfinance's to its best .

Below is the article http://themoneybees.blogspot.com/2009/03/10-commandments-of-personal-financial.html

Saurabh's LinkedIn Profile is here

Thanks

Note : I have updated the Akruti City post once again showing a bearish candlestick chart . Have alook again at it , Readers , Dont forget to put your vote on my poll at the top .

Continue Reading


Akruti City Plunges 28% , stay away

Post Updated , Read it again if you read it before .

This is a follow up post on Akruti City saga .

While I write this post on Friday Evening 20th Mar 09 , Prices of Akruti City has crashed by 28%with better than average volumes on NSE , and may even fall more . This is happened becauseSEBI banned it from F&O from next month . In my previous post I mentioned that retail investorsmust stay away from these kind of companies . The scrip has gained more than 250% from Jan 09 ,and has doubled in just 5 sessions . this kind of behaviour is unjustified and hence it had become adangerous scrip to trade in .

There was a Evening Star Pattern seen today , which is a bearish Signal . This tell that its somethingto be cautious of .Though its a signal to sell , but dont just go and sell , wait for the first sign ofconfirmation again . Overall markets upmove can again take it high again .So wait for next downmove toconsider selling incase you havemade your mind to do so . The betterthing would be to stay away .

Read what is Evening Star Pattern

Photo credit goes tohttp://timamo.blogspot.com

In my earlier post I had mentionedabout this , Read it here

Though the reasons are not directlyrelated to company inside news oranything . the point is simple ,Whenever it comes down , it will be a heavy move and it has happened . Any one who had invested1 lac a day before has now worth of Rs 75k. It may go further down or again go up . that's is not thepoint .

The Point is Was it a Good investment ? Think :)

Read detailed new about Akruti City's Drop in Prices here

Read Is Direct Equity for you ?

To read some of the best articles of this blog , read this

Continue Reading


Thursday, March 19

Akruti City , Have you gone Mad !!

Double in a week ?

If you are watching Markets , you must have seen the movements of Akruti City . This company isa Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that's roughly a week .


Note : Please vote on the question asked on the upper - left hand side of this blog .Also see the update on Jaiprakash Associates after todays markets action on my analysys blog ,click here

So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , justnext to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!

see list of real estate companies with market capitalization

My God !! , whats going on !!

90% of the equity is with promotors , and a very small fraction is with retail public , you canunderstand that everything going on is just the "kartut" (hindi word) of minority public .

Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back hasmade exceptional profits , But is it a right decision to invest in this as of now for short term gain orto ride the trend . A big NO!!

For sure some insider trading is going on with company , that's the reason why stocks has gone mad. Retail Investors must not get very excited with these kind of things , These kind of sharp movesare not sustainable , to move in a healthy way , the stock must form a base (spend some time in arange ) and then start its up move slowly and with some corrections in between .

These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready toexplode .

If like someone who just entered the trade 1 week back and made 100% gains , other person canalso loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investingnow , its Gambling !!

Suggestion : please stay away , Dont forget the mantra of "Not loosing money" rather than "Tryingto get fast money" in stock markets . If you are bothered about lost opportunity , I can bet theremore opportunities in market every day than all the combined opportunity in the world in all otheraspects of life . Wait for just 1 day and you will get thousands of opportunities again .

see detailed news on :http://www.thehindubusinessline.com/2009/03/19/stories/2009031950981000.htm

Note : Please vote on the question asked on the upper - left hand side of this blog .Continue Reading


Tuesday, March 17

Margin Of Safety Principle

Came across a good article . Just reproducing the work here . This post talks about the Value andPrice difference of some investment .

Margin Of Safety Principle

In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as

being an essential part of any true investment. He goes on to say that margin of safety is an elementof investing that can be demonstrated quantitatively with sound rationale and from a historicalperspective.

Graham’s definition of margin of safety is essentially the gap between price and value. All elsebeing equal, the wider the gap between the two, the greater the safety level. Graham also explainsthat the margin of safety is important because it can absorb mistakes in assessing the business or thefair value of the enterprise.

As Graham says, The buyer of bargain issues places particular emphasis on the ability of theinvestment to withstand adverse developments. For in most such cases he has no real enthusiasmabout the company’s prospects...If these are bought on a bargain basis, even a moderate decline inthe earning power need not prevent the investment from showing satisfactory results. The margin ofsafety will then have served its proper purpose.

From its origin, the calculation of margin of safety was never related to the volatility of the sotckprice of a company. The focus of most value investors has always been based on the intrinsic worthof the company in question--a bottom-up process that should be done without regard to currentmarket valuation (which very few analysts are willing to do). Even with a margin of safety, aninvestment can still go bad. This is not a failure of the concept of margin of safety principle, as theconcept only provides assurance that the odds are in the investors’ favor that they will not losemoney. However, it is not a guarantee that the investors will not lose money.

There are and have been many adjustments to Benjamin Graham’s margin of safety concept in themodern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation. It is theinclusion of the concept that is important in one’s assessment of an opportunity, rather than theactual mechanics and particulars of the safety calculation.

Some value investors use a variety of measures in determining a firm’s safety levels. They are askeen on asset values as on earnings and cash flow, and may even consider intangible asset valueslike brands, reputations and intellectual property. They also use a variety of measures just in caseone of them does not hold up--the objective is never to be caught off guard. Based on thesecriterion, these value investors look for several different measures, such as break-up value,favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts toGraham’s margin of safety principle.

Buying companies with a margin of safety prevents owning companies with a high burden of proofto justify their stock valuations. When a stock trades at a high valuation level, the expectations areso great and often so specific that a slight disappointment or an adverse change in expectationscould be catastrophic. Buying shares with ample safety means buying stocks with the lowestpossible burden.

Value investors also believe that margin of safety should incorporate an investor’s appatite for risk.The disparity of safety levels among investors is based on the amount of volatility they are willingto tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing toendure.

The margin of safety principle essentially asks the question: What is supporting the stock price at itscurrent level? or, Why shouldn’t the stock fall significantly from today’s current price? The Grahammargin of safety is heavily conscious of what can go wrong, and not what the discount is to its fairvalue--the safety is thus purely based on the liquidation value of the current assets.

WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham--butwe shift the primary focus from asset valuations to discounted future earnings. Our method is lesstangible today, but more valuable as a predictor of tomorrow. Because our DCF method entailsmaking several important predictions 10-years into the future, we require a large margin of safety--

perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currentlyexperiencing, there are several fine businesses discounted by over 50%.

Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividendyields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitiveadvantages, management capability and other fundamental aspects of each business beingconsidered for our portfolio. We place rather equal emphasis on quantitative and qualitative issues.This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s currentassets less all liabilities--placing current value squarely on the value of property, plant andequipment).

Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both thequantitative asset valuations and the qualitative business assessments to find true value stocks.Buffett favored the discounted cash flow valuation because it included both the ability of a businessto generate cash flow from tangible assets, as well as the ability to create value from intangibleassets--like brand strength, intelligent management, and consumer monopolies. Buffett madefamous the expression--I’d rather pay a fair price for a good business than a bargain price for a fairbusiness. WallStraits agrees that the ultimate investment is one undervalued versus its ongoingability to produce profits and reward shareholders.

You can use your own logic and creativity to make personal assessments of the qualitative andquantitative forms for any business you consider for your portfolio--but regardless of yourmethodology--don’t forget to always think from the perspective of seeking large margins of safety.

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Monday, March 16

Is Direct Equity for you ?

This is one of the questions which everybody wants answer to . You can do it , butit will require some effort , learning and dedication . Also you will have to developsome kind of discipline and change your attitude a bit . We shall first see who allare into Direct Equity Investing. They are Mutual funds , FII's , Big experiencedInvestors with high experience and qualification . These people are 24/7 doing thisjob of researching the companies for long term investing . And even these peopledo mistakes and even they can predict markets directions always .

So now you can be one of the two kind of people .

1 . Someone who has no interest in the markets and have no desire to learn things on his/her own .They want to earn better returns than debt , but at the same time without bothering much . Then youbetter invest in mutual funds (SIP would be a good idea) .That way you can get returns over longterm and dont have to put much effort (apart from choosing good mutual funds in the start andmonitoring them once in a while in a year , which is not a big deal) .

2. Someone who is ready to take more risk and can also devote some time to do his own study ofstocks (not a big one , but basic atleast) . He has better than average interest in these things and alsoenjoys the stuff . If you are one of those than you can put some money directly in shares ofcompanies after your own research and understanding , it can be any way you are comfortable with. You should learn some basics of Fundamental Analysis and then apply it . For example i can say ,that After RPL - Reliance Merger , Reliance will be among the biggest refineries of the world (itwas anyways , but now in better position) , It has lots of exploration projects going on andcompany's is in safe and great management (as per the current information) , On the top of itCompany has great valuations , and is available at many years low price and now overall marketsare near its bottom . Just by looking at these facts , you can understand that it would make sense toBUY Reliance for long term , better accumulate it over the next 6 months , to catch the volatility too.

Can we go wrong and it may not give us good returns ? Definitely yes , Markets are the place whereyou should expect the unexpected . But at this moment that's the best we can do and should do .

Can you do better than Fund managers of mutual funds ?

Some people may answer yes , and may be they are true , But personally I would say at thismoment I can't do better than them . Reasons are as follows :

- They are doing it from last 10 yrs , I might be doing it from last 6 months or 1 yrs (personally idont do any ) .- They are highly expert and qualified people . I learned accounts till my 12th only and it reallysucks for me .- They have access to internal information and resources to do better research . I don't have it .

So, I may be able to pick a company once in a while which gives 100% in 6 months against there20% . but over long term , chances of there sustaining in the business is very high . So think longterm . Don't over estimate yourself .


You should understand that i am not trying to tell you cant do it . I am just trying to make sure thatyou understand your position in this game and your abilities to do things. I personally like to dothings on which i am good at and transfer the responsibility of other things to experts in that field .If I want the joy of it anyways , I will take a small portion of my portfolio and will play with directequity . That is allowed :)

Why Mutual funds Makes sense for Retail public ?

Mutual funds are the products which are formed on the philosophy that many inexperienced anduninterested people who have money but no knowledge will pool all the money together and hire aperson who has experience , understand the markets well , and can take better decision . This personalso has all the time dedicated to investing , so that thousands of investors dont have to monitor theinvestments and the returns which will be generated will be distributed to investors after paying thisfund manager for services .

So it makes sense you any one like you , who may be a Software engineer , Doctor , businessman oranother person , who has no time for all this investing thing . Its you who have to decide who youare ?

Dont fell in the trap of high returns , With high returns comes the disaster too .

"Good return with some risk is much better than Exceptional returns with catastrophic losses" .

Comments please .



Friday, March 13

Investing and Wealth Growth Presentation

Investments And Growing Wealth


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Tuesday, March 10

Best Articles of this blog

Happy Holi to all the Readers , We have completed more than 1 year with total of 135 articles , Ihad posted the first article on Dec 6 , 2007 . This blog is appearing constantly on many keywordsearches , It all result my readers and I would like to thanks all of you .

I am putting links of some of the best and most appreciated articles of this blog .

Power of Compounding and Early Investing : This article talks about how early investing helpsby growing money in different stages and how you can generate more by putting less by earlyinvesting . Time is the best friend in investing .

Understanding Life Insurance : This article gives you the insight on how to view Life Insuranceas , It talks about the importance of Life Insurance and How you should approach it .

5 Elements : Every Individual needs at least 5 things in this portfolio, If you have these 5 , your are90% done . What are these most important things you should have .

Creating Long term Wealth : It gives you insight on how to approach long term Wealth Creation .You can also see some astonishing facts on Compounding .

Diversification of Portfolio : This article talks about what is Diversification , and how it helps you, It shows you how it reduces the risk and why its logical for an average investor .

Pillars of Success : This is one of my Favorite , It talks about the components of good portfolio .Any stable , secure and strong portfolio needs to have some important Characteristics . Read it .

How to do your own Financial Planning : Financial Planning is not a very tough thing . Its logicalstep by step procedure which any one can do on its own .

Portfolio Rebalancing : It talks about How portfolio re balancing Helps an investor and saves himfrom timing the market. Its easy to do but needs Discipline .

How to choose a Mutual Fund : This post talk about the step by step approach of choosing amutual fund for an average Investor .

5 mistakes of my first Trade : This is for people who are into trading in markets . This talks aboutmy mistakes which I did myself , and talks about how to avoid it and learn from them .

Early Investor , Smart Investor : Even this post talks about the advantages of Investing Early .

Some other good Articles are :

How to Manage ULIPS

What is Long term in Stock Market

Options Trading , My Comments

How small savings can build big Corpus

Summary : I have just put the best article of this blog here , There are many other articles whichare worth reading , go through them one by one after you read these all

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DSP Black Rock Top 100

Lets see a good Equity Diversified mutual fund today ,DSP Black Rock Top 100 , is an old fund , Its namewas DSP ML Top 100 earlier , but now its renamed . Itcomes from one of the best Mutual funds houses DSPBlack Rock .

The fund has very good record and consistentlyoutperformed its Benchmark . To get more informationsee here

Returns

If you see last 1 years returns its only -35% , which is much better than others who have given closeto -50% return .

1 yrs : -35%3 years : 1.2%5 years returns : 15%Since Inception : 29%


It has consistently outperformed its category average by good difference. Which is one theevaluating criteria .

Portfolio

Its portfolio is well diversified with high concentration on Large cap companies (50%) , which isgood .

Derivatives usage : There is one point to note in the portfolio is that the fund also uses tries to takeadvantage of Futures (derivatives) . This is a smart action , considering Fund manager understandthe risks . Else it can be disaster .

Rating

Its rated as 5 star fund and is places in Low risk High Return Grade by value research online .Though we should not put lot of focus on ratings , its one of the things to look at .

Conclusion : Overall the fund looks good . We have not done any detailed analysis but see it in away which should be done at the minimum level by an average investor . The main thing is not theproduct , its the usage and utilization . You can take a normal fund and make most out of it usingSIP and portfolio re balancing .

Please do your own findings and see if the fund fits your risk-appetite and criteria . People whowant to invest money for atleast 3-5 yrs and without putting lot of efforts on monitoring the market ,can invest there money using SIP in this Fund . Keep the money invested for at least 3-4 yrs , andkeep monitoring the fund performance minimum once every 6 months .

If you want to check one of my favorite scenes from movie "Socha na Tha" , see this

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Monday, March 9

What is long term in Share market ?

How long is long term ?

There are mainly 3 time frame in markets

1. Short term (6 months - 2 yrs)2. Medium term (2 yrs - 8 yrs)3. Long Term (8+ yrs)

We are taking about long term investing from point of view ofInvestor , which invests in a company on the basis of fundamentals and valuations .

Time Frame is a relative term , Short term for some one can be medium term for some one and longterm for other . similarly if some time duration is long term for you , it can be short term forsomeone else .

I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it

But here we are talking about an average investor . So lets look at predefined tenures .

from my understanding, any time frame less than 6 months shall be considered as trading Timeframe . Traders are people who like to take advantage of short term price movements based on news, Charts patterns etc .

One thing you must understand before hand is that Risk and returns are proportional , If you takehigh risk , there are chances of high Returns.

Now , lets see different time frames .

Short Term (6 months - 1 yrs) : Any investment made from 1-3 yrs should be considered as shortterm .

Risk/Return Potential : VERY HIGH .

Investing for short term : Invest for short term only if you can afford take the risk . Its alwaysgood , not to invest for short term for any goals which are very important . Like for example, if youare going to have an operation or a marriage after 1yrs , don't put your money in stock markets forless than a year to gain extraordinary gains . Its for professionals , not for an average investor . do itif you can afford to risk loosing it .

Low risk Short term investment option : Corrections in a BULL RUN : If there is a BULL Run ,wait for a correction , It happens many times that there is some correction in stock markets , At thattime you can do some investments for short term like 6 months - 1 yrs . Invest only when marketsstart rising again . Have a level in mind where you will take loss if it goes against you . There is noguarantee of profits ever . If you are in profit after 6 months, take your profits and get out , don'tconvert your short term investment in long term one , One who can not be loyal to his plan inmarkets will eventually loose it all some day . Same thing can be applied to short selling incorrections in Bear markets .

Example : In april 2005 , Oct 2005 , June 2006 , there was very good correction , after which itgave 30-40% returns within 6 months - 1 yrs .

Medium Term (1 yrs - 3 yrs) : Any investment made from 2-8 yrs should be considered asMedium term .

Risk/Return Potential : HIGH/Medium : Higher the tenure , lesser the risk .Also it depends on the situation , there is again no guarantee , There can be some time , when therecan be high risk in 3 yrs and some time it can less , but over all it should be less than the short terminvestment .

Investing for Medium Term : You should invest for medium term for goals like Car , Vacations ,etc and some part of portfolio for House , etc (close to 5+ yrs , not 2 yrs) . Choosing well diversifiedportfolio and investing in strong fundamentals is extremely important . Good timing is alwaysimportant in any time frame . but its difficult to time the market .

Low risk Medium Term Investment Time : After a Bear Market is there for some time around ,and markets have fallen considerably , you can start accumulating good stocks with good valuationsevery month in installment . Don't jump and put all your money at once ,just because you feel ,

"now markets have fallen much" , Markets are supreme and you are no one to "feel" or "tell"markets movements . Just expect it to come back soon and now start accumulating good shares , orstart a SIP . There is no guarantee of any profits , we are just discussing the low risk opportunitieshere .

Read why SIP helps in falling and Volatile markets , Part 1 and Part 2

Example : Current time . This is an excellent time to start accumulating fundamentally good stocksin installments over next couple of months , especially a big chuck should be invested when thereoctober lows are breached within some days ,which is expected with high chances .

Long Term (8+ yrs) : Any investment made from 2-8 yrs should be considered as Long term .

Risk/Return Potential : LOW , By Low do not think that we are saying you will get lower return ,we are talking about CAGR , obviously the CAGR you can expect over long term is lower than theCAGR which you can expect in short term or medium term , but more important is the risk , theloss potential , and that is extremely low here , almost Nil i would say , This I am saying on thebasis of past historical data . Loss is possible but chances are very bleak .

Investing for Medium Term : You should invest for Long Term for goals like Retirement , ChildEducation , Children Marriage or any financial goal which is to be taken care of after 8+ years , Doit using SIP .

Low risk Long Term Investment Time : Ideally speaking , you can start doing this any timewithout seeing the current situation of market , because over long term it would matter less thatwhen you entered markets . This does not mean that timing is not important in growth of money ,obviously , If you enter neat the end of bear market or at some other important time, it would help .But the point here is that , it would not harm if you start investing for long term at any time frameassuming that you are diversifying it well across sectors and stocks and also apply some extremelybeneficial techniques like Portfolio rebalancing over this long tenure . Don't get scared by thesewords ,they are extremely easy to understand things and can be applied by anyone , and it does nottake much time also , The only thing required from investor is the his share of determination to doall this .

Read what is Portfolio Diversification and Portfolio Rebalancing

Final Note : What ever i have talked about here are my personal views and my own idea of shortterm , medium term and long term . It can differ from people to people with different risk - appetite. Also understand that deciding your time frame is extremely important to deal with the situation inmarkets after investments .

For example , if you decide that you are investing your money for your retirement which is going tocome after 25 yrs , then it would be really easy for you to digest the volatility of markets and to seeit going down while you invest . So know your time frame and invest it smartly at correct time .Don't try to get smart and get greedy . Markets are the place where Albert Einstein and IssacNewton also failed and returned to try what there were good at . That does not mean we will alsofail . Don't try to made fast money , in fact try to make smart money .

For new comers in this area, its advisable not to enter through Direct equity , better go thoughmutual funds , and please listen to people when they tell you all this, don't get smart , else you willbe ruined like millions others .

I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it

My trip to Savandurga on Saturaday was Great , check the pics at flickr here

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IDBI Fortis WealthAssurance

If there is any ULIP i can say is worth for , its WealthAssurance . I saw the product on its site and Itlooks good to me .

The policy is very well organised and presented in a simple way . It does not look very complicatedalso , Also it has many kinds of features using which you can adjust it to your situation any time .

I guess , the premium allocation charges for this policy is also low compared to other funds.

Who can take this policy ?

Anyone with time horizon of more than 10+ yrs can take this policy , he/she can use this to save forthere child education , marriage or own retirement . Make sure you read the policy documentsbefore investing your money .

To read more on the policy in detail , read here .

My trip on Saturday was Great , Here are the pics



Saturday, March 7

Swing Trading Presentation by Sudarshan Sukhani

Swing Trading

this post is for people who are interested in Stock markets trading , Sudarshan Sukhani has postedan excellent presentation on Swing Trading here , please go through it and use it incase you want todo it .

Who should use this presentation for Trading ?

This presentation is only for people , who are already experienced with Trading , no matter theymake Profit or Loss . You must have some level of knowledge and experience before . Especiallyfor people who are trading and are yet to succeed in Trading (Whether its Stocks , Futures orOptions , it may be currency or Commodities also). I also come in this "overall loss making"category of traders till now . I am yet to break even and start making some profits in Trading .

Who should not start using this presentation just after seeing this presentation ?

Anyone who is not at all related to trading and just want to start Trading . If you have not done itbefore , Just look at it and stay away as of now . You are yet to gain more knowledge and then enterthis world , You yet need to understand what is Money Management , Trading Psychology ,Technical Analysis etc etc . If you don't listen to me and start using the techniques given in thispresentation , there is extremely high possibility that you loose blow up your account at some pointof time , Just see this presentation , get the feel and save it for future reference .

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Thursday, March 5

RBI Relief Bonds

Some bonds have a special provision that allows the investor to save on tax. These are termed asTax-Saving Bonds, and are widely used by individual investors as a tax-saving tool. Examples ofsuch bonds are:

• Infrastructure Bonds under Section 88 of the Income Tax Act, 1961• Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961• RBI Tax Relief Bonds

see other articles on tax here

What Are RBI Relief Bonds?

RBI Relief Bonds are instruments that are issued by the RBI, and currently carry an 8.5 per cent rateof interest, which was reduced from 9 per cent early this year. The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands ofthe investor.


INVESTMENT OBJECTIVES

How Suitable Are RBI Relief Bonds For An Increase In My Investment?

RBI Bonds are not very suitable if you are looking for an increase on your investment. Since RBIBonds carry interest @ 8.5 per cent, capital appreciation is better in other safe instruments that offera higher rate of return. However, if safety is of paramount importance to you, you couldn't ask for abetter deal as this is the safest instrument to invest in. In case of the cumulative option, bonds issuedat a face value of Rs 1,000 are redeemed at Rs 1,516.

Are RBI Relief Bonds Suitable For Regular Income?

Yes, you can opt to receive interest either on a half-yearly basis or on maturity of the instrument,along with the principal invested. If you opt for the first option, i.e., to receive interest on a half-yearly basis, you will receive interest every six months from the date of issue of the bond up to 30thJune or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.

To What Extent Do RBI Relief Bonds Protect Me Against Inflation?

RBI bonds do not offer any protection against inflationary pressures. As with other instruments of asimilar nature, this risk has to be borne by the investor.

Can I Borrow Against RBI Relief Bonds?

Yes, you can borrow against RBI Bonds by pledging them as security in a bank.

RISK CONSIDERATIONS

How Assured Can I Be Of Getting My Full Investment Back?

RBI Bonds are issued by the country's central bank, the Reserve Bank Of India. These are amongthe safest instruments available for investment, and you can be assured of getting back the fullamount of your investment.

How Assured Is My Income From RBI Relief Bonds?

Your income from RBI bonds is assured. Since the issuing entity is the country's central bank, therisk on this investment is nil. In case of the half-yearly interest payment option, the rate of return is8.5 per cent. In case of the Cumulative Scheme, where you receive the total interest at the end of thetenure of 5 years, the simple interest works out to 10.32 per cent at the end of the tenure.

Are There Any Risks Unique To RBI Relief Bonds?

No, there are no risks associated with your investment in RBI bonds. This is one of the safestinvestments you can make. Inflation and fluctuations in interest rates affect investment decisions inRBI Relief Bonds. An increase in the interest rates result in a decrease in bond prices, and vice-versa, if you want to sell them in the secondary market.

Are RBI Relief Bonds rated for their credit quality?

No, since the issuing party is the country's central bank-the RBI-these bonds are extremely safe, andrequire no commercial ratings.

BUYING, SELLING, AND HOLDING

How Do I Buy RBI Relief Bonds?

Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank ofIndia, designated branches of the State Bank of India, and designated branches of nationalisedbanks across the country.

What Is The Minimum Investment And The Range Of Investment for RBI Relief Bonds?

The minimum investment on RBI Relief Bonds is Rs 1,000. You can apply in multiples of Rs 1,000thereafter. There is no prescribed upper limit to your investment in this instrument.

What Is The Duration Of RBI Relief Bonds?

The period of holding of RBI Bonds is five years from the date of issue. The bonds are repayable onthe expiration of 5 years from the date of their issue.

Can RBI Relief Bonds Be Sold In The Secondary Market?

Yes, the bonds can be sold or transferred to another party. If the bonds are in the form of BondLedger Account (BLA), they can be transferred by execution of a Transfer Deed in the prescribedform. However, transfer shall not be deemed as complete until the name of transferee is registeredas holder of the Bond in the Office of Issue. A new BLA will be opened in the name of thetransferee (whom the bond has been sold to) for the remaining period by closing the BLA of thetransferor (original holder of the bond). The Bond in the form of Promissory Note (PN) will betransferable by endorsement and delivery.

What Is The Liquidity Of RBI Relief Bonds?

While RBI Bonds cannot be redeemed prematurely and must be held for the entire duration of 5years, you can always exercise the option of selling RBI Bonds in the secondary market if you sodesire.

How Is The Market Value Of RBI Relief Bonds Determined?

Market value of RBI Relief Bonds is determined on the basis of prevailing (8.5%) interest rates andmarket conditions.

What Is The Mode of Holding RBI Relief Bonds?

RBI Relief Bonds can be held at the credit of the holder in an account called BLA or in the form ofPN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder ofbonds in the BLA. The bonds in the form of BLA are issued and held with the public debt offices ofthe RBI or any branch of a scheduled bank authorised by the RBI. The bonds in the form of PN areissued only at the offices of RBI. However, bonds issued in one form will not be eligible forconversion into the other.

TAX IMPLICATIONS

Interest received on RBI Relief Bonds is completely exempt from income tax as per the provisionsof the Income Tax Act, 1961. RBI Relief Bonds are also exempt from Wealth Tax. However, there isno tax benefit on the amount invested in these bonds.

For more information visit This Site

source : http://in.savings.yahoo.com/rbibond.html

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Magic of SIP , Part 2

Some days back I had talked about SIP and its characteristics using some examples , you can read ithere .

Today we will take that forward and see other important things related to SIP .

So , We have that same last example where 1,00,000 was invested over 2 years using SIP andwithout SIP in UNITECH . Can we measure how good our investment is at any point of time . Forthat I developed a simple indicator called IV ratio which is very simple , Its just the ratio of Your

total investment divided by its current Value at any given point .

IV ratio = Current Value / Investment

So if your investment = 10k , has current value of 8k , IV ratio = .8 , If current value is 15k , IVratio = 1.5

I have plotted a graph of IV ratio in two cases of SIP and NON-SIP . You can clearly see in thegraph that , IV ratio for SIP was always more than non-SIP mode . At first , IV ration was decliningfor both mode , which is fine , because of falling markets , but still For SIP it was high , whichmeans , that you get better returns . then in last part , when markets were volatile , IV ratio for non-SIP was stable , but for SIP it went up , which means that SIP was giving better returns at this point.


Finally SIP mode generated worth of around 42k (IV = .42) and Non-SIP gave around 9k ( IV = .09)

Conclusion : IV ratio is a simple tool to measure the performance of your investment . You can alsouse it to compare two different Investments mode over a period of time .

Now , let us see some other things in regard to SIP . I have plotted the graph for IV ratio of SIP ,and the investment value itself scaled down to 1 . Blue line is the actual growth of investment andRED line is the IV ratio .


Some of the things to Notice here are

1. In the start (till 17-18) Investment was going up , but IV ratio was falling , which indicatesGrowth in value mainly because of your Monthly inflow in SIP , that means the markets are fallingand eroding your investment , but the decrease in value is less than your monthly addition whichyou make .

2. From 18 payment onwards , you investment and IV ratio both are falling , which means thatmarkets are falling at very high rate and your monthly contributions are smaller than the decrease inyour portfolio .

3. from 31st payment onwards , you can see that IV ratio and your investment were going up ,which means volatile and sideways market or small upside correction on up side .

At last , you can see that both the value converge to same value of .42 , which is your IV ratio andyour actual investment value , Because at this point total investment is 1,00,000 .

Conclusion

IV ratio is the measure of how well your investment is doing in a given market , If its higher thanyours friend , you can feel better because your have lost less for your investments . SIP results inhigher IV ratio in markets which are not going up too fast . which means apart from fast movingmarkets on upside it makes sense to invest through SIP only . It protects you from volatility ,develops from discipline , and your are more satisfied mentally .

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Tuesday, March 3

GOLD or SILVER

Precious metals market is on a roll these days !! , GOLD and SILVER are everyones Darling .GOLD Gold has given good returns from this year start and finally broke its trading range . Its expected to give goodreturns in future too .SILVERSilver has outperformed Gold in 2008 and is expected to do so in future too . But I am hestiant with an ideaof buying Silver from some local jeweler . It should be bought from some recognised Bank only as per myview .I dont think that its a good idea to buy gold or silver in physical , People who want to do it to invest formarriage and all is ok , but still its only for Investment and to gain from the price appreciation in these metals, the best idea would be to go for ETF's . They are easy , secure , more cost-efficient and tax efficient .Some NotesSilver ETF's are still to come , currently we only have GOLD ETF's , sogiven a choice of investments in precious metals , I would prefer GOLDETF to Physical Silver even though Silver is expected to outperform GOLDin coming future .Even GOLD has broke out of its trading range and now its expected to goupto the levels of 1750 per gram , and then upto Rs. 2000 levels asexpected by some analyst in coming times . See :http://manishanalysis.blogspot.com/2009/02/gold-breaks-out-from-its-trading-range.htmlGuys , When it comes to ETF's , Benchmark mutual funds are the leaders ,that company mainly focuses on ETF's and manage them in a better way .So there ETF's are recommended . (that does not mean , others are notgood or can outperfom them) .

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Sunday, March 1

SIP Magic , Part 1

Numbers Speak !!

Today we will see some characteristics of SIP (Systematicinvestment plans) . this is first part of this article , we will havepart 2 of this aswell where we will discuss other importantthings about SIP .

Note : I have posted comments on Reliance-RPL trade failureand markets update on my analysis blog

Assumption : We are assuming that investments were startedfrom year 2007 , It has both a part of Bull markets and Bearmarket , So i chose that time frame .

Let us first see an example where investment was made inNIFTY ETF's . There are two friends Ajay and Robert . Both of them want to invest Rs 50,000 inmarkets with 2 yrs of time frame in mind . Both of them do not have that much cash in the start .

Robert believes that Markets are in Bull run and hence it has good chances of Capital appreciation .He does not want to miss this chance and decides to borrow money on loan from friends and familyor personal loan and invest it .What are his Characteristics at this point . Its just like any normal , average investor , whereinvestment decisions are based on emotions , without foresight and too narrow . They do notunderstand the cycles of market and they do not understand that markets moves up and down inevery time frame .

On the other hand Ajay is an informed investor and does understand cycles of Market , He knowsthat markets run from up to down and the bull market which started in 2003-04 has already run along way and can turn any time now . He understands that its a better idea at this point to not getinto debt to invest in stock markets . He controls his Greed and will invest only what he has . Healso decided to invest 50,000 in 2 yrs . but a small amount month by money systematically .

Now lets see the capital appreciation which happened for both of them .

Summary :

Robert invest full 50k in the start around Jan 2007 with 2 yrs of time frame .Ajay also decides to invest the same amount but he breaks it in smaller chunks and wants to do itusing SIP on his own .

Monthly Investment Growth in NIFTY ETF from Jan 07 - Jan 09 for Rs 50000


Lets look at what happened ?

Markets continue to rise and Robert sees his investments grow from 50k to 75k within a year . Ajayalso sees his money grow to 35k , on an investment of 25k . If you see at this point , Robert hasmade very great returns on his investment compared to Ajay . But after that see what happened .Markets started going down and investment of Robert kept coming down with markets and at theend it was at 35k . With Ajay it was a different case . His investments went up and down both sidesand finally ended at same point at 35k .

What is Drawdown ?

Drawdown is the drop in the value of investments from its High . If 10k investment go up to 15kand then fall back to 12k . The drawdown is High(15k) - Lowest point after that (12k) = 3k , OR20% drawdown .

Things to notice

Roberts Portfolio : You can see the behaviour of Roberts investments . It was too volatile . You cansee it going up and down and here and there . I am not saying that it didn't move and made profits ,It made good profits at one point of time , but Robert must be smart enough and courageous to takehis profits even if markets are going up and there are chances of making more . People who want"more" and "more" , eventually not even get "what they had" . Have a target and BANG !! , once itmoves at that point , be unemotional and take the profits . Markets is a place where money is fleshand everyone is Vultures . If you leave it open for a long time , It will be taken by some one of other.

The other thing is Psychological issue . Because investment moved so high , and then so low ,Robert must be feeling bad and too conscious . He must be regretting a lot on not taking the profits .This has bad effects on investment decisions .

Roberts Drawdown : His 50k goes up to 75k (high) and then it moves down to 38k . Draw downof 41k which is 49.3% , this can have devastating affect mentally , as one sees his investment growto 75k and then drop to 38k and finally end at same point 38k after some volatile movement up anddown .

Ajay Portfolio : You can see the consistency of Ajay portfolio . It moved up and up all year wheemarkets where rising . and once markets started going down and was volatile , his portfolio was alsovolatile , but not very high , Its volatility was very low and finally it was almost at the same point asin the start of the year . Infact you can see that his portfolio was rising still when Roberts wasdeclining .

Ajay's Drawdown : This highest Drawdown seen by Ajay portfolio was from high of 39k (20thpayment) to low of 35k , which is just 10.25% drawdown . You can get a feel , How difficult or easyit must be for Ajay to see this .

The point here is not Who made more money or Lost more? infact you can see that they both werein loss of 12k on an investment of Rs 50k , But the journey was not same for both of them . WhileRobert worked too hard and saw wild swings . Ajay made systematic investment and continuouslysaw his money go up only with minor drawdowns , which was easy to handle pshcyologically . Thisis true for any investments weather it is Shares , Mutual funds or ULIPS investment s .

Now's let see and example for the same period , weather these two same investors have madeinvestment in UNITECH . why UNITECH ? I have taken this example because it shows what Iwant to show , the power of systematic investment . Here both of them are investing Rs 1,00,000 (1lac) in Shares of Unitech . Roberts invests 1 lac in the start of Jan 2007 , where as Ajay makesweekly investment of a fixed amount in such a way that it adds up to Rs 1,00,000 at the end of 2 yrs.

You can see the behaviour of portfolio for both of them.

Robert

Investment : Rs 1,00,000Mode : One time investmentFinal Value : Rs 9,000Time frame : 2 yrs

Drawdown : 91% (Rs 1 lac , from high of 1.1 lacs to low of 10k)

Ajay

investment : Rs 1,00,000Mode : Weekly investment (weekly SIP by self)Final Value : Rs 42,000Time frame : 2 yrsDrawdown : 70% (28k, from high of 40k to low of 12k)

Weekly Investment Growth in UNITECH from Mar 08 - Feb 09 for Rs 1,00,000


Conclusion :

Now the main question ? What is good One time investment or SIP ?The answer is both are good in different conditions , and it depends on your Risk appetite too .When you don't have clear indication of trend and are not sure where markets can go , the best ideais to invest through SIP . That will save you from volatile markets and small down moves too .

SIP will definitely miss out on returns in BULL markets . But it will work best in Volatile marketsand falling markets .

SIP is not a way to avoid losses , its a way of investing, where you feel more disciplined andaverage your cost of investment of long term . The examples i have taken were biased because ofthe idea i wanted to communicate . Anyone who did one time investment in 2004 would have mademore money than someone with SIP , till 2007 at least because of the rising markets .

You must have seen in first example that Ajay's portfolio was at 35k in the start of 35k , and even atthe end of 2009 , it was at same point even though markets fell from 20,000 levels to 10k levels andwas too volatile ,there comes the power if SIP (the money you pump in fights the falls in markets atleast) .

Part 2 : This is first part of this article , we will have part 2 of this aswell where we will discussother issues and things regarding the second example we took (UNITECH)

Request from Readers

If you are on twitter , try to post this article there , so that your friends can read it . I also have asmall complain from my readers . please recommend this blog to your friends and any one youknow and needs it . I feel this blog needs more readership and deserves too . You can help mepromote this blog to others , please pass it on to others . Thanks

Also , why dont you guys and gals leave me messages and comments , please put your commentswith your views on article and your own ideas, I should also get chance to learn from you all , dontI ?

Read continuation Part 2 of this post here

Have a great day .. I have posted comments on Reliance-RPL trade failure and markets update onmy analysis blog



Friday, February 27

Are private Insurance companies safe ?

Many people have this concern about taking policies fromPrivate Insurance companies . Let us try to understand about thefactors which takes care of financial stability and ability to repayback customers there money . In reality the only thingsdifferentiates one insurance company from other is the servicethe provide , there settlement track record .

Want to know why Insurance is Important ? Read this

Solvency Margin

It indicates how solvent a company is, or how prepared it is to meet unforeseen exigencies. It is theextra capital that an insurance company is required to hold to meet all the claims which arise .

In other words , Solvency margin refers to the excess amount of asset the insurance company has tomaintain over its liabilities. Basically, it is the amount the insurer has to stash away in order to paythe claims during emergency. IRDA requires the insurance companies to maintain a particular levelof solvency margin for their smooth functioning.

Why is Solvency Margin there ?

Companies have Assets and Liabilities . In some adverse situation , Assets are used to payoff all theLiabilities . Suppose there is company which has assets of 100 , and liabilities of 100 . In ideal caseit would be able to payback the liabilities . But what if some adverse situation occurs and liabilityincreases unexpectedly . In that case company will be declared Insolvent (Bankrupt) . This will be abad situation which every customer does not want to experience .

Thats the reason , Solvency margin comes into picture , The excess margin maintained by thecompany provides that extra cover which may be required in case some thing totally unexpectedhappens .

by the way , i am now on twitter , so you can follow me and get updates on twitter .

What is the current Solvency Margin ?

Current Solvency Margin is at 150% for Life Insurance Companies . It means for every Rs 100insured the Insurer should have 150 with them .

Does it mean customers are totally safe ?

You must have understood Solvency margin till now , but what if some bad event of HighMagnitude happens and then Liabilities of company (the claims they have to settle) crosses theretotal assets + extra margin , in that case they will not be able to pay back , but the chances of thishappening is very very small , and generally Solvency margin takes care of it .

Some bad unexpected event like Earthquake or some terrorist attack which kills say 1000's ofpeople can dramatically increase Insurer's Liability , but in most of the cases its always taken careby choosing adequate Solvency margin . But there are always that small percentage chances of theFailure which you have to live with and we cant do anything .

So what does it mean for us common Investors while choosing Insurance Products ?

Solvency Margin has to be maintained by all the Insurance Companies in India whether its Privateor Public sector . All the companies are at same level , Some of them are old , some are new , someare big and some are small , but its same for all and everything is under IRDA norms and scrutiny.So decisions based on How safe or unsafe a company is not relevant now . Risk is with everycompany and that is equal for all .

So for people who are going to take Term Insurance , the best thing is to go with the cheapest priceand good record of claim settlement . There are many new players in this market who are so newthat we don't have any long track record . like for Religare Aegon (which is my favorite) . So forterm Insurance , just break your cover into 2 parts and take insurance from 2 companies to diversifythe risk further .

Read tips while taking Term Insurance

Summary

This is what many people never knew and they take there decisions based on just trust and howlong company has been in existence . Huh , people trusted Satyam and Lehman Brothers also , sowhat !!

Source : https://www.insurancemall.in/ and http://www.irdaindia.org/ .

Jeevan Varsha Analysis

Update : As pointed by Ranjan , there was a mistake in the analysis about the paying term of thepolicy , i have corrected it now . Please re-read the analysis .

Now i am on twitter : Follow me athttps://twitter.com/jagoinvestor

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Today we will talk about the market product"Jeevan Varsha" , If you are a regular reader ofthis blog, by now you must have gained enoughknowledge on how to evaluate a product like this ,if not then go ahead and see .

JEEVAN VARSHA

You can see the features in detail here . Mainlythere are 2 things .

Survival Benefits

- 10% of the Sum Assured is payable at the end of3 years.

- 20% of the Sum Assured is payable at the end of 6 years.

- 30% of the Sum Assured is payable at the end of 9 years

- 40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, ifany, at the end of 12 years.

Guaranteed Addition

The policy provides for Guaranteed Addition at the following rates

- Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.

- Rs. 70 per thousand Sum Assured per year for a policy of 12 years term

We will analyse the policy for 12 yrs here . We will talk about two things using an example .

1. Returns from this Policy at the End

2. Can we do better than this policy with same amount of premium [ you know we can ;) ]

Example : Lets take an example of a person 30 yrs , who takes this policy for Rs 5 Lacs and wantsto make yearly payment .

Tenure of Policy : 12 yrs

Tenure of Payments : 9 yrs

Sum Assured (SA) : Rs 5 Lacs

Premium : Rs 78500 (calculated adjusting Mode rebate and High Sum assured Rebate)

Method of calculation of Premium

Total Annual premium for 30 yrs old for 12 yrs policy = 165.30Mode Rebate of 2%

High Sum Assured rebate of Rs 5 .

So Total premium = (500000/1000)*(165.3 - 5) * .98 = 78547.0 (So i took it approx 78500 .

In Case of Survival , he will get

In 3rd Year : Rs 50,000 (10% of SA)

In 6th Year : Rs 1,00,000 (20%)

In 9th Year : Rs 1,50,000 (30%)

In 12 Year : Rs 6,20,000 [2,00,000 (40%) + 4,20,000 (70 for per 1000 for 12 yrs , 70 * 12 *5,00,000/1000 ]

Returns from this Policy at the End

Now how do we calculate the returns from this policy for this person. There are two way (Models)of doing this . One way is that we can just add the amount of money he receives from the policy andsee how much total money he gets at the end of 12th year. The other way is to assume that he isinvesting his money (which he gets at 3rd , 6th and 9th) year somewhere , so that he can get it at theend of 12th year (this way is a better way of calculating) .

First Model : Amount is just added

Total Sum received = 50,000 + 1,00,000 + 1,50,000 + 6,20,000= 9,20,000

Second Model : Amount received is invested @8% such that he recives it at 12th yr . (for 9 yrs ,6yrs and 3 yrs)

50,000 after 9 yrs : 99950 [ 50,000 * (1.08)^ 9 ]1,00,000 after 6 yrs : 158687 [ 1,00,000 * (1.08)^ 6 ]1,50,000 after 9 yrs : 299850 [ 1,50,000 * (1.08)^ 3 ]6,20,000 : 6,20,000

Total = 99950 + 158687 + 299850 + 620000= 11,78,487

We have not consider Loyalty additions and lets us see what are the reasons ?

Bonus's and Loyalty additions are not guaranteed and thats the reason you cant claim it asentitlements . These components are not backed by the sovereign guarantee that extendsto the sum assured and guaranteed additions components. In the (unlikely) event ofCompany going insolvent , you’ll only be entitled to the sum assured, at the time of deathor on maturity, and the guaranteed additions thereon.

This applies to any Insurance company with products giving Loyalty Bonus as one of thecomponents .

Now lets calculate the CAGR return from this policy , We have to use annuity formula for it for 9yrs and then simple compound interest formula for 3 yrs . The formula would beA = [ annuity part for 9 yrs] * [compound interest part 3 yrs ]

A = [ P * [{(1+i)^9 - 1 }/i] * (1+i) ] * (1+i)^3, where

A = Total money he accumulated till now .P = yearly Premium (78,500)i = CAGR return which we want to find out .

What have we done here ?

The person we have calculated annuity returns for first 9 yrs (because he is making the paymentsfor 9 yrs) , then he does not pay anything for 3 yrs , so we have calculated compound interest fornext 3 yrs . It may be a bit complicated to understand i know .

So

For First Model

The value of i which satisfies this equation is 3.3% , Yes you read correct . But this is not a goodway of seeing things , so lets look at Second Model .

>>> (78500 * (1+.033) * ((1+.033)**9 - 1)/.033)*(1+.033)**3919262

For Second Model

The value of i which satisfies this equation is 6.4% . This is the true representative of returns .

>>> (78500 * (1+.064) * ((1+.064)**9 - 1)/.064)*(1+.064)**31175443.4117343538

Which model is more better

So lets take the Second model as the standard model for evaluation , So we conclude that returnsfrom this policy would be around 6.4% considering

Consumer is smart enough to invest the proceeds again into some debt product using which he canget 8% returns .

Note that this return is considering there is no Loyalty Additions because they were not assured.

Total payment in 12 yrs was 12 * 79,000 = 9.48 lacs and at the end of 12 yrs he gets

9.2 Lacs (First model , 50k , 1 lacs , 1.5 lacs and 6.2 lacs, not reinvestment)

OR

11.78 Lacs (If proceeds are reinvested)

Some policy lovers would argue i am not considering Insurance and tax benefit part.

Regarding Tax benefit : We will compare this product with PPF , Mutual funds and Term Insuranceand they also have 80C benefit with them , so tax benefit is something common with all , so there is

nothing special with this policy regarding Tax benfits . For Insurance I will cover it in next partwhich we will discuss .

Can we do better than this policy with same amount of premium

Let us first understand the Insurance part .

The sum Assured is 5 lacs , so if a person dies before 3 yrs , he gets 5 lacs , if he dies after 3rd yr ,he will also get the Guaranteed additions . So the maximum a person can get by dying is in 12 yr ,in that case he will get 9,20,000 (50k , 1 lacs , 1.5 lacs , 2 lacs + 4.2 lacs GA, No loyalty additionsin this case) . So lets be grace ful and say that this person will get 9.2 lacs in case he dies .

The first thing to note here is Insurance cover , I don't know what will happen to the family of thisperson if they get 9.2 lacs as Insurance money . If a person has the ability to pay 78,500 per Annamas premium , a wild guess for his Insurance cover is around 30-35 lacs at least . So the Insurancecover is not enough

Now lets see , what I recommend for this person who pays 78,500 per year to take care of hisInsurance of 9.2 lacs .

So a person who pays 78,500 per year , can divide his 78,500 yearly payment into two parts , Forinsurance and Investment separately . You know what i would suggest , its simple Term Insuranceand Investment in PPF or MF's

Read Importance of Insurance (Term Insurance) Read about Mutual funds and how to choose them

Let us first take care of his Insurance part , though he is covered of max 9.2 lacs just for 12 yrs , weare not that uncaring in nature to under-insure him , we understand importance of Insurance and hisFamily needs and the tenure of cover should be 25-30 yrs , not just 12 yrs , His Insurancerequirement is around 30-40 lacs and we will provide it anyhow , even if the investments are to becompromised . So we will try to provide him 35 lacs cover for 30 yrs .

For Defensive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

So he is left with 68,900 (78,500 - 9,600) , for his investments . If he invests this in PPF (thoughthere is limit of 70,000 , lets assume he can do it) . he will get around 14.12 lacs (annuity formula)at the end of 12th year .

He can then take out 1.73 lacs out of this to fund for his Insurance premium for next 18 yrs left ,still the amount left would be better than the Jeevan Varsha . The other alternative is to keep themoney in some Fixed Depositand keep using the interestamount to fund Insurancepremium for next 18 yrs . There

can be other ways of doing it , but the main point is that we have done better than Jeevan Varsha inall respects .

This investor can also use balanced funds for investments .

For Aggressive Investor

Insurance

Term Insurance of 35 lacs for 30 yrs : Rs 9,600 (Aegon Religare)

Investments

He can invest 68,900 yearly (5741 per month) left in Equity Diversified Mutual funds using SIPevery money month in max 3-4 mutual funds .

He should expect to get around 12% compounded returns over 12 yrs , and your money shouldgrow to 18.5 lacs (12% is again not guaranteed , its not based on Historical returns )

Summary and Notes

We have seen the policy from a broad level and see its main components , we have not seen smalldetails , because they are not significant enough to change the views anyways . We have seen howits too complicated and provides returns which are less than what you can easily get in PPF .

Conclusion

Term Insurance + (MF or PPF) is a great combination , its easy to understand .The main this is tofirst Insurance your self Sufficiently and then think about investments .

That's what i had to say for the day , don't forget to recommend this blog to others so that they canalso benefit . Also be sure to follow me on twitter here in case you are on twitter .

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Disclaimer : The views on this article are my personal . All the things discussed on this article arefor learning purpose only . This blog will not be responsible for your investment decisions . Theremay be some mistakes while calculations , so please do your own calculations for taking anydecisions . thanks

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Tuesday, February 24

Beware of Mis-selling

From many years there has been a lot ofmis-selling happening in some products .

What is Mis-selling ?

Mis-selling means selling a product by giving a wrong picture of a product , it may include .

- Giving Wrong Information

- Giving Unrealistic Information (some times based on previous performance)

- Not giving full information about the product.

- Selling the product with proper information , even if it does not fit customers requirement.

Why is mis-selling happens ?

Mis-selling happens because of following reasons

Low Awareness : Financial awareness is very low in our country ands thats the reason we do notunderstand products and how they can fit our requirement , Agents put a picture of a product in sucha way that it looks the best product for us .

Competitive environment and Sales Targets : There is lot of pressure on agents and manager toshow performance and sell products to meet there targets because of which mis-selling happens .

Last minute "Tax Rush" : People in India do not plan there Investments in Advance and hence atlast moment they buy product just to save tax and which does not fit there requirement , and sellerstake advantage of this .

Examples of Mis-sellings

ULIPS :

ULIPS are the classic example for mis-selling in this country , ULIPS are often projected as highgrowth , less risky products with "Insurance" in build . Ofter agents promise that ULIPS are riskfree and it wont drop more than x% and return at least 10-15-20% in long run , which is nothing butmarketing gimmick . I have seen at least 100 people who have bought ULIPS and they don't need itafter 3rd year . They do not know why they bought it other than tax saving and when talked abouthow much Insurance cover they have , no one had more than 5 lacs .

One of my friend has ULIP for 50 yrs !!! , not sure what he will do !! . One of my friend hasinsurance of 1.25 lacs !! , Insurance of 1.25 lacs !! Really , what does that mean ... His/her life coveris just 1.25 lacs , he earns 5 lacs yearly !! .

Read : who needs ULIPS ?

Mutual Funds

Even mutual funds are mis-sold , that happens when a agent recommends you a mutual fund whichdoes not fit your requirement . Often agents recommend mutual funds which are too risky forcustomers without understanding there risk-appetite .

Read how to choose mutual fund ?

Insurance

One of the worst thing which has happened in India is that Agents never tell customers about Term-

insurance , which is ultimate requirement for Indians , This happens because of penny likecommission agents get on Term policies , thats the reason they often lure customers with productslike ULIPS and Endowment or Money back policies, which do not insure people to the extent theyneed it . Agents dont explain the importance of Insurance and only make them feel that they loosemoney in Term Insurance and we get lured by it , because we love "not loosing money" more than"little chances of dying and our families suffering" , this happens because people do not haveenough foresight to look into future and question themselves about what will happen if they diewithout giving enough cover to there families .

Read why Life Insurance is so important

So like this Mis-selling happens in many products .

What can we do and should do ?

"Prevention is better than cure" , this saying also applies in Investing , I know of people who tookwrong products and then have to live with it for 10-20- years like Endowment plans . (Read whyEndowment plans are not good)

So the only thing we can do is to educate our self to the level where no one can take advantage ofour ignorance . Once you come to a level , where you understand importance of things in investingand managing you money , then no one can mis-sell you the products .

One of the recent product which i will categorise in Misold category is "Jeevan astha" , The reason iwill say it was mis-sold is because it tried to put its picture in a very fuzzy way and tried to putthings which were confusing to general public .

Conclusion

Dont Take any product just because it look good or is recommended by someone (not even me) . Doyour research and do some study , it does not take more than 1 hr to search the net and read about it, or ask some knowledgable person whom you trust about the product . 1 or 2 hrs to study can saveyou pain of years , So dont be lazy , when it comes to money no one is yours , its only you who cansave you from mis-selling . So wake up .. Jago Investor :) jago !!

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Insurance Presentation

I have created a small and simple presentation for newbies regarding Life and Health Insurance . Itwill help new people to understand the importance of Insurance .

Life And Health Insurance


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Saturday, February 21

Search within You ..

I was watching a seminar video on my laptop today whichwas a trading seminar conducted in US , the speaker was anAmerican . In the middle of the seminar he presented asmall story which was from Hindu Mythology which mademe feel good , I am putting it here word by word afterfinding it from net (so that i don't have to type all myself) .

There was once a time when all human beings were gods,but they so abused their divinity that Brahma, the chief god,decided to take it away from them and hide it where it couldnever be found.

Where to hide their divinity was the question. So Brahmacalled a council of the gods to help him decide. "Let's buryit deep in the earth," said the gods. But Brahma answered,"No, that will not do because humans will dig into the earthand find it." Then the gods said, "Let's sink it in the deepestocean." But Brahma said, "No, not there, for they will learnto dive into the ocean and will find it." Then the gods said,"Let's take it to the top of the highest mountain and hide it there." But once again Brahma replied,"No, that will not do either, because they will eventually climb every mountain and once again takeup their divinity." Then the gods gave up and said, "We do not know where to hide it, because itseems that there is no place on earth or in the sea that human beings will not eventually reach."

Brahma thought for a long time and then said, "Here is what we will do. We will hide their divinitydeep in the center of their own being, for humans will never think to look for it there."

All the gods agreed that this was the perfect hiding place, and the deed was done. And since thattime humans have been going up and down the earth, digging, diving, climbing, and exploring--searching for something already within themselves.

What does this teach us ? In life we have all the power to achieve something we want , we cant gethelp from some one , we can get tools , we can get support or for that matter any damn thing , butwhat is needed for success lies with us only , So don't hunt for things outside , first know yourself .Its only you who can change things .

How do i relate this to Investing and Money Management ?

Whatever it takes to grow your money , do better investments or take informed decisions , Its withinyou , you just need to explore it , You can read stuff on this blog or anywhere else , but the realwisdom lies within you , you have to work hard on it .

I know nothing spacial or advanced things , I know things which any one can learn , The onlydifference can be my willingness to learn and make the difference and confidence . You can do it to. Just make sure you have the fire to learn and see within you and have confidence .

Just like a good cook doesn't need great ingredients to make good food , he can make great thingsout of simple and basic stuff , the same way , we dont need fancy products for our investments ,Even if we have basic products we can utilise them well and create wonders , Only the knowledgeand willing to do is required. Its within you , search for it ...

I have put a analysis on Jaiprakash associates for a trading opportunity on my analysis blog , maybe you would like to see ..

Please leave your comments on the blog, on your view and wheather you liked the articles or not .That way i can know atleast that people like my articles or not .



Friday, February 20

LTA and medial Reimbursements

As we are in mid Feb of the year and its tax time , i thought to talk a bit on LTA and Medicalreimbursement benefits .Though many of you might already know about it , let me go over it inbrief for readers who have less knowledge about it .

You have a limit up to which you can claim your spent amount on LTA and medical bills and savetax on that part . If you dint claim it, for that much amount you will be taxed .

Limit for LTA : 50,000 per yearLimit for Medical Bills : Rs 15,000 per year

So from your total salary , you can save tax on this 65000 if you want , if you dont claim it , youwill have to pay tax on this part .

What is LTA ?

LTA is Leave Travel allowance , is the benefit given to a salaried employee . You can claim travelexpenses from any one journey in a year .

- There is a block of 4 yrs decided by govt ( current block is 2006-2009) . In a block youcan claim LTA any two years . for other 2 yrs you cant claim it , so total 50,000 will betaxable in those 2 yrs .

- You can carry 1 LTA claim for next block , which you have to claim in the first year ofnext block .

- You cant claim LTA 2 times in a year .

- If your LTA is not utilised, it gets added to your salary and you will be taxed onit.

- LTA covers travel for yourself and your family. Family, in this case, includesyourself, parents, siblings dependent on you, spouse (even if your spouse isworking) and children.

- The entire cost of the holiday is not covered. Only the travel costs are covered.So, whether you fly, hop on to a train or take public transport, you will have toshow the ticket to claim your LTA. This means you will need to keep your air, railor public transport ticket.

Medical Reimbursement

You can also claim deductions on the medical bills for medicines and doctor visits . You just have toget the bills and submit a proofs .

The bills can be in the name of you or your dependents .

Final Note : Utilising this benefit just requires you to keep the documents ready . many people donot claim this benefit because they are too lazy of keep the documents safe . Don't be lazy ...

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Thursday, February 19

What is Risk Apetite ?

Have you heard the word "Risk Apetite" ?

You might have heard this word from yourmutual funds agent , your Ulip agent , yourstock broker , from analysts giving tips orany other place , we hear the word and thenwe feel we understand it . may be youunderstand it , But how do you define it ?

One of the reader asked me to include this inmy article and it seemed a good idea to me .Before writing this article , i had a goodunderstanding and explanation of "What isRisk-appetite" ? but instead of using mywords i thought it would be a good idea tosurf the net and try to find some material onit to help it write article . As expected , eachone was totally correct , but not easy tounderstand by common public . So at last ithought i should write it the way i see it andfeel it . One of simple funda i apply in mylife is "if its complicated , its not worth" , Solet me start this small explaination .

What is Risk appetite ?

Risk appetite is the amount of risk you cantake on your investment . It is the point tillwhich you feel that you should be in thegame because still in the long run you will berewarded finally . Till that point there willnot be enough change in your mental state .The moment it reaches a point from whereyou feel like getting out is the best thing youcan do , That is the point where you accept that you were wrong at the time of investment . thatsyour Risk appetite point . Now this is for a situation where you can not decide in advance aboutyour risk .

Lets see a Psychological aspect of this , When you see your money increase or decrease it has directrelationship with your emotional state . If your money keeps increasing , you will feel euphoria andget excited , you will be on top , and when you see it decrease or going down day by day .Ouremotions guide us in our life, and they are very helpful in your financial life (to determine risk) .

Lets see an example :

Ajay and Manish invested 100 in Share A , After some days the value dropper to 90 , at this pointboth were calm , and accepted that this happened because of market volatility and its totally normal

. After some more days price went down to 70 . At this point Ajay thinks starts feeling oohh.. andoucch.. in his stomach . This is the point where his emotional pain increases to a point where he canno longer stay with this investment . Thats the risk Appetite for Ajay . whereas Manish is notaffected that much , still he can take loss of 20 more , only where prices drop to 50 , he will feeljitters .

What determines the Risk-appetite ?

Risk Appetite is determined from many factors like Your Expectations , Your current Situations andyour past experiences .

Your Expectations

You risk appetite has to be proportional to your expectation . If you want more you Will have totake more risk .

In the above example , Ajay will exit the investment and take Rs 30 loss , but what if Shares drop to60 and then starts moving up and up and finally reaches 130 . Who will make profit . The personwho had more risk-appetite .

Your Current Situations

Your current situations determine your risk appetite , If you are sound financially and can afford toloose more , you can have high risk appetite and vice versa . A person with a family to support willhave less risk appetite than some one who is is totally independent and has all his salary to spend onhis own .

Your Past Experience

Obviously , what happened in past with you in different situations will determine your futuredecisions . People who lost lot of money by investing in Jan 2008 will now have less risk-appetite ,because next when they invest there money somewhere , they will get panicked easily by a smalldrop and hence may get out fast . Where as a person who made great money in 2003-2007 bullmarkets will have high risk appetite .

I personally like Equity a lot , the reason may be because i want to make lots of money fast(expectations) , I can afford to loose some money currently because of less responsibilities (currentsituations) , and because i have made some (very small number) of quick profits (past experience) .

What is good ? High or Low Risk Appetite ?

Its a personal thing , There is nothing like good or bad . Its a subjective matter. At last everythingboils down to "You get what you wanted" , It must give you emotional satisfaction and joy .

There are people who are fine with 9% return per Annam and there are people who are not evensatisfied with 20% returns .

What is Risk Factor of a Product ?

Many people do not understand what is there risk appetite , I have friends who invested in Dec 2007in ELSS funds , and cried a lot after it went down by 50% . The reason was they never understoodthe risk factors . I also saw my investments drop to same levels , but my mental state was not

affected because i knew that it was possible with mutual funds and before investing i had acceptedthat if it happens , Its fine .

Risk and returns are always proportional . If A gives more returns than B , than A has to be morerisky than B .

Generally people choose a product which matches there return expectation and then compromisewith the risk and then later when there is loss more then there risk appetite , they cry .

The better thing would be to choose some thing which matches your risk-appetite on risk side andthen accept that you deserve the returns provided by the product .

I know people who want more than 12% returns and also dont want to see there investments see anynegative returns ever . they are totally foolish to expect this . This will not happen .

Also i know people who are ready to see there investments dip by 30-40% with happiness but theyonly invest in PPF or bank FD's , these people are bigger fool than former one;s , by not utilisingthe equity power .

Update : some days back i had said that Gold has break-out from the trading range and can nowmove to 1650+ levels . from that day , gold has shown very Sharp move , A sharp move can lead tosome short term correction , which can be used to add more gold or buy some fresh Gold (ETF , ifyou want) , for some quick and small gains . see :http://manishanalysis.blogspot.com/2009/02/gold-breaks-out-from-its-trading-range.html



Wednesday, February 18

Brief Therapy

Brett SteenBarger is a famous name in Trading World . He writes about some thing called as BriefTherapy which is related to psychothrapy .

I am copy pasting his article from his blog . Find some time to read this full article to understandhow you need to change your thinking and physcology to succeed in life . May be you want tochange what your are doing all together .

Brief Therapy – Part One: Therapy For The Mentally Well

Brett N. Steenbarger, Ph.D.

www.brettsteenbarger.com

It is commonly assumed that the role of the psychologist is to help people with theirproblems. Lodged in the backs of our minds is the image of the patient on the couch,talking with a Freudian analyst. In reality, applied psychology has come a long way from itsbeginnings as a "talking cure". Indeed, many of the newer approaches, which have beenextensively studied and validated through research, do not emphasize talking at all.

Nonetheless, old assumptions die hard. People assume that you need to have "a problem"in order to see a psychologist. In fact, insurance companies will not reimburse visits topsychologists and psychiatrists unless they are provided with a "diagnosis" of theproblems being "treated". Little wonder that the stereotype persists that there's somethingwrong with you if you need to see a "shrink".

The reality is that the good psychologist is not a shrink, but instead expandspeople's minds and horizons. The goal is not to treat problems, but to make changes.Psychology is about making changes in life. Sometimes these are changes inrelationships; other times, they are changes in the ways we think, feel, or act. To benefitfrom psychology doesn't require that you have a problem. It does require a desire to makechanges.

A group of methods known as brief therapies are extremely promising, because theyaccelerate the process of change. I refer to the brief therapies as therapies for thementally well. There are individuals who have chronic mental health problems. They arenot the ones for whom brief work is appropriate: lifelong, severe problems often requireongoing assistance, including medication help. The mentally well, however, are not besetwith such problems. They are simply interested in making changes. Sometimes thosechanges are simply to expand their strengths: to become even better at what they do.

A trader who made 2 million dollars last year--and more the year before that--recentlyinsisted on meeting with me before New Year's Day to identify areas for improvement andset goals--and a path for meeting those goals--for 2007. His goal was to enhance hisperformance, not rid himself of personal demons. That is an excellent use of therapy forthe mentally well.

So how do you know if you can benefit from such brief work? Here's a guide:

Behavior is patterned. How we think, feel, and act have a pattern to them, and thatpatterning is what makes us who we are. The sum total of our patterns is our personality.

Sometimes our patterns interfere with our goals in life. They prevent us from being who wewant to be or accomplishing what we want to accomplish.

Perhaps there are times when you say to yourself, "I don't know why I keep [fill in theblank]. I wish I would stop."

You could fill in the blank with any of the following--and more:

"losing my temper" "going into slumps" "winding up in bad relationships" "overeating" "beating myself up" "making stupid trades" "procrastinating" "pushing people away" "worrying" "choking under pressure"

In each of these situations, we're recognizing that there is some pattern of behavior that is

not fully in our control. The pattern has ossified: it's hardened into a habit. If you canidentify a pattern that is getting in your way, you can benefit from short-term applications ofpsychology.

Brief therapy is about changing the patterns that no longer serve us well. Thesecond step in such therapy for the mentally well is to ask yourself: What is the onepattern that is most holding me back from my goals, from being who I want to be?

So what's the first step? To know what our goals are. To know who you want to be.Many people never travel the right path, because they never formulate their destination.

So that's where we'll begin in the next post in this series: Figuring out where you want togo in life. Then we'll take a look at what might be holding you back.

But first things first. Solving a problem will not give you a goal. Furiously climbing theladder of success won't help you if it's leaning against the wrong structure.

Brief therapy doesn't start with problems. It starts with goals--and a vision for the future.Without such vision, we're walking blind through life. The therapy for the mentally wellbegins with the recognition that it's time to open our eyes and develop our vision.

Brief Therapy – Part Two: The Vision and the Goals



In my recent post, I described a set of change techniques that I refer to as"therapies for the mentally well". These brief, intensive approaches to change arevery different from the traditional talk therapies that come to most people's mindswhen they think of psychology. In coming posts, I will be describing some of thespecific methods and how they can be employed in trading situations--and anyother life situations in which performance matters.

I also mentioned in that earlier post, however, that these techniques are not the firststeps in a change process. Rather, it is crucial to establish goals for change: toknow what it is you want to change in the first place.

That is not so easy. We become so engrossed in getting by from day to day, withresponsibilities at work and home, that the big picture of our lives stays in thebackground. Year after year we busy ourselves with work and routines, only later inlife to realize that opportunities have passed us by.

So the first question to address in a change process is, "What do you want tochange?" Or, stated otherwise, "How would you like your life to be different?"

The usual responses to this question involve eliminating or reducing some negativestate of affairs: "I want to stop thinking negatively;" "I want to be less anxious"; or"I want to argue less in my relationship". Even when there is a positive response, itis often so vague that no one can truly act upon it: "I want to feel better about

myself" or "I want to be a better trader".

The absence of concrete, actionable goals--and a clear vision for the future--is amain reason we stay submerged in daily minutiae, getting by but not necessarilygetting ahead.

If your life is a canvas and you are the painter, what will the finished work look like?Will it be a work of art, with a theme and integrity of its own, or will it be a randomassemblage of colors and shapes without meaning or significance? A paintercaptures his or her vision on a canvas. What is your vision for your life's canvas?

Here's a useful exercise that might help you answer that question:

Imagine your death. You have died, and on the gravestone is inscribed an epitaph.What is written on that stone? What does it describe of what you've left behind andthe impact you've had during your life? Imagine very specifically what you wouldlike that stone to say.

Now imagine that you've received the results of medical tests from your physician.No doubt about it: you've got five years at most left in your life. There is no possiblecure or remission for your disease. Within five years, your epitaph will have beenwritten.

What would you do during those five years? Would you make radical changes anddo things very different from what you've been doing, or would you simply continueon your existing path at perhaps a more urgent pace? What would you need to doduring those five years to earn the epitaph you want at the very end of your life?

If what you would do to earn the epitaph is very different from what you're doingnow, you quite likely are on the wrong path. You'll find your proper goals in theactivities you'd stuff into those remaining five years: those, most likely, wouldcontain the essence of what you would find meaningful, what you would like toaccomplish, what you would want to leave behind.

Learning the techniques to make life changes is really the easy part. The harder partis knowing which changes you truly want to make and keeping those topmost ofyour mind. Mark Twain once advised people to never let their schooling interferewith their education. Similarly, it's important to not let life interfere with living.

You don't want to be that person, regretful at the end of life, hurting and having hurtothers. A canvas and a rich array of paints lies in front of you. All that matters iswhat you make of that opportunity: to face the end with pride, fulfillment, and thesense of having made a work of art of the life you'd been given.

Brief Therapy – Part Three: Becoming the Playactor of Your Ideals



I was sitting in a waiting room reading a popular magazine, when I came across aninteresting quote from actor/director Mel Gibson. The interviewer pointed out that many ofthe actors in his latest film, Apocalypto, had no acting experience. Was it difficult, theinterviewer asked, to work with them as a director?

Gibson's response was that it wasn't all that hard. To teach someone to act, he insisted,what you need to do is show them how to breathe the emotions they are trying to portray.If actors can shift their breathing, Gibson implied, they can enter into the emotional statesdemanded by their roles.

To be sure, I haven't agreed with all of Gibson's comments of late, but this one struck meas particularly perceptive. There are approaches to short-term therapy that purposelyincrease a client's anxiety, by confronting patterns of avoidance, resistance to change, anddefensiveness. Under conditions of heightened emotion--particularly anxiety--individualsgain access to memories, insights, and perspectives that they didn't have when they firstwalked in the door. By shifting a person's state of mind and body, the psychologist alsoshifts their awareness.

Think about the phenomenon of test anxiety. A student can study hard for a test and knowthe material cold. Under conditions of performance anxiety, the student tenses up. Muscletension increases, negative thoughts intrude, and breathing becomes more shallow. InGibson's terms, the student is literally enacting a panicked mode by adopting the mindsetand physical state of the anxious person. Once the state has shifted, the student no longerhas access to what he or she already knows.

This illustrates that the state we're in either facilitates or blocks access to what we know.Stated otherwise, what we know is relative to the state we're in. Without realizing it, weare like actors, altering our breathing, our posture, our movement patterns, and ourthought processes to create a convincing enactment. Actors and actresses, however, shifttheir states intentionally to generate their portrayals. When we shift states, it is most oftenwithout our conscious awareness.

I submit that access to our implicit knowledge about markets and trading patternsis mediated by the states we're in during our decision making. If our bodies arerelatively immobile, our breathing is shallow, and our thoughts are worried, we are hardlycreating the conditions by which we would normally experience ourselves as powerful,confident, and controlled. We fail because, unwittingly, we enact the role of the ineffectiveindividual.

What if we tracked the states of mind and body that we're in when we're tradingeffectively and then consciously made efforts to access those states through thetrading day? What if we followed Gibson's dictum and enacted the mental and physicalprocesses associated with success? Quite a while ago, a social psychologist named Kellyinvented a therapy in which he encouraged people to act out their ideals: to play-act the

person they wanted to be. He even had them make up a name, personality, and history ofthe role that they were to portray.

What he found was that, as people played out their ideal roles, they began to get positivefeedback. This, in turn, encouraged them to continue the role enactments, which in turnprovided more good feedback. After a while, the roles became more natural: Kelly's clientsinternalized the roles that they were playing.

We often think that we have to change ourselves internally (our thoughts and feelings) inorder to change our behavior. But what if we adopted very different behavior and *then*generated new sets of thoughts, feelings, and experiences? What if, to paraphraseNietzsche, we became the play-actors of our ideals--and thereby moved closer tothose ideals?

For those who have developed trading skills, perhaps success is just a matter of findingthe mental, physical, and emotional state in which access to those skills can bemaximized. There is much room for self-experimentation for traders inclined to work onthemselves.

Brief Therapy – Part Four: Programming Our Own Experience



A bit over a week ago, I described short-term applications of psychology as "therapy forthe mentally well". The goal of such work is to make positive changes, not necessarilyeradicate pre-existing deficits. For that reason, the first step in the change process ishaving a vision of the changes you wish to make. By linking these positive changes todistinctive emotional, physical, and cognitive states, we are able to become the play-actorsof our ideals.

Allow me to expand on a metaphor I used in the Psychology of Trading book.Consciousness is like a radio dial, and we operate on many frequencies. Each spot on theradio dial is a particular state: a blending of our experience of our bodies and minds. Thetest anxious student has a spot on their dial that combines negative thinking, increasedarousal, shallow and rapid breathing, and diminished access to retained information. Otherspots on the dial may combine much more positive thinking, alert concentration, erectposture, and fuller breathing. When operating at those frequencies, the student has fullaccess to the information studied and performance on the test is excellent. What we knowand who we are is relative to the frequencies of consciousness at which we're operating.

The problem is not that some of the spots on our personal radio dials are programmedwith negativity. Rather, the problem is that we lack full, intentional control over thedial itself. We change stations, so to speak, without intending to. What the brief therapiesaccomplish is a greater control over selecting our own frequencies: they give us a hand toturn our dials. The idea, after all, is to become our own trading coach: to develop our ownability to reach our goals.

What creates the "radio stations" that make up our dial of consciousness? Two things:repeated experience that becomes habit patterns and powerful emotional experience thatis processed as a trauma. Just as some radio stations on our car radio dials are faint andothers generate a powerful signal, some of our states are weak and some dominate thedial. The more repeated the experience--and the more powerful the experience--the moreit becomes part of your spectrum of consciousness.

As I emphasized in the Enhancing Trader Performance book, one reason so many tradersfail is that they create repeated, negative emotional experiences for themselves. Indeed,this is why I included self-help manuals for cognitive and behavioral change techniques astwo chapters within the book. Quite simply, traders can find themselves operating onfrequencies that they don't want to be experiencing: their dials change without theirconsent or control. And all it takes to shift our frequencies of consciousness, very often, isa simple shift in one element of our frequency: a few negative thoughts, a change in ourpatterns of posture or breathing, a fleeting emotion. Those become triggers that diminishour control over our own experience.

While the aforementioned cognitive and behavioral techniques are extremely valuable, it isalso important to be able to program our own new, enhanced spots on our dials ofconsciousness. The way to do this is to rehearse positive patterns of thought and

behavior while you are in a distinctive emotional and physical state. This is one of thequickest and most reliable ways to generate change.

For instance, let's say your desired behavior is to hold onto winning trades longer. Youmight mentally rehearse market scenarios of holding onto trades--emphasizing howexcited, happy, and profitable you'll be by achieving this goal--while you are pushingyourself during a strenuous treadmill exercise. By setting the treadmill at an incline and agood speed, you will be jogging at a brisk pace and elevating your heart rate. Withrepetition, you will begin to associate the goal--and its emotional benefits--with your body'spumped up state. It will become an increasingly powerful signal on your radio dial. Then,before trading and during trading breaks, all you have to do is get back on the treadmill.Triggering your body's shift in state will trigger the desired shift on your dial ofconsciousness. You will access the behavior you desire by intentionally triggering thecues associated with the behavior.

Making changes entails far more than simply engaging in positive thinking or gettingpositive images in your head. If you don't change your state of consciousness--and yourability to shift your own consciousness--you'll be listening to the same programming dayafter day. Learning how to shift out of negative states is a huge achievement. Wheredramatic growth occurs, however, is in learning how to create new, positive states: inbecoming the programmers of our own experience.

Source : http://www.brettsteenbarger.com

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Tuesday, February 17

How to manage ULIPS !!

I am finally back from vacation , I feel bad for not writing anythingfor these 11 days .. I have written a post on GOLD Breakout here ,People interested in investing in GOLD may be interested . Let metalk about IRR and ULIPS today . When we see talk about Ulips ,people generally see its returns over some years , where as its notthe true indicator for its actual returns , What we need to see iscalled IRR .

What are ULIPS ? , read here

What is IRR ?

Actually IRR is not only related to ULIPS , its a general concept . IRR is Internal rate of Return , Itmeans returns after adjusting all the costs and expenses .IRR alone is not a single thing we shouldlook at , Its calculated by assuming fixed rate of return like 6 or 10% . The other things to look areits actual performance too .

What are good ULIPS in markets currently ?

Some weeks back there are was a survey and study by outlook money on best Ulips , Birla SunLife’s ClassicLife Premier and Kotak Life's , Long Life Wealth Plus were some top fundscompared on the basis of IRR . this article talks about the best ULIPS in detail , click on this toread more .

Full article related to ULIPS can be read here

Understand , Choosing a good ULIP is just 5-10% , the main part is how your manage it . how totake care of the advantages provided by ULIP, If you just want to buy a ULIP and sleep for 10 yrs ,ULIPS is not for you then . you must buy Mutual funds Instead .

Manging a ULIP is the main part , If you manage a bad ULIP very well , you can earn good returns,but you can loose money by buying Best Ulip in markets and mismanaging it .

How to manage a ULIP ?

Managing a ULIP over a long term is very simple but not easy . You have to do some simple things. Always use switch facility when you anticipate the opportunity . When you see markets are veryhigh and there is lot of euphoria in market , Decrease your Equity allocation and shift it to Debt .And when you see dull ness in market and everybody is too afraid in markets its the time to shiftyour money in Equity .

How to make sure that this is done easily ?

You should find out your Equity : Debt allocation ratio which suits you , which is comfortable foryour risk appetite . Once you choose it . Make sure you maintain it once it goes out of sync . Sosuppose you decide that your Equity:Debt ratio will always be 75:25 . and suppose after an year ,you see that it has changed to 65:35 . You should shift some of your Debt part to Equity and bring itback to 75:25 .

You can read how Equity Debt rebalancing helps in long term

This way you will make sure that if Equity has gone up (because if good market performance) , youare shifting some money back to Debt (because now chances to correction is high) and vice versa .

The main advantage of ULIPS is the you can shift between Equity and Debt without any taxliabilities , If you buy Mutual funds and do it , you will pay tax every time you buy and sell it inshort time frame (1 yrs) . So until you utilize Switch facility well enough in ULIPS , you are nottaking best advantage from your ULIPS .

So as a general rule :

- Increase your Debt allocation once markets are too high and every body is rushing to buy sharesin stock markets .- Increase your Equity allocation after markets are down a lot and there is lot of fear amonginvestors (this is a good time to buy cheap stocks).- Increase your Debt if you are too confused about what will happen .

Final Note :

If you cant invest for more than 10 yrs and cant look after switch facility and cant monitor marketsat broad level , You should stay away from ULIPS, the best thing for you would be to invest in PPF

each year and invest in Equity Diversified Mutual funds through SIP every month and review it atleast once a year .

Please dont buy ULIPS for just tax savings , dont get out of it in 3-5 yrs . there is 3 yrs locking , buteven if you get out in 4th or 5th year , there are heavy penalties you have to pay to get out , whichyour agent never tells you , Only after 5th year there are free exits .

ULIPS are not bad products , they are only bad if you dont manage it well and buy them for wrongreasons .

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Thursday, February 5

Trading !! what is it !! Example of Reliance

Hi all , I am going to Pune for 10 days and will not be posting any article for next 10 days . See youall after 10 days . Read the post now :

What is Trading ?

I see many people who want to try there hands in trading .

Trading means buying and selling something with a short tenure in mind . Short tenure can be day ,week or months . You can trade Stocks , Derivatives like Futures or Options or you can try outCommodities or currencies too .

The sad part is that many people just enter this trading business without much preparation andknowledge and burn there hands like anything . they continue loosing money every day , week ,month and cant figure out why they are loosing .

Understand some things :

Trading is a profession , and its highly rewarding in every ways . BUT !! , Trading is one of thehardest thing one can ever attempt . trading is simple but not easy . It takes years for one to master itand become successful as a trader .

If you are trying to learn trading and want to do this in your life . I can suggest somethings :

- Start Learning about markets and do it for at least 1 year (not 1 month)- Learn Technical Analysis and try to do some analysis on your own .- Read good books and make sure you have read it really well .

Once you have done this . Then you should paper trade for some time ,may be 2 months . After youhave paper traded and can see that you can trade well on paper , then start with small money (youmust be ready to loose this money) ... Do some real trading with this money and see how youperform .

Trading is a highly rewarding and satisfying profession . You can earn good money and you areyour own boss . Trading can be fun and challenging . But Trading is the most challenging andhighly risky profession one can attempt as i already said .

I have put up a simple Technical Analysis Example for Reliance , It discusses buying or sellingSignal for Reliance in coming days. You can see it here

Why Technical Analysis ?

Technical analysis helps in taking much better decisions for buying and selling . Its a must for shortterm traders , however it also helps people who have longer time horizon , With Technical Analysisyou can maek better entries , exits and manage your decisions well .

Some reading Material for people who want to learn technical Analysis is here

1. http://www.investorsintelligence.com/x/why_technical_analysis.html

2. http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-3-technical-tools/technical-analysis/

3. http://www.informedtrades.com/trades.php?page=freetradingcourses (this is very detailed one)

ThanksManish

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Tuesday, February 3

http://manishanalysis.blogspot.com/

http://manishanalysis.blogspot.com/

This is my new blog which i have created to teach what i know . This blog will be used for

- Replying to the queries i will get at [email protected] . You can mail me your queries andi will post an article for my reply .

- Any short term opportunity which arises in stock markets .

- If we can use options in some situations , i will post about it .



Keep it simple Stupid !!

Keep it Simple Please

Your investment must be the way you want your life to be . Simple and Easy .There are many products available in markets , Some are extremely easy to understand andstrongest . While others are complex and on an average not very easy to understand by common

public .

In Life , simple things works best . We all want our lives to be simple and easy , We don't want lotsof complications . In the same way we should use simple products while choosing our investments.Simple things works in the best manner . There is a tendency of creating complex products becausegeneral public feels , that because they are complex and not easy to understand , they must beworking very differently and in a smart way . This is far from truth .

Easy to understand products like Term Plans , PPF and Mutual funds works brilliantly . You dontneed ULIPS or product like Jeevan Astha and Endowment plans with lots of stupid clauses .

What happens when u choose simple products ?

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

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

What are the benefits B enjoys ?

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

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

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

there are many things like this , where as in ULIPS and Endowment policies , people are stuck withno mercy if they cant pay premiums some 2-3 yrs in a row . There are too many clauses anddifferent types of sum assured ,and things like those .

What is the Learning ?

Take easy to understand and simple products which look Plain Vanilla , Complex products havenothing extra than complexity . Just make sure you understand easy products well and how to usethem well . Your investing life would look much like your investments . Keep them Simple .

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Monday, February 2

Early Investor , Smart Investor

You are 25 , and want to retire at 60 , after 35 yrs . You earn anything more than10k+ , and can save more than 2k per month for investing if you wish . You mightbe earning 30k or 60k or whatever , but i am considering an average urban Indianwho is earning 10k or 12k or anything like that and can save more than 2k permonth .

Now , What would you like to do ?

Choice 1 : Start now and invest total of 8.4 Lacs (8,40,000) distributed in a span of 35 yrs (till yourretirement).

Choice 2 : Or after 15 yrs , when your salary is increased and you have good money , then Invest72 lacs (72,00,000) , in a span of 20 yrs (start when you are age 40) .

In Choice 1 you will have to invest 2,000 per month for 35 yrs , so you invest total of 2000 * 12 *35 = 8,40,000 (8.4 lacs)

In Choice 2 : You invest 30,000 per month for 20 yrs , so you invest total of 30000 * 12 * 20 =72,00,000 (72 Lacs) .

In choice 1 you pay less than 12% of what you pay in choice 2 . I am sure that you must have got ahint by now that which choice will lead you to generate more money , But it has to have someassumptions .

Choice 1 : You are investing for 35 yrs . What is the return we should expect in this case , In last 29yrs of history , Indian Equities have returned 17.5% , So we will expect same return of 17.5% , but iam expecting it to be much more .

Choice 2 : In this case you are investing for 20 yrs , we can easily expect close to 15% returns inthis case .

Lets reveal the secret and see the numbers now.

Choice 1 : You pay 2000 per month for 35 yrs @17.5% CAGR , total amount at the end : 5.9

Crores

Choice 2 : You pay 30000 per month for 20 yrs @15% CAGR , total amount at the end : 4.5 Crores

The graph below shows how the money increases with each choice (Early start and Late Start , Ispent 2 hrs figuring out how to plot this graph using gnuplot (linux command for plotting graphs ...man , it took me so much time to just do this)

CLICK ON THE GRAPH TO ENLARGE ...


Now , What is the Learning ?

This article is for people who think they don't earn much money to invest , There are many whoearn 7k , 10k or 15k per month and there are many who earn 30k,40k , 50k per month . People whoearn less often think what can 1k per month do , they fail to see what will happen in long term , they

do not appreciate power of compounding .

Wealth is generated by people who invest smartly and with discipline , not who just earn lots ofmoney .

Where to invest ?

If you are a regular reader of this blog , then you know the answer , if you don't, then let me tell you, Its Diversified Equity Mutual funds , take a SIP and invest small sum of money every month , Themore you can contribute in the start , the lesser you need to invest in later years of your life .

For example, If you can invest 4000 per month (instead of 2,000) in the starting years of your careerlike 10 yrs , then you can stop investing for rest of 25 yrs and still generate more wealth (around 7crore) ,considering same interest of return

Is it practical to put 4k for starting 10 years and then leave it for 25 yrs , May be NOT !! .. Peopletend to take the money out when they require it and never give compounding any chance to show itsstrength . But if people leave it , they will see how amazing and powerful it is .

Why do you believe me and whatever i write here ?

Ans : You never believe me or for that matter any one when it comes to investing and your money ,you just choose to learn from me and check the authenticity of what i say , you can read what i tellyou and what i write , Ask your self if there is any logic behind anything or not .

When i say expect 17.5% CAGR return in 35 yrs time duration , Its because equity outperformsevery other asset class in long , and it has happened over centuries .

When i say that if you invest X every month @r % return for t years, you will get A amount at theend , you should go and check using your own calculations to see if the figures are right or not .

For people who are new to Mutual funds and don't how to choose it can read my earlier post :http://www.jagoinvestor.com/2009/01/what-to-look-for-while-choosing-mutual.html

Be a early Investor , be a smart Investor .

Personal notes

ok ,I am done with my post of the day . I should take my time off now .

Yesterday i went for a Trek to Madhugiri some 40-50 km from Bangalore in Tumkur district ,interested people can choose to look at some pics i uploaded athttp://www.flickr.com/photos/manish_chauhan/sets/72157613257560390/detail/

btw , there is a group called BMC (Bangalore mountainering Club) which organises these events ,anyone who is without a group or with a group can come for the events , Just register for the eventand go for the events . See there site for more : http://www.bmcindia.org/

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Saturday, January 31

What to look while you choose a mutual fund :)

One of my readers was confused with thequestion "Which mutual fund should he investin through SIP ? "

He started an SIP of 1000 in Reliance RegularSaving mutual fund , suggested by an agent .How was his investment ? It is a mistake or agood decision ? This is a common problemwith investors . Let me today give you asimple way to think and a methodology tochoose mutual funds for your investmentdepending upon your requirement . In thisarticle we will only talk about investment inEquity Diversified mutual funds for long term(5+ years) .

For Beginners : Read what are mutual funds

Question : What does the return from

mutual funds tells us ? and how do you

interpret it ?

Ans : Understand that the returns of a mutual fund shows you how did it perform over than period ,How did it manage his funds and took there investment decisions in good times and bad times . Itmeans that you should see its performance in good times and bad times .

A simple analogy can be how do you want your wife/husband to be like , One who is really great ingood times and excellent person to be with in Good Times , when everything in life goes great .

Or you want a person who is there with you in good and bad times , supports you in good and badtimes .

When times are good , everyone behaves good and performs well , There is a saying "Don't judgepeople by there Sunday appearances" . Look at a bigger Picture .

Looks how a mutual fund performed in good times , in bad times , did it invest according to thereplan , Is there management excellent . It does not matter if they were No 1 or No 2 this year or thatyear . But if they were just good in every year , and perform well above there benchmark, and keepperforming over time , Its bound to be become an excellent long term consistent performer .

Question : What about the last 3 yrs returns of a mutual funds ?

Answer: It will give you a good indication , but not an overall picture . If you see 3 yrs return , youhave to understand that out of those 3 yrs , 1st and 2nd years were strong bull markets , where anydog and cat has also performed very good if not excellent . and in last year they gave very badreturns . so ultimately they will be in positive returns in 3 yrs . You should also look at there 5 yrsreturn and 3 yrs returns . Both in synergy with each other .

When you see Reliance Regular Savings Fund you can see that its 3 yrs returns are 7.82% which isvery good compared to other funds (this fund is Rank 2/135 in the 3 yrs category ) , but when yousee its 1 yrs returns , you can see actual face , the returns are -51% , if you see the rank for 1 yr , its127/210 .

If you look at its portfolio allocation athttp://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=2790

you can see that its allocation to mid cap and small cap companies is very high , It can give yougood returns but also it has very high risk . Please understand that i am trying to say that this fund isgood or Bad . No !! . I am trying to tell you what to see , how to interpret.

People get excited by seeing returns of years 2003-2007 , that was in range of 35-50% . Which isnot possible in long term . Now from this point on (2009) , the returns in long term will be in rangeof 12-15% (max 20%) . Now its difficult to see this kind of bull run in another medium term (5-7yrs) . Now you should just expect normal 12-15% kind of returns in long term .

So , whom should you rely on , On mutual funds who launched them selves near 2001-2002 andgave great returns from there onwards because they them selves dont know how they gave them .Or shall you choose those mutual funds who have seen all types of markets in India andcontinuously gave much better than average returns from long term , They performed in goodmarket , bad market , quiet market and roaring market .

So the things you should look at mutual funds are :

1. Long term performance , It should figure out in top 10-15 at least over 5 yrs returns .

2. They should have a track record of consistently outperforming its Bench mark (this shows thatthey did better than what they were based on and tracking ) .

3. See that its management is good , Don't just buy Any Idiot MF just because it returns 45% lastyear , but you have never heard of its parent name . Some long term Great AMC's are DSP , SBI ,Sundaram , HDFC , KOTAK , PRINCIPAL , HSBC , RELIANCE (In order of my liking) , Make sureyou dont follow this , it is just to give an idea . DSP is one of the best and old AMC in India , dontlook only for Indian names .

4. Once you shortlist some mutual funds , then look for its portfolio allocation , see how it has putits money for large , Medium and small cap companies . If its concentration is high on Mid andsmall cap funds , it means that it has more than average risk , but potential for very great returnsalso , choose it if it fits your risk appetite .

For people who just want to take a short route and want to choose some mutual fund based fast , butwith not great accuracy , you can just see the list of mutual funds appearing on 5 yrs returns list orsince inception returns (Should be greater than 3-4 yrs at least) and choose any one of them . Thiswill make sure that you have not made a bad choice , if not great .

Some links :

To see the rankings of mutual funds and compare them on different parameters

1. Go to http://www.valueresearchonline.com/funds/default.asp

2. In the right side , you can see "Compare Fund" , choose "Open Ended" in the first box and for thesecond part choose "Equity Diversified" or "Tax Planning" or any other thing which you want tocompare. and now click on Go.

3. You can now see a list with different parameters like Snapshot , Performance , Portfolio etc etc.

4. Click on Performance and then you can see different parameters like 1 month , 6 months , 1 yr , 3yr , 5 yrs and ranks . You can sort them by clicking on 5yrs or 5 yrs ranking to see the ranking .Example . When you click on 5 yrs returns on the top , you can see the ranking either in ascendingor descending form (click once again to see in different order) .

5. In the same way you can choose different parameter also .

This article gave you a general idea on how to choose a mutual fund and interpret different things .You can also do some advanced analysis the way i discussed in one of my previous article :http://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html

Question : Which Mutual funds i will invest in if given a choice ?

Ans : I hate this part for suggesting some mutual funds , but i know people look for it and expect solet me give some .

Equity Funds :

1. Sundaram BNP Paribas Select Focus Reg2. DSPBR Equity-D 3. Magnum Contra

4. Sundaram Taxsaver (For TAXSAVING) : see this for more 5. Nifty Beas (Index Fund , take SIP in this) : see this article for more

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If this article helps you in anyways , please comment to tell if you liked it and learned anythingimportant from this . I would be glad to hear from you . If it helped u anyways , this article wouldbe considered as success.

I write this article on Saturday , 3:00 Pm after a chat with one of my readers . I am now gettingready for a Trek next morning . Looks like i have written for next 2-3 days of my quota , huff ...Feeling tired now . (kidding) .

Disclaimer : I think Reliance Regular Savings FIf this helps you in anyway und is a good fund .But there may be much better choices for long term . I hold no mutual funds other than some taxsaving funds.

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Thursday, January 29

Joint Life Insurance Policies

I got a mail from one of the reader regarding some explanation on Joint Life Insurance policies . Hisquestions were

1. Joint life Insurance policies are also available in the market! What is the significance of thesepolicies? Under which circumstance, it should be considered?

Ans : They are generally same as normal Endowment polices , but with fact that in this bothhusband and wife are covered . Joint Life Insurance is designed mainly for married couples. So thatwhen one of them dies , the other person gets the insurance money.

Now it does not make sense to take this if anyone spouse is not working and earning , becauseanyways , you will not be financially impacted (Don't think in a way that even if he/she dies youwill at least get some money , that's a wrong reason to take Insurance) .

these policies are again policies which return you your money at the end , This is a fundamentalmistake with any Insurance policy . Insurance products should only cover your risks. Now i will notadvocate to buy this kind of policies .

You can only consider to buy Joint Life Insurance products if they are Term Insurance products(Joint Term Insurance Policy) . But that too has some limitations .

What if there is Divorce ?

No one will think this , but what if some years down the line , there is divorce , that couplesuddenly become enemies other each other . This can lead to many problems .

2. Lastly, whether it has any edge on two separate individual policies, if we compare?

I dont think Joint Insurance policies have any edge over two separate policies, The counterargument can be that they are a single policy and easily manageable .But how tough it is to managetwo policies . Idiot people look for products who are afraid of managing the documents and trackingthem . Smart people concentrate on buying smart products and manage it well .

One more problem with Joint products is that you are stuck . What if at the time of taking the policyboth people where earning money (so they required Joint insurance) , but later after 2 yrs one ofthem starts working and brings no money home . Now what happens . there is no need to cover theother person now . You cant just stop other person's share of premium . But two separate termpolicies for each of them would have worked brilliantly . You can just stop one policy any time youwant without loss .

Summary :

Understand , You financial life will become just like the products you take .Take easy and simple things and make your life easy . Don't complicate your life by taking ULIPSfor short term , Endowment polices and things like those .

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Wednesday, January 28

A bit of Reality !!

Some days back , i talked about Why one should avoid products like Jeevan Astha (read here) andICICI RGF (read here) .

I had talked how they are not very sensible product for anyone who wants to make some goodreturns from there investments (These products are for those who just want there money back , andno returns) .

Shyam Pattabi writes on his blog , (read here)

How schemes like these which offer guaranteed returns with all kind of complexity does not scoreon any thing . People buy them with ignorance and because of there emotions (fear) linked tomoney .

I am glad that i was able to do correct analysis at write time and saved my readers in falling in whati call as "Jeevan trap" going on from many Decades in India .

Continue Reading


The Chemistry of Equity and Debt

Following is a small Table which discusses the Equity and Debt allocation for your Investments .(Click on the chart to enlarge it). It will tell you how Equity and Debt should be used for long andshort term financial goals .


It has two parameters .

1. Importance of your investment goal (Left Downside)

- Low : Buying an a/c for you car , Going for a vacation .- Medium : Buying a Car , Saving for a second home- High : Retirement , Child Education , Family health Related things , Down payment for HomeLoan .

2. Time Duration of your Goal . (Upper Right)

- Short term : 1- 2 years- Medium Term : 3-7 years- Long Term : 8+ years

Basic Idea : It is based on the following facts .

- Equity is extremely risky in short term- Equity is highly rewarding in long run with almost no risk - Debt is safe always - Debt eats away your money purchasing power.

So on based of these observation. Your Equity : Debt allocation should be based on both parametersof Importance and duration of goal , not just one one them

Some Examples

Example 1 : Ajay wants to invest 1,00,000 for his brother Education in next 1 year .

His Action : This is extremely important thing and cant be risked with , also its a short term goal.Equity should not be used . He should invest in anything giving him pure protection of his money(even though he does not get high return) . A plain FD for 1 yr will be good enough .

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Example 2 : Robert want to save some money for his house down payment in next 4-5 yrs .

His Action : As this is an important thing with time goal of medium term , His investment shouldbe mixed in both Equity and Debt . He should invest 35-40% in Equity (SIP in mutual funds) andrest in Debt products like Tax FD's and Debt funds% .

Alternative : He can also choose to invest his money Balanced mutual Funds (as they have mix ofboth Debt and Equity built in)

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Example 3 : Ankit wants to retire in next 25 yrs .

His Action : Now this is a important thing , with a goal tenure of around 25 yrs . There is no reasonwhy Debt must be involved here at all . The matter that Equity is risky does not apply here its truefor short - medium term , not for Long term like 25 yrs . (probabilistically only , If you are extraunlucky , what can one do) .

He must invest 50% in some good 3-4 Equity Diversified Mutual funds though SIP route and and hecan invest 50% of his money also in some very good fundamentally strong mid caps and large capsstocks directly .

Note : Understand that , your definition of "Importance of Goal" and "Duration" depends on your

situation , For me buying a Car is "Not Important" ,whereas for some one with a family of 4 andrequirement of often going places can be "Important" .

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Monday, January 26

What can Repiblic Day teach us about Financial Planning

India gained its Independence in 1947 . At that time India was free , and ready togrow on its own , with its own decisions . But it was not possible without a set ofguidelines to guide the decision making process . Success comes when you aredisciplined and have a decision making process. On Jan 26 , 1950 ourConstitution came into effect and now we had laws for different things .

We knew exactly what we have to do when thing happens . We had a road mapto follow . From there on we progressed and have came a long way . We can now say that we aremuch better than we were at that time and we continue to grow and make better decisions .We needamendments from time to time and that helps us to change the bad laws and adapt to new situations.

How do we relate it to Investing ?

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

1. Gaining Independence

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

2. Republic day

This is the day when we understand that we need to do our financial planning and have a set ofguidelines to guide our decision making regarding our investments .When we know how exactly weare going to invest to achieve our goals, we have a clear road map and time duration . We just needto follow it with discipline.

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

approaches .

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

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

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

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

The formula is

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

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

Now you can calculate what monthly_contribution fits the values .

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

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

When you do this , you go with a plan (constitution) and dont have to doubt your self and you willnot get lost . Just follow it with discipline without fail.

3. Amendments

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

Summary and Learning

What I want to point out here is that just earning money and being independent in not enough andcant make you successful with money , Discipline and proper understanding with good planningwill help . So if you are Independent but have not put your constitution in place , do it soon to reallysucceed . Make this day as your teacher and learn from it . Dont be afraid of mistakes .

"Success is a ladder where every step is made up of Failure . If you cant fail !! , Winning will not beeasy " .



Saturday, January 24

Review of "Jeevan Astha" Collections

Before some days back i had talked about "why a investor should avoid Jeevan Astha Policy"

But looks like Indians have developed unshakable belief and trust in these companies . Let us

see some statistics about the policy .

A report from Economic times (Thursday , 22nd Jan 2009) says

"Collections for the policy which closed on Wednesday is expected to cross Rs

8,000 Crore . Some insiders say that collection could go even higher .Although the corporation had said that it targeted collections of Rs 25,000

Crore this was seen as a marketing gimmick not a real target .

- A sports person is understood to have put 35 crores .- A leading Film actor has invested 8 Crores .

- A little known business family has invested 50 Crores.

- Insiders day that over thousand of policies are over 1 crore plus .

The policy has helped to bring LIC's flagging mark ship back on the track and

has enabled several offices in metro centres to achieve there targets for whole

year."

Despite the success the scheme has some limitations . Jeevan Astha is more of

a bond and less of an insurance policy . Although the sum insured is five times

the premium in its first year , the cover declines to 2 times in the second year. Smaller investor who were not all that savvy in reading the fine prints were

missold the policy promising returns of 10% "

My comments :

Goodwill and trust is the biggest thing, especially in country in India where people are not not mucheducated and can not take much informed decisions .I can imagine SBI failing or running with public money, but not LIC (pun intended) . That's the kindof faith and trust in India . Which is fatal .

It may make sense for a filmstar or a sportsperson or a big business family to put there money inthis kind of Policy , because there 10 crores will become 20 crores in 10 years (10 crores in 10 yearsis the return) , and i am sure even if that is 7% CAGR return , its a good return for them as 10 croresis a big money . But we have to see it as a small investor point of view and goals.

A small investor who invests 10,000 or 50,000 in it and get double of his money after 10 years . Iam not sure if he is getting any return at all when you consider 6-7% of inflation . He is just gettinghis capital back with almost same purchasing power.

I come from a very small town in UP and i am sure that it represents India when you see per capitalincome , education level and living standard . And people there are not ready to hear anything otherthan LIC policies and FD's of SBI or some other nationalised bank , will a small percentage havingheard of Mutual funds or Ulips even term insurance etc. This is the story of India . When millions ofuninformed and unrealistic investors come together and put there small money together in thesekind of polices , Its bound to generate thousands of Crores of Rupees .

But i am sure of one thing , who ever invested in these kind of policies will get guaranteed returns ,but i am not sure if he will get guaranteed and benefit for there investments when you take it for 10yrs period. People investing there money in this policy are going to double there money in 10 yearsto buy something which will more than double in price in 10 years .

Fear is an excellent thing to take advantage of , when financial markets are down heavily and thingare looking bleak in short term , Anything with guaranteed "tag" will act like a magnet to hardearned money .

I am happy to not invest in anything like this and do not want my money to double in 10 years.

Jago Investor , ab to Jago !!! Continue Reading


Friday, January 23

New face : Jagoinvestor.com

Hi Readers

I am happy to tell you all that this blog name has changed to http://www.jagoinvestor.com/ .

Please update your bookmarks to this new name. All the old names would still redirect to this site ,so there is no problem if you dont update .

Thanks for love and support till now , I will try my best to do good job in future .

Manish

The amazing irony about Insurance

Imagine you are 25 years old earning 6lacs/year , with a family to supportfinancially. A Term insurance policy withsome cover (may be 25 lacs) will havepremium of 5k per year (for 25 yrs old)as the premium for this policy.

Almost 99% people need Term Insurance,But most of the people show goodamount of reluctance, because they see"wastage of premium" incase nothinghappens to them.

Let us try to see what are the reasons

for this ?

This happens because of some

physcological reasons . Some of the reasons and counter arguments are :

1. People are not ready to accept subconciously that they have equal probability of death like

others , Every one assumes them selves to be little more safe than others .

Counter Argument : A different case , some one tells this person that he has chances of dyingwithin 20 years somehow explicitley , there are greater chances that his perspective about TermInsurance will change and he may go for a good amount of cover with this premium , the reason isthat now he sees these [premiums as risk cover fees and not wastage . Now he has convincedhimself that there are good chances that his "death" is possible and his family needs some goodcover, although there has not been any change in his lifestyle or life in gereral , All what matters ishis attitude towards Risk coverage .

2. People do not concentrate on the value provided by Term Insurance and its cheapness , it is

taken for granted .

Counter Argument : I did this very small survey where i asked my friends online . See one of thembelow

manish_chn: if your compnay says that it will cover your family for 25 lacs , but will cut yoursalary to some % manish_chn: what will be the max % you are ok with manish_chn: just the first number which comes to your mind manish_chn: no calculation manish_chn: please rajagopal: hirajagopal: never thought abt such things.rajagopal: prolly 5%?rajagopal: without any calculations

This shows that a person somehow feels comfortable with 5% of his salary getting cut for just 25lacs of cover for his family , It means that he can pay the price of 5% of his salary per year for 25lacs cover.

Some people were even ok with 10% or 7% , on the average it was greater than 5% , where as thereal worth of cost is less than 1% of there salary (everyones salary is more than 6 lacs/year ) . Costof 25 lacs cover in market = 5k - 5.5k per year .

2. People pay money from there pocket after getting salary , so it feels that they are giving

money unneccesarily .

Counter Argument : If you make term insurance mandatory for everyone and cut 1% from theresalary (6 lacs salary , and cut 500 per month for insurance premium of 25 lacs) . In this case thereare very high chances that almost everyone will feel that its a good thing . And they will evenappreciate this move (there are always exceptions , but i cant help those people) .

What it shows is that people are lazy , when you do things purposefully ,there are great chances thatthey will understand the importance of something .

So , If you give them 100% salary, they might not take the term insurance.but if you give 99% salary and 1% is cut as insurance premium , many people will tell others howgreat there Company is !! (you can also just cut 1% and put it in your pocket and give them 99% ,

some people dont even notice these things)

Summary

Understand that a lot depends upon yours perspective about something . When you see things in adifferent way , its meaning and importance chances totally for you .

Continue Reading


Sunday, January 18

ICICI Prudential's RGF , 2 out of 10

posted on 3:32 am in Morning , 18th Jan 2008

ICICI Prudential has introduced Return Guarantee Fund (RGF) (Click on this to read more) inthis troubled times . I can see that whenever these bad times comes for Equity Markets , Thesecompanies cook out these kind of products with some "Guarantee" or "Safe" or "Assured" word init and then take advantage of public emotions ...

When Equity markets are down and its the best time to get invested in start investing in Equities forlong term wealth creation , at that same time these Great Institutions come in the scene and playwith public ignorance . They make complicated products and provide totally humiliating returnswith labeling it as "safe products in these troubled times" . They are only safe and nothing else ...


Another product from LIC was Jeevan Astha , which attracted zillions of investors across India whojust invested in that policy mostly without understand the clauses and the complexity of the product( read : http://finance-and-investing.blogspot.com/2008/12/jeevan-astha-another-idiotic-product.html )

Just putting "safe" , "assured" and "guaranteed" words with some product does not make a productGreat . If a product is not simple enough to understand, most probably its a disaster . Please stayaway from it .

One of my Friend Fell into trap of this and thought of discussing it with me , Please read the chatbetween us to understand more about this product . (please excuse for the spelling mistakes andformat)

Starting from Between ...

shivani@GMAIL: isme 3 saal tak premium dena haishivani@GMAIL: lets say 50k eachshivani@GMAIL: so 1lac 50k totalshivani@GMAIL: after 5 yrs we'l get 75k for 50k givenshivani@GMAIL: wen i asked them , wil it be 75k * 3 they said yesshivani@GMAIL: so it means 150% guaranteed return haimanish: no

manish: that is not true

shivani@GMAIL: on top of itmanish: They are lying

shivani@GMAIL: let me complete pooramanish: its not for all the 3 years

shivani@GMAIL: they wil invest the money in diversified marketsshivani@GMAIL: in case there is profit on the investment we will get that also..shivani@GMAIL: thats itshivani@GMAIL: ab bolomanish: ya .. so the first thing is that this is not a stand alone product

shivani@GMAIL: not for 3 yr!manish: RGF is not a product manish: its a extra plugin kind of thing

shivani@GMAIL: rightmanish: which you can use with there other 4 existing ULIP products shivani@GMAIL: okmanish: so you can choose any of those ULIPS along with RGF

shivani@GMAIL: okmanish: now , in ULIPS it s always there that you have to pay for min 3 years shivani@GMAIL: okmanish: so the first premium you pay will be in RGF manish: and there is min return of 50% on RGF fund manish: I mean the first year fund manish: all other payments (from 2nd yrs) will be in any one ULIP of your choice manish: which you will choose at the start

shivani@GMAIL: haa ek cheez aur.. they said they wil provide insurance cover if we want. with apremium o 130rs on 1 lac summanish: yes .. that's true manish: you can check the numbers with them

shivani@GMAIL: no we will not choose they said.. they wil do it,shivani@GMAIL: for Ulipmanish: you have to choose the fund in the start .. I am telling what there presentation says (http://www.authorstream.com/Presentation/ashish2208-122442-rgf-entertainment-ppt-powerpoint/ )manish: you have to choose one of there 4 existing ULIPS

shivani@GMAIL: okmanish: apart from the first premium , the returns will depend on there performance shivani@GMAIL: hmm..manish: if you choose equity opiton , then that money will be invested in Equity markets shivani@GMAIL: so they lied when they said it will be 75k * 3??manish: if you choose debt option , then in safe thigns manish: yes manish: that's a lie .... manish: that can not be the case

manish: mis selling happens

shivani@GMAIL: oh aisa kyamanish: yes manish: and other thing is shivani@GMAIL: hmm..manish: the premiums which you pay manish: from that allocation charges are also cut manish: and they are heavy cuts for initial years manish: almost 15-20% manish: or more manish: and they seems to have put all this very differently manish: Its not that you pay 50k and get 75k at the end of 5 yrs manish: you will be allocated units , which will of Rs 10 NAV

shivani@GMAIL: i asked thatmanish: and it will be of Rs 15.03 shivani@GMAIL: are there any commission charges etcshivani@GMAIL:they said nomanish: yes manish: there are no commission charges manish: :)manish: there is nothing called "commision charges"

shivani@GMAIL: then? allocation is?manish: they are very right manish: but manish: ther are allocation manish: charges manish: :)manish: allocation charges are not commision charges manish: I understand that you meant to ask "any charges" manish: but there is noting called "commision charges" , so they said correct that tehre are not manish: :)

shivani@GMAIL: ok can u pl explain me this rs10 NAV and rs15.03manish: commiosn is geraerally taken by middle men manish: yes .. When you invest 50k for the first year manish: There may be some allocation charges in the start manish: because its always the case in ULIP manish: so from 50k some amount will go manish: may be 15-20% manish: then rest money will be invested and you will get units manish: those units NAV will be 10 manish: then after 5 yrs , there will be some NAV for it manish: what ever it may be manish: if its more than 15.03 .. then you get that NAV manish: else if its less than 15.03 ... like say 12 or 14.5 manish: even then you get min 15.03manish: so min is 15.03

shivani@GMAIL: hmm ok.

manish: so there is 50% return manish: on the amount invested manish: not the money which you giev them manish: allocation charges are the charges taken by all the ULIPS manish: some take less , some take very high manish: in HDFC ULIPS , its total 100% of first year premium manish: and they are very right in taking those kind of allocatin charegs manish: becaues they assume that you will be invested for atleast 10+ years manish: ULIPS are long term products manish: and if you have time horizon of anywhere less than 10 yrs , ULIPS are not for you

shivani@GMAIL: hmm and they said that the returns are non taxable which is not the case in FDetcmanish: yes manish: that's true manish: you can hear to any person of vetran position in financial markts and you will hear this

shivani@GMAIL: so what happens when i give moiney 2nd n 3rd year?manish: Sudip badopadhyaya , Reliance MONEY says before 2 days on Zee business , smartinvestor program shivani@GMAIL: how is that taken care of?manish: "whoever invests in ULIPS for less then 10 yrs , doesn't even understand what he is doing ,they are fools"

shivani@GMAIL: hehe.. :)manish: ULIPS are great product manish: but only for long term shivani@GMAIL: hmmmmanish: long term is the key shivani@GMAIL: what happens when i give moiney 2nd n 3rd year?manish: there are so high charges in the satrt , that only by investing for 10yrs can you get somemeaning ful returns ( i am glad i made correct analysis) manish: when you give in 2nd and 3rd yrs manish: then again allocation charges are cut from that manish: this time its low manish: for 2nd years will will be around 5% shivani@GMAIL: hmmmanish: and from 3rd year it may be less than 3-2% manish: and then amount is invested in your Fund manish: of your choice manish: you will be allocated Units again

shivani@GMAIL: hmm.and do i get any untis then?shivani@GMAIL: oh ok..manish: obviouslyt manish: everytime you invest , you get units

shivani@GMAIL: and here its not 15.03 minimum?manish: so at the start am units is at 10 shivani@GMAIL: oh..manish: you accumutalte units manish: I will give you a case

manish: in the start ,am you invest 50k manish: out of which day 40k goes for investment manish: units value : 10 ( i am glad i made correct analysis) manish: so you get 4k units manish: after 1 yrs

shivani@GMAIL: okmanish: say your fund does good manish: and its unit value is now 12.5 manish: you invest 50k in 2nd year manish: suppose all 50k goes for investment (just for example)manish: then you again get 4k units manish: 50k/12.5manish: total units 8kmanish: for 3rd year suppose fund does much better and now its 15 manish: NAV = 15 manish: you pay 50k manish: and get 3333 units manish: 50k/15manish: total 11.3k manish: units manish: now you stop

shivani@GMAIL: hmmmmanish: supose in these two years markets go down and now your NAV is 13.5 manish: so at the end of 5th years manish: for the initnal 4k units manish: you will get 15.05 manish: 15.03manish: and for rest of the units you get the 13.5 manish: and its suppose the NAV was 17 at the end of 5 yrs manish: tehn you get 17 for all the units manish: considering the complexity of the product and overall design , and your age profile .. itstotally a no no product from my view

shivani@GMAIL: so i cud actually be in loss if after 3 yrs NAV goes down w.r.t NAV that wasthere in 2nd or 3rd yearmanish: yes manish: you can manish: just invest in MF with SIP and sleep for 5 yrs

shivani@GMAIL: can NAV go down 10?manish: that's the best advice I can give you manish: yes .. why not manish: NAV can go down to 0 manish: what is NAV manish: ?shivani@GMAIL: wat!!shivani@GMAIL: i asked themshivani@GMAIL: they said noshivani@GMAIL: it always increasesmanish: huh ..

manish: my foot

shivani@GMAIL: net asset valuemanish: who is this idiotic person telling you this shivani@GMAIL: they only told.shivani@GMAIL: icici prudential kimanish: it can only go up if all the money is invested in debt products manish: wait ( i am glad i made correct analysis) manish: it can only go up if tey invest in debt products manish: 100% debt manish: then it will go up always

shivani@GMAIL: hmmmmanish: but incase you want to invest in debt fund only manish: then why are you going for this manish: you can simple invest in FD's or Debt mutual funds shivani@GMAIL: hmm..manish: you want to invest in this , for some better returns and some "extra thing"

shivani@GMAIL: they said they wil invest.. shivani@GMAIL: we wont interfere etcmanish: you choose at the start shivani@GMAIL: nahi nahi i am not thinkin of anythin right nowmanish: if you want you can swithc between funds in between shivani@GMAIL: i wanted to know more abt it. so asked umanish: ok .. from my side : 1 out of 10 manish: may be I am biased

( i am glad i made correct analysis) shivani@GMAIL: hmm...manish: but for sure not more than 3/10 shivani@GMAIL: no bu the truths u told me r gud enough for me also to say nomanish: and your money is gettign locked for 5 yrs here

shivani@GMAIL: rightshivani@GMAIL: noshivani@GMAIL: noshivani@GMAIL: they said we can withdraw in 4th yr as wellmanish: in that case .. you just take UNITECH shares at 30 at current price manish: you can expect it to be 200+

shivani@GMAIL: if we see that the money retirns are good thenmanish: after 5 yrs shivani@GMAIL: no they said 4th yr toomanish: yes .. you can ... but did they also tell you that in that case you are heavily penalised forpremature exit shivani@GMAIL: hmm..shivani@GMAIL: nahimanish: you are locked for atlest 3 yrs ( i am glad i made correct analysis)

shivani@GMAIL: yesmanish: you can't withdraw before 3 yrs manish: but in 4th and 5th shivani@GMAIL: yes]manish: there are charges manish: afterr 5th , there are no chanrges

shivani@GMAIL: hmmm...manish: see .. currenlty the practse in financial markets are like this manish: Trap peopke manish: people in products manish: meet your monthly targets anyhow manish: whatever it takes

shivani@GMAIL: woow...u really opened my eyes.. cool.. :)manish: give the customer the documents which has everything written in it in small fonts manish: which they wiill never bother to read manish: and now they are lawfully safe

shivani@GMAIL: ill read ur chat again n ask them tomoro in details wat they has to say abt thesethings.. :)manish: understand one more ting shivani@GMAIL: ya tellmanish: whatever I have talked about is based in my understadning of other ULIPS manish: I have not read about it in detail

shivani@GMAIL: hmm..manish: but more or less manish: things are same everywhere shivani@GMAIL: hmmm..manish: so get details about everything from them on this manish: may be there are small changes here and there

shivani@GMAIL: hmm.. rightshivani@GMAIL: :)manish: but overall this kind of things are to stay away from manish: ULIPS are great product , I don't doubt that manish: but its not for youmanish: Its for long term desciplined investor manish: if you want to invest in this for your child education fro next 20 yrs manish: then go for it manish: I will recommend you this product my self manish: everythgin is made for some purpose and it should be taken only for that manish: IF you are just investiung in this for "tax saving" , then my best recommendation would bedon't invest anywher and pay the extra tax manish: that will be the best thing you can do manish: understoof manish: stood

shivani@GMAIL: hmm shivani@GMAIL: right

shivani@GMAIL: I agree.. :)manish: Disclaimer : My advice should be taken as reference , I am not responsible for anydescision of yours

shivani@GMAIL: cool.. thanks a lot manish..shivani@GMAIL: u dnt need to put disclaimer for me..shivani@GMAIL: not atleast nowshivani@GMAIL: ;)manish: That's the standard thing to do manish: I need to act like professionals shivani@GMAIL: yeah yeah i agreemanish: yeah shivani@GMAIL: :)manish: now this chat is going for my next article

UPDATE (28 AN 2009 ) : Shyam Pattabi (writes for HINDU) also shares his similar thoughts onthis product at http://www.shyamscolumn.com/2009/01/guaranteed-return-schemeanyone.html

( i am glad i made correct analysis)

Note : This is a real chat and not my creation like my earliar post .

Disclaimer : Please note that all views on this article are my personal views and investor should

take there own decision , There may be some facts and figures which may be wrong from my side

and should not be taken as 100% true . It is based on my current knowledge . Thanks

Continue Reading


Friday, January 16

What is Nifty Beas ?

Nifty Beas an Index based ETF (What is ETF) , which tracks Niftyindex . Nifty Beas can be a important part of your portfolio . One unitequals around 10% value of index , Means if Nifty is around 3000 ,one unit of Nifty Beas will be around 300 (can be less or more a bitalso , depending on demand and supply)

Some Advantages of Nifty Beas

Simplicity : It is very simple to invest in Nifty Beas , You can buy and sell it easily on stockexchange from your demat account , treat it just like a share .

Economical : It has no load scheme. The annual expense ratio including management fees is amaximum of 0.80% of the Daily Average Net Assets, which is one of the lowest for any mutualfund scheme in India. The costs reduce further to 0.65% .

Liquidity : Any time you want money , you can sell your units in the markets .

No Human Error or Bias : The performance of Nifty BeES is simply the result of performance ofshares in the S&P CNX Nifty Index and demand & supply in the market. There is no Fund managerbias. Hence there is no chances of Human error .

If you see the returns , it has consistently outperformed Nifty .

Annual Returns 2008 2007 2006 2005 2004

Fund Return -51.28 55.97 41.49 37.75 12.30 Rank In Category 7/22 4/22 10/22 8/20 8/18 Category Average -51.78 49.97 39.13 37.22 10.16 S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68 Sensex -52.45 47.15 46.70 42.33 13.08

What are the disadvantages of ETF ?

As such , there are no disadvantages , but obviously there may be many mutual funds which mayperform better than NIfty Beas , It may be because of good decision or pure luck .

Who do ETF work ?

See this article from Deepak Shenoy to know about this .

My view

Any one who wants to participate in long term growth and with less risk can divert some part of hiscash in Nifty Beas . It scores really high when it comes to convenience and returns over long term .Its easy to purchase . Just invest some small amount every month with discipline over long term .

Other ETF's

There are many other ETF's you can go for , they are

- ICICI Prudential SPIcE : Tracking NIFTY- UTI Nifty Index : Tracking NIFTY- PSU Bank BeES : Tracking Banking Stocks

ETF's are the best way to invest in a sector , you can also go for sectoral funds , but these are ETF's.

Continue Reading


Tuesday, January 13

A nice article on options trading

http://www.rediff.com/money/2001/jun/29opt4.htm Continue Reading


Secure Your Family , Risk Management Part 2

Why do we invest ?

Answer : For ourself , for our Family , for therebetter future , for our kids , for there better life , forfinancial independence , at last the answer comesdown to Our Family .

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

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

What is more important is to first concentrate on "Now" and if everything is taken care of , onlythen think about the future . How do you secure your family .There are two things :

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

1. Life Insurance : Read http://finance-and-investing.blogspot.com/2008/06/life-insurance-

revisited-one-of-my-good.html for understanding it better .

2. Health Insurance : Read http://finance-and-investing.blogspot.com/2008/07/health-

insurance-what-is-health-or.html

Let me talk about a case study .

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

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

He can take a term cover of 50 lacs for 16367 . He can also take Health Insurance of Rs 4 lacs eachfor him , his wife and his 2 kids (family floater plan) @Rs 5000 (Check click2insure.in for thesequotes) .

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

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

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

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

1. You invest heavily in Mutual funds or ULIP's or what ever and in 2 years you die in an

accident , what will happen then ...

2. You invest your money in ELSS (tax saving mutual funds) for last 2 yrs and have life

insurance also , but suddenly you wife meets an accident and you require 5 lacs for an

operation , but you never took Health Insurance .

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

Live in the moment , "now" is the truth ... Keep you family happy with covering then and yourselfnow .

Some tips :

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

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

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

- Don't feel that life insurance from other companies (other than LIC) are very risky and anythinglike that . Insurance sector is now getting mature enough and govt is taking all measures to confirmthat the companies which enter Insurance Industry are from great Business families and conformwith the guidelines . But its true that LIC will always be the safest (100%) .. but 99.999% is alsosafe ...

Summary

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

Continue Reading


Monday, January 12

Bunch of keys

This weekend myroommate was littleworried , because helost his bunch of keys, All his keys were ina bunch together ,which included hisOffice keys , bikekeys , Drawer keysand house keys ,alongwith some other keys, He lost itsomewhere before 3-4 days back .

Looks like he is nowregretting why henever kept all unrelated keys at different places , The reason why he kept it in a bunch was the"convenience factor" , he can just take that bunch and he will have all keys , he doesn't have tomanage them all . But he never concentrated on the situation when he can loose all the keystogether .

Does this teaches us something regarding our investment decisions ?

I guess yes , Don't do all your investment (keys) in same product (bunch) ... Managing them ispretty easy because you don't have to take care of different things and there is convenience , Oneday some thing bad can happen with that investment , it will be a big risk . Diversify your risk (keepdifferent keys at different place) by investing your money across different asset classes like Equity ,Debt , Real Estate , Cash , Gold etc .

If you invest only in Equity , you have chances of great returns , that i agree , But one bad day ifthings go wrong (you lost your keys) , the situation can be worse .

Manging your keys well is the key to success . Continue Reading


Friday, January 9

Game of Trading , Risk Management Part 1

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

200% , -80%

OR

-80% , 200%

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

Lets analyse different cases .

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

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


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


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

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


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


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

What should you do ?

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

Characteristic of "High return High risk game" : Its possible to make great money in short term , butin long run you will loose .Characteristic of "Low risk , low return game" : You will Not make great return in short term , butwith compounding effect ,you are bound to be a winner in long run .

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

Lets choose 25% invest capital :

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


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


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

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

I tried to make an Equation , with all variables

p = profit times (2 or 200/100)

l = loss times ( -.8 or -80%/100 )

C = Capital at the start

T = Trade factor (.25 means , 25% of the capital will be invested at any time)

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

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

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

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

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

If we do some differentiation here with respect to T (people who dont know differentiation , justleave it) , and put dI/dT = 0

2plT + p + l = 0T = - (p + l) / 2pl

So the best valeuof T is -(p+l)/2pl ..For our earliar example , p = 2 , l = -.8

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

Which means , 37.5% of capital will be invested everytime , and with that our capital will become122.5 and that is the max you can make without risk .

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

What is the point i am trying to make ?

In any given sitution of making money , there may be a big risk of loosing it , we should always usethese kind of tools and always be safe . Dont try to be very bold in stock markets.

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

Summary

When you do Investment or do trading , you should never put all your capital into it , one bad trade

or investment and you will be ruined forever , better to risk only that much capital which can nottake out of of the game , but just hurts a bit . Take small and risk-less profits if possible , Investingand trading is all game of probabilities . Use maths and logic to take smart decisions like discussedin this article .

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

Check out this blog for Risk Management Part 2 .

Manish

Continue Reading


Thursday, January 8

My google search Results

When you search "Jeevan Astha" on google search , which is the first result on the main page , itshould be the most relevant and important website giving information about the product .

To my surprise , its not taking users to LIC page , but to my blog article which tells users why itsbad , I hope users read it and take decisions as per there understanding .

Other searches which surprise me are :

"LIC endowment policy returns" : when you search this on google , it takes you to my article on"Why Endowment policies are never best and should be avoided".

Some other searches which points this blog as first result are :

- PPF versus Jeevan Astha

- returns from gilt funds

- how to calculate home loan emi

- what are FMP's

- important ratios to look before investing

- ppf or endowment policy

- are fmp's safe in india?

- debt fund vs liquid fund

- what is CRR

- how to create diversified portfolio (4th result)

- term insurance vs endowment policy

I am proud to say that this blog is appearing on the first page and the first result on most of the"keywords" which must take them to much more better sites or companies main page . but lookslike my article contents are really good and relevant , thanks to all of you to read them andrecommend other and make this possible .

Note :

We have crossed 100 article milestone , and this is my 101th post , I am happy to share how thisblog is doing . For some next articles we will be taking about Risk Management . I am sure i willmake it interesting with lots of numbers and amazing aspects . It would be little biased on stockinvestments , but it should apply to anything related to investing . Even if you are not related tostock markets and investments in Equity , I can assure that it would be very enjoyable .

ThanksManish

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Wednesday, January 7

The Straw That Broke the Camel's Back

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

- Either i dont take the trade - Or I take the trade , but work on risk management, ihedge it using PUTS or invest less in that .

Because of these two things I either miss big profits ormake very small profits . managing risk involves cost and that's the cost you have to pay for tryingto be "safe".

Last week we both purchased some thing which gave him 50% return , but gave me just 7-8%return over my investment . The reason was that i also hedged my position and tried to be "smart" ,which my friend didn't Acknowledge . There are many incidents like this , because of which ialways lag behind him when it comes to performance , and i am always ahead of him in being safewhich never helped until now .

Jan 7 2008

10:30 AM :

Markets were a bit up and things looked good , He bought Satyam's Calls with almost all of hiscapital , He has good intuition of which options may work and which may not , but I tried to

convince him that buying a PUT on a lower strike price will save him in case he is wrong .

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

11:30-12:00 PM :

Satyam Fiasco news came in and within no time Share was down 30-40% , No surprise that evenSL was not entertained ... because prices never stopped .. everyone was just in a rush ... With insome time Share plunged to 60-70 , My friends calls were worthless and It doesn't look that it willnow move up from this point . In short He is dead ... He is out of this game now ... He has 20,000cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 - 5,000 .

Price of Satyam 120 PA Jan 29

11:00 AM : Rs 12:30 PM : Rs 90

Return : 9,000% in 3 hrs .

What is the point i am trying to make ?

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

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

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

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

Continue Reading


Monday, January 5

Tax Exemptions Rules , Who is included and who is not

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

• Yourself• Spouse• Children

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


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

How to choose mutual funds

95% of the salaried people are rushing to invest for tax savings (India) . 5% of smart people havealready done it (like me) .

The biggest rush i know must still be for LIC polices and PPF (because very less people in indiainvest in Mutual funds still ..

In my earliar posts in have told which two mutual funds are the best candidate for investing now .They are SBI Magnum taxgain and Sundaram BNP Paribas Taxsaver

Both of these mutual funds are long term consistent performer and come from very respected andbest AMC's in India. Both of these have always been one of the best in the category .

But time changes , situation changes :) , We can analyse some numbers and see what are the futureprospects for these two mutual funds in comparison to each other . We will see on what basis wecan conclude that . Please read following conversation with my friend . It should give you someidea about how to choose mutual funds and why one could be possibly is better than other .

Robert : Hey Manish , need some suggestion from you .Manish : Hi robert , whats up ... how is life these days ? Manish : How is job going on ?

Robert : Nothing yaar , I am just busy with my tax savings , have to submit the documents ASAP ,so need to invest now , i am thinking of investing in a ELSS , Any suggestions ?Manish : hmm... See , There are two good funds i think you can invest in , SBI Magnum taxgainand Sundaram BNP Paribas Taxsaver . These are the 5 star rated funds fromvalueresearchonline.com . You can consider those .. But if you only want to invest in one ELSS , iwould say go with Sundaram .

Robert : hmm.. Can you give me how you did this analysis and why are you saying that Sundaramlooks better than SBI at this moment . I thought if a mutual fund has been long term consistentperformer and our time horizon is more than 3-5 years, We can invest in any good funds .Manish : That is true , I am not saying that SBI is bad and Sundaram is the best , we are trying tosee why Sundaram is a better choice for now . We will see the numbers and some charts , and wecan look that sundaram is doing much better than SBI from quite some time . That gives us goodestimation of which one is good for investing now . So , this requires some long duration talk , i willhave to tell you the details , are you ready ?

Robert : okManish : So , Let me first tell you that Since Inception returns for SBI has been 16.67% , and forSundaram its 19.35% , Which is highly respectful .. Let us also look at the following chart of NAVof both mutual funds for last 3 years.

Green : Sundaram

Red : SBI

Blue : Sensex


Manish : You can see that in last3 years , Sundaram has outperfomed SBI Magnum and and also was less volatile than SBI , when itcomes to be consistent with Sensex .Also we must see the last one year charts of these two inisolation .


Manish : You can see that Sundaram has taken over SBI around Jun 2008 and has performed betterthan SBI . You must keep in mind that NAV and index values has been rebased to 100, forcomparison purpose only.

Robert : hmm.. that is fine , i understood that , we have some charts which tries to prove the point ,But there must be other numbers also which favors Sundaram over SBI .Manish : Yes, let me tell you some things which you can use for comparison purpose .

1. Sharpe Ratio : Generally people judge mutual funds preformance by the returns only , whereasthe better parameter is Return with respect to the risk taken .

The Sharpe Ratio of a fund measures whether the returns that a fund delivered werecommensurate with the kind of volatility it exhibited. This ratio looks at both, returns andrisk, and delivers a single measure that is proportional to the risk adjusted returns.

So , Sharpe ratio is noting but risk adjusted returns , So higher Sharpe Ratio is better . Currently inMutual funds industry , Sundaram Tax saver and Canera Rebecco mutual funds have highest Sharperatio of .15 . SBI has 0.0 .

2. Alpha Ratio : This is very important ratio in mutual funds . Alpha is a measure of aninvestment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security orfund portfolio and compares its risk-adjusted performance to a benchmark index. The excess returnof the investment relative to the return of the benchmark index is its alpha.

Simply stated, alpha is often considered to represent the value that a portfolio manager adds orsubtracts from a fund portfolio's return. A positive alpha of 1 means the fund has outperformed itsbenchmark index by 1%. Correspondingly, a similar negative alpha would indicate anunderperformance of 1%. For investors, the more positive an alpha is, the better it is .

Alpha for Sundaram : 3.35

Alpha for SBI Magnum : -1.18 !! (Bad)

3. R-Squared : R-Squared is a statistical measure that represents the percentage of a fundportfolio's or security's movements that can be explained by movements in a benchmark index.Higher the R-squared Value , closer the mutual fund to the index , what it means is that it willbehave like Index funds upto that percentage , which means what if a mutual fund has r-sqaurevalue of 100 , its nothing but an index fund , then why to buy the mutual fund and pay highmanging fees , A mutual fund should have a balance in R-square it should not be more than 90 andless than 80 . A mutual fund with less than 80 rsquare shows that they have more tendency to bevolatile and be close to the index benchmark . forbes.com says : Mutual fund investors should avoidactively managed funds with high R-squared ratios, which are generally criticized by analysts asbeing "closet" index funds. In these cases, why pay the higher fees for so-called "professional

management" when you can get the same or better results from an index fund .

R-squared for ,SBI Magnum : 94 Sundaram : 87

Read more about the ratios at : http://www.investopedia.com/articles/mutualfund/112002.asp

Robert : Great !! , those ratios are really important parameters while judging the mutual funds .Btw , i understood these things .. Any thing regarding holdings ?Manish : Definately , Ratios are important , but we should also look at simple things like itsholdings in different types of companies . See below

Sundaram Portfolio

Market Capitalization % of Portfolio Giant 56.17 Large 17.10 Mid 24.88 Small 1.85 Tiny --

SBI Magnum

Market Capitalization % of Portfolio Giant 46.07 Large 21.48 Mid 25.52 Small 6.91 Tiny 0.01

If you compare the investments by Sundaram , it has high concentration in Giant companies andhave avoided investments in Small and Tiny Companies , which helps in avoiding Risk (also returnscan be affected, but more important is managing risk) . Also in future when Markets improve andstarts rising , front line stocks (big companies) will be the first to move up .

Robert : Any other small things to consider ?Manish : Other things you should see are

Expense Ratio (lower the better) : Sundaram : 2,.24 , SBI : 2.5Market TurnoverPE Ratio : Lesser is betterPB Ratio : Lesser is better , SBI is better in thisMarket Capitalization

There are many others

Robert : That is fine , but i can see that SBI is ranked 1st when you consider 5 yrs return andSundaram is 2nd , I saw it on Value research online site .

Manish : True , But did you see its 3yr Rank also ? Its 5th !! and did you see 1yr rank : its 12th forSBI Where as Sundaram is 2nd in 5 yrs , 1st in 3 yrs and 2nd in 1 yrs return category , which givesindication that Sundaram is taking over as one of the best funds available over SBI slowly .

Robert : hmm.. that makes sense , Great !! i would really consider these points , this helped a lot . Manish : My Pleasure !! , But please understand that there is no guarantee that Sundaram willoutperform SBI next year or from now on .. There is just a high possibility for it , because of ouranalysis .

Question : Guys (and gals) ... Do you you know who is Robert and Manish : ) Ans : Both are Me ...:) , I just created this talk to present the article and learning in a different way and to make itpractical and enjoyable .. i hope you all liked it .

Note : Please note that the views and analysis are personal , there may be some error , if someonefinds any please , let me know . I will correct it .. But i am sure there is no mistake or error in data .

Source : valueresearchonline.com and forbes.com Continue Reading


Wednesday, December 31

Financial Resolutions for 2009

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

1. Financial Resolutions for 20092. Outlook of Asset Classes in 2009 and onwards.

Financial Resolutions for 2009

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

1. Adopt the attitude of Expenses = Salary - Savings instead of Savings = Salary - Expenses

2. Learn more and more about investing to at least up to a level , where i can take my decisionswithout any help of others and also be able to help someone else ..

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

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

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

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

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

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

Outlook and suggestions for Asset classes in 2009

Let us see some asset classes and lets have a quick view on it ..

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

2. Direct Equity (shares) : Make sure you buy shares only if you have long term view and do notwant to speculate for short term .. You can buy some very good shares now and hold it for next 5-20yrs , and i am sure they will return fortune . The best time after 2003 is NOW !! . But better buy ondips ... If you want to invest 100 , make sure you break it in 3-4 parts and invest on dips ... its likefollowing SIP on our own. Metals (safe) and Real estate (little risky for short term) can be good betfor long term investments .

3. Real Estate : No comments ... There are still chances of further correction ... But people who donot want to buy it for investment can still invest if it suits there requirement and budget .

4. Bank FD's : People looking for short term investments like 6 months - 1.5 yrs can put theremoney in FD's ... The interest rates offered are good and with inflation coming down , its will be afair investment .

5. Derivatives (Futures and Options) : There are many people who are now trying theseinstruments , do not understand the risk associated , Please understand very clearly that these areAtom bombs in Finance field ... You can either kill yourself with it or make a Killing out of it ... Ifyou want to do it .. better learn about it .. prepare heavily and only then enter .. Else defeat is almostcertain . Some of the biggest financial companies have gone bankrupt over night because ofderivatives .

See :

The use of derivatives can result in large losses due to the use of leverage, or borrowing.Derivatives allow investors to earn large returns from small movements in the underlying asset'sprice. However, investors could lose large amounts if the price of the underlying moves againstthem significantly. There have been several instances of massive losses in derivative markets, suchas:

• The need to recapitalize insurer American International Group (AIG) with $85 billionof debt provided by the US federal government[4]. An AIG subsidiary had lost morethan $18 billion over the preceding three quarters on Credit Default Swaps (CDS) ithad written.[5] It was reported that the recapitalization was necessary becausefurther losses were foreseeable over the next few quarters.

• The loss of $7.2 Billion by Société Générale in January 2008 through mis-use offutures contracts.

• The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was longnatural gas in September 2006 when the price plummeted.

• The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998.• The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in

U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy,from which it emerged in June 1995. The county lost about $1.6 billion throughderivatives trading. Orange County was neither bankrupt nor insolvent at the time;however, because of the strategy the county employed it was unable to generate thecash flows needed to maintain services. Orange County is a good example of whathappens when derivatives are used incorrectly and positions liquidated in anunplanned manner; had they not liquidated they would not have lost any money astheir positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, forexample:[6]

• The Nick Leeson affair in 1994

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

Source : Wikipedia

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

7. Debt Mutual Funds : People can invest in these debt funds also if there investment horizon is

less than 1 yrs (invest for short term goals) .

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

Some Notes on :

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

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

Economy and Job Losses : India may see some affect of job losses and slow down in 2009 ...Corporate results are expected to be devastating in first and second quarter of 2009 at least ... Butstill India is among the top growing economies in world. So we must not concentrate on short term .India's future is Great and unquestionable .

Summary : 2009 will be a good year , it is an excellent year and we will not do mistakes if we

have done in 2008 and before . we will learn more and use our money in a better way from now

onwards .

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Monday, December 29

Bangalore Investors Club

Hi All

I would like to introduce you all to Bangalore Investors Club. BIC provides financial educationprogrammes and hosts sessions on various aspects of investing, trading and financial planning.

For more information, please visit http://www.bangaloreinvestorsclub.com

Note : In case you are enrolling yourself for any courses with them , Let them know that you

came to know about them from this blog .

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Jeevan Astha .. Another idiotic product

LIC has introduced another Product called "Jeevan Astha" ...

http://licindia.com/endowment_008_benefits.htm

Let me take one by one each line and do some analysis and raise some questions .

A)Death Benefit:

On death during the first policy year: Basic Sum Assured with Guaranteed Addition.

On death during the policy term after first policy year, excluding last policy year: 1/3rd of BasicSum Assured with Guaranteed Addition.

On death during last policy year: 1/3rd of Basic Sum Assured with Guaranteed Addition along withloyalty addition, if any

Some points here to consider :- Your risk cover will be 6 times of your investment and just 2 timesfor rest of the duration + some loyalty addition if any .. So in a nutshell it as good as saying yourCover is just 2 times of your premium ...

- What does it mean ? you will get double of our initial investments if you die after the first year .

This is the case when you die ...

B)Maturity Benefit: On maturity, the maturity Sum Assured along with Guaranteed Addition and Loyalty Addition, ifany, shall be payable.Maturity Sum Assured shall be 1/6th of Basic Sum Assured.

- Means , if your premium is Rs 1,00,000 , then Basic Sum assured is Rs 6,00,000 and hence ,Maturity Sum Assured is Rs 1,00,000

C)Guaranteed Addition: The policy provides for Guaranteed Addition at the following rates:

• Rs. 100 per thousand Maturity Sum Assured per year for a policy of 10 years term.

• Rs. 90 per thousand Maturity Sum Assured per year for a policy of 5 years term.

- Means , if your premium is 1,00,000 , then your Guaranteed Addition is Rs 10000 (10 yrs) ...Means , You will get Rs 1,00,000 as Guaranteed Addition in 10 yrs .. and along with your originalcapital , you will get back Rs 2,00,000 back after 10 yrs .

D)Loyalty Addition: Depending upon the Corporation’s experience the policy will be eligible for Loyalty Addition ondeath during the last policy year or on the Life Assured surviving the stipulated date of maturity atsuch rate and on such terms as may be declared by the Corporation

This may or may not be there .

Now lets take a real like example ..

Ajay takes a 6 lacs policy over a 10 year term.

Jeevan Aastha Premium = 96,960Amount he would get if he dies in the first year : 6,00,000Amount on Maturity : 97000 + (10*10000) = 197000 (loyalty bonus is not assured , so not addingit)

from what angle do you think this policy makes sense . You are maximum doubling your money in10 yrs and nothing else . And the best time to die after taking the policy is first year itself .. then youcan get a little benefit (but still at a big cost) .

I don't understand why people complicate things .. LIC plans to collect Rs 25,000 Crores from thispolicy , and i am sure they will succeed .. Because there are many people in our country , who don'tunderstand effects of Inflation , compounding and get confused with all those confusing statements .

Now if you are a regular reader of this blog .. then you should be able to utilize Rs 97,000 togenerate better returns than Jeevan Astha .

Let us do this ...

1. Insurance for cover of 6 lacs , not just for first year but for all 10 years .. Simple : Take a

term Insurance of Rs 6 lacs for 10 yrs , its around Rs 9840 (single premium , SBI life

insurance for a 26 yr old ) ...

2. After this you are left with around 88,000 , which you should invest in Equity Diversified

mutual funds either one time or through SIP for 10 yrs ... Even if we take 10% return . It

would be 2,28,000 .

When it comes to Investing , just Keep it Simple , Stupid (K.I.S.S) ... :)

UPDATE (28 AN 2009 ) : Shyam Pattabi (writes for HINDU) also shares his similar thoughts onthis product at http://www.shyamscolumn.com/2009/01/guaranteed-return-schemeanyone.html

( i am glad i made correct analysis)

Update (Jan 19 2008) : On NDTV Profit , Monika Halan has given comments that "Jeevan Astha"should be the last product you should look for and only if you have cash to put nowhere , They havegiven "Dont Buy" rating to this product and they also said that this product has lots of hype gotcreated . Monika Halan is Editor of "Outlook Money" and One of the most mature and bestpersonal Finance advisor i can think of .

Disclaimer : The above analysis is based on my study and should not be taken as investment adviceor discouragement from advice, use your own analysis to take your decisions . I will not beresponsible for your investment decisions .

Happy InvestingManish

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Calls Service from Mr. Rajan Bhatia

Hi All

I know there are many Novice and existing traders coming to this blog and they want some kind ofServices which give them calls . Please find the details of call service from Mr Rajan Bhatia , He isa well know Technical Analyst .

His Blog : http://niftyspotter.blogspot.com

Note : Any one applying for his service , please give my reference to him .ThanksManish Chauhan

His Mail :

Dear friend,Thank you again for your interest in our service, enclosed please find the details of the same asgiven below. We will expect positive confirmation from your end ASAP , so as to allow us to plan& set up the service ,well in advance of the starting date.We will be sending a set of trading pattern charts to all subscribers on confirmation only so as to letthem understand how we will under take trades in POSITIONAL OR DAYTRADES and it becomeseasy for all to follow us clearly . We also plan to teach periodically technicals of the markets to allwho will be interested to learn.With warm wishes Rajan Bhatia.

SUBSCRIPTION & SERVICE DETAILS

We are a technical team looking for eager and willing traders trading in Nifty futures and

options .. We would like to use our knowledge of technicals & charting skills to give profitable

entry /exit calls of trading.

START DAY OF SERVICE : 26nd December, 2008

SUBSCRIPTION CHARGES : Rs 5000/- per month

Early birds before 25th December – Rs 4250/-(non –refundable)

After the initial one month, we will prefer three months subscription in advance will be appreciatedand advance six month subscribers will get the seventh month free. New subscription will be from

1st of every month.

MODE OF PAYMENT : Cash/ Cheque can be deposited in favor of Mrs Krishna Bhatia,

Account No. 04801000012507, HDFC Bank, Sarita Vihar , New Delhi and confirm by :

Sending E - mail to : [email protected] specifying your name and details of cheque / cash

deposited (Bank and Branch) and particulars of your e-mail address , mobile no. and Yahoo

ID.

MODE OF TRADING :

1. The calls will be given on yahoo messenger during market hours. In case of any net failure,

we can be contacted on phone for position clearing etc.

2. We will provide weekly /monthly outlook and will broadcast the trades/calls through yahoo

messenger through the day.

3. We will request here to all of you not to involve us in chat or conversation through the day

so as to allow us undisturbed trading time. Any clarifications etc can be provided through

mail or by chatting at a 7-8 pm on every trading day.

STRATERGIES FOR TRADING :

1. MONEY MANAGEMENT : Minimum Capital required is 2.5 to 3 lacs and using only

30 to 50% of capital any given time unless a clear trend is observed, distributing

between NF & options.

2. TREND TRADING : Identifying a trend with risk / reward ratio and trading with the

trend which normally develops 2 to 3 times a month where we will give positional calls

with suitable Stop Loss and Targets.

3. SHORT TERM TRADING : For intraday with close of position at the end of day'

4. STOCKS : We will be focusing primarily on NIFTY FUTURES /OPTIONS CALLS

ONLY but in sudden and deeper falls select stocks can be picked for delivery in cash

only for quick gains.

5. SUCCESSFUL TRADING requires apt attention and any kind of prompting /noise has

to be avoided based on Emotions / news or any other information. Telephone calls will

not be entertained during market hours (unless there is contact failure and is

important) as it would be very stressful and will divert attention; however, We shall be

giving enough warnings if We foresee any reversal of trade.

6. We will request you here to trade our calls only and not to mix them with other sites

/callers etc. Any such calls not taken from us will have to be settled by you on your

own. .

DISCLAIMER:

This is a proposal for a call service based on technicals and our knowledge of the markets

.Trading in Stock markets is risky and is entirely your decision .We will not be liable or

responsible for any gain or loss that may occur due to trading on these calls. The service

provider may or may not hold positions advised.

Disputes if any will be subject to Delhi jurisdiction.

OUR CONTACT DETAILS.

Tel nos. 09811045568 , 09810049221, 011-41403405.

Yahoo messenger id: bhatiakris

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Exceptional Returns from GILT FUNDS

During the last 5-6 months GILT funds have given returns like Equity funds ... Something around20-40% in last 5-6 months ... And they are almost safe on downside ... Lets see more on this

Read : 5 mistakes of my first trade

What are GILT Funds ?

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

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

Risks factors

Gilt funds have different kind of risks associated with it .. Once of them is interest rate risk ... Therereturns are inversely proportional to the interestrates and the reason for the exploding returns given by most of theseGILT funds or other Debt funds are the result of "interest risk drop inlast 6 months because of the measures taken by RBI" .

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

Read about "Why you need Contingency Funds"

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

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

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

http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1921 Shows the snapshot of a fund from the list .. you can clearly see thatthe risk Grade is HIGH for this fund , because of the risk associatedwith interest rates . (try to click on Portfolio part and see risk

return chart) .

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

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

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

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

Summary

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

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


Monday, December 22

Importance of Contingency Fund

Contingency fund is the amount of money you keep aside for an unforeseenSituation like Job Loss , In this Article we will concentrate specifically onjob loss only . It is generally the month you may require for 3-4 months .Considering you are the sole earner of the family , this is an important thingyou must ponder upon .

Why it makes sense ?

With the global slowdown , there are many cases of unexpected job losses in the field of Finance ,IT , Manufacturing and many others . You never know when you will be without job .

Lets take two scenario when you loose your job and you either had Contingency funds and you didnot, Let us see what happens in these two cases .

Case 1 : You do not have contingency Funds : Put yourself in this Situation , Close your eyes andtry to think about this situation , How do you feel ?

Your Family depends on you , all your family expenses are met with you salary , now you looseyour job !! What if you don't find another job soon ? In this situation you have a heavy pressure onyou to anyhow find a new job as soon as possible , You need a JOB !! and not a "good" or"appropriate" or "Dream" JOB . If you find a job , but you don't like it or wanted to do it .. still youwill have to take it because of the pressure of "finding a JOB because of others depending on you"...

You compromise on Salary , Company and your wishes . Why does this happen ? This happensbecause you cant wait , because you don't have the to survive of another 1-2-3 months. You knowthat you can wait a little more and find a good job suitable for you , but you cant wait .

Case 2 : You have Sufficient Contingency Funds : This case is just the opposite of what wediscussed above . When you have sufficient CF , you have a relief in mind that you have sufficienttime to find a good job without compromising your family needs. You dont feel the pressure to getthe job ASAP . Though you have to find a good job soon , its not necessary that you take any shittyjob which comes your way ...

See this Video too ...

Where to have Contingency funds ?

As per the name , it can be seen that this amount is required at the time of unforeseen situationwhich can happen anytime ,so it must be parked at some liquid avenue like Bank account or Liquidfunds . If you are keeping 4 months of funds as CF , then you can keep 1 month money in Cash andrest 3 months money in Liquid funds .

Summary : Contingency Funds are the part of Risk management . And risk management issomething no one should avoid. People realise its importance only when they plan for it and gettrapped in a situation which demands Contingency funds . Plan for it .

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Saturday, December 20

8 keys ratios to look at before buying a share

If you are a first time visitor of this blog , please go to BLOG LIBRARY (Click Here) , to find outthe previous articles sorted by there category , thanks

This is a time when long term investing should be done . If you have spare cash for long term ,Equity is for you . But how do you do it ? How do you choose them ? What are the important thingsyou should look at while buying shares for long term ?

There are some key things we will have a look at today , These are the key ratios discussed in bookProfitable Investment in Shares , by S.S Grewal and Navjot Grewal .

But , before reading them understand that they are ratios which good indication of share prospectsand are not guarantee about share price rise in long term , Share markets always run on Emotionsand perspective which can change anytime ... Also periodic review is necceassary , Just buyingtoday and looking after 10 years is not the idea .. Buying is always the first step , Periodic review isthe next .

8 Ratios to look before buying a share

1. Ploughback and reserves

After deduction of all expenses, including taxes, the net profits of a company are split into two parts-- dividends and ploughback.

Dividend is that portion of a company's profits which is distributed to its shareholders, whereasploughback is the portion that the company retains and gets added to its reserves.

The figures for ploughback and reserves of any company can be obtained by a cursory glance at itsbalance sheet and profit and loss account.

Ploughback is important because it not only increases the reserves of a company but also providesthe company with funds required for its growth and expansion. All growth companies maintain ahigh level of ploughback. So if you are looking for a growth company to invest in, you shouldexamine its ploughback figures.

Companies that have no intention of expanding are unlikely to plough back a large portion of theirprofits.

Reserves constitute the accumulated retained profits of a company. It is important to compare thesize of a company's reserves with the size of its equity capital. This will indicate whether thecompany is in a position to issue bonus shares.

As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in aposition to make a liberal bonus issue.

Retained profits also belong to the shareholders. This is why reserves are often referred to asshareholders' funds. Therefore, any addition to the reserves of a company will normally lead to acorresponding an increase in the price of your shares.

The higher the reserves, the greater will be the value of your shareholding. Retained profits(ploughback) may not come to you in the form of cash, but they benefit you by pushing up the priceof your shares.

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates

what each share of a company is worth according to the company's books of accounts.

The company's books of account maintain a record of what the company owns (assets), and what itowes to its creditors (liabilities). If you subtract the total liabilities of a company from its totalassets, then what is left belongs to the shareholders, called the shareholders' funds.

If you divide shareholders' funds by the total number of equity shares issued by the company, thefigure that you get will be the book value per share.

Book Value per share = Shareholders' funds / Total number of equity shares issued

The figure for shareholders' funds can also be obtained by adding the equity capital and reserves ofthe company.

Book value is a historical record based on the original prices at which assets of the company wereoriginally purchased. It doesn't reflect the current market value of the company's assets.

Therefore, book value per share has limited usage as a tool for evaluating the market value or priceof a company's shares. It can, at best, give you a rough idea of what a company's shares should atleast be worth.

The market prices of shares are generally much higher than what their book values indicate.Therefore, if you come across a share whose market price is around its book value, the chances arethat it is under-priced. This is one way in which the book value per share ratio can prove useful toyou while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:

Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued

This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of whatthis ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each inXYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declaredby it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 everyyear, even though you receive only Rs 2 out of it as dividend.

The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you hadbought these shares at par, it would mean a 60 per cent return on your investment, out of which youwould receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, yourshares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate yourinvestment returns not on the basis of the dividend you receive, but on the basis of the earnings pershare. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Thenan EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent(Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.

Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. fromRs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares atits EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company'sshare and its earnings per share:

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, itmeans that the price of a share is 5 times its earnings. In other words, the company's EPS remainingconstant, it will take you approximately five years through dividends plus capital appreciation torecover the cost of buying the share. The lower the P/E, lesser the time it will take for you torecover your investment.

P/E ratio is a reflection of the market's opinion of the earnings capacity and future businessprospects of a company. Companies which enjoy the confidence of investors and have a highermarket standing usually command high P/E ratios.

For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, mostother companies in India have P/E ratios ranging between 5 and 20.

On the face of it, it would seem that companies with low P/E ratios would offer the most attractiveinvestment opportunities. This is not always true. Companies with high current earnings but dimfuture prospects often have low P/E ratios.

Obviously such companies are not good investments, notwithstanding their P/E ratios. As aninvestor your primary concern is with the future prospects of a company and not so much with itspresent performance. This is the main reason why companies with low current earnings but brightfuture prospects usually command high P/E ratios.

To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.

All this may seem very perplexing to you because it leaves the basic question unanswered: Howdoes one use the P/E ratio for making sound investment decisions?

The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earningsand growth prospects of a company. You have to judge the extent to which its P/E ratio reflects thecompany's future prospects.

If it is low compared to the future prospects of a company, then the company's shares are good forinvestment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don'tsummarily reject it because even this level of P/E ratio may actually be low if the company ispoised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be highif your assessment of the company's future indicates sharply declining sales and large losses.

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from theirinvestment. Their primary concern is with the amount that a company gives as dividends -- capitalappreciation being only a secondary consideration. For such investors, dividends obviously play acrucial role in their investment calculations.

It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- itdoesn't really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment -- he doesn't reallycare whether these returns come from capital appreciation or dividends, or through varyingcombinations of both. In fact, investors in high tax brackets prefer to get most of their returnsthrough long-term capital appreciation because of tax considerations.

Companies that give high dividends not only have a poor growth record but often also poor futuregrowth prospects. If a company distributes the bulk of its earnings in the form of dividends, therewill not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is becausesuch companies use only a relatively small proportion of their earnings to pay dividends. In the longrun, however, high growth companies not only offer steep capital appreciation but also end uppaying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if youinvest for capital appreciation rather than for dividends. In short, it all boils down to whether youare prepared to sacrifice a part of your immediate dividend income in the expectation of greatercapital appreciation and higher dividends in the years to come and the whole issue is basically atrade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to themarket price of the company's shares. This relationship is best expressed by the ratio called yield ordividend yield:

Yield = (Dividend per share / market price per share) x 100

Yield indicates the percentage of return that you can expect by way of dividends on your investmentmade at the prevailing market price. The concept of yield is best clarified by the followingillustration.

Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per sharewith a face value of Rs 10 each.

If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividendof Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 percent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of whatyou are earning through dividends on the current market price of your shares.

Average yield figures in India usually vary around 2 per cent of the market value of the shares. Ifyou have a share portfolio consisting of shares belonging to a large number of both high-growth andhigh-dividend companies, then on an average your dividend in-come is likely to be around 2 percent of the total market value of your portfolio.

6. Return on Capital Employed (ROCE), and

7. Return on Net Worth (RONW)

While analysing a company, the most important thing you would like to know is whether thecompany is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company isable to earn on its capital, namely its equity plus debt. A company that earns a higher return on thecapital it employs is more valuable than one which earns a lower return on its capital. The tools formeasuring these returns are:

1. Return on Capital Employed (ROCE), and

2. Return on Net Worth (RONW).

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financialratios for evaluating a company's efficiency and the quality of its management. The figures for theseratios are commonly available in business magazines, annual reports and economic newspapers andfinancial Web sites.

Return on capital employed

Return on capital employed (ROCE) is best defined as operating profit divided by capital employed(net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinaryone-time expenses, and deducting extraordinary one-time income and other income (income notearned through mainline operations), to the net profit figure.

The operating profit of a company is a better indicator of the profits earned by it than is the netprofit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company'sbusiness. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio thattells a shareholder what he is getting out of his investment in the company.

ROCE is a better measure to get an idea of the overall profitability of the company's operations,while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company's efficiency, financialviability and its ability to earn returns on shareholders' funds and capital employed.

8. PEG ratio

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share.It tells you whether the share that you are interested in buying or selling is under-priced, fully pricedor over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company.This is based on the assumption that the higher the expected growth rate of the company, the higherwill be the P/E ratio that the company's share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in thecontext of the company's future growth rate. The PEG is calculated by dividing the P/E by theforecasted growth rate in the EPS (earnings per share) of the company.

As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity,whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.

The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company.Wide and intensive reading of investment and business news and analysis, combined withexperience will certainly help you to make more accurate forecasts of company earnings.

Source : Rediff.com Continue Reading


Friday, December 19

Blog Directory (Updated)

Dear Readers

This is my 90th article , and I should thank you all who appreciated this blog and came back to readmy articles. I just wanted to thank people and let you all know that i will keep adding articles oninvesting and how to make smart decisions for investments. Google-analytics tells me that this bloghas crossed 10000+ visits ,which is a great achievement for this blog, and credit for this goes to youall .

Below is the map giving details of the Readers of this Blog .. The maximum readers are from India ,US , European and Asian Countries . Thanks to all of you to make this happen .

Today i am just reproducing all the articles and categorising them so that new readers find it easy tounderstand about it.

Request : People leave your comments after reading articles, it helps me in improving and writebetter article next time. In case of any doubts and question , feel free to mail me [email protected]

Also , i have started posting more articles on Stock Markets and Trading . I hope that's some thingpeople want and like .

How can you search something you want to read on this blog ? You can see a search box on the top, you can search things on this blog using it

You can also Follow this Blog , See at the right hand side the link to follow the blog .. Let the worldknow what you are reading :)

How do i know in future that you published an article ? On the below right hand side (very below)there is a Email subscription link , you can subscribe your email id , you will mail when i publish anew article or change any existing one .

Categories for articles

For Beginners

Why Managing your money is Important and why to take pain in doing it

Terms and Terminologies in Investing World

Why small saving matter

How tax is calculated (2008)

How tax is calculated for different things

Common mistakes in Investing

All about Provident Fund

Inflation, How it eats your money slowly

How to evaluate your returns

Some investing Equations to make you understand some basic things

3 most important Formula's you must always know about

How to calculate Life Insurance Cover

Price Vs Value

Analysis of Comments regarding Endowment Policies

Tips for Disasters

CRR and Repo Rate

Investing Presentation

Know your RBI

Some tips while Taking Insurance

Liquid , Equity and Debt Funds

Basic Info on Stock Market

6 must follow rules of Investing

Super Star Articles (You can't afford to miss these at any cost , these are some very high levelarticles , but easy to understand)

Portfolio Diversification

Portfolio Rebalancing

Creating Wealth

Power of compounding

Life Insurance , How to go about it

Why small saving matters

Why Endowment Policies are never Best

5 mistakes of my First Trade

Risk Management of Portfolio using Derivatives

Pillers of Success

5 Elements

Different Products and knowledge about them

What is a mutual fund

Myths about Mutual Funds

Advantages and Disadvantages of Mutual Funds

Mutual funds categories

Difference between Growth and Dividend option in mutual fund

Life Insurance 2 (Read it after reading the First Part)

Why to invest in GOLD and How

What is SIP (Systematic Investment plans)

Some Calculators to calculate growth of your money

What is a ULIP , and who needs them

REMF (Real Estate Mutual Funds)

What is Health Insurance and why its so important

What are Options (Stock market related , F&O category)

What are ETF's (Exchange Traded Funds)

What are FMP's (Fixed Maturity Plans)

What are GOLD Funds

All eggs in Single basket

Religare Aegon Life Insurance

Some products I know and recommend

Returns with Options Trading

My Advice on Options Trading

Averaging technique by Jesse Livermore

Things people generally don't know about

All tax saving funds are not same, Read why

What people loose by not knowing things

The Real Face of FMP's

Why avoiding bad decisions is better than taking good ones

Things you didn't knew in investing world

Magic of partial Profit booking

Kenyisian Beauty contest

Some things to Download

Some other links

Some recommendations

Continue Reading



Some Basic Information on Trading and Investing

What is an Index ?

NIFTY and SENSEX are the Index , they are the indicator of how Markets are performing . AnIndex is created for measuring a particular section of stocks . When the Index goes up or down ,they represent the group of Stocks they comprise of . So if an Index is up you can say with highprobability that most of the stocks under them have done well .What is Nifty and Sensex ?

There are many Stock Exchanges in INDIA , BSE (Bombay Stock Exchange) and NSE (NationalStock Exchange) are most famous and biggest of all and with maximum business happening there .

Nifty : Nifty is the Index of NSE . Nifty has 50 biggest companies of India representing thecompanies from almost all of the sectors , Each stock has there own weightages. Like Reliance ,Infosys have High Weightage and Ranbaxy has less .

Sensex : Sensex is a Index of BSE , It is comprised of 30 shares .

What are different Indices on Exchanges ?

There are different kind of Indices on Stock Exchanges like for NIFTY .NIFTY : Basket of all the sectors , Represents all the whole Economy CNX IT : For IT stocks CNX100 : Top 100 Stocks CNX MIDCAP : For Midcap Stocks BANK NIFTY : For Banks

Each Index represents a sector or a group , if you track a Index you can understand how the sector isperforming overall .

What is difference between a Trader and Investor ?

Trader : A Trader is a person who tries to earn profit from small movements in price , there timehorizon is very small like 1 day or a week or some weeks . For example , A trader will buysomething @100 and will sell it at 105 and make a profit of 5 . He will try to take advantage ofvolatility . His main tools will be Charts , News , sector outlook for short term etc. He will notconcentrate much on Company fundamentals , Long term sector outlook .

Investor : A Investor is someone who tries to invest money for long term . Long term can beanything from 1 year to 10-15-20 years . Investor is more concerned about the fundamentals for thecompanies , its growth and factors like those which are going to drive the share price in long termnot short term ... Investor is not concerned about the short term volatility . There focus is long term .

How to Begin Trading ?

Trading is one of the toughest things to master . Its a better idea to first learn and read about Tradingfor some months , Watch the markets for some months and try to paper-trade first . paper trademeans just trading on paper and seeing how you perform . Read about Technical Analysis also . Tryto gather more and more info on Trading . Read good Books and Learn as much as you can .

Knowledge and your intelligence has very less contribution in your success as Trader . The mainthings are Money Management , Discipline , Control over GREED And FEAR , and Risk

Management .

Once you are very confident you can start , Start with very small Cash and take big bets only whenyou have made some progress to cheer about .

Have a plan and targets for your Trading . Take Trading seriously as your business and not as hobby, else with high probability you will Fail .

How to Begin Investing ?

Read How to analyse stocks and Read books . Have a long term horizon and don't be afraid of yourshare coming down ...

Should you be a trader or an Investor or nothing ?

It depends on your personality , the time you want to give in this and your goals . IF you find funwith dealing in markets in short term basis , Be a trader.

If you can devote time to markets in daily or weekly basis , then you can be an Investor .

If you are not interested in Either , just don't be anything .. Do what you are doing right now :)

It was a fast written post , I hope thing are clear . Continue Reading


Tuesday, December 16

Jesse Livermore's Averaging Up Technique

Following is a Guest article (just like Guest lectures :) ) from Mr. Arun Prashanth for this

Blog . This article is regarding Trading in Stock markets .

Jesse Livermore's Averaging Up Technique

An effective method to limit your losses and let your profits run...

Jesse Livermore is considered to be one of the Greatest Speculators of All-time if not the best.Starting at an early age of 15, Livermore went on to shock the Street with his extraordinary plungesand was once called the “Boy Plunger”. In this post I will explain in detail a strategy he used to cuthis losses effectively and let his profits run. The following technique works best for Swing tradingand Position trading but it doesn't mean it cant be used for other types of trading. Averaging down is one of the worst things which can be done in trading. Why would you want toadd to a position which is losing? Its blind gambling from that point on. Your just hoping for theprices to come up when in reality your losing and the markets are telling straight on your face thatyour wrong. In trading, when the markets tell you that your wrong, it is best to accept it and cutyour losses as soon as possible and get out immediately. We can never know for sure if the stockwill come back. Averaging down maybe a good idea in Value Investing but it is never good whileyour trading. Remember “Never turn your trade into an Investment”.

Now let me come back to the topic in discussion. Averaging up is the same as Averaging down butthe only difference is that your doing it in the other direction. And you know your right every time

you add to your position. Confirming the fact that you are correct gives you confidence and helpsyou catch the full trend or at least the major part of it which makes the big money . As JesseLivermore said

"And right here let me say one thing: After spending many years in Wall Street and after makingand losing millions of dollars I want to tell you this: It never was my thinking that made the bigmoney for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right onthe market. You always find lots of early bulls in bull markets and early bears in bear markets. I'veknown many men who were right at exactly the right time, and began buying and selling stockswhen prices were at the very level which should show the greatest profit. And their experienceinvariably matched mine - that is, they made no real money out of it. Men who can both be rightand sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stockoperator has firmly grasped this that he can make big money. It is literally true that millions comeeasier to a trader after he knows how to trade than hundreds did in the days of his ignorance."

( From Jesse Livermore's book “How to trade stock”)

You could have bought Unitech @ 25 and had ample opportunities to increase your position as yousee in this chart.

You could have easily split the money you have planned to use in that position and could haveadded as the stock went up. And you got the clear signal that you are right and so your moreconfident and also more secure. Even if the stock hadn't reacted as you had planned you would havelost only a marginal amount in comparison to the big amount you would have lost if you had boughtoutright. This technique particularly effective in Swing trading and Position trading, but I don'tthink it would as as effective in Day trading.

The Averaging Down technique is much more important for the psychological aspect of sitting

through the whole trend. Because your adding to your profits, so your not troubled of any losseswhen you are trading. Even if your wrong half the times in catching the trend you can still makelarge sums of money because the times when you get the trend right you will be making lots ofmoney. Let us see another example where we get our predictions wrong. This time it is the Nifty Index.

As you see we think the trend upwards will continue but it doesn't and breaks down and thus wedon't lose as much money as we would have if we had put our full money on it outright.

The above technique is most useful if you are a Swing or a Position trader who follows the trend butyou can always integrate it into your system and see if it works well for you. If you are interested inlearning more about Jesse Livermore you can read his book “How to trade in stocks”. The book isquite small and he gives detail about his style and also shows us how he made and lost millions. It isa lovely read which I would recommend to you. Hope you enjoyed reading this post and found ituseful. Please feel free to comment and ask any questions which you would like answered. And I'dlove it if you could just reply about whether you found this post useful. It will serve as a greatinspiration. Regards from Erode, Tamil Nadu. For Finance and Investing Blog by,Arun [email protected] me on MSN or Yahoo Messenger. I'd love to talk to others and learn more on Trading. I too ama beginner and we could join and trade better :) !

Continue Reading


Sunday, December 14

5 mistakes of my First Trade

Inspired by the name of 3rd novel by ChetanBhagat ,i thought of writing this article where i wanted todiscuss some mistakes (big one) which i made duringmy first trade in stock markets , though i realisedvery late that i made so many mistakes in that trade .

Its worth discussing how i could have avoided thosemistakes and others can learn from that .

MISTAKE 1 : Buying on Recomendation without

doing your own research .

27th Nov 2007 : I got my trading account openedand i was thrilled to trade and make lots of money ...i saw a orkut community recommendation on GTCIndia "Buy" Recommendation and how it can reach from current price of 600 to 2000 in some somemonths , there were all the good reasons discussed there .It looked like a "cant-miss" trade . ibought 10 shares @560 .

Mistake : Buying only on recommendation and not analysing it well , over relying onothers recommendation , buying a company which i do not understand enough .

What is the right thing : Never buy just on recommendation, Do your own study and analysis .When you buy on others recommendation , you will don't take responsibility on your own if there isany loss , which is dangerous in markets . Hear others but listen to your self . See other things likemarkets trend , sector view , global markets , future prospects . Once you are fully confident that itsa correct trade and you feel comfortable with it ... go for it .

MISTAKE 2 : Being too GREEDY !!

After 3 days : Just after i bought the shares It went up from 560 to 800 in 3-4 days ... i thought thatits moving as expected and bought 10 more shares at 800 . Within another week , it went up more to950 , and i was flying ... i bought 10 more shares @955 again , to reach the target of 1500+ . Myaverage buy price was now 772 .

I was feeling little bad for not buying 30 shares directly @560 in the start .

Mistake : GREED !! , This is a very common and very big mistake , so big that it willbe among the top mistakes investor and traders do . Buying more quantity was not awrong thing .. it was the intention behind it .

There is nothing wrong in increasing the position once it moves to your target, but it has to bebacked up with strong reasons and study . It should be a trade with high probability of success. Inmy case it was not . It was just a recommendation from someone in orkut community , there was a 2line explanation for why it will go up .

What is the right thing : There was no need to buy more shares that point in time .. i should havejust sit back and watch .

Stock market is just like our life , You need to have satisfaction in your life and stock markets , Ifyou want more and more and more , you might not get anything , in fact you can loose . You puteverything you have on the trade like i did .. Because of GREED i invested more than i could affordto loose . I took unwanted and unaffordable risk , because I only saw profits and never the potentiallosses.

MISTAKE 3 : No profit booking

Next 1 week : The prices were not moving now ... it was going up a bit then coming down againand was stuck in a range of 900-1000 . It went up to 990 once . For a time being there was doubt inmy mind if it will not move up to 2000 and will return back to my buy price levels .

Mistake : No profit booking . There was a sharp rise in shares price from 550 to 900 injust 2-3 weeks and that is rare . it doesn't happen to every stock ... It was an excellentreturn , but i did not book the profits . Reason : GREED again

Read why partial profit booking is so important

What is the right thing : The better thing to do was to book profits , at least partial ... Situationschanges in markets, I never checked back the news regarding the company after i bought the sharesand i was never updated about it . Every time you get some good profits , its a wise idea to at leastbook some partial profits out of it (Unless you have strong reasons to hold it for long) .

Mistake : No profit booking . There was a sharp rise in shares price from 550 to 900 in just 2-3weeks and that is rare . it doesn't happen to every stock ... It was an excellent return , but i did notbook the profits . Reason : GREED again

MISTAKE 4 : Having a Big Ego , Not accepting that you can be wrong .

Next week : Prices now started coming down ... It came to 900 first , i was scared , and i said tomyself , i will book profits once it goes back to 950+ . It never did .

Then it came back to 800 and i regreted for not booking profit at 900 , i said to myself , i will bookit for sure when it comes to 850 . It never did .

Then it went up a bit again and went up to 850 , i forgot my promise and allowed GREED to takeover my promise . It went down again after that and now it was neat my average buy price ... thiswas the time was feeling myself a big fool (i was) for not booking Great profits . And not booking itat 0% profit-loss seemed foolish .. we trade for profits .. if i had to take 0% profit .. why did i tradeat all ...

Mistake : EGO !! .

Fear of loosing part of profits . then Fear of not making any profits , then fear of loosingsome money . Fear Fear Fear !!

What is the right thing :

"When your boat starts sinking , you don't pray , just Jump "

Once you are doubtful , surrender to markets wish ... See what markets is showing you . Not whatyou wanted to see ... Markets are supreme and no one can be above markets ... Leave you Ego atyour home when you go in front of Markets .. markets tell you whats going to happen , Not viceversa ...

Accept that you are wrong and made a mistake and move on .

MISTAKE 5 : Impatience , Not understanding that markets will take there time

After that : Then the prices started falling and went to 600 (my original buy price) and now i wasin loss . i was proved wrong . but i was not accepting it and just trying to prove myself right byholding it and just hoping it to come back ... it never did .

Finally it went down and down and down and i was just seeing it everyday in a hope that it returnsback to a level where i can be happy to sell it ... it never did . It went up to 300 and i sold infrustration .

I saw it go down to 250 and then saw it bounce back to 500 again . I was again feeling cheated bymarket of not giving me right opportunity to exit .

Mistake : Impatience !! and Fear !! and not cutting my losses short .

I exited at a very bad time , i exited at almost the lowest price of that time .There was an opportunity for me to exit at small loss . But taking a loss hurts Ego and itdid . Not cutting my loss early was the result of not defining my loss early enough . Ishould have had thought of it earlier itself and just a trigger needed to be pulled when ireached that level of loss , without emotions ..

Fear overtook common sense ... Fear overtook logic .

What is the right thing :

I should have defined my Target and Losses before taking the trade ...I should have been realisticand logical .

I should have waited little more time , and then exit at a better price ... I should have consultedsomeone who is better than me (even a street dog could have given a better advice than me myself) .

Current price of GTC INDIA : Rs 55

Conclusion and Summary

My first trade was not at all planned and "no plan" is "a plan to fail" .Fear , Greed , Emotions , Ego , Impatience : these are the elements of Failure in Stock markets..Manage them well and you can do better . These things are still not the most important elements ofsuccess in stock markets , they are Money management and Risk management . I will write on itlater sometime ..

Continue Reading


I am Back

Hi Friends ...

Sorry for not posting anything for so long .. i am back from vacations now and will start postingsoon ...

For the meanwhile , try reading an excellent article here

In the next post , I will talk about my first trading experience and how i made all the classicalmistakes ... i will try to explain them and talk about them .. that should help new traders to avoid themistake ...

Continue Reading


Friday, November 28

Dear Readers , there will be no post for next 2 weeks as i will be on vacations . See you all afterDec 15th . :)

Mumbai Attacks

Last 2 days have been very disappointing . I am not talking about Markets or anything , its MumbaiTerror attack . What has been happening in Mumbai is very disappointing.

Terrorists who are doing this are highly motivated and highly trained , they have been reallybrainwashed very deeply . They are pakistanis who are trying to look and make them appear asIndian Muslims . Here is a phone talk between India TV and these terrorists .

Terrorist 1 : http://ishare.rediff.com/filevideo-Terrorist-calling-himself-Sahadullah-spe-id-

519886.php

Terrorist 2 : http://ishare.rediff.com/filevideo-2nd-Terrorist-speaks-from-Nariman-house-id-

519881.php

They were not Indians : http://ishare.rediff.com/filevideo-Terrorists-speaks-id-519878.php

I hope everything turn out to be good and whole of India and world live happily again . Continue Reading


Wednesday, November 26

Options trading , My advice and some comments

Looks like people are very much interested inlearning about Derivatives . Let me try to put basicthings about Derivatives .

Read a basic about Derivatives (Options , in thiscase)

Read how you can Hedge your portfolio using PUToptions

Let me first talk Good things about Options

If there is anything in world which can make youinstant rich , its Options !!! , What is instant Rich here !! , Instant can indicate anytime from 10 daysto 5-10 yrs . It depends on you how much risk you want to take . Options can deliver returns whichyou can never imagine . You can get returns in a day equivalent to what you get in 8 yrs in FixedDeposit !! 10% return in a week is what i call a realistic average return in long term after riskmanagement .

Just to give an example , if you start with 15,000 and take 10% profit each week , you can generate1 Crore in 1 years (compounded basis) .

How to Trade options ?

To Just like people trade in Stocks, shares , they can trade in Options .. buy them at a cost andselling it later at some profit or Loss . The main difference in options trading and Stock trading isthat Options trading also has time limit attached to it . That's makes them more dangerous . Thereare some selected shares which have options for them. Almost all the well know stocks have thereoptions . Nifty index also has an option for it .

Almost 85-90% options trading happens in NIFTY options ... Each stock options have lot size , likeNIFTY lot size is 50 . So if the price for NIFTY 2600 CA is 90 , 1 lot will cost you 4500 . andsuppose the price reaches to 200 , you can sell it and get 10000 , 5500 of profit - brokerage charges .Some other very good stocks for options trading are RELIANCE , ICICIBANK , CHAMBALFERTILIZER , JAIPRAKASH ASSOCIATES and many more .

Some Expreiances I can remember

I have often seen a option rise anywhere from 2 times - 50 times .

Just 2 days before NIFTY made the lowest of 2250 in OCT , NIFTY was at 3000 , and i boughtNIFTY 3000 PA at 60 (NIFTY was at 3000 and 3 days left to expiry) .Within 5 min , it went up to90 and started coming back down .. i sold it at 88 and took good profit of 40% ...

Just after i sold it market starting going down and it went up to 200 .Next day market tanked heavily and the price was now 500 .

Next to Next day market again tanked heavily and option price was now 750.

Something i bought at 60 was at 750 after 2 days and i sold it at 88 . Anyways .. i made good profitand i was happy (Its a white lie , you know that)

This is a little extreme case , but in general options can give close to 50% - 200% return in shortduration . Scenario is very different at the starting of month and at the end of month because ofOptions expiry . At the time of options expiry , the change in price is significant because of the timevalue and uncertainty .

How Risky Options Are ?

If you don't fear anything in World , better you fear Options .. it can wipe you out with in days ... Itsa Money eating machine . You can loose all your money if you are not focused or dont haveknowledge or good money management .

If you are trying hard to loose money and you are not successful , try options .. Warren Buffet callsDerivatives as "Weapons of mass destruction" , I agree with him , but i also differ on the fact thatoptions have the power to make you super rich if you can use it effectively and with intelligenceand without GREED .

Advice

If you want to try options trading , first Learn about it heavily .. read books , read stuff .. watch itfor 1-2 months .. see the behaviour and once you are confident that you can make some money ..enter with small money (because you are going to loose) ... Don't feel back after loosing money ,think of it like "Guru-Dakshina" ... everyone has to give it in the start , you are no exception. Nowgo back .. again read some more books , Do some virtual trading , and once you are confident againstart with small money (which you can afford to loose) .. and start doing the trading slowly step bystep ... Don't put all your money in one go .. else you will cry later .

Disclosure

I have been trading options from last 6 months and still i am in loss and way far than break even ..Please don't take it as my advice to trade option , its just for informational and sharing purpose ..You are your self responsible for your losses .

"I thought Women are complicated and tough to handle , then I met Options" :)

Continue Reading


Monday, November 24

Returns with options trading

what kind of markets have these been .. a slight news of hope is causing stocks to rally to so muchamount which they used to rally in a year .

As i write this Citigroup Corp shares have risen 68% in just 1.5 hrs of trading . 68% in a day !!

That's a kind of return which mutual funds are really jealous of . Last month when there was somebad news about UNITECH , it plunged by 50% in a day only to recover back 40% the next day ..

Last quarter DLF lost 33% in 2 days on the news of US FDA banning its drugs in US . and then itagain came back to its normal levels .

When DLF lost for 2 days , I had seen DLF PUT options went up 50 times in 36 hrs ...and on thethird day when it was up again by 20% , then its CALL options went up by another 5 times . meansif you got everything correct and bought call and put options at right time , you could have made 5Crores ($1 million) with 4 lacs of money ($8000) . that's 25000% return in 60 hrs . there is anassumption that you bought things at right time which is almost impossible ... but with little luckand study at least 1000% was possible for sure ...

I thought of buying DLF puts after it fell for 1st day , but because of fear , i didn't buy it .. and itwent up by 800% next day ( i remember it correct , it went up from Rs 4-5 to Rs 40) , that's 800-900% return in 2 hrs .

I am sure Citigroup option traders would either have made a killing or killed themselves . :)

Anyways , options are extremely dangerous products , its not advisable to get into them unless youare sure what you are doing ..

Read the basics of what are options Continue Reading


Friday, November 21

I see that many people come to my blog from some technical analysis blogs , I have recently startedusing Technical analysis for my trading decisions , i must appreciate that Technical Analysis is agreat way of making trading decisions .

To understand the basic things in Technical Analysis , read this small tutorial , source :Investopedia.com

Also , for getting Intraday charts , the best place for retail investors is yahoo Finance Site (India)

The chart is for Nifty Intraday , you can use different indicators for yourself . By default i have putRSI and Slow Stochastic . To read more on this , Investopedia has excellent .

Nifty for Monday

Markets have reversed its position from Negative teritory to Positive and gained more than 450points . It should now retrace to the levels of 2800-2900 next week . Any rate cuts and good newsfrom US may trigger the positive mood . But the main trend is still negative and any rise in marketsmust be used for profit booking and going short again (with good SL) .

Happy technically trading.

Continue Reading


Thursday, November 20

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

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

ELSS (Tax mutual funds)

1. Magnum Taxgain2. Sundaram BNP Paribas Taxsaver

EQUITY DIVERSIFIED

1. DWS Investment Opportunity2. Kotak Opportunities

DEBT Oriented

1. UTI Mahila Unit Scheme2. Birla Sun Life Asset Allocation Conservative

Source : Valueresearchonline

Some article related to this

http://finance-and-investing.blogspot.com/2008/08/all-eggs-in-single-basket-people-say.html

http://finance-and-investing.blogspot.com/2008/02/all-tax-saving-mutual-funds-are-

not_9196.html Continue Reading


Tuesday, November 18

Investment Idea for Non-Indians

Hi Readers

This post is solely for non-Indian readers for this blog . It will talk about why and where should youinvest currently . Global Equity Markets are facing heat of global crisis . US , UK and Japan haveentered in recession and it will last longer than people expect it to last .

India , China and other Asian countries are also facing the heat but not as much as US and Europeancountries . Also they are facing crisis not because of there local issues , but because of someexposure to US and European markets . Long term growth story of India and China cant be denied .They are still expected to grow by at least 6-7% (conservative figure) for another 10-15 yearsminimum .

Let us see some of the points which makes India a very attractive place for investment .

Equity Markets : Indian Equity Markets are almost 60-65% down and may go even down incoming months. Once the crisis is over and markets start recovering .. there will be explosivegrowth and long term investors will reap great returns.

Real Estate : Real Estate Sector is also very promising for long term in India , but currently priceshave corrected to some extent and are set to correct more in coming months .

How to invest ?

I am sure that there must be mutual funds in your countries which invest in Emerging Economies .You can invest in those to get benefits for Equity Markets .

For Real Estate , If you have sufficient funds , you can invest in Real estate in India (as per theguidelines on RBI) .

I am not suggesting that you only invest in Emerging Asian countries , the point is that, this is agolden opportunity to diversify your investments across geographical location .

Read more Stuff

Must follow 6 rules of Investing : http://finance-and-investing.blogspot.com/2008/11/six-must-

follow-rules-to-investing.html

5 Elements : http://finance-and-investing.blogspot.com/2008/10/5-elements.html

Portfolio Rebalancing : http://finance-and-investing.blogspot.com/2008/07/portfolio-

rebalancing-today-i-am-going.html Continue Reading


Friday, November 14

The Real face of FMP's

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

Continue Reading


Thursday, November 13

Six MUST FOLLOW Rules to Investing

This is a nice article by Charles Delvalle , i am just reproducing his work on this blog.

Have you ever been on a losing streak and felt like there was no way for you to make money in themarkets? I think we all feel that way from time to time. It’s natural. After all, our emotions are neverstatic.

The worst part is that when we’re in that mindset, we can actually create a self-fulfilling cycle.Maybe we’re trying too hard. Maybe we get sucked into a variety of different indicators that wenever followed before. Or perhaps we get into one trade hoping that it’ll make up for all the loserswe just had.

Nine times out of ten, it never works out though. The end result is that you lose more and moremoney. But it doesn’t have to be that way. So here are six simple rules for you to follow that willhelp you manage your emotions better and become a better investor.

Rule #1: Hope to make more money, fear to lose more. In the book Reminiscences of a StockOperator, this was one of the most important lessons that trader Jesse Livermore learned in his timeas a trader.

When he got into a position and it started losing money, he realized that he had to get out of itquickly (cut your losses). So what he’d do was to fear that he’d lose more money and get out of thetrade. On the other hand, if the trade was going his way, he would hope to make even more (let yourwinners ride).

Rule #2: Stick to Your System, NO MATTER WHAT. This is a tricky rule to stick to, even forexperienced traders. But the truth is this: If you have a system that you know for a fact works, thendon’t stray from it. You will only end up losing money.

Why do investors stray? Sometimes it’s the feeling of invincibility they get after they’ve won a fewtrades in a row. Other times it’s simply because they are desperate to hit a winning investment.Whatever the reason, when you stray from your system, you stray from what you know works.Ignoring what you know is never a good way to make money.

Rule #3: Don’t become attached to your money. Sounds easy, right? You’d be shocked how hardit is to actually implement. Too many people put money in the stock market that shouldn’t be there.If this is your retirement, or tax money, or money you owe to somebody, DON’T USE IT IN THESTOCK MARKET! Only use money that you can afford to lose.

Rule #4: Don’t play catch up. If you’ve hit some losses in the stock market, the last thing youshould do is ‘double up’ and hope to hit a winning trade. What if you don’t win? You will lose twiceas much and be in even more pain.

Listen, losses are a part of the game. Every investor in the world loses money from time to time, butif you’re system works (rule #2) then stick to it and you should end up back in the green in no time.

Rule #5: Don’t overanalyze things. I can’t tell you how many times I open up the Wall StreetJournal and see an article that goes completely opposite to what I believe to be true about aparticular sector or investment. Does that mean I listen to them? In all honesty, I look at theargument and see if it has merit. If it doesn’t, that’s it. I stick to what I believe to be true unlesssomething drastically changes.

In my trading arsenal, I have a few indicators I look at and then have certain beliefs about themarket and sector based on a few people I trust and what I know of the market. Everything else isjust static. It’s only there to agitate you.

Rule # 6: Listen to yourself. One thing I’ve learned is that as you trade, you find out new thingsabout yourself. You find out what your true fears are (fear of success, maybe?), you find out yourweaknesses (maybe not following your system to a T), and you find your strengths (maybe youmake money best in certain sectors). As an investor, you need to pay attention to all of these things.That way if a certain emotion is cropping up and threatening to lead you in the wrong direction, youcould quickly stop it and move on.

If you can stick to these six rules, you’ll be able to have a much better grasp of your emotions whileyou trade.

Continue Reading


What are Debt funds and Liquid Funds

We will talk about Equity , Debt and Liquid Funds . We will also discuss dividend distribution tax istreated for all these funds.

First understand what is DDT (dividend distribution tax)

Dividend received from a mutual fund is tax free , but only at receivers hand . But mutual fundshave to pay a tax on that dividend to Govt before giving it to us . So actually the tax is paid bymutual fund on behalf of us . This tax is called DDT .

Now lets go ahead and see different types on Funds .

Equity Funds

They are the funds that invest more than 65% of their corpus in equity shares of companies. Thedividend distributed by such funds is exempt from the dividend distribution tax. So all the dividendwhich is declared comes to the unit holders , you get 100% of dividends. But don't think that this issome extra income .. it is just a part of your own money , after you get the dividend , NAV comesdown by that much . This is difference between growth and dividend funds . You you actually gotsome money back , nothing else.

Dividends are are totally tax free and not even DDT is applied to it .

Why to invest : You should invest in Equity mutual funds when you want to invest for long termand when you can take risk . Understand that these funds invest primarily in Equity , so there ismore risk , but if you are investing for long term and want capital appreciation to happen , these arethe funds for you .

Debt Funds

These funds invest in medium-to-long term debt securities like government bonds and corporatebonds/debentures. The dividend from these Funds are subject to 12.5% Dividend distribution tax .The fund is also liable to pay a surcharge and a cess of 10% and 3%, respectively, on the tax. Theeffective tax rate comes to 14.16%.

Why to invest : They are debt products and offer good liquidity also . If you want to invest somemoney for safe returns and for short term goal , then Debt funds are something you can look at .

Liquid Funds

These invest in short-term debt securities (which have a duration of less than a year) likecommercial papers, certificates of deposit and call money. The income distributed by such funds issubject to an income distribution tax of 25%. The fund is also liable to pay a surcharge and cess of10% and 3%, respectively, on the tax. The effective tax rate for liquid and money market funds is28.32%.

Why to invest : The main reason for investing in Liquid funds should be Liquidity factor , thesefunds are most liquid and least volatile .. So if you need to have liquidity in your portfolio , alwaysinvest some money in Liquid funds , any extra money lying in your Saving Account above your 1month requirement should be in Liquid fund .

Conclusion :

There are different type of funds and they all have different purpose , you should see which onesuits you and accordingly invest in that . Dividend received from mutual funds are not any extramoney like Stock dividend. It is your own money .

Comments please .

Read what is Repo rate and CRR Read what are different tax treatment on different products

Continue Reading



Some tips while taking Term Insurance

We will today discuss some of the best practices andmust do things while taking a Term Insurance.

Click here to read what is Term Insurance and itsImportance

1. Take a policy just before your Birthday .

Term Insurance premium depends on your Age . So ifpossible try to avoid taking the policy just after yourBirth date . What i mean by this is that try taking itbefore you turn +1 year in age . If your Date of birth is10/11/1983 , and you take the policy on or before 10/11/2008 , you will be considered of age 24 .But if you do a delay of 2 days ... and you take a policy on 12/11/2008 . You will be considered 25yrs old and hence your premium will increase by 4-5% .

Note : It does not mean that if your birthday just passed by and now you want to take Insurance ,then you should wait for another year . thats not what i am saying :)

For a male with DOB on 10/11/1983 (24 yrs old), the premium for Rs 50,00,000 cover with tenureof 25 yrs , is 10157 , if the policy is taken on 09/11/2008 (just 1 day before the birthday) . Where asif he takes the policy on 12/11/2008 , the premium will shoot up to 10647 (Rs 490 more) .. though490 is a small amount , but if we can avoid it by taking the policy little early .. always try to do it .

Even a small amount like 490 saved over 25 yrs in a PPF would give 45,000 and in mutual fundwith 12% return will give 77,000 .

Note : The gist of the point is that try to see this small point while taking the Term insurance , itdoes not mean that you wait for 8-9 months just to take the policy before a birthday .

2. Try to diversify your Policy

If possible try to diversify your policy amount over different Insurance companies . If you want totake an Insurance of 50,00,000 , it would be better if you take 2 polices , rather than 1 single policy .

How it helps ?

- If you hold a single policy and the company does not honour the claim , dependents wont getanything , but if there are 2 parts , then there are less chances that both the companies with nothonour the policy .

- If your liabilities come down or you have less dependents after a couple of years and ultimatelyyou need to bring down your Life insurance cover , you can simply stop one of the policies andcontinue the other one .- It helps in diversifying the risks involved with the Insurance company.

3. Buy a policy early in life and for longer Tenure .

Its always recommended to buy a Term Insurance early in life and for maximum tenure possible . Inyour early life you are more healthy and hence your premium will be lowest . Also by takinginsurance for a large tenure you are making sure that you are covered for a large period , but thepremium will be marginally more .

For example : For a cover of 50,00,000

You can see here that you have to pay marginally more for an extra cover of 5 yrs . So for example ,a person with age 25 will pay 14,000 more than the 30 yrs old , but he will be insured for 5additional years . So it always pays in long term .

Also taking a 30 years term insurance once will be very cost efficient than taking a 20 yrs terminsurance now and then taking a term insurance of 10 additional years after 20 yrs . Because after20 yrs , the premium you will pay for that 10 yrs tenure term insurance will depend on your Agethat time and health that time .

Note : Premiums are from Aegon Religare Life Insurance . Continue Reading


Tuesday, November 11

Weird Markets

Whats going on ?

Can you answer this simple but important question ?

Companies announce good results , there shares falls . GDP estimates are downgraded , marketsmove up . Textile and Real estate sectors are planning to cut jobs heavily and are under immensepressure , there shares move up .

Markets are moving in different direction of what they should move . Why is it happening ?Markets have become gambling place these days . Rather than moving the expected way , itsmoving differently and with high volatility now ..

6:00 PM , 11 Nov : Yesterday people were talking of a start of new bull market , but today marketswent down by 6.66% and now the trend is confirmed as Down again .

General motors is almost bankrupt , No sector looks good currently . Markets around the worldhave not yet seen there lowest point .

Nifty can now touch 1800 . We canbe back to the levels of year 2002 .


Is it a good news ?

For people who never entered Stock markets, it is a great news .But people who invested in Mutual funds (like me) .. they will feel the heat of this .

People who invested in mutual funds and Equities heavily and cant take a further big loss , pleasehedge it using Put options . Read :http://finance-and-investing.blogspot.com/2008/09/risk-management-of-portfolio-using.html

Lets see whats in the store next !! Continue Reading


Monday, November 10

Know your RBI

What is RBI ? How does it help us ? What kind of measures does RBI take to indirectly or directlyhelp us ?

Non-Indian Countries : This presentation is holds true for all the Central banks of any country . likefor FED for US .

See this presentation to understand more .This Presentation is RBI property and i am reproducing it .

Note : For best view , see it in Full screen mode .

RBI

View SlideShare document or Upload your own. (tags: policy monitory)

Download link : http://manish.pucsd.googlepages.com/Know_your_RBI.pdf Continue Reading


Friday, November 7

Today Let me ask some questions to you which you can answer to see how much you understandthings in investing . This small quiz will help you and me know where you belong to . How muchhave you learned ?

Request : I request you to give answers of the questions as a comment back to this article . I willannounce the winners after some days . Also please mention your reasoning about the answer .

Information : I have started a chatbox on this blog , please see the right hand side to see it , you

can post your questions or queries to it and i would try to answer them as soon as i see them .

Q1. Ajay and Priya are married and both of them earn 40,000 each . They earn total of 80,000

and there monthly expenses are around 20000-30000 per month . In case they have to opt for a

Insurance plan . which one they should go for ?

a) Term Insurance

b) Endowment or Money back plans

c) ULIPS

d) No Need to take Insurance

Choose one option among these and give the reason .

Q2. Ajay lends 1,00,000 to Manish on following conditions.

- He will get 7,000 per year for next 30 years.

- He will receive whole 1,00,000 back after 30 years.

What is the best way Manish to utilize this money and make some profits for him too if possible .

No options here , you should give a detailed description of step he should take .

Q3. Your friend wants to enter magic world of Stock markets. He/She is determined and very

confident that he/she can make huge profits . What will be 3 things you would say to him/her .

For an example : the first thing i would say to him/her is "Don't concentrate much on making profits, rather concentrate on avoiding losses" .

What are the 3 things you would say to him/her .

Q4. There are two strategies of investing in Stocks of blue chip companies in Stock markets.

Time Frame : 2-3 months

Strategy 1 : Can give profits upto 50% , or loss upto 50% with equal profits. (Assume the

stock is very volatile)

Strategy 2 : Can give profits upto 10% , or loss upto 10% with equal profits.

(Assume the stock is very less volatile)

Which Strategy will you choose ? You are free to make your assumption .

Note : Please answer these question to help yourself and see if you actually deal with these

situation . What kind of thinking you have? What kind of advice can you give to someone ? And

more than that , to learn .

I will review all the answers and reply them . Also i would choose the best answer in some days .

Continue Reading



Investing Presentation for Newbies

This was a small presentation from my side to people who need some basic information in Investing, mutual funds , Tax saving etc .

Investing Basics

View SlideShare presentation or Upload your own. (tags: investing finance)

Download link : http://manish.pucsd.googlepages.com/finance.ppt

Read about :

CRR and REPO Rate 5 Elements

Continue Reading


Monday, November 3

Follow up on the Comment

I would like to thank Mr Bhargav , to comment over my article http://finance-and-investing.blogspot.com/2008/10/why-endowment-policy-are-never-best_08.html (Comment 11) andraise some questions , which gives us an opportunity to look over it once again and i hope for thefinal time , I hope after this article i don't write more on Endowment policy more .

Dear Readers , If you have any doubts or anything is unclear to you regarding anything , or youdisagree on any topic , part of topic or any comment, feel free to comment on it and let everybodyknow about the confusion , it will help us to be interactive and clear doubts in an easy way .

Note : Please subscribe to email updates on the right hand side to get future updates in your mail

box .

For now , lets go Ahead

Comment from Mr Bhargav

I don’t know how you get the maturity figure of 23 L.If you go for plan no 14 and consider the bonus amount of 48 /1000(which lic has declaredfor prev fin year and FAB of 500/1000 S.A. it comes to10 L + 1440000 + 500000= nearly 30 L which is nothing but a very good return and amountis tax free as well.

No doubt that term + PPF as you have pointed out is a good bet but in no circumstances term+ mF is good ,many financial planner are fooling just to increase the selling of SIP’s andULIP of their fav companies and they are no way secure, current market condition are thebest eg. However it is always a gr8 thing to diversify your saving and distribute your moneytoward risk free and high return instrument.

The good thing of PPF is only 15 years lock in and partial withdrawal.And if you talk of longer horizon End are one of the best to generate good return the onlyworst thing is you end up paying heavily if you surrender in between.

I have commented back to Mr. Bhargav , lets see the reply once again here in little detail and

with extra comments .

This was my comment back to him :

The example which i gave in my article was from one of my friends who took some policy 5-6 yrsago.

Lets leave that example aside and take your example (http://lifeinsureinfo.blogspot.com/2008/07/endowment-with-profitplan-no-14.html ) and discuss it .

Tenure : 25 yrsyearly premium = 38820Maturity benefit = 30 lacs

Some questions for you .

1. Please let me and and readers know why do you consider this plan returns are good ?

I calculated the returns of this policy and it came out to be 6.25% CAGR . Is that a good return ?

2. Is the Cover provided by this Plan (Rs 10 lacs) enough for a average person .

I assume the person who pays an yearly premium of Rs 38820/year , must be earning 4-5 lacs year,DO you think 2 times him yearly income is enough for this person's family for whole life ?

3. You feel that Term + MF is risky (may be they are) , in that case what do you think about

Term + PPF ?

If this 30 yr old person take a term insurance of 30 lacs for 25 yrs , the cheapest premium i can seeare around 7,000 , He can invest 38820 in a year in this way .

Term (7,000) + PPF (31820)

In that case , from start to end , he will be covered for 30 lacs and at the end he will get 30 lacs.

Annuity Formula : (31820 * 1.08 * (1.08)**25 )/.08 = 2941899.4900399372 (Almost 30 lacs)

Even if he dies within 5 yrs , he will get 30 lacs , but in the plan 14 , he wont , Dont you think life isuncertain and anything can happen anytime , so better idea is to consider worst case.

4. Why do you feel that Term + MF is not a good idea? Dont you expect Indian markets to

return even 12% in next 25 yrs ?

I believe it will return 15% + at least ...

Dont you agree or trust Historical data for Equity returns ? (India and Global)Do you know any year Y , where Y+25 yrs returns have been less than 12% ?

I beleive 12% returns in Equity in next 25 yrs is an understatement . It should be more than 14-15%. i know its not guaranteed and not 100% sure, but what shoulnt we trust 99.99% probability ?

5. As per my assumption in question 2 , where i assumed the annual income of a person as 4-5

lacs , what do you expect his/her monthly expenses to be ?

I believe at least 20k , 30 yr person will be married and will have kids probably , if not now thanafter some years . At least then his/her monthly income will shoot up to 25k per month , whichmeans 3 lacs/year .

If we expect inflation to be 7% per Annum and do a simple calculation , we can see that his futureexpenses after 25 yrs would be

3 lacs * (1+.07)^ 25 = 16.28229 lacs/year

Which means that the money he gets out from his Policy will be good enough for his next 2 years(just monthly expenses) .

Is he saving for 25 yrs of his life just to live 2 yrs of good retirement ?

Mr. Bhargav , Please share your comments on all these questions asked ? May be we have missedsome point you were trying to put.

Disclaimer : All the figures are just to give an idea about the situation and should not be taken as

the words on Rock . Things can change according to situations .

Summary and Conclusion

In life , people make mistakes all life , they may feel something is good and there may be otherswho make them feel this because of there ignorance , unability to have an insight about something .In India , same thing has happened in Insurance Sector . People are never told what is Insurance ?Whats is its importance ? How to calculate it ? All there life Insurance is seen as investment productin India , our parents , Grand parents and other relatives have done this all over there life and theywill not understand why its bad , because 90% of India does it . 90% people doing it does not makeit correct . What can be done if there was "Mass fooling" done in our country .

Its never late if we young generation understand and try to see things logically . Endowmentpolicies always remind me of this saying "Common sense is not common" . In India thats very truewhen it comes to Endowment Policy .

Again , this is my attempt to create awareness on this issue , if people still disagree and want to gothere way, its there wish , i have done my job and may be i should call "Social Responsibility" .

Continue Reading


Thursday, October 30

Keynesian Beauty Contest

How do market price of a share is determined ? how do prices move ? Where should a price of

share reach ?

1. The price which an individual thinks it deserves2. The average price of all the investors in the market thinks it deserves .

Which among 1 and 2 ?

The actual answer is not among 1 and 2 , to read further read an excellent article here :http://en.wikipedia.org/wiki/Keynesian_beauty_contest

Other article on what happens in a crowd can be read here :http://en.wikipedia.org/wiki/Crowd_psychology

These 2 articles must give some insight about how the Physcology on which markets work .

Note : Please subscribe to email updates on the right hand side to get future updates in your

emails .

Continue Reading


CRR and Repo Rate, how they Help !!

Today we will see what is CRR rate and Repo rate and how they help in combating Inflation andother monitory issues of Economy

You might know what is CRR or REPO RATE , but may not know what is there significance andhow they Help . Read whole article to understand .

Dear Readers : Please subscribe to email updates (on the right hand side) to get the article

updates by mails , this would help you to know when articles are published next time .

What is CRR Rate ?

CRR is simple , Cash Reserve Ratio ! . It is the the ratio of deposits which banks have to keep withRBI . When you deposit Rs 100 to your bank , bank gets Rs 100 and now can use this money tolend others , but they have to put some part of it with RBI , if CRR is 8% , they will have to deposit8 with RBI and they are left with Rs 92 .

So when CRR is decreased , Banks are left with more money to lend and when its increased theyare left with less , even though 1% decrease in CRR leaves bank with 93 instead of 92 , this Rs 1 isbig enough thing .

What is Repo Rate ?

When you take loan from some bank you pay interest for that , in the same way , these banks alsotake short term loans from RBI , and the interest RBI charges from them is called Repo rate . So ifrepo rate is 9% , and some bank takes loan of Rs 100 from RBI , they will pay interest at the rate of9% .

How is Repo Rate linked to the interest we pay for loans from Bank ?

Simple , Banks need to charge more interest than they are paying , so if repo rate is 8% , they willcharge more than 8% for loans which they give , If Repo rate comes down , banks may alsoconsider the interest rate they charge us .

Thats the reason why with this latest Repo rate cut , people are talking about home loans ratescoming down , so what will happen is that Bank need to pay less interest for the loan they take fromRBI , now because they are paying less , they may think of charging us less on the interest for theloans which we have taken from them .

What is Money Creation ?

How do money gets created ? When A gives 100 to B , Rs 100 is created for B , then when he givesthis to C , 100 is again created for C , this way money creation happens for different people fromthat same 100 .

How does CRR help ?

Suppose CRR is 8% you had 100 , which you deposit to bank , now bank will Deposit 8 to RBI andlend this 92 to some one , This 92 will be another money which is created for someone , now this 92

will exchange hands and then come back to bank somehow , out of this 92 again bank will deposit7.36 to RBI and then lend the rest of it to someone ... and it goes on like this .

The money creation from this 100 is :

100 + 92 + 84.64 ... (100 + 100*.92 + 100*.92*.92 + 100 *.92 * .92 * .92 ...)= 100 *( 1+ .92^1 + .92^2 + .92^3 ...)= 100 * (1/(1-.92)) (because 1 + x + x^2 + x^3 ... infinite times = 1/(1-x) for x<1) 08 ="1250"class="blsp-spelling-error" id="SPELLING_ERROR_19">CRR(C) = M/C

It means that this 100 actually generates 1250 in the economy indirectly. What will happen if CRRis increased by 1% , from 8% to 9% . though it may looks like that this is a small change and itwould affect a lot . lets see what happens now

How much money will 100 create now ?

Ans = 100/.09 = 1111 (approx)

So the same money is now generating 1111 instead of 1250 , that's 139 less or 11.12% less moneyin the market .

How does Repo Rate and CRR help to ease Inflation ?

Repo Rate : When repo rate is increased , the banks can have to pay higher interest to govt andthey also charge higher interest from common public which gets discouraged to take more creditfrom banks , because of which there is less supply of money in system and there is less Liquidity ?

CRR : Its easy , if CRR is increased , banks have to deposit more money in with the bank and itresults in less money creation in economy , and hence people have less money to buy things andthey will think twice before paying higher price for something .

So in short Repo Rate and CRR are two tools which RBI uses to control the liquidity in country andas Inflation is linked to liquidity , it can be controlled to a great extent .

Some other articles

What are the 5 most important things for your Portfolio : 5 Elements

What are the most important characteristics for your portfolio : Pillars or success

Continue Reading


Wednesday, October 29

Read this chat conversation with one of my old classmate in Graduation .

Manish : So where are you going to invest you money this year ?XYZ : May be PPF or Bank FD Manish : But do you think they would give you good returns ? also they would be locked for a longtime , dont you need that money in near future ? XYZ : Not exactly! , actually i can leave that money invested for more than 5 yrs , or may be 7-8

yrs too .. XYZ : also , But i would like to invest some money in mutual funds ... around 20k , May be i needsome money to send to my brother for his MBA coaching .... Manish : hmm.. But i think you should do exactly reverse . Invest this 20k in FD and Rest money inMutual funds + PPF or only mutual funds . XYZ : No no , i cant !! , i have already lost 50% in mutual funds this time , i cant take risk now , iam fine with less return but a secure one ... Manish : hmm... i told you dont put all money in lump sum . you never heard !! . XYZ : I invested because i trusted you , I thought you know more than me , but it fell so much ...you gave wrong advice at wrong time. Manish : Dont you think it was your desire for high returns which made this happen ? Equity arerisky ? i told you this too !! . XYZ : Whatever ... Manish : ok .. np ... Consider what i said ... goodnigfht ... :)XYZ : night

What is the problem of these people ?

First they need high returns , then they cant wait for long term to get that kind of return . They justhear that equity are risky but don't believe it ,they will make you feel that you are responsible forthe crash . They just don't take responsibility for what they did !!

What I actually told her ?

I told her that its ok to invest at these high levels but don't invest in Tax saving mutual funds as theywill be locked for 3 years, also invest less and that too through SIP (What is SIP) , so that it can eatup the volatility and insure less losses if things go wrong .

But the only things on her mind was:

- It will save her tax- Will give superb returns like it did during 2002-2007 (these are the people who dont read "Equityinvestments are risky and passed performance is not guarantee for future performance")- If she does SIP and markets goes up and up , she will be buying less units.

This is a classic example of "Overestimating Returns and Underestimating Risk"

How should you do your tax planning for the year ?

First thing , if you have not done your tax savings yet, its a bad thing . It should be done at the startof the year itself , at least planned .

If you need money for short term goal , don't invest in Shares or mutual funds !! Put it in someassured investment instruments like FD.

"Return of investment" is more important than "Returns from investments" .

If you have money which you can invest for long term , invest in Shares or Mutual funds (but onlyfor long term). As per your risk taking capability choose combination of Debt and Equity and investfor the long term ...

Why Equity ?

Do you know that most of the stocks have beaten down so much that they have come down belowthan the price they deserve , There value has exceeded there price (Read about Value Vs Price) .

Unitech : One of the largest and most respected Real Estate companies has fallen down to levelswhich are unimaginable !! from 532 to 40-50 .

Tata Motors : Nano will be manufactured in some months , every thing looks so good , but peoplejust sold it because of Singur tension (It was fine to sell it , but now its oversold) .

there are countless examples like this in current market . Things will go fine , but with patience . Continue Reading


Saturday, October 25

5 Elements

This article will talk about 5 things every portfolio must have and we will seethat it should be good for almost every type of investor . We will try to judge itover the important parameters discussed in my one of the earlier Article : Pillarsof Success

Read my best Articles

The Five most important and must have things each and every portfolio must have are :

1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through TermInsurance. This must be taken at an early stage of life for the longest term possible.

For India :

- Aegon Religare Life Insurance - SBI Life Insurance - Max New York Life Insurance- LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

Read an excellent article on Term Insurance and its Importance Read an article on how to calculate your Insurance Requirement

2. Health Insurance

This is extremely important now a days, because of rising health-care expenses. A Family must becovered with a Family Floater plan for a good amount (Rs 5 lacs/$10,000) depending on yourbudget .

Read in detail about Health Insurance

3. PPF

Each and every portfolio much have debt exposure and PPF (for India) is an excellent investmentproduct for anyone, backed by government , its 100% safe and one of the most efficient and taxefficient products available , with post-tax returns of 8% , its a must have in each portfolio .

Click here to Read more about PPF and EPF

4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the routeand for systematic and disciplined investing , SIP is the best way to channelize your money .Considering the undebatable growth for Indian economy , no can afford to miss Equities for longterm investments.

Read All about SIP How to create Long term Wealth

5. Contingent Fund (Cash + Liquid Funds)

Each and every portfolio must have good amount of cash and liquidity to meet unforeseen andemergency expenses. Other wise you will have to liquidate and break you investment productswhich may attract penalites and may not give you enough cash at the time of requirement which cancreate problem .

Better to have money equivalent to 3-4 months of expenses in contingent fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustivelist . Depending on your profile and requirements you should have other products as well. but iwould say this will solve 90% of the problem . Let looks how a portfolio consisting of this 5 thingspasses on 4 parameters called Pillars of Success ?

1. Capital Appreciation : ****

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPFwould provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity : *****

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management : *****

Term Insurance and Health Insurance will take good care . SIP will take care of the marketvolatility. some other techniques like Hedging using Derivatives and being well informed willmanage extra level of risk .

4. Goal Oriented : *****

Each and every product is for a specific and important goal , as described above .

For Non-Indian Readers

Hi all , the article is specifically with Indian context , but article is helpful for each of you , pleasefind the similar products in your country .

Conclusion

Each and every portfolio can be different and should match the requirement of the investor , Butthese 5 things are such that it can be for any kind of investor . Just like we have master key for anykind of lock , we have these products for any kind of investor .

Read my best Articles

Continue Reading


Friday, October 24

Is this a Bear market ? i asked to myself and realised its not !!!

Bear market is small remark for this market . Bear market is not so dangerous , the kind of volatilityor brutality this market is showing , it should be called as some thing like "Anaconda market" or"Dinosour Market" ...

There was a time when stocks were up or down by 20% ,30% , 50% in a year . Today Unitech wentdown by 50% in 1 trading day . Now bear market is a small thing to handle thsi kind of fall . this iscertainely a deadlier market situation . Some of the falls which are worth noting are :

from Dec -> Oct End (24th)

UNITECH : 522 -> 29

IFCI : 113 -> 16

JAIPRAKASH ASSOCIATES : 500- > 58

TATA STEEL : 925 -> 175

DLF : 1176 -> 200

I am sure there more stocks to note , but i choose these .

What is the point ?

Just to tell people that this bear market is far different than earlier bear markets . Analysts all overthe world are saying this is a kind of market they have never seen . read this article

This is a great time to make money out of options trading , at least straddling should give safereturns in these high volatility time . Read what are options ?

Disclaimer : I have myself not made any absolute profits till now with options trading

Is this for Indian Investors ?

No , it is true for anyone across world .. things are same for every country (US , Europe ,India orany other) .

Tips for Disaster

1. If a stock is in limelight and rises a lot and keep rising in front of your eyes , jump into it

and buy them .

2. If you have small losses , try to be emotional and never accept that your decision was wrong

.

3. Sell as soon as you start making profits and keep the stock with you which start loosing.

4. Treat a stock like your relative , be emotional with it .

5. Don't see other factors like Economic , political and global situation , say to yourself that

they don't matter.

6. Try to beat the market and think yourself as supreme.

7. Put 100% of your money in trade at a time .

8. Put tight Stop losses when markets are volatile .

This article teaches you how to loose your money in stock markets.

Disclaimer : There is no Guarantee that your will loose money using this steps . Take these asrecommendation only .

Continue Reading


Saturday, October 18

Features of an excellent portfolio

What makes an Health Portfolio ? . There are some good traits of portfoliowhich makes it better than others . A good and strong portfolio has some strongelements or parameters which it must meet . These are the Pillars for a strongPortfolio or Investments.

Important Elements are :

1. Capital Appreciation2. Liquidity3. Risk Management 4. Goal Oriented

Lets take each of these points one by one :

Capital Appreciation

This is one of the biggest reason to invest. Isn't it very obvious? Yes , it is . But the main point is notjust its growth in numbers but its real worth . We are talking about Post-tax and post inflationreturns .

The real return of Plain Fixed Deposits in these high inflation days are negligible when you factorout Inflation and tax (Click Here to Read WHY) . The best investment must be robust and goodenough to provide appreciation in real worth over long period of time . Real Estate and Equity(Long term) can generate good returns .

Read a good article on Building Wealth , Click Here

Liquidity

Another important aspect of a good portfolio is that its provide enough liquidity , so that in case ofneed , you can get the money .

What is Liquidity ? Liquidity is how fast and easily asset can be sold and you can get cash . Forexample Mutual funds and Shares are highly Liquid , If you have them and want to sell, you can getthe money soon . Where as Real estate is not a Liquid asset . So if you need urgent cash , you mightnot find right price and or buyer.

Every portfolio must have some element of Liquidity, as per the requirement of the investor.

Risk Management

Every portfolio or investment must be to some level insured or have element of risk management

What do we mean by this? A good investor is one who sees beyond what an average investor cantsee. Average investors concentrate very well on Profits , How good an investment can be , Highreturns etc. An exceptional investor goes beyond that and takes care of Worst case Scenarios andsituations which may cause damage. He is the real investor .

Some of the steps to be taken are :

- Adequate Insurance to be taken .- Proper monitoring of performance of investment.- Getting out early in a bad investment and accepting that you made a wrong decisions.- keep your self updated with news ,laws , things which can affect you investments .

Risk management is not buying some product for managing risk but being aware of things andtaking right and logical decisions.

Read how to protect your Shares and Mutual Funds , Click Here

Goal Oriented

"A good investment is one which has a purpose"

Each and every investment should be done because of a strong reason . I see people who takeInsurance policies to save tax at the last rush hour of the year !!! . Better loose the tax benefit anddon't take that policy . That kind of investment is nothing more than a waste or burden. On the topof it these people don't even need insurance !!!

When someone asks you the reason for making a investment , you should know why you did it ?

Some of the bad or idiotic reasons for doing investments are :

- I can save tax by that- My friend did it and recommended me- Everyone is doing it .. why shouldn't I ?

Every time you take a decision ask yourself some questions like :

- Do i really need it at this point of time ?- Can i afford it ?- Do i understand it well ? Can i protect myself if people make me fool ?- What is the purpose or goal of this investment ?

If you get satisfactory answers go for it else take an expert advice.

Sample Portfolio Analysis.

Sample Portfolio 1

Robert is a married person earning 40,000 per month. He is the sole Earner of the family and andhas 2 kids . He is not a risk taker and his portfolio looks like

- 50,000 invested in NSC (opened before 3 years)- An endowment policy with 10 lacs cover and 40,000 premium for 30 yrs , with maturity benefits.- 1,40,000 in a Tax saving mutual funds (investment 70k for 2 years for tax saving)- Home (Rs 30,00,000)- Cash : 20,000- Car : worth 5,00,000- Jewelery worth 80,000

Lets rate his portfolio on all the parameters on the scale of 5 stars

Capital Appreciation : ** (A small portion in Equity , andthat too for a wrong reason of just tax saving , Savingthrough Endowment policy is another wrong decision , thereturns are too less )

Liquidity : * (None of the assets are Liquid and Cashavailable is not enough to meet emergency requirement)

Risk Management : * (No Risk management , What if hedies after 10 days , What if he meets an accident , What ifsuddenly he requires 1,00,000 , what if he looses his Job)

Goal Oriented : * (The reasons for investment in most of the things looks like they are for Taxsaving , or some one suggested )

Sample Portfolio 2

Ajay is married and has 2 kids and parents who are all dependent on him , He earns 40,000 permonth .

- Long term investments in Tax saving Mutual Funds (Rs 4,000 per month) - Term Insurance of Rs 80,00,000 (80 Lacs) - Health Insurance of each member up to 3,00,000 - 4,00,000 (Family Floater Policy)- Yearly Contribution to PPF (Rs 50,000)- Invested 1,00,000 in Liquid Funds- Home loan taken by him and his Wife Jointly (Along with Home Loan Insurance)- 30,000 invested in Gold ETF and some good shares.- Rs 25,000 Cash

Lets rate his portfolio on all the parameters on the scale of 5 stars

Capital Appreciation : **** (Appropriate investment in Equity with long term view , and somemoney in Debt)

Liquidity : ***** (Has good amount of money in Liquid funds , Cash and Gold ETF , which havegood liquidity and can provide him Money quickly in case of requirement)

Risk Management : **** (In case of any type of Eventuality, He is properly covered. He isprotected well against Death , Health Issues , Home related issue , Emergency issues)

Goal Oriented : ***** (Most of the investments have strong and valid reasons . Like TermInsurance is required for Financial Cover , Mutual funds investment was for Long term WealthCreation , PPF investment for Wealth Creation with Debt Route and safe investment , Joint HomeLoan with wife for Tax benefits , Health Cover for Tax benefits and cover against Health Issues ,Gold Investment in ETF because of Diversification and Liquidity , Cash for instant requirement ,Liquid funds investment for Liquidity along with some returns)

Note : Both the portfolio's are created just for the illustration .

Summary

Each and every person portfolio should be strong on all the areas , it should pass all the criteria tosome extent . A portfolio should pass all the parameters for different requirements . If you have aportfolio ask yourself all these questions :

- Is it good enough to provide stable and good returns over long term . Is capital appreciationhappening in Value or just numbers are growing , but post-tax and post-inflation returns arenegligible .

- If i require instant money within 2 hrs , 2 days or 5 days , Is my portfolio smart enough to provideme .

- Is my portfolio good enough to provide protection to me and my family against calamities or anyunexpected events . Do i review my Portfolio in regular basis to cut out the losers .

- Is my portfolio a result of my Needs and requirements or Greed , Ignorance and Hearsay andemotional Buying ? If that's the case , take action !!!

Some I would be happy to read your comments !!!

Continue Reading


Sub prime crisis

Who is the culprit of this Mess ?

Most of the people have lost there years of savings and investments in this crash in stock markets ,One of the biggest reasons for this financial crisis is the Sub Prime Crisis in US .

What is it ?

A detailed article worth sharing is : http://www.shyamscolumn.com/2008/10/cost-of-financial-ingenuity700-billion.html

Another Link : http://www.slideshare.net/guesta9d12e/subprime-primer-277484/ (see this in fullscreen) .

Continue Reading


Thursday, October 16

A reply to one mail

This post is most probably the one on which i didnt worked hard . This is just an email reply

from my side to one of my friend who queried me regarding his Endowment Policy package

which an agent has created for him .

The policy looks like this ... 15 small polices of 1,00,000 each which will mature one by one

every year after 27 years and will act as yearly pension in his old age

His mail :

>>>

On Wed, Oct 15, 2008 at 9:37 AM, ajay patel wrote:

15 policies of Rs. 1 Lakh each, starting from sept 2007, first policy matures in 2034 and othersfollow every year from there on. Cover of 15 Lakh is for life time. There is an extra Rs 500,000 accidental insurance along with it tillthe age of 70(2053) (if the world exists till that time).Annual premium of Rs. 42,000 till 2034, a total amount of 3,400,000 will be received from maturityof these policies.

Say after ten years, I see myself earning around 2.5-3 lacs per month. with one child (if i getmarried :))

My Reply :

OK

now lets see some of the facts for you to ponder .

Starting from 2007 you are paying 42,000 each year till 2034 (for 27 years) . You will receivemoney starting from 2034 - till 2049 (15 years , each policy matures) .

Points to note :

- You are paying 42,000 and then its locked for 27 years- You are getting maturity value of each policy per year , just like a annual income(around 2.25Lacs/year ie : 34/15 , which is not taxable (you keep all the money). - You are getting Tax exemptions under sec 80C for this.

I think these are the points you have to agree , because they are not opinion , they are facts .

Some of the flaw or issues with this plan are following , which you never considered at the time oftaking this .

- The premium you are paying each year equals to your current monthly salary , also you said thatyou see your self earning 2.5-3.0 lacs (6 times , your current) per year just after 10 years from now .i am not sure what kind of figures will it be after 27 years . At that time , the money which you getfrom the policy should not last even 2 months . Considering your expenses currently at 25,000 permonth (considering you are married and have children) . the same expenses will rise to 1.2 lacsassuming 6% inflation (also remember that the expenses will keep rising each year ie : 1.66 , 1.77 ,1.9 ... 4.2 lacs , whereas the money you get each year will be around constant 2.25 lacs only , thismay look unimaginable , but ask your father to grandfather about the monthly expenditure of familybefore 25 years , i am sure it should be 5% of current, people always forget inflation).

- The insurance provided by this policy is so less that you are highly under insured . What can yourloved one do with 15 lacs today ? Will it be sufficient to replace you ? If you consider time after 10years (when you think you will earn 2.5-3 lacs / month , will the insurance money be sufficient tocover the dependents ? When you will be of age 60+ , the insurance amount is able to meet notmore than 9-10 months expenses .

Having this policy is as good as not having it . The issue is not that Can there be policy better thanthis? ,The main problem is what kind of value is this giving to you . Is the benefit provided by thispolicy after 27-42 years is much less than than the pain you are getting by paying hefty premiumnow .

With the same money (42,000) , let me see what can i plan for you with same money .

Lets first take a most conservative way (which is undebatabely safe).

You take an insurance of 50,00,000 (50 lacs) for 30 years and pay a premium of just 10.5k per year .

You are left with 32k per year which you put in

1. PPF account

In PPF the money 32k @8% will become 2,55,000 in 27 years and you will get this money everyyear (total 38 lacs till end) , till age 66 ( In Endowment policy it was 2.25 lacs)

2. In MF considering 12% return

32k invested will become 6.83 lacs in 27 years , so you invest every year 32k and get 6.83 lacs justafter 27 years of payment . so it can provide a regular income of 6.23 lacs after 27 years forcontinuous 15 years till you are 66 .

3. In Mutual funds considering 15% return

The amount would be 13.93 Lacs , every payment of 32,000 will become 13.93 lacs.

Question: How realistic are these mutual funds returns ? Answer : Over the history no asset has returned more than equity over long term . India Equitymarkets have returned 17.5% CAGR annually (since inception) . 15% is a very realistic returnconsidering the money is invested for long term like 15+ years . Equity investments risk areinversely proportional to tenure of investments .

After 30 years you will not even need Insurance , because this money will be available every year .and i am assuming that you will earn enough till than that you don't need insurance .

Some other things to ponder are :

Investing in your Endowment policy does not give you any flexibility of stopping or missing yourpremiums . In case of PPF or mutual Funds , you can be very flexible and stop for 2 years if youwant money to be utilized some where else .

The plan which i told you has everything which you had in that endowment policy , even more thanthat . its like Buying Nokia 2600 @20,000 when you have iPhone available at same price , you justdidn't knew where you can get it :) . Ok , i know that was pathetic analogy , but i need someplatform to show that i can think .

So better stop those policy and take the loss of premiums which you paid , anyways you are notgoing to be affected now , and life will be normal as it was .

I have done nothing extraordinary here , but some calculation based on some common sense , whichis not common . disagreements are welcome .

- manish- Show quoted text -

--Manish ChauhanBangalore

http://finance-and-investing.blogspot.com/

Lets understand some basic things here . No matter what people tell you or design things for you ,Always calculate and apply the simple formula's which will give you certain numbers, which can beused as benchmarks by you .

Some must know formula's : http://finance-and-investing.blogspot.com/2008/09/3-most-important-formulas-you-should.html

Please post your comments . Continue Reading


Monday, October 13

An ideal portfolio for Someone in this market

What should be the ideal portfolio for someone in this market for long term ?

As far as i think , A good portfolio now will contain stocks which are beaten down because of panicselling , but still they are fundamentally sound .

My Recommended portfolio would be:

For Safe Investor (assuming time horizon of 3+ years)

- Infosys- Tata Motors- ICICI Bank- DLF- Reliance Communications

For Risky Investor (assuming time horizon of 5+ years)

- ICICI Bank- Jaiprakash Associates- Chambal Fertilizers- DLF- Praj Industries

People who want to trust someone more experienced and more knowledgeable should read

Sudarshan Sukhani recommendation at http://tt-wealth.blogspot.com/2008/10/portfolio-for-safety.html

Sudarshan Sukhani is a well know and respected Technical Analyst of India and often talks on

CNBC .

To get a better view on markets read my earlier article : http://finance-and-investing.blogspot.com/2008/10/current-situation-of-stock-market.html

- Manish Continue Reading


Thursday, October 9

Term of the Day Archives

This page contains all the "Term of the Day" posted on this blog earliar .

1. Short Selling

Short Selling : Short Selling refers selling of shares without owning them . If you shortsell a stock , you first sell them at higher price and later you buy them (cover them)back at lower price .Lot of times you feel that markets will go down , at that time youshort sell a stock . People who deal in Derivatives can either Sell the Futures or BuyPUT options . Short Selling can offer tremendous returns in short frame , because bearmarkets are markets fall with much speed and momentum compared to rising market .Read more

2. Derivatives

Derivatives : Derivatives are contracts whose value depend on value of some otherthing. Examples are Futures and Options . Value of Stock is independent , But value ofFutures or Options depend on the movement of Stock . Derivatives are dangerousInstrument and not recommended for Starters . In India People are attracted towardsDerivatives because of its Return potential , but they underestimate its Risk potentialand its ability to paralyse investor or trader financially , Better to learn first and thenenter in Derivatives. Read more

3. P/E Ratio

P/E Ratio : P/E ratio is a reflection of the market's opinion of the earnings capacity andfuture business prospects of a company. Companies which enjoy the confidence ofinvestors and have a higher market standing usually command high P/E ratios. Thisratio indicates the extent to which earnings of a share are covered by its price. If P/E is5, it means that the price of a share is 5 times its earnings. In other words, the company'sEPS remaining constant, it will take you approximately five years through dividendsplus capital appreciation to recover the cost of buying the share. The lower the P/E,lesser the time it will take for you to recover your investment. Its one of the mostimortant Ratios you can look at .

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

4. ETF

ETF : ETFs are a basket of securities which tracks an underlying and are traded on arecognised stock exchange. Examples are Nifty Beas (this tracks Nifty) and Gold ETF's(this tracks Gold prices) . Read More

Soon there will be Silver ETF's in India .

5. FMP

FMP : FMP's are close ended mutual funds , similar to FD's but much more tax efficientand with marginally superior returns , but they have there own risks . The returnsoffered by FMP's is indicative and not guaranteed. They come from 1 month maturity to1 yrs maturity . In year 2008 , FMP have done very badly because of defaults . Readhere for more

6. Technical Analysis

Technical Analysis : A method of evaluating securities by analyzing statistics generatedby market activity, such as past prices and volume. Technical analysts do not attempt tomeasure a security's intrinsic value, but instead use charts and other tools to identifypatterns that can suggest future activity. It is generally used by people who want to takeadvantage of short term price movement. Technical Analysis can make you a better thanaverage Investor

7 . Demat Account

Demat Account : Demat account is an account where shares are stored electronically .Just like Bank account deposits money , Demat account deposits your shares . Now adays , you cant hold shares in physical form , every share has to be in physical form . Aperson can only hold a single Demat account (trading account is different) .

8. Trading Account

Trading Account : Trading Account is an account through which you can buy and sellthings on stock market . Dont confuse it with Demat account , Demat account is just aplace of storage . Trading account is a platform which provides you a service of buyingand selling things . You can have multiple trading accounts , which will all be connectedwith your single demat account .

9. Futures

Futures : Futures are the contract which gives you a right to buy or sell a specifiedcommodity of standardized quality at a certain date in the future, at a market determinedprice . For Example, If you buy Reliance Futures for June series, you will get a right tobuy specific number of Reliance shares at a fixed price on last Thursday of June . Thefuture date is called the delivery date or final settlement date . Read more

10. NAV

NAV : NAV is a price of a mutual fund unit . You can see it just like a share price ofcompany . Mutual funds invest the money in market and its tracked by NAV , ifinvestments goes up , NAV goes up and vice versa . Generally NAV value starts with Rs10 .

There is a myth among investors that low NAV mutual funds are better than high NAVmutual funds, which is totally wrong .

11.

Continue Reading


Price Vs Value

A Rose can be of more value than a Dress to your Wife orGirlfriend on Valentines Day . Even though that Rose was very lessin Price compared to a Dress.

Today we will discuss things about investment products from adifferent perspective . Value and Price

Price : Price is the amount of money needed to purchase something .Value : Value is the worth or Importance of something .

An Example

We pay Rs 8/Kg (20 cents/Kg) for Salt as part of our Groceries , Will we stop using it if its pricerises to Rs 100/Kg or even Rs 400/Kg . May be not !!! Why ? Because the Value of Salt even thenwill be Very high , compared to the price we pay for it . Considering that , its a very cheap product .

As a personal Example , I recently bought a second hand mobile (Nokia 6610) to keep at my homeas a land line just for Rs 800 (worth 8,500 at time of buying, excellent condition) . The price i paidfor it was much much less than the value it would provide to me. So i consider it as one of the bestinvestments made till date.

By cheap i mean its Value/Price is very high .

Cheapness (P) = Value provided by P / Price we pay for P .

The same way there can be things for which we pay high amount , they don't have high value for us.

Please understand that it depends on individual where something is of great value or not . Forexample for me , an expensive Mobile set with 134 different things costing Rs 10,000 is low invalue and high in price . I dont buy things like that , but a digital Camera worth 12K a value buy forme (because of my interest in Photography)

So, in short we can say "Price is What we pay actually , and Value is what are ready to Pay"

We understand this in our daily Life, but we forget this simple rule when it comes to money andinvesting . Most of the time we invest in things which we should not because of this basic rule , butwe are carried away by emotions or simple stupidity .

Let us now see Some of the products which are really High Value , Low price

Term Insurance : Term Insurance is one of the best example for this .

"How much are you ready to pay as yearly premium for Rs 50,00,000 Cover for 25 yrs tenure?" .

This is a question i ask a lot of my friends in there 20-30's . And i am amazed to see that even with amiser mind they tell me at least twice the amount what it really costs . Everyone said 2k/month ormin Rs 20,000/year . The actual cost is not more than 13-14k , in fact the best price is 10,112 for 30yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).

This clearly shows that it cost way less than the expectations of people and what people are ready to

pay for it . The value offered by Term Insurance is more than what it costs.

Endowment Policies : I am not sure if its my hatred for Endowment Policies or they really deservemy criticism every time, Or may be there are both the reasons. We pay so heavy price forEndowment polices and the value provided by them is almost nothing . Its a product designed forWealth Creation , but wait ... not for investor but for the Insurance company . (Click here to readmore on Badness of Endowment Policies)

The other products i would rate in category of Cheap and Expensive are :

Cheap

- Term Insurance- SIP investments in Equity Mutual Funds - PPF - Good Stocks in low markets (Like current markets , Buy Reliance , Infosys and JaiprakashAssociates for Rs 1,00,000 each today and your retirement planning is probably Done !!! , if youare around 25 and retiring at 60) - A interest free loan given to a close or a very good friend. (even ifyou don't get any thing interest , you get some emotional satisfaction or valuable relationship whichis more important) .

Expensive

- Endowment Policies- Bank FD (at the time of High inflation)- NSC- Most of the stocks in High Markets ( not true for all stocks but most of them) - A high interest loangiven to someone whom you don't trust much . (Even if you get good interest , there is risk ofloosing money)

Every time you invest your money its important to understand the price of it and value of it . If youfind that its cost is less than what you are ready to pay , consider it cheap and go for it and not in theother case . Price and Value depends on Situation , time , age and other factor , dont forget it .

Stock Market Investments

Most of the successful investors become one because they invest in stocks which are trading at pricelower than they deserve, which market eventually finds out later . Currently In this marketsReliance is trading at 1400 (Oct 11 , 2008) , the it was trading at 2300 before a month , and has lostalmost 40-50% in a month . Considering it is going to start its OIL exploration and other things, itsa good stock to own and at an excellent price . Its price is less and its value . Which makes it a goodinvestment regardless of what is going to happen next month or next quarter . Sooner or Later it willturn out to be a good investment and reward its investors . Same is with Jaiprakash Associates ,ICICI Bank , DLF , Ranbaxy and other similar blue chip stocks .

Summary

When you analyse some product , stock , mutual fund , Home (Real estate) or anything forinvestment matter or even for general shopping , always consider value and price for it .

Disclaimer : Any stock discussed on this article is not a recommendation . Please analyse it your

self and then invest. It can also result in losses. Continue Reading


Wednesday, October 8

Current Situation of Stock Market

Bloodbath in Stock Market

As i write this article on Oct 9 , 2008 , Sensex is below 11000 (10850) ... Most of the Mutual fundinvestments returns (since peak of Dec 2007 - Jan 2008) must be down by 40-50% (lump suminvestment) and 25-35% (if SIP) . Looks likeSensex is heading towards it original value of 6000 or 7000 which willbring losses to 60+%.

Though most of the investors know in theory what to do in these situation ,most of them will stillnot buy , Now the physiological investing problem happens , For long term investors its the besttime to invest, but no one will take the plungeafter burning there hands so badly .

Do Indian Markets have many reasons to Decline further ?

Remember , the global markets are looking bad , not Indian . Indian markets are just following USand European markets because they are the "Big Boss" .

The US markets and European markets are the culprit for the global slowdown. The sub-primecrisis related issues will have deep impact on US and global investment banking firms . India orother Asian countries are just bearing the pain along with global stock markets.

Yes we are in Bear markets , in fact every country stock markets are , but the bearishness of marketsare exaggerated because oh high oil and US sub-prime crisis and subsequent Bank Failures .

India is not short of its local good news like

- Nuclear deal- Stable growth of more than 8% p.a- Inflation now coming down from its high (and as Oil comes down , the inflation will come downfurther )- Strong Corporate Earning and Many companies on the verge of setting global standards (Reliancestarting its oil production soon , etc etc)

Once things are in control (should be soon , but no one can be sure),another bull market should be more exciting than the last one . Priceswill move like rockets and people who will benefit most will be one who will doinvestments in these down markets .

Is it the right time for investments ?

This questions was answered by many pundits when Sensex was around 15,000-16,000 . Some saidYES , some said NO . People who did investments must be thinking why they did it and people whodid not must be happy for not investing that time . The scenario could have been exactly opposite if

markets would have gone up .

So what do you do now ?

The best idea is to invest a part of the money now , If the markets go down from here , You stillhave another part of your money in hand which you can invest later and again invest more if it goesdown further. It will ensure that your average cost is not very high , and a decent run in markets willresult in profits . If markets go up after you buy some mutual funds or shares , you at least are inprofit and not LOSS . which is a privilege now a days in Market . Once there is a good confidencethat markets are stable and wont fall further , you can then do rest of your investments

Remember , Don't try to make profits in stock markets , just try to avoid losses and make sure thatyou preserve your capital. if you can do that much , profits will be at your feet .

As Warren Buffet said "We need to take very less correct decisions in Life , as far as we make surethat we don't take many wrong ones"

Continue Reading


Why Endowment policy must be avoided

Today we are going to see why Endowment policies should be avoided in any portfolio and howother things are much better than Endowment policy with the same cost .

The assumption is that you understand what are Endowment policies and What are Term InsurancePlans , if you dont know click here to read about it

A look at the Endowment Policy

An Endowment policy would look like this for a 25 yrs old

Tenure : 30 yrsYearly premium : 31,000 Sum Assured : 10 LacsMaturity amount : 23.1 Lacs lacs ( this you get when you survive full tenure , It includesthe sum insured + Bonus accrued)

This data is from website of an Insurance company .

Q . How much money to be paid every year? How much will the person get in case of Death orSurvival ? What are the Risk factors ?

Ans :

Tenure : 30 yrsMoney outgo : Yearly 31,000/yrMoney received In case of Death : 10,00,000Money received In case of Survival : 23,100,000Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)

What is the interest earned on this investment ? 31,000 per year for 30 years becomes

23,10,000 .

Annuity formula is :

Maturity value = Amount paid per year * [ {(1+r)^n - 1}/r ] * (1+r)Here n = 30 yearsand r = rate of interest earned

Putting all these values

23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)

The value of r which satisfies this equation is 5.4 . Which means that the interest earned by theinvestment in Endowment policy is mere 5.4% , which is truly pathetic by any standard in India atleast . There is no investment product known which is known to pay so badly .

The reason why people feel that endowment policy are so good is that they also get insurance cover( which is virtually useless because its so less that it does not even cover the financial dependents toeven a fraction of what they need in reality)

So can we mix Insurance + investments product which can be better than supremely better thanEndowment policies and still cost the same( or even less) .


Now let us see that by spending same amount (30,000 , 1,000- less than the endowment policy)every year for 30 yrs , can one achieve better than this .

1. For Safe Investor (Let us first see a almost 100% safe way to do this)

Term Insurance of 30 Lacs for 30 yrs : 6kInvestment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns , as its invested in govt backedPPF , which gives 8% post tax return)

Amount invested = 30,000 per year for 30 years (same as Endowment policy)Amount received on death : 30 Lacs + investments done in PPFAmount received without Death : 30 Lacs (investments)

2. For Aggressive Investor ( A person who can take more risk that the former one)

Term Insurance of 70 Lacs for 30 yrs : 14,157Investment of 17,843 ( 30000 - 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs

Amount received on death : 80 Lacs + investments done in ELSSAmount received without Death : 92 Lacs (investments)

Equity investments for long term are almost risk free.

So , we can see here than in any case term insurance + MF is supremely better than Endowmentpolicies .

Solution for People who have taken fresh policies

People who have already taken fresh policies and have not completed 3 yrs should just forget therepayments and stop there premium payments. The profits of switching from Endowment to "Term +

MF" will be far greater than the loss from leaving Endowment policies .

Solution for People who have completed more than 3 yrs

Either convert your policies to Paid-up or just surrender your polices and take the Surrender value(take your call on what you are comfortable with)

Solution for people near the Maturity

You have almost paid most of the installment , so better stick with it , but don't forget to insureyourself to a respectable cover through term insurance

Summary

Endowment policies according to me are totally incorrect and worst product i have ever seen(ULIPS are not far behind) . It is structured and presented in such a way that investors are attractedto it . Agents present them in such a fancy way and give judgements which make these policies looklike must have products.

Disclaimer : The exact figures can differ , this is just a demonstration of how Endowment policies can not be betterthan Term Insurance + MF combo . All the Insurance premium are for Aegon Religare Life Insurance and Mutual fundspayments are considered monthly (amount/12) .

All the view on this article are personal, some people may disagree with it which is totally acceptable .

Continue Reading


Monday, October 6

New hope for Indian Insurance Industry

Aegon Religare Life Insurance

This is a new Player in Indian Insurance Market . This company seems to have clear understandingabout the Insurance Market and what India needs exactly , there main focus is on Term Insuranceand that makes it respectable in my opinion , its not like other companies concentrating onEndowment and Money Back plans and tag them as Great Insurance products , which is nothing butSaving and investment products with a pinch of Insurance .

Website : http://www.aegonreligare.com (To understand what is Life insurance terms Click here )

About the Company

AEGON : Aegon is one of the largest life insurance and pension groups with market in over 20countries (Americas , Europe and Asia) with 40 million customers . It has more than 160 yrs ofexperience.

RELIGARE : Religare is one of India’s leading integrated financial services groups . They have1550 locations spread across over 460 cities and towns in India .

Products Offered by the Company

AEGON RELIGARE Life Insurance has excellent products as far as Term Insurance is concerned .They also have ULIP plans .

In Term Insurance they have the minimum rates for Term Insurance plans . They have 3 differentplans .

1. Level Term Plan (Premium Calculator) : In this cover remains same through out the Tenure.Calculator

Premium for amount Rs 50,00,000 (50 Lacs) for 30 years .

Male/Female (25 yrs) : 9,000 per yearMale/Female (30 yrs) : 12,150 per year

2. Increasing Term Plan (Premium Calculator) : Cover increases by 5% every year.


Male/Female (25 yrs) : 13,800 per yearMale/Female (30 yrs) : 19650 per year

3. Decreasing Term Plan (Premium Calculator) : Cover decreases by 5% per year (Tenure = 20years max)


Male/Female (25 yrs) : 7,100 per year Male/Female (30 yrs) : 7,900 per year

One can choose the plan as per there requirement . The best part is that there rates are very very low. This Term insurance is worth a consideration .

Click here to understand why you need Term Insurance and not Endowment or Money Back Plans .

Continue Reading


Sunday, October 5

Need Information on what you would like to read

Dear Readers

I have written a lot of articles on things which i know , understand and want to share and now i am

little confused about what to write ?

I would like to know what people would like to Read ? So i request you all to let me know what youwant to read . Send me your queries and may be i would like to come up with some article on thattopic .

This is a request not only for Indian Readers but from every reader, i can see that there are lot ofinternational readers from all across the globe .

Please send mail at [email protected] and ask questions on anything related to finance andinvesting in general . Also you can send me a topic on which you want to read something . I will trymy best and write something soon .

Just to give an idea one of the reader from USA has mailed me to write something on "Investment

opportunities for Non-indians inside India" . I would soon write something on that and post itsoon.

Another Reader has asked me to write on "Home Loan Repayments" .

I would be very happy to write on these topics and soon post something . Please mail me yourqueries or anything you would like to read (even though its very basic thing) . If you dont want tomail me you can leave a comment here and let me know what you want .

This is will help me serve my readers in a better way and will make this blog more interactive .

Thanks

Manish Chauhan Continue Reading


Monday, September 29

The amazing truth of partial Profit booking

This article is going to talk aboutimportance of partial profit booking. The scope of this articles are onlyrisky investments where we haverisk of loss . Its not related to Debtproducts where we are sure ofreturns . Partial profit booking isrelevant if you invest in Shares ,mutual funds or derivative products.

What is the main goal ofinvestments in Equity ?

When we ask this question, most ofthe people would get it correct,


Answer is Capital appreciation or fast growth of money . But most of the investors concentrate sohard on maximizing profits that they underestimate risks and that's the main reason for most of thelosses they make. The biggest goal while doing Equity investments has to be "Capital Preservation"and only then you must think about any profits . So the main concentration must be on "CapitalPreservation" . If you dont concentrate on capital preservation , it can erode because of continouslosses and then you will have to try for profits just to get back to level you started .

Suppose by taking a lot of risk you can either earn 60% or loose 60% . If you get profits , its great .But if you loose 60% , then you will have to earn 150% ,just to get back to your starting Capital .Whereas if you take a less risky route where you just earn 10% or 15% , your money will growslowly and steadily , it will soon increase due to compounding effect .

We are investors , we are not god , we cant predict markets move accurately . We can only avoidbad moves and take decisions which can help us minimize our risk and losses . We will soon seehow Partial booking of profits can is so important while doing investments .

What is partial booking of Profits ?

When we invest our money and if we get some profit and then we are not sure what can happennext, we book a part of it to minimize our risk . The main idea here is that if we gain some profits ,we should book some part of it to make sure that we already got that profit in hand and not just inmind.

For Example

Ajay invested 1,00,000 in shares , which grew by 20% in 6 months . Now he is not sure what canhappen , Markets are uncertain and now there might be 40% profit or 40% loss (just for example) .He has 3 options here

1. If he does not book partial profits

His investments grew to 1,20,000 and now he can get profit or loss of 40% . let us see the range ofhis return.

in case of 40% profit , he will get 1,20,000 * (1 +.4) = 1,92,000In case of 40% loss , he will get 1,20,000 * (1 - .4) = 72,000

Total investment : 1,00,000

Returns : In range of -28% to +92%

2. If he books partial profits

Here we assume that he books his 50% profits . His investments grew to 1,20,000 and books profitof 10,000 , he get backs 60,000 back and rest 60,000 is still invested . Let us now see the range

in case of 40% profit , he will get 60,000 * (1 +.4) = 96,000In case of 40% loss , he will get 60,000 * (1 - .4) = 36,000

As he has got back 60,000 back earliar , the actual range will be

if 40% profit : 1,56,000

if 40% loss : 96,000

Total investment : 1,00,000Returns : -4% to +56% .

So there is choice between -28% to +96% or -4% to 56% . The good idea will always be the secondoption . Because the second option is more close to giving positive returns . It saves us from risk . Itmake sure that even though less , we get positive returns .

To understand more on why avoiding bad decisions is better than making good ones , Click here

Let us see another example

Just before the NSG waiver meeting , Robert invested 35,000 in options , he was very sure thatmarkets would rise . Just after news came about NSG waiver, markets were suddenly up and Hewas in 12k profit overnight . This was a positive news for market and he wanted to remain invested. He was very sure that market would rise further for next few days and his money would grow to60-70k . People who are familiar to option trading will know that 30k can become 60k or 90k in asingle day.

Robert was so confident that he did not book partial profits .Next day there was Lehman BrothersCollapse and it was a great shock to world. From next day markets fell and his investments fell by90% in 2-3 days . His money grew from 35,000 to 47,000 and then fell to 8,000 in 3 days . Now hewas in 27,000 loss .

What if he would have booked partial profits ?

If he would have booked 50% profits . It means he invested 35k which grew to 47k and he takes out50% of his investments , He should have taken out 23k and left 24k invested . In that case even ifmarkets feel by 80% , His 24k would become 5k . Remember here , that he has already booked halfof his profits and his exposure has reduced by 50% , which will help him in minimizing losses.

Total investments = 35,000Final value = 23k (booked earliar) + 5k = 28,000

Loss : 7,000

Summary

Markets are uncertain and volatile . If we get profits anytime, make sure that they are partly booked, By doing that , you make sure that you have actually got some profit materialised and reducedyour exposure to investments after it has gone up . If your investments start falling again , you willsuffer some loss , but that loss can be compensated by the profits you have already booked . Bypartially booking profits you reduce you risk for huge losses , at the same time you also cut yourchances of making large profits, which is fine . concentrate on cutting and avoiding losses and riskand not making profits . Profits will automatically come once you know how to manage your risk .

Continue Reading


Wednesday, September 24

How to hedge your Portfolio using Derivatives

Risk Management of Portfolio

using Derivatives

This article is surely for you if youinvest in Equities (Direct shares orEquity Mutual funds) . Manypeople might have seen thereinvestments go down to anywherebetween 20-50% , if they investedin Indian Stock markets around Dec2007 or Jan 2008 , and they mightbe wondering if it will go moredown in value .

Just like we know take life Insurance to cover the risk of Life , Home insurance or car insurance tocover the risk if anything goes wrong , Can we also take Portfolio insurance ?

What does insuring the portfolio means ?

What does insurance means ? It means securing something from some event which can cause lossor damage . We ensure our Lives , our homes , our Car . What happens when nothing happens to ourlives , Home or Car . We pay a small price for it and that is a kind of fees , which we pay for thesecurity .

In the same way , we can also insure our portfolio , We can make sure that our loss is limited, Theloss is always limited. If you are one of those who invested in Equity mutual funds or Shares during2007 or Jan 2008 , And you are sitting on a loss of 30-60% , you will understand this very well .Any one who invested Rs 1,00,000 in stocks or mutual funds has loss of anything from 30,000 to60,000 (depending on his investments) . Just wonder if they could insure there portfolio and makesure that there loss can not go beyond a certain limit . That would be wonderful . We are going todiscuss this today .

How to insure your portfolio ?

There is no specific product or service for this , you have to manage it using Options (DerivativeProducts). ( Read it in Detail)

I assume that you now understand what are Options and how do they work , what are call and putoptions and what is expiry date , in case you have not read about it , please read it at above links (tryfirst link to get basic info).

If you have invested in Mutual Funds

Ajay has invested Rs 2,00,000 In Equity mutual funds in Aug 2008 , Nifty is around 4,200 . He hasinvested his money for 4 months and would like to withdraw his investments in Jan 2009 . He is asmart investor and knows that markets can crash and there is no limit to how much down it can go ,So he decides to minimize his risk . For this he has bought Nifty 4200 PA DEC-2008 trading at 200


, for which he spent Rs 10,000 (Rs 200 * 50 lot size.)

Now lets see 3 different cases and what happens to his portfolio

1. Markets boom and goes up to 5,000 : Nifty has gone up by 20%

I am assuming that his investments followed and his Rs 2,00,000 has grown to 2,50,000

Value of his Nifty PUTS : 0

Profit from investments : 50,000Loss in Puts : 10,000

Total Profit : 50,000 - 10,000 = Rs 40,000

2. Markets Crash by 25% and nifty goes down to 3,100 .

His investments follow and now its value is around 1,40,000 , but his PUTS will be valued at 1,100(4200-3100) . So its value at the end would be 1,100 * 50 = 55,000.

Loss in investments : 60,000Profit in PUTS = 45,000 (55,000 - 10,000 investment)

Loss = Rs 15,000

Here you can see that Out of his loss of 60,000 , 45,000 is covered from PUTS .

3. Nothing happens and markets are still at 4,200 .

His investments will be almost same , and his PUTS will expire with value 0 .

Profit from investments : 0Loss from Options : 10,000

Total loss : Rs 10,000

In all the 3 cases , we should note that in all the cases his Losses are minimized .

Let us also take an example of Shares .

Ajay bought 300 shares of Reliance @2,000 on 1st Jun 2008 . He wants to sell these shares aroundDec 2008 .

He senses that markets are uncertain , So he buys 4 lots of RELIANCE 2,000 PUTS DEC 2008@100 . one lot of Reliance options has 75 shares , that's the reason he buys 4 lots , so that he hastotal 300 shares control .

What does it mean ? It means that on Dec 2008 , he has the right to see 300 shares of reliance@2,000 and for this right he has paid Rs 100 for each shares .

The maximum loss for him is now Rs 100 per share .

Let us see the 3 cases .

1. Shares price has gone up to 2,500 .

Profit in shares = 500 * 300 = 1,50,000Loss in Puts = 100 * 300 = 30,000

Total profit : 1,20,000

2. Shares price remain same at 2,000

Profit in shares : 0Loss in Puts : 100 * 300 = Rs 30,000

Total Loss = 30,000

3. Shares price go down to 1,500

Loss in shares = 500 * 300 = 1,50,000Profit in Puts = 500 * 300 = 1,50,000 - (30,000 investments)

Total Loss = 30,000

Again , we can see that in any case his loss is capped by 30,000 (5% of his investments of 6,00,000)

So options can be used to hedge or security .

This is a good Youtube video to understand : http://www.youtube.com/watch?v=4z5QClUFcuk

Summary

So the main idea of options is to use them to minimize the losses . If there is loss in investments ,the puts will end up in profit and we will have very less loss or may be we can get some profits only. The same way , if people do short selling they can use calls to minimize there losses.

So if you have invested in Shares or mutual funds and want to minimize your losses , use options orFutures as Hedging tools .

Life Insurance : http://finance-and-investing.blogspot.com/2008/06/life-insurance-revisited-one-of-my-good.html

How to Create Wealth for Retirement : http://finance-and-investing.blogspot.com/2008/08/creating-weatlh-we-are-going-to-discuss.html

Continue Reading


Tuesday, September 16

What are Gold Mutual Funds

Gold Funds

What are the alternatives to invest in GOLD other thanphysical Gold and GOLD ETF ?

What are Gold Mutual Funds ?

Gold Funds are mutual funds which invests in stocks ofcompanies engaged in gold mining & production . Theydo not buy gold directly but invests in stocks ofcompanies engaged in gold mining and production worldover.

When gold prices rise, the profitability of goldcompanies tends to increase more thanproportionately, thereby providing long-term capitalappreciation as stocks of gold companies have the potential to outperform gold prices by asignificant margin over the long run.

Even they these are Gold funds , they can invest some part in Platinum and Silver.

According to the DSPML website, DSPML World Gold Fund has invested over 80 per cent in goldfollowed by platinum (9 per cent) and silver (5.10 per cent). As per the December 2007 portfolio,Australia based Newcrest Mining is the top holding of the fund accounting for 8.4 per cent of thefund's assets, followed by Barrick Gold (7.50 per cent), Kinross Gold (5.50 per cent) and Lihir Gold(5.20 per cent).

Why to invest in These Gold Funds?

Investors can benefit from the global demand for gold by investing in the precious metal and incompanies involved in its production. In times when Equity markets are uncertain , Gold can be agood hedge. After Equity markets crash of Jan 2008 , Gold Mutual funds were the best performersin any Mutual Funds category.

Also, this fund has an edge over GOLD ETF's (What are GOLD ETF's) as the portfolio ofgold equities is actively managed as against the passive management in Gold ETFs.

Taxation and Returns

From the taxation point of view, These fund will not enjoy the tax benefits that equity fundsare eligible for. Long term gains would be taxable at 10% and short term gains would betaxable as per slab rates applicable to the investor.

Most of the Gold mining companies will be outside India and hence these funds wouldeventually be invested in dollar denominated assets, any currency fluctuation woulddirectly affect your rupee return. For example, the US dollar has depreciated by over 8% inthe last 3-4 months against the rupee. Such appreciation of the rupee directly eats into adollar return and investors should be aware of the currency risk that they undertake when

they invest in this fund.

What are Gold Funds Available (In India)

- DSPML World Gold Fund (Click here to see Details)- AIG World Gold Fund (Click here to see Details)

Read Why to invest in GOLD and What is the Best wayRead How to Calculate your Life Insurance ? Read Creating Wealth for retirement

OR

Goto the Blog Directory where you can find all the topics category wise.

I would be happy to read your valued comments . thanks

Continue Reading


How to calculate Insurance Requirement

Today i will discuss about the calculation of InsuranceAmount one needs . Though there is nothing great in that ,but most of the people miss on this part and according tostudies , more than 80% of people in India are underinsured , which means the amount there nominees will getwill not be able to cover them against the financial crisis.

In case you have not read my previous articles on Lifeinsurance, please read them

How much should be the Insurance cover ?

you will hear that it must be 6-7 times of Gross yearlyincome which is good enough estimate. but it does notconsider other things like Debts or living style . It may betrue for you but not for other . Some people may havesimple lifestyle , whereas some other can have expensivelifestyle . So lets answer this question in another way .

This is pretty easy to answer , The Insurance amount much be enough to pay off

- All the debts- Should be able to provide monthly income which is good enough to cover family expenses - Any future needs for future .

Example :

Ajay is 30 yrs old and earns 40,000 per/month . He is married and has 2 kids . There monthlyexpenditure is 20,000 per month .

His debts and future expenses .(total : 47 lacs)

- home loan of 24 lacs (remaining)- Car loan of 3 lacs.- His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

- 5,00,000 in Fixed Deposits- 3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 ,considering inflation @5% , which will also increase every year.

His Insurance money should be able to pay for both of these .

We have to Answer that how much money will provide 20,000 per/month (post-tax) or 2,40,000 peryear.

Considering 15-20% tax , The family should get 3,00,000, so that after paying tax they are able toget 2,40,000 per year . So how much money will give them 3,00,000 per year .

Fixed Deposits pay around 9-9.5% per year . Which means 3,00,000 X 100 / 9.5 = 32,00,000(approx) .

So if they have this much amount in Bank which pays interest of 9.5% yearly , they will receivearound 3,00,000 per year as interest and after paying taxes , they will be left with 2,40,000 , whichcan meet there monthly expenses .

Also the insurance amount should have 47 lacs extra , which will be used to pay there debt andfuture expenses .

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also , His Insurance needs comes down to 77,00,000 -8,00,000 = 69,00,000 (let make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen . Soinsurance can be increased by 10-15% . But for the moment we will not do it . Its in fact notnecessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden

death of the family head (earning member) , how this money helps the Family .

They receive 70,00,000 , Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 - 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans , which will provide them with monthlyincome of 20,000 per month (post-tax) .

Money left = 46,00,000 - 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least20,00,000 in some years (considering its needs after 10 yrs at least) .

At the end of 10 yrs , when family needs this 20 lacs for there children education , they can use it .And for any emergency needs they have another 8,00,000 in investments .

So in general All the requirements of Family is taken care of . If insurance amount is less than70,00,000 they will have to compromise at one place or the other.

How much will the Insurance cost him per year ?

As i write this Article , i can see on http://www.click2insure.in/ that for a 30 yrs old non smokingmale for 25 yrs of cover , the minimum premium per year for 70,00,000 Term Insurance is Rs21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income . Just imagine how cheap term insurance for totalpeace of mind for rest of the life.

So whats the final formula ?

Insurance cover = A + B + C - D

whereA is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest ratewhich bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency .

D = Your investments or Assets (excluding HOME)

If you are under insured , please take extra insurance and cover your family , Please read my ear liararticles on Term Insurance to understand more .

I would be happy to read your comments. Continue Reading


Sunday, September 7

Blog Library

Dear Readers

This is my 43rd article , and I should thank you all who appreciated this blog and came back to readmy articles. I just wanted to thank people and let you all know that i will keep adding articles oninvesting and how to make smart decisions for investments. Google-analytics tells me that this bloghas crossed 2000+ visits ,which is a great achievement for this blog, and credit for this goes to you.

Today i am just reproducing all the articles and categorising them so that new readers find it easy tounderstand about it.

Request : people leave your comments after reading articles, it helps me in improving and writebetter article next time. Incase of any doubts and question , feel free to mail me [email protected]

How can you search something you want to read on this blog ? You can see a seach box on the top ,you can search things on this blog using it

How do i know in future that you published an article ? On the below right hand side (very below)there is a Email subscription link , you can subscribe your email id , you will mail when i publish anew article or change any existing one .

Categories for articles

For Beginners

Why Managing your money is Important and why to take pain in doing it

Terms and Terminologies in Investing World

Why small saving matter

How tax is calculated (2008)

How tax is calculated for different things

Common mistakes in Investing

All about Provident Fund

Inflation, How it eats your money slowly

How to evaluate your returns

Some investing Equations to make you understand some basic things

3 most important Formula's you must always know about

How to calculate Life Insurance Cover

Super Star Articles (You can't afford to miss these at any cost , these are some very high levelarticles , but easy to understand)

Portfolio Diversification

Portfolio Rebalancing

Creating Wealth

Power of compounding

Why small saving matters

Risk Management of Portfolio using Derivatives

Different Products and knowledge about them

What is a mutual fund

Myths about Mutual Funds


Mutual funds categories

Difference between Growth and Dividend option in mutual fund

Life Insurance 1 , Must read

Life Insurance 2 (Read it after reading the First Part)

Why to invest in GOLD and How

What is SIP (Systematic Investment plans)

Some Calculators to calculate growth of your money

What is a ULIP , and who needs them


What is Health Insurance and why its so important

What are Options (Stock market related , F&O category)

What are ETF's (Exchange Traded Funds)

What are FMP's (Fixed Maturity Plans)

What are GOLD Funds

All eggs in Single basket

Some products I know and recommend

Things people generally don't know about

All tax saving funds are not same, Read why

What people loose by not knowing things

Why avoiding bad decisions is better than taking good ones

Things you didn't knew in investing world

Magic of partial Profit booking

Some things to Download

Some other links

Some recommendations

Continue Reading


Thursday, September 4

Some of the best products i know about

1. Term Insurance

One of the best products in Term insurance markets i know is SBI life Insurance Shield Plan

Before taking any Insurance into consideration , we should give importance to

- Premium amount you pay : Premiums are among the cheapest in market- Claim settlement Rate : Next only to LIC

There Shield plan is designed very nicely , have a look at it and you will love it .

2. UTI Gold ETF's

If you want to invest in GOLD , try this ETF , search GOLDSHARE or UTGOLD (if you are onICICIDIRECT) .

3. Mutual Funds (see details of these mutual funds at http://www.valueresearchonline.com/)

ELSS

- SBI magnum tax shield- Principal Tax saving

Equity Diversified Mutual Funds

- DSPML Equity- HDFC top 200- Magnum Contra

Balanced Funds

- HDFC Prudence- DSP Balanced- UTI Mahila Unit Scheme

Debt or Liquid Funds

- Kotak Flexi- Birla Sun Life Income

Continue Reading


Tuesday, September 2

3 most Important formula's you should know

1. Compound Interest

This formula is often used to calculate the returns some investment has given . The main concept in

compound interest is that interest gets accumulated with the total principal amount and that interest

again earns interest over the years. Which makes it very powerful .

Formula : A = P * (1+r/t)^(nt)

Where

P = principal amount (initial investment)

r = annual interest rate (as a decimal)

n = number of times the interest is compounded per year

t = number of years

A = amount after time t

Example 1 :

Investment = Rs 10,000

return = 9%

investment period = 8 years

Total amount = 10000(1+.09)^8 = 19925.63

Example 2 :

Sensex returned 17.3% return over 29yrs since its inception in 1979 . What would be worth of Rs

10,000 invested that time .

A = 10,000 * (1+.173)^29 = 1022450.64 (10 lacs)

You can see that a small amount has actually grown to 100 times .

Compound interest Calculator : http://math.about.com/library/blcompoundinterest.htm

2. CAGR

This tool is very important because it helps in comparing two differnt returns from two investments

, you can calculate how much an investment has returned per year on compounded basis , Its just

the opposite of Compound interest

Formula : CAGR = (A/P)1/n - 1

where:

A = Final amount

P = amount invested

n = Number of years

CAGR can be a great tool to compare two different investments and there returns .

Example :

A. 10,000 invested in a XYZ mutual fund for 2 yrs became 20,000

B. 50,000 invested in GOLD for 7 years became 4,00,000

Which investment has given more returns ?

Here the main doubt is that how to calculate which one is better .. the amount , tenure is different .

So in this case we calculate and see CAGR , one with more CAGR will be good .

A) CAGR = 41.42 %

B) CAGR = 34.59 %

So , investment in A is better than B.

Which

CAGR calculator : http://www.moneychimp.com/calculator/discount_rate_calculator.htm

3. Annuity

This formula is very very important one , in our daily life we come across many situation where we

do a fixed payment at the fixed interval , and we want to calculate the returns , but we dont know

how to do it .. Example can be

- Monthly payments in Mutual funds through SIP

- Yearly payment in a PPF .

Or any investment at a fixed inteval over some years. In that case we calculate the Final value using

formula called Annuity .

Formula : A = P * [{(1+i)^n - 1 }/i] * (1+i) (if payment are being made at the start)

(it will be P * [{(1+i)^n - 1 }/i] if payments are made at the end of the year)

Where :

A = final amount

P = installment each time

n = total number of installments

i = interest rate for that tenure (example if yearly return is 24% , but payments are made monthly

then i = 24/12 = 2%)

Example 1 :

Robert invests 10,000 each month in a mutual fund for 10 years and the annual return was 18% ,

what will be his final corpus ?

Here as payments are monthly , total payment will be 10 * 12 = 120

so n = 120 and i = 1.5 % (18/12)

A = 10,000 * [{(1+ .015)^120 - 1}/.015 ] * (1+ .015) => 40,39.241 (40 lacs)

Example 2 :

Vikas is planning his retirement , and planning to invest 5,000 per month in a Mutual fund for 20

yrs where he expects a return of 15% , then take out all the amount after 20 yrs and then put it in a

FD for 15 yrs which gives him 9.5% return .

Here , we there are two parts

A. He makes monthly payment for 20 yrs (here we have to apply annuity)

B. then he takes the money out after 20 yrs and then put it in FD for 15 yrs (as this is one time

payment , here we will apply compound interest)

A )

n = 240 and i = 1.25% (as the payment are monthly)

His money after 20 years = [5,000 * (1 + .0125)^240 - 1) / .0125] * ( 1.0125) = 75,80,000 (75 lacs)

Now he invests this money into a FD for 15 yrs at 9.5% .

B) Final amount = 75,80,000 * (1.095)^15 = 2,95,00,000 (2.95 crores OR 29.5 millions)

So his final corpus will be 2.95 crores .

Calculator : http://www.moneychimp.com/calculator/annuity_calculator.htm

Note : You can also find some calculators at http://finance-and-

investing.blogspot.com/2008/05/calculators.html

Buzz up! 1 vote Continue Reading


Thursday, August 28

Creating Wealth for Long Term through Equity

Creating Weatlh

We are going to discuss today, how a huge wealth can be created by in vesting with discipline over

long period of time . We often think that investing a small sum of money will not be able to

generate huge Wealth and we need to invest huge amount of money . Its obviously true that more

money will create more wealth , but we are going to see today that we underestimate small savings

and how small investments over a long period of time can generate fortunes.

How much wealth you can create, if you earn around $1000 /month (Rs 40,000 per month) and can

invest 10% of that amount every month for next 30-35 yrs . I am assuming you are a 25 yrs old and

retiring at the age of 60 (though i want to retire at 40) . Total dependents are 3-4 . And monthly

expenditure is Rs 25,000 ($600/month) .

What kind of wealth can this person create ?

Can he invest Rs 5000 ($125) in a diversified Equity Mutual fund per month till his retirement. I

hope the answer can be YES

As we said that he is investing in Equities , What kind of return should we expect ? 5% , 20% or

50% , but Wait ... Equities are risky , it can be negative also !!! . that's very true ... but People may

not know that Equities are extremely risky in short term, but its almost not at all risky in long term ,

and if the long term = 35 yrs , then forget it , you can get some great returns. Risk in Equities are

inversely proportional to the investment tenure. Well that's a different topic to talk about (And i will

post an article on that soon , keeping an eye !!!) . Just for the data , Indian Stock markets have given

return of 17%+ CAGR return in 28 years , from 1979 (inception) to 2007 . We are talking about

Sensex.

So, to be safe we can easily consider 15% CAGR return in Long term (remember LONG TERM).

Coming to the point , It may happen that during initial years ,our investor may face difficulty

investing this much money considering , he may have other important things to take of and later he

may have more responsibilities. But during is career life , his salary will also rise and then 5000 will

be a small percentage of his salary . So assuming he can do the investment we are proposing , what

kind of retirement corpus he can build? Guesses ?

I am sure most of the people will be thinking the following way:

He invested 5000 * 12 in a year , which is 60,000 , and then he does it for 35 yrs , so he invests total

of 60,000 * 35 = Rs 21,00,00 0 (21 lacs) . And he will get some return of 15% every year. if we take

15% of this 21 lacs , it will be around 3,00,00 , so total corpus = 24,000 and also as this is

compounded , his interest will also keep growing at 15% , so it will be more than 24,00,000 , so lets

take it 50,00,000 . Fine ...

Ok , let take 70,00,000 (70 lacs) to be safe. This is a calculation done not exactly by the proper

annuity formula, but a workaround , which a general person can think of.

How much does he generate with this strategy

You can also look at my another article on Early investing and power of Compounding to get an

idea about early investing and how compounding is a great tool. But keep going ahead if you are

enjoying this article.

So the question is What will be his corpus , can it be anywhere near to 70,00,000 . The answer is

that his actual Wealth will be way beyond this amount. After doing the actual calculation i can see

that it will come around 7.43 Crores (Rs 74 million) . But how is it possible , such a big amount !!! .

That's because of compounding power . The interest earns interest and that again earns interest and

this keeps on going. Initially the interest earned is very small , but as the time passes , the amount

keeps growing and the interest also grows at an unbelievable amount. Can you believe that this

investor will earn more than 1.04 Crores only in interest in his 35th year (last year) , more than 4

times the money he actually invested whole his life. That's all possible because of systematic and

consistent investing with out fail and because of Power of compounding.

Thats the reason why one of the greatest Scientist Albert Einstein said "Compound interest is the

8th wonder of the World".

So it that all we are going to talk about today , NO !!! We have more to talk on this topic .

Why does this investor takes pain of investing that 5,000/month all this life. What if he invests just

10 yrs and leaves that money to grow for another 25 yrs. What if this is his plan till retirement.

The sudden thing which will come to your mind is that he invests for 35 yrs and created wealth of

7.43 crores , What if he just invests for 10 yrs .. it should be 10/35 * 7.43 crores = 2.12 Crores . Is

that true ?

Will it actually be 2.12 Crores only. The answer is NO !!! . Then the question is how significantly

different will his Wealth be in this case. The Answer is 5.88 Crores. Yes it will not be significantly

less but just 21% less . So Just by not investing for 71% tenure he actually gets 21% less money ,

thats not a bad deal !!!

But wait , What if he wants that same 7.43 crores at the end , and still wants to invest for 10 yrs. the

obvious way out is to invest more than his regular 5,000 per month . The question now is HOW

MUCH MORE !!!

The answer is Rs 1420 more . Instead of 5,000 , he should invest Rs 6,420 per month for 10 yrs and

then leave the money to grow for rest of 25 yrs. And he can generate wealth of Rs 7.43 Crores.

What we can learn from this

So there is a learning here and a very important thing to note , that more pain we take in the start ,

the better it is . In the initial years of career , its possible for people to invest more , as they have

less responsibilities to handle and less dependents. So it may be feasible for them to invest heavily

in the initial phase of there career, which will benefit them for long term . Now see this person .

Instead of investing 5,000 for whole of 35 yrs , If he chooses to take a little more pain in the initial

10 yrs and manages to invest Rs 1,420 more per month , then he can save investing for 25 yrs of his

life and still can generate same Money.

One great question now !!!

What if our investor is ready to invest his 50% salary (20,000) per month for starting 2 yrs and then

let it grow for rest 33 yrs. He is ready to heavily invest first 2 yrs of his career and do some

sacrifices like not spending too much , no vacation , no fancy spending and all.

Can he still beat the target !!

Will he be able to generate the same Wealth for himself like in earlier examples !!

So here you go !!! , He will not only achieve the target , but exceed it . His Wealth will be 9.24

Crores (Rs. 92.4 million) at the end of 35 yrs. I know that's an Eye-opener . So now you know that

the best time to invest was 5, 10 or 20 yrs ago , but if you missed it , don't worry :) . there is another

golden chance and that's NOW !!! .

please let me know what you feel about this article , that helps me to refine and write better articles

.Thanks , Happy Investing

Note: The formula used for calculation is called Annuity.

http://en.wikipedia.org/wiki/Annuity_(finance_theory) See formula under "Annuity Due" on this

wiki page

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Tuesday, August 26

All eggs in a Single basket

People say its always a wise thing to Diversify your investments. Its gives you better security andbetter returns . It minimizes your risk and if one part of your portfolio is doing bad , it will notaffect others and you will benefit from other side.

That is true, But then there are some things to note here .

Ask any investor who Started investing in Equities around 2002 and then sold his holdings at theend of 2007 . If he sold it just by luck its great , but if he managed to take this decision based on hisstudy on markets and hard work . Then its worth appreciating.

Diversification is very good, but only when you don't have much time to track whats happening inthings which you have invested in. Its a trade off between return and the time you can contributetracking your investments.

What if you can watch your investments closely and take decisions based on any move in marketsor investing world. In that case Diversification is not that important.

One of the greatest investors of all time Warren Buffet also says that Too much diversification isneeds only when investors doesn't know what he is doing. If you are cautious and well aware ofthings which affect your investments , then too much diversification is not required. Because youwill take actions fast as an when required.

People who can not give time for there investments on daily or even weekly basis need betterdiversification. Read http://finance-and-investing.blogspot.com/2008/04/what-is-diversified-portfolio-and-how.htmlto read more on diversification of portfolio .

Warren Buffet says that he likes to put his eggs in a single basket and watches it closely .

Lets take a Case study.

Ajay and Manish want to invest 1,00,000 each for 1 yr. During this period returns from differentthings were

Equities : 25% (for a year , but there were ups and downs in Equities market for whole year)

Gold : 20%

Debt : 9%

Real Estate : -10%

These were returns after an year , so before making investment both of them did not knew that whatwill be returns.

Ajay do not have time to track his investments, but Manish has , so Ajay diversifies his investmentlike this/

Equities : 50,000

Debt : 10,000

Gold : 10,000

Real Estate : 30,000

His portfolio after 1 yr looked like after getting respective returns

Equities : 62,500

Debt : 10,900

Gold : 12,000

Real Estate : 27,000

Total : 112,400 , which comes to 12.4% before tax.

On the other hand Manish do not diversify , because he has much time to track things closely, Hedoes some study and understands that Real estate has short term bear market as there is lot of supplyand interest rates are also going up which will affect demand and hence prices. He Invests most ofhis money in Equities and some money in Debt and Gold.

His portfolio looks like :

Equities : 80,000

Gold : 15,000

Debt : 5,000

His portfolio after 1 yr:

Equities : 1,15,000 (He sold his equities when he sensed that markets may fall in near term

and then again bought at low levels, because of his good timings he earned more than 40%

return)

Gold : 18,000

Debt : 5,450

His total = 1,38,450Return = 38.45%

Though this is hypothetical example, it shows that Because Manish kept a close eye on thisinvestment , he does not need very highly diversified portfolio. He can have more concentration onsomething which he can closely track .

Diversification in portfolio is to minimize risk and to get benefit of all the form of investment.

But risk can also be minimized by keeping a close eye on your investments, So the investor canchoose more risky products and hence also increase there chances or earning higher returns.

What is FMP (Fixed Maturity Plans)

FMPs, are the equivalent of a fixed deposit in a bank, with a little difference. The FMP's returns areonly indicated and not 'guaranteed', Since the fund house knows the interest rate that it will earn onits investments, it can provide 'indicative returns' to investors.FMPs are debt schemes, where thecorpus is invested in fixed-income securities.

Where do FMP's invest ?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs), money marketinstruments, corporate bonds and sometimes even in bank fixed deposits. Depending on the tenureof the FMP, the fund manager invests in a combination of the above-mentioned instruments ofsimilar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing inone year.

The expense ratio, generally varies from 0.25 to 1 per cent.

Tenure of FMPs'

The tenure can be of different maturities, from one month to three years. They are closed-ended innature, which means that once the NFO (new fund offer) closes, the scheme cannot accept anyfurther investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 andso a retail investor can comfortably invest too.

Actual return Vs Indicated Return

The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixeddeposit exactly prints the amount which is due to you on maturity on the FD receipt. However,FMPs do earn better returns than fixed deposits of similar tenure.

Have a look at the list of closed ended FMP's , and there returns :http://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp

Tax Implication

Dividend : Tax-free in the hands of the individual investor.

Investment in growth option of the FMP for less than a year : The gains are added to theinvestor's income and taxed at the investor's slab rate.

Investment in the growth option of the FMP for over a year : Either 10% capital gains taxwithout indexation or 20% with indexation.

What is indexation benefit?

The finance minister has been generous enough to recognise that inflation erodes the real value ofany investment. So every year, he comes out with an inflation index based on the prevailing rate ofinflation. The cost of investment is indexed by multiplying the index of the year of maturity anddivided by the inflation index prevailing on the year of investment. If you have arrived at anindexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for theindexed cost, then the tax is 11.22 per cent.

To understand more on indexation, Read this

Conclusion

FMP's are investment options for sure if you want to park your money for short term. They are

more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they

are almost risk free (remember almost) .

If they really give better than returns then FD's and practically as safe as FD's why don't

people invest in these ?

Ans : No awareness among people and they less risk taking attitude

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Some Equity Recommendations for 2008

Equity Investments

We know Share markets are at there all time lows from 21000 in last 1 yr and incase some onewants to do Equity investments for long term (5+ yrs) , This is one of the best time. Markets are notyet out of bear market , but we cant be very sure about anything , markets can go more down , but ifthe investment horizon is more than 5 yrs , Investing in equities is a good Idea.

Which companies to invest into ?

This is the question whole world tries to solve and there is no right question , there can be justanalysis and faith . It can still turn out to be bad investment , but there is very less chance for it .

Large Cap :

These are companies which have come down a lot because of the market crash but still have a lot ofvalue on it .

- Infosys

- DLF

Mid and Small Cap :

Kavveri Telecom (CMP 109) :

Telecom is a space that is buzzing at the moment. Kaveri Telecom is a supplier to all major telecomgiants in the country. It supplies radio frequency, RF, products like filters, couplers, isolators,repeaters and connectors.

The company has bagged orders for RF products and antennas from Reliance Infocomm, Alcateland World Space Corporation, which have to be completed during the next quarter.

http://money.rediff.com/money/jsp/company.jsp?companyCode=15140047

Facor alloys (CMP 10.2) : Recommended from Money Today . Good prospects in future.http://money.rediff.com/money/jsp/company.jsp?companyCode=14520024

Coromandal Fertilizers (CMP 170.75) : This is Infosys of Fertilizers Industry . Recommended atone of the investors camp from Angel Broking.http://money.rediff.com/money/jsp/company.jsp?companyCode=12100001

Continue Reading


Tuesday, August 19

Introduction to ETF's , what are ETF ?

What are ETFs?

ETFs are a basket of securities that are listed and traded on a recognised stock exchange. Simplyput, they are mutual funds, whose units can be bought and sold on the stock exchange.

Given that an ETF is traded on the stock exchange, its price may not necessarily be the same as theNAV of the underlying portfolio. In other words, an ETF could have an NAV distinct from itsmarket price. The reason being that the market price is usually driven by the demand and supply ofunits. Hence there is a distinct possibility of an ETFs units trading at a premium or discount to itsNAV.

For Example Nifty BeES , whose underlying is NSE , may not have same price as its underlying ,For example if Nifty is 4500 , it may be possible that The ETF's value is 4600 or 4400 , dependingon the sentiments and expectations.

GOLD ETF's

We also have gold ETF's , which tracks gold prices , Gold ETF's are one of the best form of GoldInvestments. To know more about it read : http://finance-and-investing.blogspot.com/2008/04/gold-as-investment.html

ETF's in India

Nifty BeES : Tracking NSEQuantum Index Fund : Tracking NSEICICI SPIcE Fund : Tracking BSEBank BeES : Tracking CNX Bank Index

Advantages of ETFs

1. ETFs tend to be more cost-effective vis-a-vis comparable mutual funds. The expense ratio of apassively managed ETF (tracking a benchmark index) would normally be in the range of 0.50%-1.00%; for an index fund, it can be as high as 1.50%. And for mutual funds the entry load is 2.25% .

2. ETF's can be bought and sold anytime during the market hours , unlike the Mutual funds NAV atthe end of the Day.

3. Given ETFs are traded on the stock exchange, and can be bought/sold on a real time basis; theytend to have low tracking error (deviation of ETF's performance from that of the underlying index)as compared to index funds.

Disadvantages of ETF

1. Investors need to have a demat and a trading account, with a SEBI registered stockbroker, forinvesting in ETFs.

Continue Reading


Tuesday, July 29

Cost of Ignorance

There are two kind of losses

1. Loss of money because of wrong decisions

2. Loss of potential profit because of lack of knowledge or having wrong information (i like to

call it loss)

I personally feel and realised most of the losses happen to people because of the second point .Today after so much of progress, India Personal Finances still has some very immaturecharacteristics . Indians have one of the highest saving rates in World, but we fail to invest our hardmoney in the best way.

What happened because of lack of knowledge

- Every insurance agent told that insurance is important, but not the best product for a person whichsuits him/her . They made Insurance policy synonymous with an Investment product to our averageIndian. They packaged those Money back and Endowment policies as must have products for anymarried person with family .

- People love numbers , they love to get back 30 lacs back by investing just 10 lacs in a 20 years .They were never told about inflation , about decreasing purchasing power of money . Hence theycan figure out that 30 lacs after 20 years is less than today's 10 lacs , so actually they are gettingcheated (yes, i like to call that cheated)

- Ask people what is an ETF , FMP , STP or REMF ? Its like asking people what is LIC in 1957-58or asking some one what is Mutual funds in early 90's . These are important financial products offuture, but people are not able to get benefited because of no knowledge.

- People who invest for long term (5-10+ years) still invest in FD's and bonds , i dont say that itswrong , but they do it because they don't know that equity is best for long term , they know there isrisk but don't know that it almost no risk if they are investing in Equity for 10+ years.

When it comes to personal finance , people are almost clue less ... Every one wants high

returns but without any risk of loss. Everyone has heard about mutual funds giving 40-50%

CAGR in 2005-06-07 , but not even few know how what role did there excellent management

and stock picks played to generate those returns.

Let me tell you what happens when you dont know a lot of things . See some of Real life

examples :

- One of my classmate has taken ULIP , she pays 25000 per year as premium ... She didn't knewthat there are high allocation charges of 18-20% in initial years... She didn't knew that she canswitch her investments in other safe options in ULIP if markets are down ... On the top of that she isgiven an Insurance of 1.25 lacs (i am not sure how it helps with her insurance needs) ...

- One of my friend took LIC policy and pays 60000 per Annam as premium , he heard that it willsave him tax ... he did a great job in choosing the policy , returns are good ... Insurance is fine .. butwhen asked if he has any financial dependents , he was clueless... i am not sure why the hell he tookinsurance at all then ...

- One of my friend had put 100% of his investments (around 1.4 lacs) in Equity (80% shares andrest in mutual funds in early 2007 ... when i asked on what basis he has invested all his money inEquity .. he said he needed good returns because this money will be used for his brother educationin another 2 yrs ... i told him that they are risky and more than his risk appetite ... he ignored it,saying that his money is almost grown by 70% already and gave him decent returns which he

expected .... then came Jan 2008 crash and now his total investments are worth 80,000-90,000, hehad invested in small -cap companies which gives nightmares to even great investment guru's ...

- lot of my friends have invested in Mutual funds in lump sum in Dec 2007 or Jan 2008 and didn'ttake SIP instead of my telling them several time that SIP is the the systematic approach and willbring down there average cost ... and returns in volatile markets... All of them have 30-40% loss at the moment , but all those who invested through SIP have loss ofaround 10-12% only ... .

- I know many who earn good money, have good risk appetite and long term financial goals to meet... but they invest in what? NSC and Money back policy of insurance schemes ... Any one who isout of his/her mind and is totally insane will invest in NSC or KVP in today time ...

They take money back Insurance policy of 3 lacs or 5 lacs for 25 yrs or 30 yrs ... i wonder how willthat 5 lacs help them in 2035 when average monthly expenses of a medium class family will bearound 1 lacs/month ... they pay hefty premium of 30k , 40k or 50k in today's time to get back thekind of money back after 30 yrs which will just pay there 1 yrs expenses ... They do it because theycant see not getting money at the end if they survive for all the money they have paid ... they stayaway from Term insurance because they don't get any thing in the last .. so what if for 20 lacsinsurance for 25 yrs they just have to pay 4200 total every year ... they don't get anything at last .. sobetter not to take term insurance .. its not giving anything ... that's what they feel ...

Whats the solution ?

It takes Rs 30 to buy "Outlook Money" and Rs 20 for "Money Today" (or read online :http://moneytoday.digitaltoday.in/index.php?latn=1 ) and 5-6 hrs to read all of it .

Just Rs 100 and some hrs per month can help anyone save thousands or lacs (depending on thereinvestments) , but it takes discipline and regularity

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Thursday, July 24

How to do PORTFOLIO REBALANCING

Today I am going to talk about some thing which is one of the extremely important tool for riskmanagement and also something which is encouraged if you want stable returns from yourinvestments.We are going to talk about the investments in Equity and Debt.

How Rebalancing the portfolio will help in

Risk ManagementStabilityMaximize returns

Understand the pros and cons of Equity and Debt

EQUITY

Pros : High returns , Low risk in Long term , High Liquidity Cons : Risky , not suitable for short term investment

DEBT

Pros : Stable and assured returns , Good investment for short term goalsCons : Low returns

Equity + Debt : When we combine Equity and Debt , returns are better than Debt but less thanEquity , but at the same time risk is also minimized compared to Equity and Debt , and when weapply technique of Portfolio Rebalancing ,both risk and returns are well managed.

What is Portfolio Rebalancing ?

The first step to understand is that each person must divide his investments into Equity and Debt insome ratio , it can be 40:60 , 50:50 , 60: 40 , 75:25 or any ratio , The ratio depends on a persons risktaking capability and return expectation . For an example let take the ratio to 60:40 , portfoliorebalancing is nothing but rebalancing your portfolio in same ratio , in case they got changed aftersome months or years , as you wish . Preferably the good time is every 6 months or 1 yr , but not 15days or 1 month.

Why Do we do it ?

You have to understand that each person should concentrate on both returns and risk .

Case 1 : Equity:Debt goes up .Action : Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.Reason : As our Equity has gone up , we could loose a lot of it if some thing bad happens , we shiftthe excess part to Debt so that it is safe and grows at least.

Case 2: Equity:Debt Goes Down.Action : Decrease the Debt part and shift it to Equity , so that Equity:Debt is same as earlier.Reason: As out Equity part has decreased, we make sure that it is increased so that we don't looseout on any opportunity.

Limitations Lets also talk about the limitations of this strategy, once your equity exposure has goneup , if you rebalance and bring down your Equity Exposure , you will loose out on the profits ifEquity provides great returns after that , or if your Equity exposure as gone down and you bring upyour exposure from Equity and if Equity does bad , then you will loose more.

Understanding the Game of Equity and Debt

But , we already said in the start that our primary concern is managing risk and profit is secondary .Let us understand that markets are unexpected and they can go in any direction , so better be safethan sorry . Many people are confused that if there equity has done very well then shall they bookprofits and get out with money and wait for markets to come down so that they can reinvest.Portfolio rebalancing is the same thing but a little different name and methodology , so once you getgood profit in something which was risky you transfer some part to non-risk Debt.When we say Equity we mean shares or mutual funds which are related to Stock markets , whichtend to go up and down , if it goes up , there are high chances that it will come down and when itcomes down, its highly probable that it will move up again . Lets us now see the most interesting

part : Examples

Ajay has Rs 1,00,000 to invest and he want to invest it for 5 yrs and the 5 yrs returns are 30% ,-35% , 40% , 60% and -30% .

Lets look at his money and its growth in 3 different mode

- Only Equity

- Only Debt

- Equity + Debt in some ratio (without Portfolio Rebalancing)

(click on this image to see in large resolution)

We can see here that Debt performed better than Equity , because of the uncertain movement inreturns , also the Equity+Debt performed better than Equity but not Debt .

Let us now see the performance of Equity + Debt (with portfolio rebalance)

So now , every time our Equity and Debt ratio changes , we will rebalance it .

Ratio = 30:70Investment = 1,00,000Equity = 30,000Debt = 70,000At the end of 1st year (Equity return = 30% , and debt = 9%) :

Equity = 30,000 * (1.3) = 39,000Debt = 70,000 * (1.09) = 76,300Total Capital = 39,000 + 76,300 = 1,15,300


Now we will rebalance the portfolio

Equity = 30% of 115300 = 34590Debt = 70% of 115300 = 80710

Now This is our new Equity and Debt investment

At the end of 2nd year (Equity return = -35% , and debt = 9%) :

Equity = 34590 * (1-.35) = 22484Debt = 80710 * (1.09) = 87974Total Capital = 22484 + 87974 = 110457

Now we will rebalance the portfolio

Equity = 30% of 110457 = 33137Debt = 70% of 110457 = 77320

In this way we keep rebalancing the portfolio and lets see its performance for 5 yrs

(click on this image to see in large resolution)

Here , you can see that The column (E+D with PR) is the our main column which shows theperformance with portfolio rebalancing. Here we have example for two ratio's 30:70 and 70:30 , wecan clearly see that at the end of every year the final corpus for rebalanced portfolio was alwaysgreater than the non-balanced portfolio for both the ratio .

For ratio 30:70


Year 1 : 115300 vs 115300

Year 2 : 110457 vs 108517

Year 3 : 130671 vs 126142

Year 4 : 162424 vs 155595

Year 5 : 158039 vs 147452

For the 70:30 ratio also we can see that rebalanced portfolio outperformed the non-balancedportfolio.

Also you can see that for most of the years re-balanced portfolio outperformed "Only Equity" and"Only Debt" except 1st year and 4th year . 1st yr is very easy to understand why it happened and for4th year , the returns were positive again after 3rd year and we made more profit in "Only Equity"portfolio because of high concentration on Equity side , but you can see that in 5th year , when therewas a negative return of -35% , then the "Only Equity" fell heavily , but the rebalanced Portfoliofell very little because we have rebalanced it already and dropped our Equity Exposure to be safe.

Conclusion

So at last the question is what is the ultimate conclusion of all this talk.Each person has his own Equity and Debt diversification , if the person is high risk taker his Equitycomponent will be high else it will be less , every time your Equity and Debt component changesyou have to see that it matches your risk profile, if it does not you bring it back to your level . Bybringing Equity exposure from high levels to your level , you are managing the risk you can takeand by increasing the Equity exposure to your level back (in case it went down) , you are makingsure that you don't miss out the chance.

Other reason is that Debt always increases, Every time your money goes up in Equity from yourcomfort level , you take that money which is earned by risk and shifting it to a safe place which willrise for sure though with less speed. Equity is linked with Stock Market and they tend to go up anddown always and you don't know when will it happen . So better manage that risk by PortfolioRebalancing.

Please comment of this article to let me know how you feel about this article , Feel free to commenton anything which you feel is wrong .

Also , the example taken for this article was self made and does not represent any real life situation ,but for sure its possible and similar scenarios have happened in our Stock Markets

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Tuesday, July 22

Importance of Health Insurance

Health Insurance

What is Health or Medical Insurance ?

The term health insurance is generally used to describe a form of insurance that pays for medical

expenses. It is sometimes used more broadly to include insurance covering disability or long-termnursing or custodial care needs.

To understand it in simple words , you pay some amount of premium every year to a company andif some thing happens to you like an accident or if you have to through an operation or a surgery ,they will pay for it provided , its covered under the Health Insurance.

Why do I need a Health Insurance ? I am a healthy Person , what if nothing happens to me , it

will be total waste of money !!!

This is the most common thing you can hear from a person who wants to avoid Health Insurance,but its one of the most important part of any ones portfolio or plans. People concentrate on the factthat what if nothing happens to them , but they fail to imagine the situation when some thing canhappen .

Body is a complex thing , and no one knows what can happen in future,Even things like accidents isnot in your hand , you can take try to avoid it , but what about others , what if some car hits you ?What if accidentally fell from some place ? It can happen and it happens , and when you have topay hefty bill for the treatment , you will realise that its a good idea to get covered by paying asmall premium every year.

Consider this :

In Mumbai , businessman Manas Kumar rushed his wife Anita , 38, to hospital in January this yearbecause she complained of breathlessness and shooting pain in the chest. Sure enough, it was aheart attack and Anita had to get an angioplasty done.The cost of the procedure and stay at Hospital: Rs 1.5 lakh.

But he didn't have to shell out a single coin as he and his wife were covered under The HealthInsurance with limit up to 4 lacs.

Why is Health Insurance more important now compared to earlier days ?

Yes , Health care cost has increased many fold in last 20-30 yrs , Also now more and more youngerpeople are complaining of Heart and other diseases which were seen in older people earlier.Because of high stress jobs , bad eating habits and other similar problems , more and more cars inthe city , pollution etc , the chances of getting some disease meeting with an accident etc haveincreased compared to earlier days.

More about Health Insurance

- You get a good coverage for diseases and surgeries, so most probably you will be covered for mostof the things.

- You have to pay the premium which you can plan ahead and manage it , else if some thingunexpected happens , your finance gets in problem and impact your plans

- You get tax deduction under section 80D up to Rs 15,000 (Rs 20,000 for senior citizens)

- You can also go for group insurance , its a ideal thing for a family with spouse , parents , kids ...With group Insurance every one is covered and you pay less premium , also its more advantageousbecause there are many things which are covered in group insurance and not single person health

insurance.

- Make you buy a good cover which suits you , do good research and then choose the product.

Source : Money Today

Some Links :

Advantage Group Insurance :

http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&id=3623&issueid=45Before you buy your policy :

http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&id=3625&issueid=45Protect your Health :

http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&id=3620&issueid=45What cover should you take? :

http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&id=3622&issueid=45

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Friday, July 18

Some Investing Equations

Early Start , Small Investment = Late Start , More Investment

Term Insurance + Mutual Fund Investing > Money back insurance plans

Small investment * High Patience > Big investment * Low Patience (For stock market)

Risk of Loss = Investment / Patience

Probability of your investments to Grow = Knowledge + Patience + Tenure

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Sunday, July 13

Most common Mistakes in Investing world

1. Take inadequate or wrong Life Insurance

This is my favorite, because it is the mistake done by majority of people , Most of the people arehighly under insured. By default, a person must be at least covered for 10-15 times his annualexpenses. So a person who has a yearly expenses of Rs 2.4 lacs (20000 per month) , must have acover of around 25-35 lacs at least. But they have insurance like peanuts , 2 lacs , 5 lacs , or 10 lacs.The biggest reason for this is that they take wrong type of insurance. Most of the people need TermInsurance , but they end up with Money Back plans.to read more at :

- http://finance-and-investing.blogspot.com/2008/06/life-insurance-revisited-one-of-my-good.html- http://finance-and-investing.blogspot.com/2008/02/life-insurancehow-to-go-about-it.html

2. No Diversification in Investments

Most of the people don't pay good attention at diversification. They are either in Debt or Equity.They must understand that they have to diversify along different types on investments to minimizerisks and also to boost up there returns. Some people have only FD's, PPF's or NSC in there portfolio, then there are people who hold onlyShares or mutual funds. While the former misses on the returns , the later on is exposed to high risk.Combining both of them can decrease risk , increase stability of returns.

To read more :- http://finance-and-investing.blogspot.com/2008/04/what-is-diversified-portfolio-and-how.html -http://finance-and-investing.blogspot.com/2008/04/gold-as-investment.html

3. Tax investment because of Last month rush and not Financial Planning

Most of the people rush for tax saving only in the month of Feb-March, when they get a letter fromcompany saying that they need to submit proofs of investments under section 80C , and that's thereason why people end up taking wrong products, just because they don't have time to plan thereinvestments. The best thing is to start planning for tax saving right at the start of financial year.

4. Starting Late

This is another big mistake people do , they do not start investing at the right time . A lot of timepeople actually can save some money but they feel that its not worth to save a small amount , theythink that when they will be in condition of saving enough per month , that would be the right timeto start, which is far from truth.

Consider this:

Ajay Started his career at 22. He has worked for 8 yrs and now he is 30 yr old , He wants retire at60 , and can invest for another 30 yrs. He want to generate 4 crores for his retirement. He has 3choices

1. 6000 every month for next 30 yrs.

2. Invest 10,000 every month for next 7 yrs and then leave it to grow for another 23 yrs.

3. Invest 20,000 per month for 3 yrs and leave it for 27 yrs.

Guess which choice will give him maximum money , The one where he is investing more for lessyears !!! . Yes .. The corpus generated is as follows:

1. 4.2 crores

2. 4.59 crores

3. 5.11 crores

So the idea is , start early and invest more ... remember:

Start Early ,Invest less = Start Late , Invest a Lot

Btw ,Had Ajay invested 4,000 per month right from the time when he was 22 , and invest for next 8yrs and waited for that money to grow till retirement, He can generate more than 6.5 CRORES !!!That's better than all the 3 choices :)

Also see this example :

Considering return of 15% per Annum from Diversified Equity Mutual fund , If you invest 10,000per month for 10 yrs and then leave it to grow for 20 yrs , your investments worth will be 4.5 crores, But before that if you also invested 5,000 for 5 yrs and then 10,000 for 10 yrs , your money will be7.5 crores.

To read more on related stuff , see :

- http://finance-and-investing.blogspot.com/2008/01/power-of-compounding-and-early.html- http://finance-and-investing.blogspot.com/2008/06/small-is-big-one-of-my-very-good-friend.html

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Thursday, June 26

How small investment make up fortune !!

Small is Big !!!

After seeing the right hand sidephoto , you might think thatwhat is this Ant photo doing inthis article. Its just to give anidea about how powerful smallthings can become.

In tribal villages of Cameroon ,when termites become dangerfor homes made of Wood, alltheir stored food stock(Millet's) and growing crops,They bring 500-1000 Red fireants , which defeats aroundmore than 10 million termiteswith there power , strategy and unity. because Small is Big !!! . Lets go ahead with our story of the

day after getting a hint on whats in the store for today.

One of my very good friend works in a finance company and earns around Rs 20,000 a month. Justgraduated from college and found a decent job in Delhi , He lives a great life, movies with friends ,eating out , smoking and boozing , Great Life ... as he calls it.

He can give good competition to any smoker and occasional drinker. Eating out with friends is hishobby it seems. 2 jeans are must in every quarter because he can not see himself out of fashion!! .His mobile bill comes more than 2000 because phone is the only way to keep in touch with 10-15"old" and "true" friends.

He never saved anything until I bombarded him with my lectures on "why he must start investingfor his future" . With great effort he started investing 1500 per month in a Mutual fund i told about.

When i asked him what are his future goals, he said

* Retirement corpus of more than a crore when he is 60 * 40-50 lacs to open a restaurant * 6-7 Lacs for a vacation in Europe after 10 years with his wife.

He was expecting a big laughter from my side and a disagreement that he was doing nothing butmaking unachievable dreams with a salary of Rs 20,000 per month, and a situation where he isfinding saving 1500 per month a tough task.

To his surprise i told him that its not at all a difficult task considering he is ready to take some toughdecisions which will be good for him from every angle.He thought that my advice and plan for him will be tough , complex , full of jargon's . He thoughthe will have to spare a day for understanding what i am going to suggest.

And here was my plan for him:

Quit Smoking and Drinking and cut your eating out and movies by Half, Limit the number of

calls and duration of calls and make sure that he cuts the bills by 50% at least. IS THAT

ALL !!! ?

I said YES , that is all he has to do and he has to do this systematically , with discipline for years.Because Small is Big !!!

Small things matter most , many things become our regular expenses which we can avoid andshould avoid, and if saved and invested they can take care of our future financial goals.

Retirement : His retirement can be taken care by just investing the money which will be saved byquiting smoking. He spends more than Rs 60-70 per day or Rs 2000/month . If he invests thismoney in a Equity Diversified mutual fund through SIP per month , He can generate a corpus of

- 1.5 crores in 30 years considering a return of 15% CAGR

OR

- 2.9 crores in 30 years considering a return of 18% CAGR

OR

- 3 crores in 35 years considering a return of 15% CAGR

OR

- 7 crores in 35 years considering a return of 18% CAGR

Equities in long run gives excellent returns and 15-18% return can be expected from equities if thetime horizon is 30-35 yrs , especially from Indian Markets.

Plan for Restaurant : His plan for opening a restaurant can easily be achieved by investing themoney he can save by not drinking. He drinks once or twice a week and spends somewhere close to300-400 a week on drinking.. Lets consider Rs 1000 for a month.

- Rs 1000 invested per month for 30 yrs at 15% return can generate a corpus of 70 Lacs.

For Vacation : He can also save around 1000 from is unnecessary telephone bills and 800-1000from eating out and invest that money. Considering it around 2000 per month.

- Investment of Rs 2000 per month can generate 5.5 lacs in 10 yrs @15% CAGR

OR

around 7 lacs @18% CAGR.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.


Disclaimer : all the investments are considered to be in Equities for very long term. And equitieshave a track record of providing similar returns in long term. Like Sensex gave return of more than17% CAGR in its 29 yrs. Equities outperform all the other asset class in long term.

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Tuesday, June 24

Importance of Life Insurance in India

One of my good friend had a small argument with me, that she would not invest

in Term Plan of Insurance, because she will not get any "returns" out of it. I believe investing in aterm plan looked a very unprofitable thing to her as she never gets back the money she paid as"premiums" , if she survives.

Endowment plans looked nice to her, because they provide money if you are dead and even if yousurvive. You get back money as the prize for not dying !!!.

With respect to Term insurance , she understood the fact that her family will get the money frominsurance company in case of her death, but she was concentrating on the fact that she would notget back anything if she survives. What is the return in that case? Nothing !!! , and looked like someone is fooling you with a product called "Term Insurance" , where you are "investing" premiums toget nothing at the end.

Let me now tell why this happens and some give you some insight on this matter.

I have already talked earlier in my last post "Life Insurance and how to go about it" , about TermInsurance . Let me now take more deep dive into it and talk about the reasoning part.

I will first talk about fundamentals of Insurance and then talk about Endowment Policies and whyare they popular, and what people don't realise about them. and how Term insurance is the rightthing for most of the people.

Basics of Life Insurance

What happens in a average family : There is someone who earns and his family comprises ofwife , kids , parents . if not all there is a subset of these family members. The head of the familyearns and his family lives happily. All the expenses are met from the earnings of this main member ,most of the time the husband. Now consider this person dies in an accident or for that matterbecause of any event. What happens? What happens to his family members other than thepsychological trauma . If they don't have money to take care for them selves ,either some one fromfamily have to take up the job and start working which may not be possible for them, or They haveto decrease their standard of life to maintain the expenses . They are now totally unsecured fromfuture's point of view. In short they are totally messed up , which should not have happened. I gavethis detailed explanation for the circumstances because i wanted you to understand how bad canhappen and proper measures must be taken care for this.

What is the Solution?

Adequate Coverage !!! , this cant be compromised... You must have a backup plan which can giveyour family the same kind of income which confirms that they are not short of money in case themain earner is gone. If there are some debts like Home Loan , or any other tasks which need moneyapart from regular income , the cover must be good enough to cover that too..

For example : Robert has a family expenses of 25,000 per month and there is a Home loan of Rs 25lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife , 2 kids and parents. All of them aredependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies , whowill take care of Home loan, how will provide them enough money to live life comfortably. Theyneed 25k * 12 = 3 lacs per year. which they can get per month if they have 35-40 Lacs of money . Ifthey put this in bank , they will get Rs 25,000 per month as interest which they can use. Consideringinflation it will not be enough after some years , but lets leave it now for this example. Add homeloan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered withminimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80

lacs for his family, from that day he can happily live all his life without any tension , thinking whatwill happen if he is not there. He will be attain peace of mind , and not be worried for it. He mustget a lot of internal peace because his Family is protected with a good enough cover to take care forthem . And this is what you get in "return" from Insurance. No monitory return can give you moresatisfaction than peace of mind.

So before doing anything else , his first step is to give adequate cover to his family and that's themost important responsibility for him as a Husband , Father , Son . He must understand that this isnot an investment for monitory benefit later in his life , but its for his family happiness and future.

One point to remember and not forget is that this is the minimum cover required for family andanything less than this will be taking risk with family future.

Endowment or Money back Policies

Lets discuss the problems with these plans with respect to the above example.

High Premium : For an 80 lacs cover for say 30 yrs , the premium payable will be At least 2-2.5lacs/year (this is a conservative figure) . So now premium so high is not possible for anyone likeRobert, so what they do? They go with a kind of cover for which they can pay premium easily , canthen they take cover for 5 lacs , 10 lacs or maximum 20 lacs. And guess who suffers in case of hisdeath : HIS LOVED ONE's .

It might also happen that they are compromising on a lot of small things which are important at thatmoment in time , like buying a bike for son , which they cant buy because of the insurance theyhave to premium, or some vacation they could have gone to with family , but compromise on thatbecause of premium.

Money back at the end of the maturity is like a penny after so many years :

This is some thing most of the people overlook. They just see the numbers , 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them , because they see numbers , theydont see its value after many years, They don't consider Inflation into account . In case of aboveexample , if Robert takes a cover of 15 lacs by money back policy , what happens if he survives thetenure. He gets 15 lacs at the end , Great Money after 30 yrs . Isn't !!!

Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5lacs per month (considering inflation of 6%) . Now this money will help him survive for not morethan 10 months ... For so many years he pays high premium each year, just to get back money tocover his 10 months monthly expenses. ? What the hell !!!

Under Insurance : Because of the fact that people want money back on survival and because ofhigh premium , people end up taking policy for which they have to pay premium under there budget, which means less cover.Without realising the fact that they are highly under insured , the reason for this is that they seeInsurance as investment product and not a protection cover for there family. When they die , therefamily get the money from Insurance company , but most of the time its not enough for them and iterodes very soon.

Term Insurance Policies

Lets discuss the features of Term Policies with respect to above example.

Cheap Premium : The premium is very low for Term insurance Policies. For above example . Theyearly premium for Rs 75 lacs cover for 25 yrs is just Rs 20,000 yearly or just 1,600 per month !!! .This is in any way affordable for most of the people. Its providing the fundamental requirement ofGood cover and low premium and if you think of returns , Good cover and low premium canthemselves be seen as good enough return. You family protection at low cost is the return you get.

Opportunity to invest rest of the money in High return Investments :

With term Insurance you save a lot of money in premium and now you can invest this money as peryour wish in high return instruments , anyways in Endowment policies you put money for long termand you get it after so long time. So you can now always put your saved money in things which arelong term investment products and return great returns.

One of those things is Equity Diversified Mutual funds and Direct Equity (depending on personsability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the riskis minimised because of long term. And if you consider India growth story , it looks great in longterm , hence Equities for long term is the most obvious choice . They will give you return of 15%+CAGR. (15-20 yrs)

Also it will be flexible , you can not invest for a year or two , if you want to use the money for yourfamily vacation or some important event.

Conclusion :

Insurance is not an investment product , its a Protection instrument for your Family or any oneyour want to cover. There are other products for your investments .

Let your finances be the way you want your life to be , SIMPLE !!!Don't mix Insurance and Investments. There are products like ULIPS(What are ULIPS) andEndowment or Money Back policies which never excited me. They complicate things , confusepeople.

They can be good if you understand how to make most out of it, but it require knowledge andexpertise. They offer some flexibilities , but still they are not worth it .

Read more on Term Insurance at my Old article


Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not asencouragement.

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Monday, June 16

Basic Introduction to Options (derivatives)

What is an Option?

Option is a contract which gives buyer the right , but not the obligation to buy or sell an underlyingasset at a specific price on or before a certain date. An option has an Expiry date , when itsautomatically exercised if it has any intrinsic value left . When you buy an option you have to paysome premium at the time of buying it.

You can buy or sell Options just like you buy or sell Shares. They are traded in real time. An optionvalue depends on some underling, which can be a stock or an index or even interest rate, The scopeof this article is restricted to Stock options or index options. An example of index option is Niftyoption , so its underlying is Nifty.

You must know that its a kind of Derivative : Derivatives are any instrument whose value arederived from some other thing, there value depends on some other thing , like In case of options instock market , there value depend on either a stock or an index. Futures are also a kind ofDerivatives, The minimum money required for trade in Futures are much more than Options. Youcan trade in options with as little as 2,000 or 3,000 (depending on the option you are trading in).

Types of option: CALL and PUT

CALL option gives you the right to BUY something anytime before expiry at a predetermined price.The value of the CALL option increases as the Price of the underlying thing increases. The reasonfor this is because you can still buy it at the fixed price and the difference is your profit.

PUT option gives you the right to SELL something anytime before expiry at a predetermined price.The value of PUT option increases as the price of the underlying Decreases. The reason is that youstill have the right to SELL it at fixed price and difference will be your profit.

SOME OPTION TERMS

Exercising an Option : To exercise an Option means to Buy(CALL) or Sell(PUT) the stock on theexpiry date if they are European style else Buy or sell anytime on or before Expiry if they areAmerican Style.

Expiry Date : The date on which an option will expire and then it will be exercised automatically ifit has any intrinsic value left.

Option Style : Options are of two styles , American style (It can be exercised any time before or onexpiry date) and European Style (exercised on expiry only).

STRIKE Price : Strike rate is Stated Price for which the underlying stock can be purchased or soldon expiry date.

SPOT Price : The current price of the underlying at a particular time.

LOT : Options are traded in lot size , you can buy 1 lot , 2 lot or any number of lots , and a lot has aparticular number of shares in a single lot , Like Nifty options have lot size of 50.

Premium : Every option has some premium which users have to pay when they purchase an Option. So for a CALL option, the premium increases when its underlying price increase and decreaseswhen its underlying price decreased and just opposite of PUT option.

How does an OPTION look like?

Example : CHAFER 90 CE 1.95 , EXPIRY 26th June

CHAFER is the symbol for a stock called CHAMBAL FERTILIZERS , so its a Stock option. Theexpiry date of this option is 26th June (current year). 90 CE means its a CALL (C) option ,which isEuropean Style (E , can be exercised on expiry date only) and the Strike rate is 90 , means that youhave right to buy 1 lot (3450 shares , it depends on the option how many shares a lot has) ofchambal fertilizers shares at Rs 90 on the date of expiry if you want.

What are the Profit and Losses you can make?

The Losses are always limited to the extent of premium you pay (in worst case you do not exercisethe option and you let your premium go) , On the other hand the profits are theoretically unlimited ,because the option price can keeps increasing when underlying increases or decreases depending onthe type of option.

What is time value and option value ?

The Premium you pay for the option has two components- Time Value- Intrinsic value

Premium = Time value + Intrinsic Value

Intrinsic value is the true worth of the option (premium) and Time value is the value which is therebecause of the time left for the expiry , because as the Expiry time comes near the risk of loosingthe money is high. So time value keeps decreasing as the expiry comes closer. There fore you willsee that even if STRIKE price is closer to SPOT price , the option price will be very high if theexpiry is after many days .

For CALL option price moves towards 0 if SPOT is less then STRIKE price and expiry comescloser .For PUT option price moves towards 0 id SPOT is higher than STRIKE and expiry comes closer.

How does it works

You can either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiryand the current price of premium is suppose 10 , you can sell it at loss , because you don't want it tobecome 0 . Suppose you didn't sell it and market really closed above 4300 on expiry date , then youloose whole your premium (as SPOT < style="font-weight: bold;">Options used for HedgingExample 1:

Suppose you buy CHAFER 90 CE EXPIRY 26th June , at a premium of 1.95 (you will have to payRs 1.95 * 3450 to buy this option) , and the SPOT is 78 , means currently price of Chambalfertilizer share is Rs. 78 , now the price of option will follow the price of the share price. If priceincreases to say 85 , then the option may increase to 4.5 (depending on demand and supply) , and at

this point you can sell the option and earn a profit of 4.5-1.95 = 2.55 Per share , profit of 130% .Now suppose on 26th June (Expiry day) , the price of Chambal Fertilizer is Rs 100 , then the optionwill be exercised and who ever has the option at that time will receive the profit of Rs 10 (total 10 *3450) and the option will not be exercised if the SPOT (current price) of share is below 90 , becausethen he will make loss if exercised. (Remember , its not your obligation to exercises the option (youexercise if its in profit , or you loose your premium)

When do you buy Options

Example 1 :

Suppose Infosys is at 2000 today (1st June) and you are optimistic that its price will go further goup 10% or 15% (2200 or 2300) . so you buy a CALL option of Infosys which is going to Expire inapprox 1 month , say INFOSYS 2200 CE 10.5 26th June is available and lot size is 1000 , so youpay 1000 * 10.5 = Rs 10,500 for this option.

Now option price will move the same way as the price of Infosys share. At the end of the Expirydate if Price of Infosys share will be more than the 2200 then the option will be called "In theMoney" as it will be in profit when exercised Else it will be out of money. So suppose Price ofInfosys share is 2280 at the end of Expiry then you exercise the option and get 1000 * 80 = Rs80,000 , you can also sell the option anytime before Expiry date if you want to make profit andconvinced that the option price has reached at a good point.

Example 2:

You think that Economy is not doing well and markets as whole will fall because of high inflationnews and political issues (or for any reason) , Suppose Nifty is at 4600 and you believe that it willfall to 4300 in 2-3 months , Suppose current date is 1st June then you can buy NIFTY PE 4300AUG , assume premium is Rs 15.

Case 1: If markets fall badly and reaches 4500 in 1 month and the premium increase to 330 . Youcan either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiryand the current price of premium is suppose 10 , you can sell it at loss , because you don't want it tobecome 0 . Suppose you didn't sell it and market really closed above 4300 on expiry date , then youloose whole your premium (as SPOT < style="font-weight: bold;">Options used for Hedging

The main use of Options is for hedging , So if you have bought some 1000 shares of company ABCat Rs 20 , and think that price may fall to 15 in one month ,you can ABC PE 20 or 19 , and pay asmall premium , Now you are covered for the loss you will make on shares , because you have rightto sell the shares at 20 or 19 (depends on the price you bought the options at).

Some other important points

- Options are very risky and very rewarding , it can give returns of even 100% or 200% in day , orcan give negative returns of 50% or 80% in a day.

- Options are very volatile , so its a good idea to be patient with options.

- Buying Options near its Expiry dates are highly risky , because if they go in wrong direction they

don't have time to come back.

- Its not a good idea to buy a option with strike price very far from the SPOT price unless there issome good reason for it . Options with more gap between between STRIKE and SPOT have lesspremium , but very risky (and can be very rewarding too).

- Its not a good idea to put a Stop loss for your option very near to the current price , because itshighly probable that it will come to Stop loss point and then again bounce back because of therehigh volatility.

- Its a good idea to set a target to book profits and get out , rather than trying to get maximum outof option . If you don't exit at a good point , the chances are that value will again bounce back tonormal price and you will miss a chance. (I sold Chambal Fertilizer CALL 90 option when it pricewent up to 6.5 though 8-9 looked achievable target next day , but i thought its a great return anddidn't miss the chance of booking 250% return in 2 days , Buy price was 1.95).


Continue Reading


Sunday, June 15

How to evaluate Returns returns from Investments

Which return is better return, 40% or 30% ?

There is no doubt that 40% is more better return. But is it a right way to judge the return just byseeing the number. we ignore another important factor called as "RISK" involved. In most of thecases, people really don't consider evaluating the return in relation to RISK taken to earn that kindof return.

Which is better?

1. 30% with High risk2. 20% with moderate risk

In this case , 2nd is better than 1st , as the Return per unit of risk is better than the 1st case.(considering High risk is 3 units , and moderate is 2 and Low is 1 .

So the actual measure of return should be, Return per unit of risk

REAL RETURN = ABSOLUTE RETURN / RISK TAKEN

There are many balanced mutual funds which have given little less return than diversified equityfunds , and hence can be called as much better investment tolls because there was much lower riskinvolved with them , in case there was any fall in markets , these mutual funds would have fallenless than equity funds. Many mutual funds advertise there products only on the basis of returns anddon't care to tell investors that there is high risk involved with the products.

I you are given 2000 for climbing a tree and 5000 for jumping from one building terrace to another ,the first choice is much better. In that case you don't go for the second option just looking at 5000.

If today all banks start giving 12-15% assured return on Bank deposits, Equities investments willfall to great extent , because bank deposits will have much better returns considering the riskinvolved.

I would be happy to read your comments or disagreement on any topic. Please leave a comment. Continue Reading


Thursday, June 12

Tax Treatment of Equity , Gold and Debt

Tax Treatment

Equity Mutual Funds and Shares

Short Term Capital Gain : If you sell it before 1 yr , the profit iscalled STCG and taxed at 15% (revised in 2008-09 budget) ,So ifyou make profit of 10,000 on shares or Equity mutual funds , youpay 1,500 as tax.

Long term Capital Gain : No tax

Other Points

- Dividend income from any kind of mutual funds are not taxable.

Profit from Sale of House or Land

Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at20% on profit.

Your profit = Sale Price - (Cost price after adjusting indexation , as per the cost inflation index)

Long term capital gain tax can be saved by investing the capital gains in some other residentialproperty or in bonds of the Nabard, National Highway Authority of India, Rural ElectrificationCorporation of India or SIDBI redeemable after a period of three years.

Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.

Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to yourincome and taxed accordingly.

Short term capital gains can set off against any LTCG or STCG within 8 yrs.

Other Points

- Capital Gains from Agricultural Lands are not taxable.

- A person holding more than one residential property would be liable to Wealth Tax on the marketvalue of the second property.

Profit from Jewellery

Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .

Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)

Don't know what is GOLD ETF ? Read this article , CLICK HERE

Profit from Fixed Deopsits , PPF , NSC

Fixed Deposit : Interest Earned added to the income and taxed accordingly.

PPF : Interest earned not taxable

NSC : Interest earned taxable

Continue Reading


Things you didn't knew

There are many things we hear and believe , but they are little different in reality, which helps if weknow.

- Do you know that When you take an SIP for 6 months or 1 years or for any period , the firstinstallment (which you make by cheque) is not counted for inside the tenure of your SIP. So if youtake a SIP for 6 months , you make 6 payments other than your initial payment with cheque , sototal is 7 payments.

- The short term capital gain period is 1 yr , means 365 days , but it does not work exactly that way ,its 12th month other than your buying month. Means if you buy shares or MF on 12th May , 2008and sell on 13th May , 209 it is still short term capital gain , to call it long term capital gain , it mustsee it after 12 months after May , 2008 (your month of buy) . which means you shall sell it on orafter 1st June 2009.

- Suicide is also covered in Life Insurance after 1 yr of policy (atleast its there in my policy withSBI Life Insurance).

- ULIPS : The deductions availed under sec 80C is taken back if you surrender your ULIP before 5yrs. If you surrender your policy in 4th or 5th year , then all hte premium paid till date will be addedto your salary for that current year and you will have to pay tax on that too. ULIPS just putrestriction on paying of premium fr the first 3 yrs, but offer tax benefit under 80C if you hold it forminimum 5 yrs.

- If you repay your housing loan by taking another loan , you can continue to claim tax benefit onthe interest amount paid for new loan under sec 24.

- Tax deduction is available for the prepayment charges paid for the home loan .

- If you face any problem or defecieny in service from banks, you can complain atwww.bankingombudsman.rbi.org.in same as https://reservebank.org.in/BO/compltindex.htm

- Dividend distribution tax is levied on the Dividend which you recieve , and it also affects the fallin NAV . So NAV falls not just to the extent of the dividend declared , but also by the tax whichmutual fund company pays to govt (12.5% on dividend + 2.5% surcharge also , under sec 115-O )



Monday, June 2

Some links for Investment and Finance

Some nice Links

General Investing and Finance Knowledge

http://money.rediff.com/money/jsp/markets_home.jsp : This is an excellent place to go and seeoverall market overview and to build your portfolio for tracking purpose , excellent User interface...

http://moneytoday.digitaltoday.in/ : Money Today magazine online and other nice articles

Mutual Fund

http://www.personalfn.com/research-it/mutual-funds/fundarena/CompareFund.asp : Nice place toget mutual funds info on any criteria

Tax

http://finance-and-investing.blogspot.com/2008/06/tax-treatment-equit-mutual-funds-and.html :Article written by meShares

http://www.equitymaster.com/stockquotes/mkt-stats/ : Nice place to get info on list of shares withreturns on specific criteria , sector specific

http://wealth.moneycontrol.com/showstory.php?id=3231 : A good article on stock market investing.

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:support_and_resistance Agreat place to understand what is Resistence and Support (for people who understand stock marketand trading).

Insurance

http://click2insure.in/ : This is a website which gives all the insurance related information. You cango here and fill in your criteria for any insurance you need like Home , Life , Car Insurance etc ...You can compare different providers policy and buy them online ...

Fixed maturity plans (FMP) :

http://mutualfundcorner.blogspot.com/2008/08/fmp-or-fd-analysis.html

Some good Blogs

http://www.ranjanblog.com/

http://aimoney.blogspot.com/

http://rasoni.blogspot.com/



Friday, May 30


Finally many people like me have chance to take take plunge in the rising and booming Real estatesector , Any one who does not have Crores and Lacs to invest in flats , plots etc , to earn the capitalappreciation will to be able to invest even small amounts like 5,000 or 10,000.

What are Real Estate Mutual Funds ?

They are simple close ended mutual funds which will invest in Real-estate , as simple as that ... Thelock in period will be 3 yrs. These REMF will invest in properties and they will be owners of thoseproperties , they will also rent out these properties and pass on the rents to the investors as dividend.And when the mutual fund matures , it sells its holdings and pay us the returns.

REMF's will be listed on Stock Exchanges and they will be traded just like shares.

How do they work exactly ?

Lets take simple example :

You invest Rs 20,000 in some ABC REMF and one unit costs Rs 10 at the start , so you get 2000units. many people like you will also invest and Suppose the total money they get from investors in10 crores. Now they invest this money as per the laws defined for them. Suppose they receive 50lacs as rental income from their investments in a year and the total investments has grown to 12crores (because of rise in value of properties and other factors).

From this 50 lacs they will distribute dividend and you will recieve your share for 2000 units andthe unit value will be around Rs 12.

Rules and Restrictions for REMF's

- They will have to invest atleast 35% in completed projects , ready flats , shops , houses etc.

- At least 75% should be invested in real estate and related Securities.

- They can partner with real estate developers and invest maximum of 15% in the project (not incompany).

- The NAV will be published on daily basis.

- Most probably they will be in category of debt funds. Tax treatment not clear at the moment.

- Further caps will be imposed on the fund on investments in a single city,project or securities issued by associate companies and sponsors. Funds are not allowed to invest inassets owned by the sponsor or the asset management company or any of its associates during thelast five years the aforesaid entities hold tenancy or lease rights.

- The cities for investment by real estate mutual funds would include 35 cities in million-plus urbanagglomerates and 27 under the million-plus category as per the Census 2001

They are still to be launched , keep a watch !!!



Tuesday, May 27

ULIPS , Who need them , who don't !!!

What are ULIPS ?

ULIPS are investment cum insurance products , You take an insurance worth XYZ amount and thenyou pay some premium every year . Out of your premiums some amount is cut as administrativeexpenses (Premium allocation) and out of rest the mortality charges are cut for your insurance andthe rest is invested in market linked things.

Some points to note here are :

1. You decide the tenure of your Insurance and the insurance amount , depending on whichmortality charges are cut from your premium you pay.

2. The Premium allocation charges are very high in initial years (especially 1st year) and thenreduces in later years. That's the reason one should be invested in ULIP for long period to getmaximum benefit.

3. The money actually invested is invested as per your directions ... ULIPS have different plans with

different risk-return profile. One plan may have allocation of 80-20 to equity and debt , some othercan have 50-50 and some can have 20-80 and like this.

4. The investor can switch between the investment style as and when he wants (max 4 free switchesin most of the cases , there after some nominal fees).

5. ULIPS have sec 80C benefit, minimum of 3 premiums has to be paid.

6. ULIPS must be considered for long term investment products, so that the high cost in initial yearsare averaged out over longer period.

Advantages

- The switching over different styles is not costly , you are not charged when you switch , whichmake them flexible.

- ULIPS are innovative products and suits people who want long term wealth creation with someinsurance too..

Disadvantages

- They are not good product for people who require high cover and can pay less cover, becausepremium depends on the cover. Higher the cover , higher the premium. So these people must taketerm insurance for there life insurance.

- For people investing only for tax benefit must avoid them as they will prove to be costly in shortterm because of there high allocation charges.

ULIPS have become very popular in last some years as agents have put there life and souls inadvertising them and making people believe that they are wonderful product. Every product iswonderful for some or the other. If you can take good risk , need less insurance and closely want tomonitor markets and economy so that you can switch your investments from one plan to other ,ULIPS are great for you ... else they are not..

Evaluate yourself and dive ;)



Monday, May 26

Some Calculators

1. Corpus Calculator

What it Does : This Calculator will give let you calculate, how much money you can build up byinvesting a fixed amount every year for certain years and then leaving that grown amount foranother some years.

Example : If i invest Rs 50,000 per year for 10 continous years in something which gives a returnof 20% annually and then leave that grown money for another 10 years at return 15% , How much itwill grow upto ?

Investment every year of

for years

at interest/pa

then leave for years

to grow at interest/pa

2. Compounded Money Calculator

What it Does : If you invest certain amount one time and let it grow for some years at some interestrate annually , it will give you the total amount at the end.

Example : If you invest 1,00,000 in a mutual fund for 10 years which gives 30% annual return(CAGR) , the amount will grow to 13,78,585

Calculate

One time investment

for years

at interest/pa

Portfolio Builder

Investment every year

for years

Risk Tolerance

Calculate

Involvement

Your Financial markets Knowledge

EQUITY

DEBT

GOLD


Hope you like this ... Continue Reading


Monday, May 19

8 Steps of Financial Planning

Calculate

What is Financial Planning ? Its a little stupid definition, but its just planningyou finances. You plan your Investments in such a way which meets yourfinancial goals over time. You must be very disciplined when you do this , youmust know from where you the money is going to come to you and how are yougoing to save or invest it , and in future how are you going to achieve yourgoals.

Steps in Financial Planning

1. List down your Goals

Prepare a list of financial goals. It can be any requirement like Buying Home , Car , ChildEducation , Child Marriage , Vacation , Retirement etc . Along with this there must be a very cleartimeline associated with the Goal. Something like "I want to buy a Car after 3 years , which willcost 10 Lacs at that time" .

2. List down Your Cash Flows

Prepare the list of your cash flows , cash flow means , how money is coming and going ? Anymoney coming in is Cash inflow and Any Expenses is Cash outflow.

It it help you understand how money is coming to you and how is is utilized and how much isremaining for investing purpose.

Example (yearly) :

By Doing this , you can get very clear of how you are goingto get money and how you are going to spend it, and howmuch you are left with to spend.

3. Understand and figure out your Risk-appetite


This is a very important part of financial Planning, Risk appetite is the amount of risk a person cantake while investing. How much money you can afford to loose in order to earn high returns definesyour risk taking ability.

For Example:

if you are ready to loose 60% of your money , your risk appetite is highIf you are ready to loose 25% of your money , your risk appetite is moderateIf not at all ready to loose your money even 1% , you are not at all a risk taker.

It depends on you which category you belong in. it depends on individuals Psychology , FamilyConditions , Attitude etc

Generally people in there early age have more risk appetite as they have less responsibilities andmore freedom to invest . Later when they get married and have responsibilities , they cant riskmoney to loose.

4. List down your Financial Goals

At this point , you must be clear with your goals. Financial goals are the list ofthings for which you need money and you must have a predefined target time.Example:

Ajay earns Rs 3,00,000 per year with Rs 1,00,000 left for investment, he has moderate risk appetite.

Goals:

1. Buy a Car within 2 years worth 5 lacs.2. Vacations in New Zealand worth 8 Lacs within 4 yrs.3. Buy home worth 40 lacs in 10 years.

Here, Goals are not compatible with amount invested per year and with that kind of risk-appetite.

Therefore , Goals must be realistic and achievable , it must not look totally irrelevant.

5. Make sure your Goals are realistic

At this point you must make sure that your goals do not look unrealistic and unachievable . If theydo , then you must either lower your goals or increase risk appetite or increase the investible amountper year. This gist of the matter is , Be Realistic !!!

6. Make the Plan

Once you are done with all these steps , Its the time for the planning.

For each goal you must devise a systematic investment plan , by choosing the correct investmentinstrument. For example: For your child Education make sure you invest in something which is notvery risky for the time period you are going to invest in that. You can invest in equities for that , asEquities are not risky in very long term and generate great return.

But for a short term goal like vacation in 1-2 yrs , don't invest in equities , rather go for a debt fundor a fixed deposit.

In this way , you have to be clear how you are going to invest for achieving your goals.

7. Review and Take advice

Revise your steps and make sure everything is correct. If you are unclear about anything meet someone who is more knowledgeable than you , See a financial planner or a knowledgeable friend.

8. Take Action and keep Reviewing

The last step is to take Action and start executing the plan with discipline and make sure you changeyou goals , risk appetite as time passes and these things change over time.



Tuesday, May 6

How Inflation Eats away all your savings

Inflation : Its a tool to measure the increase inprices. If inflation is 6% , it means on an average theprices have increased by 6% , means anythingwhich had ciost of Rs 100 last year will cost 106this year. (Its a average price and not exclusively forsome item)

Considering inflation at 6% , the value of Rs 100will go down to Rs 53.86 in 10 yrs and to 29.01 in 20 yrs .

Inorder to keep value of you money same , the absolute return earned must be greater then inflation.

Investing in Fixed Deposits just retains its value, but people feel that they get good returns upto 8.5or 9.0% . There is a tax of 3.5% on your FD returns and then if you adjust inflation of 6% after that, you will realise that though your Rs 100 has become 109 in a year , you have to pay 3 or 3.5 tax onthat , and then if you have Rs 106 after that, you can purchase the same thing which you could havepurchased in Rs 100 a year ago.

Hence , FD don't give returns in real sense , they just keep your buying power. (consideringinflation + tax = return from FD)

Investing in GOLD is considered the best way to beat inflation. Historically Gold has alwaysoutperformed inflation.The worst thing one can do is to keep Cash in Bank account , which can beinvested . Cash must only be kept to a limit which may fulfill your emergency needs (preferably 3times of you salary). Any extra amount must be invested.

Continue Reading


Monday, May 5

Avoiding Bad decisions is better than taking good one's

"You only have to do a very few things right in your life, so long as you don’t do too many

things wrong." - Warren Buffet . What should be your motive as an investor? - To earn great returnon your investments with minimum risk , right ? We generally take good amount of risk to get morereturn , and many times we get it :) ... It might happen that if we make good profit 2 times , wemake 1 loss also because of the high risk we take. And we think its fair getting the losses , and youare right if you think so. We cant get profit always , if we take risk we have to accept losses .

But it is a good strategy?

Its questionable , lets explore on this topic today. Lets try to find answer of a question , what isbetter ?1. Taking high risk for high return at the cost of losses some times.2. Avoid getting losses at the cost of just moderate return and not great return.

Case Study :

- Robert do not understand much about investments, but still invests in high risk high returninstruments like shares and risky mutual funds. He invests Rs 1,00,000 for 5 yrs and gets returns of50% , -35% , 30% , -20% and 45% for 5 yrs .

- Ajay does not take much risk and invests in something which gives him better returns thanconventional FD's or PPF , but has risk component much lower than Robert case. he earns return of8% , 17% , -10% , 20% , 15% .

Who has more money at the end ?

Robert : 1,00,000 * (1 + .5) * (1 - .35) * (1+ .3) * (1- .2) * (1 + .45) = Rs 1,47,030

Ajay : 1,00,000 * (1 + .08 ) * (1+ .17) * (1 - .10) * (1.20) * (1 + .15) = Rs 1,56,940

Observation : A fixed deposit will give similar kind of returns 1,00,000 * (1 + 8.5/100) ^ 5 = Rs1,50,365

Why did this happen ?

- getting 0% profit overall is better than getting X % loss after getting X% profit. if you get 40%profit and then 40% loss on your investment of 1,00,000 , it will first become 1,40,000 after profitand then it will become 1,40,000 * (1 - .40) = 1,40,000 * .6 = 84,000 , which is a loss of 16% .

So even if you get 40% profit , a loss of 28.57% is enough to wipe out that whole profit earned.

- If Robert never got those losses and only profit , his final amount would be Rs 2,82,750 . Just lossof 35% and 20% ate way most of it .

- On the other hand Ajay , who put more efforts on avoiding losses on the cost of getting less returnway rewarded more at the end.

- The return percentage required to cover the losses is more than then percentage loss.

Learning and Moral

What do we learn from this article and the examples above?

The important part of investments are not earning great returns but taking measures to avoid losses.Earning high returns must be secondary goal , the major goal must be to avoid losses at any costthough we have to compromise on moderate returns. Because one loss is enough to wipe out majorportion of your profits and the hard work you take to earn great returns.


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Friday, May 2

Why Financial management is Important?

Why do we work? Why do we go daily to work and that too for years ?

Some people love their work and they enjoy what they do and that's a good thing. But as per myunderstanding , every one goes to work for there livelihood , because we want to earn and generatewealth over long term. People want to create wealth , want to buy home and car. they want to go forvacations , they want to accumulate millions in 10 or 20 years .

People give 100% time to there work , but not even 1% for the motive behind the hard work theyput, which is to generate long term wealth , for buying home , children education

I have seen people who earn well , but fail to invest it properly , in fact in a wrong way , and hencethey loose on that. Whats the use of working so hard if you cant invest it properly to achieve yougoals , Is there any use of your working for so many years, and after all we work for money , and ifwe cant manage that money or dont take some serious time to manage it , i personally consider it aswaste.

One of my friend has taken a ULIP policy to save tax without knowing what it is . The insurance hegets on that ULIP is 1.25 lacs with yearly premium of 25,000 with health insurance premium of4.5k.

he didn't pay any attention to what he is buying , Does he really need it , how is it going to bebeneficial to him.

One of my other friend took a Endowment policy with insurance of 10 lacs for 15 years withpremium of around 90,000 , when i asked her , how many financial dependents she had , she wasclueless and when i cleared what i am asking she said , "No one" .

People dont take any interest in knowing/learning/asking about financial instruments from anyoneand take idiotic decisions , loosing there hard earned money .It does not take 1hr / week or 4hrs/month or 1 day / year to take fair decision (if not best) regarding your finances.

If people start giving 1% time to there investments and finances and 99% to there work compared to100% time to work , they can do much better . A person earning 20,000 per month can generatemore wealth than a person earning 50,000/month , with better investment technique.

"Money does not grow just by investing more , but disciplined and great investing technique."

What do you think is the biggest reason for people in India for not taking financial planning

serious . ?

Difference between Growth and DIvident option in mutual funds

People are confused , really confused ...

There are 3 Mutual Funds Options (Growth , dividend , dividend Re-investment) and we willdiscuss those today. There are lot of misconceptions and myths which add to confusion in the worldof mutual funds and agents use it against investors and make them fool ...

Different Options in Mutual funds

1. Growth Option

Under this option you get the units at the time of buying and you have same number of units till theend. The NAV keeps changing according to performance

2. Dividend Option

This is the most misunderstood option in mutual fund.

Dividend option in mutual funds means that you will be repaid some amount of your investmentsevery year and it will be called as "dividends" , this helps those people who want some regularreturns every year from their investments in mutual funds.

People think that dividend is something extra which they receive other then their investments whichis not true :) , Dividend is declared per unit basis, if you have 100 units and MF declares dividendRs 4 per unit , you receive Rs 400 , and you think that your earlier investments have the same worth, where as it decreases by the amount you receive as dividend , because its paid out of yourinvestments only . The NAV of the unit goes down after paying dividend proportionately.

Example : let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100 , you willhave 1000 units . dividend declared : Rs 20 per unit

How it works : You will get Rs 20,000 and then your remaining worth will be Rs 80,000 and as youhave 1000 units , the NAV will go down to 80 . So your actual worth is same as Rs 1 lac . The onlyadvantage to you is that you are getting liquidity with your investments and getting regular cashevery year, unlike growth option.

Agents generally lure investors to invest in NFO's claiming that if company declared dividends,they will get more dividend compared to existing funds as they will have more units, Which isnothing but a idiotic myth :)

3. Dividend reinvestment

In this option ,the step is as follows

- Re-adjust the NAV assuming that dividend is paid.

- after that buy more units of same MF with that dividend money and allot it. So ultimately thenumber of units increases and the NAV goes down. In this case dividend money is not given to theinvestor but re-invested in the same scheme.

Example : let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100 , you willhave 1000 units . dividend declared : Rs 20 per unit

How it works : Your dividend will be Rs 20,000 , and NAV will come down to Rs 80 like ithappened above. Now this 20,000 will be re-invested in same mutual fund and you will get extra250 units (20000/80).

Your Total units = 1250NAV = Rs 80

Worth = 1250 * 80 = 1,00,000

Which one is better Dividend or Growth ?

It depends . There is no thumb rule to decide which one is better then the other, it depends on thesituation and your needs.

When is Growth Option better ?

If you are a person who earns well and does not need regular money back from your investment andif you are looking at long term investments then growth option is best for you because yourinvestments gets compounded , which does not happen on the dividend part in dividend option as itgoes back to investor and its never part of future growth .

When is Dividend Option better ?

If you are a person who need regular money every year from investments for some purpose, It mayhappen that you have more responsibilities and more dependents and if any small money which youget extra every year is helpful to you , in that case you can go for dividend option.

Conclusion : Different options in mutual funds are for different types of investors , before investingjust see what do you want from your investments and take appropriate option.

Returns in long term from Dividend and Growth : Below is an example which shows the returnsfrom similar funds with growth and dividend options and there performance over 3 years.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.Continue Reading


Monday, April 21

All about SIP , systemetic Investment plans

SIPis a

way of investing in MutualFunds where you pay a fixedamount each month for a fixedtenure.

Like If you take an SIP of 5,000for 1 year on Jan 1 , 2008 , youwill be paying Rs 5,000 permonth for next 12 months.


Please understand that its not a financial instrument , but a way of investing in mutual funds , somepeople confuse SIP with PPF ,NSC , and mutual funds , they think they can invest in "SIP" , its justa mode of investment.

SIP CALCULATOR : http://contentlinks.asiancerc.com/mt/tools.asp?pageSubType=toolsSIP

When to invest in mutual funds through SIP ?

Investment through SIP must be done only when markets are uncertain or very volatile , when youdont know which side they are headed to ..

Read Magic of SIP

SIP will be beneficial only if markets really are volatile or going down after you invested. If ithappens that markets turns bullish and starts going up , in that case SIP will not be beneficial andwill give less return compared to lumpsum investment in start.

SIP is a simple concept and hence very powerful , lets see some reasons why its worth investingthrough SIP

Reasons to invest through SIP in Mutual Funds?

More convenient for average person on wallet

Its more easy for a person to invest in small amount every month , rather than a lump sum amount.Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 years , ratherthan investing 60,000 at a same time.

It brings your average cost price for unit down (in volatile market)

The biggest advantage of SIP is this part , There is a concept of rupee-cost averaging, In SIP youbuy less when market and NAV are UP and you get more units when they are low. When thishappens , the average cost of per unit is lower.

Lets take an example of "Ajay" who invests 1,000 per month through SIP starting Jan 2 , 2007.


How SIP helps in this case ? See the result below :


ADVANTAGES

- Makes you a disciplined Investor

The other advantage of SIP is that it makes you a disciplined investor,. Once you start SIP , eachmonth you have to contribute certain money in mutual fund and that habit is cultivated.

DISADVANTAGES :

- It will not work in bullish markets or when market goes up over time

When market goes up and keeps growing over time , the units bought every time will be at highprice then the previous one, which will ultimately bring the average cost up , compared to the lumpsum investment at the start.

- In case of tax saving fund , the lock in period gets extended for every investment.

Tax saver mutual funds lock your money for 3 yrs, When you invest through SIP , each of yourinvestment is locked separately for 3 yrs from the date of investment. So if you pay your firstinstallment on Jan 2007 , it will locked till Jan 1 2010 , then the instalment paid on Feb 1 , 2007 willbe locked till Feb 1 , 2010 and like this each instalment will be locked with the gap of 1 month .

• In which type of markets do you think SIP will not work ?

Continue Reading


Thursday, April 17

What is Diversified Portfolio and how to create it ?

Today we will discuss How to build a Diversified Portfolio and hence and strong portfolio and whywe need it ? If you don't understand a lot of terms and terminologies related to investing and finance, have a quick look at terms and terminologies page to quickly understand the terms. it will take 5minutes.

What is Portfolio ?

Your investments all together is your portfolio , as simple as that .So , if i have

• 10,000 in shares• 20,000 in real estate

• 1000 cash

that's my portfolio

What is an Asset Class ?

An Asset class is something where we can invest and build assets. If i buy a Home or land , i buildan asset in real estate category , if i buy anything in shares or mutual funds (equity) , i create assetsin Equity asset class .

(Dont know what is mutual fund , click here)

They are just categories . Following are some asset classes:

1. Equity : Shares , Equity Mutual funds , Derivatives (Future and Options)2. Debt : Fixed Deposits , PPF , NSC , FMP (How to find the best Fixed Deposit)3. Real Estate : Land , Flat , Commercial Plots , Home4. Commodities : trading in commodities , leave it if you don't understand5. Gold or Silver : Recently these are also counted as Asset classes6. Cash : that's the hottest thing :)

Now what is a Diversified Portfolio ?

As the heading says, Diversified portfolio is a portfolio which is not heavily invested in some assetclass , but has balance over every asset class , There is no thumb rule that what percentage of yourportfolio shall go in which asset class. It depends purely on :

• What is your Risk appetite• Goals (short , medium and long term)• Economy and Political atmosphere• Current market over long term

Why Diversification ?

When you diversify you investments over different asset class , not only your money getsdiversified , but also risk , so if some particular asset class is not performing well , it will affect onlythat part of your portfolio and not whole of it.

Obviously it also effects the returns , you returns are collection of returns from all the asset class ,so even if some asset class did not perform over a period , it doesn't affect you hardly.

Every asset class provides some thing like :

• Equity : Very High returns , Volatility , Liquidity• Debt : Low but Secure returns , No liquidity• Real Estate : Good returns , stability , No liquidity• Gold : Hedge against inflation , Stability• Cash : High liquidity

Every asset class provides some thing good and some thing bad . Diversification helps in getting allbenefits in some or the other way and being at the centre of all. With diversified portfolio you get allthe elements of : Good returns , Stable returns , Liquidity , Security

Lets see some examples :

1. Anyone who was heavily invested in "Debt" around 2003-2004 didn't get high returns from thezooming stock markets (equity) for 4-5 yrs

2. Anyone who was heavily invested in Equity around start of 2008 , saw his investments go downby 40-60% .

3. Anyone who is totally invested in Debt cant get instant money if required, either he has to takesome loan over those investments or break his PF or FD etc.

That does not mean , non-diversification always hits ...

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards madefortunes (but at their risk) .

2. And people who had most of there money in GOLD in 2007 got the highest returns compared toany asset class.

3. It totally depends on person to person. I hope this point is cleared. Also , inside every asset class ,another level of diversification is important. Like in Equity there are different categories like LargeCap , Mid Cap , Small Cap . Read Magic of SIP

In Mutual funds there are sectoral funds , equity diversified , balanced funds , debt funds , liquidfunds etc . Another level of diversification is also necessary to achieve high level of diversification .

Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 3 (1 wife and 1kid) has following portfolio

Expenditure : 20,000 per month

Portfolio :

• Tax savers Mutual funds : 1 lacs (locked for another 2 years)• Real Estate (a land in his native place , pahari in UP) : 3.75 lacs• Fixed Deposits (for 5 years) : 2 lacs• PPF : 3 lacs• Cash (in bank) : Rs 25,000• Insurance Payout : He pay 55,000 per year as life insurance premium for an endowment

policy , for which he is insured for 12.5 lacs for 20 years . he started this policy before 4years.

His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment of 3-4 lacs2. Want to save 10 lacs for his son education in 10 years3. He want to retire early with monthly income of 45,000 at least . Read 6 steps of retirement

Planning .

This Portfolio looks like diversified, and yes it is, but not in a well mannered way.The asset wise allocation is

* Equity : 10%* Debt : 37.5%* Real Estate : 50%* Cash : 2.5%

His overall Portfolio Shortcoming

• His exposure to different asset class is not well balanced according to his over all situation• His Life insurance is very less and and not at all enough . For this he is paying a hefty

amount every year which adds a lot to his burden.• His Equity Allocation needs to go up• His Debt allocation needs to go down• His cash needs to go up for liquidity. none of his investments in any asset class provide

liquidity or near term liquidity , If he needs 1 lacs suddenly he cant get it , or will get it afterbreaking his FD.

Read a Nice article on Power of Asset Allocation .

Suggestions :

The first thing he must do is to restructure his portfolio.

• He shall surrender his existing Endowment policy and take a Term Insurance 35-40 lacs for20 years for which he will pay around 13000-14000 per Annam. he will save surplus of40,000 per year because of this.Also when he surrenders the policy he will get back aroundRs. 2.4 lacs back.

• He must invest more in Shares and Mutual funds (as his risk taking capabilities is morebecause of his less age and less dependents)

• The land in his native place is not appreciating in value much faster unlike other places likeother real-estate hot spots. He shall consider buying his home sooner and sell his land atnative place. if he sells his land he will get around 4 lacs.

• With the money he gets from surrendering policy (2.4 lacs) and selling his land (4 lacs) , hewill get around 6.4 lacs and he should utilize this money as the down payment for new flatand rest he can take as Home Loan. (Want to know how EMI on home loan is calculated ?click here ) He can do it later if he wants (when he can afford the monthly EMI)

• He shall consider increasing his Cash to a level which can meet his contingent needs if anyarised. He shall have at least 2 to 3 times of his monthly expenses as contingency fund ,which is totally liquid.

• Also apart from Cash and investing in Tax saver mutual funds , he shall consider investing insome non-tax saver mutual funds which also gives him near liquidity.

• He may leave the debt investments as it is . If he wants he can break his FD in case he isgoing for the Home loan , he can increase the down payment part from this money.

• In case he is going to take home loan after 1 year , he can also take some loan on his PPF , atleast for some part he will pay less interest than the home loan.

• Also he shall invest some money in GOLD , to give more stability and security to hisportfolio.

• At last he shall consider taking a Family floater Health Insurance plan , which helps him tosecure his Family from and health problems or illness.

Recommended Portfolio

Apart from His Home (considering he takes Home soon)

• Equity 65% ( Direct shares 20% , Equity Funds 60% , Balanced Funds 20%)• Debt 20%• Gold (ETF) 10%• Cash 5%

Conclusion

Diversification does not say that you have to invest in some money in every asset class for sure , theidea behind it is just that the risk is minimized by diversification and the portfolio is morestable.Happy diversifying :) and Leave comments ...

Continue Reading


Sunday, April 13

All about TAX in 2008

There is just one word which can describe year 2008-2009 tax structure ... GREAT. This article willtell you everything about tax in 2008 . Following things will be discussed :

1. Tax Slab in 2008 for salaried employees

2. How much will you save ?

The exemption limit for year 2008 is 1.5 lacs , which means that if your taxable income is upto 1.5lacs , you dont pay any tax .

What is Taxable Income ?

The pay which you get has many components , like HRA , conveyance allowance and others.

Out of this income some things are deductible on your hand and after deducting you arrive at aamount called Taxable income , on which you have to pay tax.

Taxable Income = Your Gross Salary - (HRA) - (Investments under Sec 80 C) - (Conveyanceallowance) - (Health insurance Premium , Sec 80D) and some more things which you may claim.

The slab for year 2008-09 is as follows:

Exemption Limit for Men = 1.5 lacsExemption Limit for Women = 1.8 lacsExemption limit for Senior Citizens = 2.25 lacs


3% Education cess also on the tax amount after tax and surcharge (if any)

What is surcharge?

* If salary is above 10 lacs , 10% surcharge will also be applicable.

Example : Ajay earns Rs 14 lacs

Total Income (14 lac ) - amount under sec 80c (1 lac) - HRA (Rs 70k , for example) - Conveyenceallowance (9,600 , 800*12) - health Insurance (10k , max 15k) under sec 80D (its seperate from sec80C) = 14 lacs - 1,94,800 = 12,05,200

Now lets do tax calculation :

0 - 1.5 : 01.5 - 3 : 15,000 (@ 10%)3 - 5 : 40,000 (@ 20%)5+ : 2,11,560 (@ 30%)

= 2,66,560 + surcharge (10% of this amount)= 2,66,560 + 26,656= 2,93,216

Now education cess will also be applied : @ 3% , so 2,93,216 + 3%= 2,93,216 + 8796.48= Rs. 302012.48

This is the total tax payable.

Note : education cess is charged after surcharge is applied and not before.


Continue Reading


Friday, April 11

4 reasons to invest in GOLD

There are many reasons why we shall look beyond conventional Fixed Deposits , PPF and highgrowth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming asornaments , for jewellery but seldom as an investment purpose , in fact silver also for that matter.

But now there are many reasons to invest in GOLD , just like people invest in Shares , Mutual funds, PPF , NSC and Fixed Deposits.

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for atleast short or medium term atleast. No one knows whats goingto happen in 6 months or 1 year or 2 year. Long term may be good but still medium termperspective is not very clear.

Not only Stock Market , but whole of financial Markets are uncertain , if you consider problemslike Inflation , dip in projected GDP growth of economy etc .

Reason 2 : It acts like hedge towards Inflation and Foreign currency

As Indian currency is gaining against Dollar and other currencies , Rupees is set to become morestrong in coming years. Gold has inverse relation with Dollar.

http://news.goldseek.com/SpeculativeInvestor/1171382460.php

In future as Dollar weakens , GOLD will become more strong.

Reason 3 : Its a relatively less known investment option and has high potential in future

Looking at history , and every time we see that a investment option starts becoming popular and bythe time most people know about it , it already gives most of its returns and becomes a talk of past.

GOLD has started gaining attention as investment option and becoming popular and still in itsmiddle stage , if not early.

So its the time to ride the boat.

Reason 4 : Future High Demand and less supply

In future gold is going to in high demand and its already in less supply , so according to thedemand-supply logic the prices are bound to go up in near future. Indians account for 23% ofworld's total annual consumption and overall global demand has increased 15% Year on year

Gold demands were on all time high in 2007 and expected to increase in coming years due tomismatch in demand and supply.

Reason 5 : More Diversification

Before some time back , diversification of portfolio was limited to Equity , Debt and Real Estateand some cash , so that your risk is spread across different class of assets. GOLD has evolved asanother asset class and not it help in diversifying your portfolio.

Whats the Best way to invest in GOLD ?

It really depends on person and situation and the motive of investment.

One can invest in GOLD directly by buying gold in physical form like jewellery , gold biscuits ,gold bars. It all of these require some maintenance and some problems are associated with investingin physical format like :

- No surety of purity , you can be sure that you got the same purity as promised- Preserving cost : if you have physical gold , you will invest in bank locker etcfor secure storage.- Risk of theft , mishandling etc

To avoid all these problems , we have an alternate way of investing in GOLD , called Gold ETF's ,read it next ...

Read about Gold Funds (Click here)

What are GOLD ETF's

Gold ETF's are special type of ETF's (Exchange traded funds) , ETF are not covered here , but viewthem as open ended mutual funds , which are traded on stock exchange just like normal stocks. Youcan buy units on Stock Exchange , each unit is equivalent to one gram of gold or .5 grams of gold.

So if you want to invest in 100 grams of gold , you can buy 100 units of a GOLD ETF from stockexchange , you can buy it just like any share from stock exchange.

gold ETF's price changes real time , as they are traded on stock exchange like shares.

In India currently there are Five Gold ETF's.

- Benchmark Gold ETF (Stock Code on NSE/BSE : GOLDEX ) (the first one in country)- UTI Gold ETF (Stock Code on NSE/BSE : UTGOLD )

and other 3 from Reliance , Quantum and Kotak listed on NSE.

Gold has returned 38% in last 1 year and 170% in last 5 years (absolute). And it looks great infuture.

You can easily enter and exit from GOLD ETF's unlike physical gold.

How investing in Gold ETF's scores over Physical gold like Bars or jewellery ?

Comparison of GOLD ETF's vs GOLD BARS vs Jewellery

Consider you are investing Rs 1 Lacs in Gold , there are 4 parameters to judge.

If you purchase Them

- Jewellery : Making charges of 15-20%- Gold Bar : 10% to 20% mark up charges by banks.- Gold ETF: 1.5-2.5% entry load

If you Sell

- Jewellery : 10% - 20% is lost due to Purity issues- Gold Bar : Banks do not take it back , so premium paid at time of purchase is written off.- Gold ETF : Brokerage of 1% or even less

Maintenance Charges

- Jewellery : Insurance charges and locker charges (if you put it in locker)- Gold Bar : Insurance charges and locker charges (if you put it in locker)- Gold ETF : 1.5 - 2.5 %

Tax Implications

- Jewellery : Long term capital gain of 20% , but after 3 years. 1% wealth tax- Gold Bar : Long term capital gain of 20% , but after 3 years. 1% wealth tax- Gold ETF : Long term Capital tax of 20% , but after 1 year. No wealth tax

Note : Gold is taxed at 30% if held for less than 1 year in any format.

So on all these 4 scenarios , GOLD ETF's score heavily over other means of investing in

GOLD.

Read about Gold Funds , another article on Gold Investing , Click Here

To read more on why gold is a must buy now and how silver is much better than gold , read

http://silverstockreport.com/


Continue Reading


Thursday, April 10

Learn about your EPF and PPF in detail

Lets see each of PPF and EPF in detail . Both are providend fund benefits for retirement .

Employee Provident Fund (EPF)

The Employee Provident Fund, is a retirement benefit scheme that is available to salariedemployees.Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's

salary and contributed towards the fund. This amount is decided by the government.The employeralso contributes an equal amount to the fund.

However, an employee can contribute more than the stipulated amount if the scheme allows for it.So, let's say the employee decides 15% must be deducted towards the EPF. In this case, theemployer is not obligated to pay any contribution over and above the amount as stipulated, which is12%.

Other Points :

- Return on Investment: 8.5%

- If you urgently need the money, you can take a loan on your PF. You can also make apremature withdrawal on the condition that you are withdrawing the money for yourdaughter's wedding (not son or not even yours) or you are buying a home. - tax benefit under Sec 80C.

- The amount if withdrawn after completing 5 years in job will not be taxable.

Public Provident Fund (PPF)

The Public Provident Fund has been established by the central government. You can voluntarilydecide to open one. You need not be a salaried individual, you could be a consultant, a freelancer oreven working on a contract basis. You can also open this account if you are not earning.Anyindividual can open a PPF account in any nationalised bank or its branches that handle PPFaccounts. You can also open it at the head post office or certain select post offices.

You can take a loan on the PPF from the third year of opening your account to the sixth year. So, ifthe account is opened during the financial year 1997-98, the first loan can be taken during financialyear 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of thefirst financial year. In this case, it will be March 31, 1998.

You can make withdrawals during any one year from the sixth year. You are allowed to withdraw50% of the balance at the end of the fourth year, preceding the year in which the amount iswithdrawn or the end of the preceding year whichever is lower.

For example, if the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, orMarch 31, 1999, whichever is lower.

If the account extended beyond 15 years, partial withdrawal -- up to 60% of the balance you have atthe end of the 15 year period -- is allowed.

Other Points:

- The minimum amount to be deposited in this account is Rs 500 per year. Themaximum amount you can deposit every year is Rs 70,000.

- Return on investment : 8%

- tax benefit under Sec 80C , no tax on the maturity and no tax on interest earned.

- If you’re involved in a legal dispute, a court cannot attach or question the money inyour PPF account.

Who should invest in PPF ?

Its mainly for people who are very conservative and cant take risk to great extent. Any one who wants to invest for long term in some secure saving instrument must invest in PPF. Toachieve long term goals there are many option like:

- Mutual Funds (Equity) - Shares (Equity ) - PPF (Debt) - Fixed Deposit (Debt) - NSC (Debt) - Others

Out of these , all under Debt catagory are safe. PPF is the most recommended if the investmenthorizon is very long like 15+ years.

Because of compounding you money will grow to a big amount.


Continue Reading


Friday, February 29

Finance Presentation , Excel Sheets and Ebooks Download

This is Download Page , There are Presentations , Ebooks , Excel sheets and other ReadingMaterials . Go ahead and download them and use them .

PRESENTATIONS

• Finance Presentation • Personal Finance for Starters • Life and Health Insurance • Investments and Growing Wealth • Important Calculations in Personal Finance

SHORT EBOOKS and READING MATERIAL

• Download this Blog in Single PDF [All articles till 22'08/09]• A small Ebook on ULIP's FAQ • All about ULIPS • Ebook on "How a newcomer should Start in Stock Market" • Ebook on "Basics of Technical Analysis"

• A Short eBook on Technical Indicators • A talk by Breet Steenbargar on Trading

EXCEL SHEETS

• Monthly Contribution Calculator • Compounding Calculator • Stock Portfolio Management Excel Sheet • Retirement Calculator

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Monday, February 25

All Tax Saving Mutual funds are not same !!!

All Tax Saving Mutual funds are not same !!!

This post targets those who already know ELSS or Taxsaver mutual funds. But many people do notknow that not all ELSS are same.

They might know that Tax saver funds are Diversified equity Mutual funds , yes they are !!! . Butstill they can be differentiated in the catagory of :

- Aggressive Tax savers : These are the ELSS who bet more on small cap and mid cap stock, andhence have more return potential.

- Safe and balanced Tax savers : they heavely bet on Large Companies , which are more safe thenmid cap or small cap stocks.

A person who want to invest in ELSS shall not put money in just 1 ELSS , but 2-3 different ELSS.Again Putting all money in same type of ELSS is not good , as they will be of same portfolio type( i mean more stake in Huge companies and less in Mid and Small cap)

Rather , they shall put money in ELSS both types.

Let us see some top performing Mutual funds and there catagory:

Aggressive ELSS:

1. Birla Equity Plan - D2. DSPML Tax Saver -G3. Principal Personal Tax Saver

Safe ELSS

1. HDFC Taxsaver2. HDFC Long Term Advantage3. SBI Magnum Taxgain

source : http://www.valueresearchonline.com



Friday, February 22

Life Insurance...How to go about it .

Life Insurance is nothing but the insurance covered foryour Life. In case of death the sum assured is given to thenominees.Unfortunately in India, people see LifeInsurance as Investment Product and not as an InsuranceProduct.

They don't understand that insurance gives financialsecurity to their dependents in case of there death, ratherthey see it as the last benefit provided to them and themost important thing for them it that they get the money back in case they survive the tenure ofInsurance.

People are ready to pay higher premiums to Insurance Companies for a policy which gives themdeath and survival benefits like Endowment plans and Money back plans.

People are not ready to pay premiums if they don't get any thing in case of surviving the tenure andthat's the reason why Term Insurance never became popular in this Country. That's also the reasonwhy many people are under-insured because of the high premium, they cant pay for higher insuredsum.

Many People even don't know that Term Insurance exists, the reason for that is their insurance agentnever told them about it, because they get a very little commission on it unlike Endowment Plans.

Life Insurance is to provide a good enough cover to dependents in case of death. This is the onlytarget of life insurance.

Case Study-------------------

Rajesh is a salaried person with salary around Rs 20000 per month , He has 2-3 dependents like hisparents and wife.

Rajesh can afford maximum of 10% of his salary as insurance premium outgo in a year.

So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.

- If he dies between 2005 - 2025 , his family will get Rs 10 lacs.- If he survives till 2025. He will get Rs 10 lacs .- Monthly premium = Rs 2,000 - Total premium in an year is 24,000

- Cover : Rs 10 lac

There are some points to consider here.

- He is highly Uninsured , Rs 10 lacs is very less amount to get covered . He needs atleast Rs 25-30 lacs as cover , as he have financial dependents.

- The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at themoment and adds to his financial burden a lot.

- In case of survival he gets Rs 10 lacs , but in 2025 . Considering inflation at anaverage of 5% , the current value of that amount will be Rs 3.5 lacs. Which means in2025 the value of that 10 lacs will be very less and considering that after 20 years rajeshwill be earning very good money and Rs 10 lac at that time will be a small amount forhim , may be less than what he may be earning in a year. It means It does not benefithim a lot after 20 years.

He could have solved all of his problem if he would have taken a term insurance instead ofEndowment Plan ...

If he takes Term Plan , he can get a lot more cover in very less premium , and can invest the surplusmoney in much better investment avenues like Diversified Mutual funds or Equities.

He can take a term plan of Rs 30 lacs for 30 years , with an annual premium of 9,000 per year .(including service tax , approx).

So instead of Rs 24000 in a year he can just pay 9,000 can be covered for 30 lacs and that too for 30years.

He can invest the extra 15,000 (24000 - 9000) in diversified mutual funds with good track recordfor next 20 years through SIP every month or yearly lump sum .

Equities in long term outperform all the investment options , In last 10 years HDFC taxsaver hasgiven around 43% CAGR ... that's the magical returns one can expect ... SBI MAGNUM Taxgainhas done much better ...

Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for next 20years..

The investment will be worth

• Rs 16 lacs at 15% return• Rs 22 lacs at 18% return • Rs 28 lacs at 20% return • Rs 94 lacs at 30% return (less chance)• Rs 3.14 crore at 40% return (very less chance)

remember that this is for 20 years and not 30 years. In 30 years it will be much much more ... for egat 20% it will be 1.77 crores and 13 crores at 30%.

If we consider this case : when he has taken Term Insurance He is in profit at any point of time

- If he dies early his family will get 30 lacs + some investments- If he dies late , his family gets 30 lacs + his investments which has grown a lot now.- If he survives , his investments are enough :)

The biggest thing to consider is that his Family is covered with good amount in case of his death ,which is the main factor and sole idea of Life Insurance.

According to me , Endowment and Money back plans are investment products with a pinch of Lifeinsurance in it. Term Insurance are the best , simple , "pure life insurance" and "must have" product.

I am not against Endowment policy or Money back Plans , but they have a different motive.

Dont see what it takes from you , see what it gives you.



Friday, January 25

Terms and Terminologies used in Investing , Finance , Insurace , Tax , Stock

Market

Share or Stock : A Share is a representation of the amount ofa company that you own. So if you own 100 shares of acompany which has 100000 shares you are owner for 1/1000thpart.

Entry Load : Commission paid while purchasing units of amutual fund from a broker, No Entry Load to be paid ifdirectly purchased from Mutual Fund Office or its Websiteonline.

Exit Load : Commission paid while selling off the mutual funds before a specified time limit.generally it is .5% or 1% if exit before 6 months or 1 year.

NAV : The current price of each Unit of Mutual Fund , it goes up or down depending on the growthor decline in value of mutual fund investment.

NFO : New Fund Offer , When a new Mutual Fund is Launched , its call NFO of that Mutual Fund.

Open Ended Mutual Funds : Mutual funds without restriction on Entry or Exit , Anyone can buyor sell the units anytime.

Close Ended Mutual Funds : Mutual Funds having restriction time on entry and exit , there issome particular time duration to buy the units and then its locked for some pre-decided period . ForEg. ABC mutual fund , a 3 years Close Ended Fund.

Growth option in Mutual Funds : Upon choosing this option, a unit holder does not receives anydividend from Mutual funds but the money it is added to investments which helps in increasing theNAV of mutual fund. Its good for people who do not want to receive cash regularly as dividend.

Dividend Option in Mutual Funds : By choosing this option a investor receives the dividend fromthe mutual funds whenever it is declared. Its good for investors who need regular cash.

Equity Fund : These are the funds which put most of there money in Equity and less in Debt.Equity refers to instruments with high risk and high returns like Shares , and Debt refers toinstruments with no risk or low risk and less returns like bonds , Fixed deposits etc . These are highrisky and with high returns.

Debt Fund : The funds which put more money in Debt and less in Equity . these are Less risky andwith less returns.

Balanced Fund : The Funds which have money in both the categories in a ratio such that it makesit medium risk and medium return Fund. The ratio need not be 50:50 ... even a ratio of 70:30 inbooming markets can be considered as balanced. and 20:80 in bad situation will be considered asbalanced.

Fund House : A Fund House is a company which manages money invested in different kind ofmutual funds. Like all the HDFC Mutual funds belong to

Sectoral Funds : These funds put money in a specific sector or a group of inter-related sectors.They have high risk , high return nature.

Fund Managers : These are the experts who manage he Mutual Fund, they take the decisions like ,which sectors to put money in , and which company they will pick up , the strategy , the road map ,etc ...

Mutual Fund Benchmark : Every mutual fund has a benchmark against which they measure thereperformance, They they perform better than there benchmark its considered that they have donegood , else bad. For Eg . A lot of mutual funds have Sensex as benchmark , some sectoral fundinvesting in Pharmaceutical may have BSE Heath care as its benchmark.

SIP (Systematic investment Plan) : This a investment method through which you can invest inmutual funds every month. Instead of paying 60,000 together , one can take an SIP of 5,000 for anyear.

Stock Market : Its a market which facilitates the buying and selling the shares of companies byconnecting buyers and sellers . It can be considered as a mediator between buyer and seller. Soanyone who wants to buy or sell shares can do it from stock market.

Sensex and Nifty : These are indexes of BSE (Bombay Stock Exchange) and NSE(National StockExchange). Sensex and Nifty, both are indicators of how prices of major stocks are moving at anypoint of time. Sensex comprises of 30 Shares and Nifty comprises of 50 shares. They are calculatedby a method called "Free Flow Market Capitalization" . When sensex moves up it indicates that onan average more shares have increased there value and some have declined and vice-verse. It movesup or down depending on the combined valuations of the shares they comprise of.

Market Capitalization : This means how much worth all company shares collectively are. Simplyputting:

Market Capitalization = Total number of shares available X Current Price .

Its the total money required to buy all the shares of the company available to public.

IPO (Initial Public Offer) : When a company offers shares to general public for the first time , itscall IPO . The purpose of this is generally to raise funds to finance there future project andexpanding there business.

Correction : It is a sharp increase or decrease in stock market which was overdue for long . Whenmarket goes more up or down then expected because of rumours or for some short term reason ,then to average out that correction happens ...

Term Insurance : In this you are insured for a big amount for very less annual premium,But dontreceive anything when your maturity expires. Its a very cheap form of insurance and considered asthe best insurance anyone can get.

Endowment and Money Back Plans : In this you get insurance and you get a big lump sum afterthe tenure expires along with periodic payments in between. The premium is high per Annam.

ULIP's : These are insurance+investment product , from the premium you pay, some amount isused as your premium towards insurance and rest is invested as per your choice. this product needsa lot of questions to be answered before taking .

Short Term and Long term Capital Gain and Loss : In case of Shares and Mutual Funds , Anyprofit or loss made within 1 year. Tax treatment will be:

- Short term profits : 15% flat. (2008-2009)- Long term Profits : Nil

Incase of Land , House , Jewelry , Any profit or loss made within 3 years. Tax treatment will be:

- Short term profits : 20% Flat- Long term Profits : 30% Flat

Portfolio : Total investments combined are called Portfolio. So if Person ABC has invested Rs x inshares , Rs y in Insurance , Rs z in PPF and Rs k in Real Estate , it will combined be his Portfolio.

Trading Account : An account through which a person deal in instruments on stock market.

Demat Account : An account where shares are stored in electronic format. Its just a account whichstores shares.

Commodities : Commodities are things like sugar , steel etc ... A person can trade in these thingsalso just like shares and mutual funds. Multi Commodity Exchange of India Limited (MCX) is thecommodity exchange in india just like BSE and NSE for shares.



Tuesday, January 22

Power of Compounding and Early Investing

This post talks about the importance of Investing early in life and do not get late at all. Also itshows how powerful compound interest and regular investing is. When we invest early in our lives,the amount keeps growing and when it becomes a big chunk, the growth in amount every year is alot more, compared to initial years .

For Example: Suppose you start in 2008 and want to save for retirement and If regularly invest 1lacs every year at 15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if youdo late for 2 years and start in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave youwith Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs.This 58 Lacks is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don't get benefit of compounding.

Below is the table of how Rs 1 lac will grow with different interest rates and different time lines.


(click toenlarge the file)

Lets see two Case studies and there results of early investing:

CASE STUDY 1

Robert and Ajay start career same time at age 23

Case 1 (Ajay) :

- Understand the importance of investing Early, enjoys some time and then ...

- Start investing early (at 25) and invests Rs 50,000 every year.

- Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year.(This is annuity , don't confuse with Compound interest :) )

- Stops after that and doesn't invest extra money till he is 65 , he just leaves that 7.97lacks in investment and that keeps growing.

- when he is 65 , he has Rs 1 Crore 40 Lacs :)

Case 2 (Robert):

- Spends a lot and doesn't believe in investing early, and when he is 35 he startsinvesting for next 30 years he regularly invests 50,000 till he is 65.

- Assuming the same return of 10% per year.

- He has only 82.2 lacs :(

Even after saving for extra 20 years Robert has 43% less than Ajay .Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i

Ref : http://en.wikipedia.org/wiki/Annuity_(finance_theory)

CASE STUDY 2

After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert isextra smart and Ajay is a Software Engineer.

Both are 25 and want to retire at 60 , both earn good money ... (both can invest 1 lac per/year) ...assuming return at 12% per/Annam ...

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his moneygrows to good amount and he just keep that money invested till he retires ..., he can invest foranother 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year...

Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if hestarts after 5 years , he thinks lets enjoy some years .

Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year ... He sees thatRobert has stopped investing now and enjoying now, so he also does same , stopsinvesting and leaves his money invested which is growing ...

Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30years till his retirement, he wants to have more money than Robert at the end.

Results at 12% return

Case 2.1 : Ajay get how much ??- 66 lacs

Case 2.2 Ajay gets ??- 1.64 crore

And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years

- 1.72 crores !!


Continue Reading


Monday, January 21

Different Categories of Mutual Funds

We will see here different categories of mutual funds (What are Mutual Funds) like:

Diversified Equity FundsTax saving Funds (ELSS)Balanced FundsSectoral FundsMid Cap and Small Cap FundsIndex fundsExchange Traded FundsFund of FundsDebt FundsLiquid Funds

Diversified Equity Funds : These are those mutual funds which invests across all sectors anddiversify their portfolio. They invest in large companies to small companies. Which results in widediversification. It helps in spreading risk across all sector and return potential is very good.

Tax saving Funds (ELSS) : These are special category of mutual funds which are tax saving fundscalled ELSS (Equity Linked Saving Schemes). These have a lock in period of 3 years. They areDiversified mutual funds in nature.

Balanced Funds : These are the funds which put money in Equity and Debt in some balancedproportion. Balanced does not mean 50:50 , it may happen that they put money in ratio of 70:30 or60:20 or may be 80:20 ... but the ideal ratio would be 50:50. It depends on market conditions. In avery fast booming market, a fund with 7:30 mat be a balanced one. And in a bearish market acombination of 50:50 may be considered are an aggressive fund. These funds have low risk and lowreturn capacity in comparison with normal equity funds.

Sectoral Funds : These are Funds which invests all its money in companies of a particular sector ora bunch of sectors related to each others. The reason for this is high faith in the sector for growthand return potential because of which these funds are very risky and have high return potential. Foreg: Reliance Diversified Power Fund .

Mid Cap and Small Cap Funds : These funds are those funds which invest there money in Midcap Stocks or small Cap stocks ... Mid cap and Small Cap companies are companies categorised bythere market capitalization.

• Large Cap : greater than $10 billion• Mid Cap : Between $2 and $10 billion• Small Cap : Less then $2 billion

Mid cap and Small Cap stocks are more riskier as they are small compared to large Cap stocksbecause of size and reachability in market. They also have huge potential for growth so they cangive superb returns too. For eg:

"Sanghvi Movers" gave a return of around 4500% in 5 years from 1992 - 1997. An investment ofRs 1 Lac was worth Rs 45 lacs in just 5 years.

In the same period "Jindal Power and Steel" gave return of 20000% . So investment of Rs 50,000was worth Rs 1 crore in just 5 years.

Index funds : These are mutual funds which mirrors a particular mutual fund. They Put theremoney in the companies which are part of that index and in same proportion as per the weightage ofthe company in that index. For Eg:

Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fundin the same ratio as their weights. Suppose following is the weightage table for index:

Reliance 10%Infosys 8%Wipro 8%..........Ranbaxy 3%

Then the fund will also invest in these companies stocks in same proportion. The NAV's of thesemutual funds increase or decrease in the same way as the index. if index will grow by 2.4% thenNAV will also increase by 2.4% .

Exchange Traded Funds : ETFs are just like Index funds with some differences, ETFs are a mix ofa stock and a MF in the sense that

1. Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index lik Nifty/Sensex ora commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange onreal-time basis

2. ETFs are passively managed, have low distribution costs and minimal administrativecharges. Hence most ETFs have lower expense ratios than conventional MFs.

3. Convenient to trade as it can be bought/sold on the stock exchange at any time of the daywhen the market is open (index funds can be bought only at NAV based on closing prices)

Fund of Funds : These are mutual funds which invests in other mutual funds. They put money indifferent mutual funds in some proportion depending on their goals and objectives.

Debt Funds : These are mutual funds which have their major holdings in secure and fixed incomeinstruments like Fixed deposits , bonds . They also put a small proportion in Equity (High risk ,high returns). These are secure in nature and provide low returns.

Liquid Funds : Liquid funds are used primarily as an alternative to short-term fix deposits. Theyinvest with minimal risk (like money market funds). Most funds have a lock-in period of amaximum of three days to protect against procedural (primarily banking) glitches, and offerredemption proceeds within 24 hours. Liquid funds score over short term fix deposits.

Continue Reading


Friday, January 18

How Home Loan EMI is calculated.

In this post we will learn how do we calculate monthly EMI for home Loan and how increasingTenure does not help much after a certain point.

In Housing Finance , Equated Monthly Installment(EMI) refers to the monthly payment towardsinterest and principal made by a borrower to a lender. EMI is calculated using a formula thatconsiders .

- Loan Amount

- Interest Rate

- Loan Period

EMI = ( L x i ) X (( 1+ i ) ^ N) / ([(1+i)^N] - 1)

Where,

L = Loan amounti = Interest Rate (rate per annum divided by 12)^ = to the power ofN = loan period in months

Assuming a loan of Rs 1 Lakh at 11 percent per annum , repayable in 15 years, the EMI calculationusing the formula will be :

EMI = (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] - 1)

====> 916 X (5.161846 / 4.161846)

EMI = Rs 1,136

Note : i = 11 percent / 12 = .11/12 = .00916

EMI caculator : http://contentlinks.asiancerc.com/mt/tools.asp?pageSubType=emi_calculator

Read : what is Net Present Value ?

Well i would like to raise a point here , or a question ??

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30Lacs at 12% interest rate.

I did a bit of my so called "mathematical skills" ... and found out that EMI is of form

EMI(n) = C1 X C2^n / C2^n-1 , whereC1 = L * i

C2 = 1+i

So the difference in the EMI value for n+1 and n is nothing but

by a bit of caculation i got :

EMI(n) - EMI(n+1) = C1 x (C2^2n - C2^n) / (C2^2n - 1)

and when n becomes very large ... and appling limit, we get

Lim C1 x (C2^2n - C2^n) / (C2^2n - 1)-> Inf

=>

Lim C1 / C2^nn->Inf

and as C2 > 1 (C2 = 1+i)

=>

Lim C1/C2^n = 0n->Inf

Or in other words if we differentiate the EMI formula ... we get a constant ...

It shows and proves that the difference in EMI value is not very significant copmpared to thechange in tenure and at one stage its almost of no gain to increase the tenure.

To show this argument : i would like to present an example, considering my old question:

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs

30 Lacs at 12% interest rate.

I am listing down the EMI value for different Tenures from 10 years to 100 years

Tenure EMI Differnce in EMI when tenure increased by 5 years

10 43041 703615 36005 297220 33032 143525 31596 73830 30858 39135 30466. 21140 30254 11545 30139 6350 30076 3455 30042 1860 30023 1065 30012 5

70 30007 375 30003 180 30002 0.9585 30001.17 0.5290 30000.64 0.2995 30000.35 0.159

What it tells us is that it's almost useless to extend the tenure after some time ...

Continue Reading


Friday, November 16


Advantages of Mutual Funds

1. Management : One of the biggest advantage is that in very low cost the investor gets hisinvestment managed by experts. If they want to get the services solely for their investment , it canbe very expensive but by investing in MF they can take advantage of the scale.

2. Scale Advantage : The transaction costs of a single indivisual is very less because mutual fundsbuy and sell in big volumes.

3. Diversification : With mutual fund investment your money gets diversified in a lot of things,which helps in minimising the risk factor. Also if one particular sector does'nt perform well the losscan be compensated with profits made in other sectors.

4. Liquidity and Simplicity : You can sell or buy mutual funds anytime. So mutual funds are goodif you want to invest in something which you can liquidate easily . Also MF are very simple to buyand sell .

Disadvantages of Mutual Funds

1. Risks and Costs : Changing market conditions can create fluctuations in the value of a mutualfund investment. Also there are fees and expenses associated with investing in mutual funds that donot usually occur when purchasing individual securities directly.

2. No Guarantees : As Mutual funds invest in debt as well equities , there are no sure returns .Returns depends on the market conditions .

3. No Control : Investor does not have control on investment , all the decisions are taken by thefund manager. Investor can just join or leave the show.

Continue Reading



Mutual funds Common Myths

1. A Mutual fund with low NAV is better than other MF's with high NAV.

This fallacy is due to the fact that investors perceive the NAV of a mutual fund (MF) as similar tothe price of equity shares.

Comparison of NAV of MF unit and Share price

NAV = (market value of all the shares held in the portfolio + CASH - LIABILITIES)/ total numberof unitsShare Price = combination of company's fundamentals, demand-supply, public perception aboutthe company + other complicated things

It is Funds Quality , Fundamentals and values that determines your returns and not NAV , its justthe "book value" of the unit.

Example : Consider Fund A with NAV Rs 100 and Fund B with NAV Rs 5 . Both has corpus of Rs10,00,000, Fund A has good fundamentals and is better mutual fund in terms of strategy comparedto Fund B. After 1 year say their return is 40% and 30% as expected. So the NAV for A will be 140and for B will be Rs 6.5 and fund A will give better returns compared to fund B.

The point to understand is its the strategy and the asset allocation which matters. Low NAV canonly get you more units and nothing else :)

2. Mutual funds with good Past Performance are best choice

This is a common misconception among the Mutual funds investors that funds which haveperformed very well in past are the best choice . People believe that if a ABC mutual fund has given60% return in past year and XYZ has given 45% return , then ABC is a definite choice this yearalso.

They should understand that performance over 1 or 2 years have very little to say about them. Theymust analyse performance over 4-5 years atleast to understand how a mutual fund has performed.

3. NFO's give better returns

NFO's are more risky than the existing mutual funds as they don't have no track record to compare.There is no advantage with NFO when it comes to investments , they have no extra magic. A NFOmust be generally avoided until they have very strong strategy and unique and strong idea.

4. Putting money in lots of mutual funds will help

As a rule of thumb , no one should have more than 5-6 different mutual funds . and even those mustbe different kind of mutual funds .

People buy 20-30 mutual funds and don't see that all of them are of similar nature and with samekind of strategy. All of them have same kind investment portfolio.

They should put money in some limited mutual funds and all should be of different type.

They can buy:

- tax-savers with aggressive strategy- tax saver with balanced aggressiveness- 2 sectoral funds- balanced fund- SOME special fund (like special situation fund)- an ETF

Tuesday, November 6

What is Mutual Funds, An Easy Explaination

The most popular thing in the financial sector now a days are MF (mutual funds). But most

people are confused of this instrument. To understand What are Mutual Funds , one needs to

understand:

Company : Company is a voluntary association of persons formed for the purpose of doingbusiness having a distinct name and limited liability. These company needs to be registered underThe Companies Act, 1956, However, company is not a citizen so as to claim fundamental rightsgranted to citizens.

Shares : To put in simple terms , its a share in a company. So it can be a very minuscule part ofownership in some company, For Example, if some one has 100 shares of Rs. 100 each forCompany XYZ , it means that he has invested that much money in that company and is owner forthat much part. Commonly called "stocks" and "equities."

As we have got some understanding of what are these terms. we can proceed further.

Now anyone who has good knowledge of Stock markets, with good knowledge of analysing thecompany performance, buying and selling of shares , timing the market, etc can directly buy andsell shares and do the investment directly in stock market.But there are people who have no goodunderstanding of these things and they can't take good decisions themselves, For them MF comesinto picture.

So MF is a financial instrument that allows a group of people to pool their money to build a hugecorpus and then this money is invested by group of people (refereed as FUND MANAGERS) whoare investment experts, have deep understanding of investing in stock market and overall financialmarkets.

All the mutual Funds have there Units just like "shares" in Company . So if some one wants toinvest Rs 10,000 in ABC MF and price for a unit is Rs. 10 , he gets 1000 units of ABC MF , andover a period of time as the MF investment grows, the unit price also grows with almost same ratio.

Read different terminologies used in financial world .

The price of these units are referred as NAV (Net Asset Value) .

When a new MF launches , its called NFO (New Fund Offer , just like IPO in case of newCompany's Share issue to public)

So for example the total corpus of the MF on 1/1/2007 was Rs 100,000,000 and per unit price wasRs 10 . and after an year on 1/1/2008 the total investment has grown to Rs. 134,000,000 , the unitprice will be now Rs 13.40 (approx , it may be little less as there are some administrative cost andother expenses to be incurred).

A mutual funds can invest money in different type of instruments ranging from shares , debentures ,gold , FD and some cash also.There are two categories of mutual funds.

1. Open-ended : Entry and Exit at anytime.2. Close-Ended : Entry and Exit restricted for some time.

There are different kind of mutual funds to suit different kind of consumers.I feel its a goodbackground for the Mutual fund to start with.

Thanks

Thanks for reading the ebook . I hope you have learned some thing which canhelp you . To read more articles like these visit http://www.jagoinvestor.com

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