The purpose of Insurance

Insurance is a tool to mitigate financial risk. However, risk should be uncertain, unplanned, and unexpected. Insurance restores & puts you back to your existing financial status, neither better off nor worst off. That means no one can make a profit from getting insurance claims. 

However, the penetration of insurance in India is just 10% and still considered a highly miss-sold product. 95% of the people buy insurance primarily not to protect their risk or fulfill their needs but for investment purpose to generate returns and/or to save taxes. As they fail to quantify their need specifically, they have to rely on the insurance agent's knowledge and get tempted by the future benefit shown to them in a spreadsheet. Buyers fail to calculate the time value of money and thereby compounding benefit, the effect of inflation, and potential losses if had taken pure investment plants separately. 

It is always recommended to have your investments and insurance separately. There are n numbers of products/schemes/policies that fall into these segments. The motto should be to get 'sampoorna suraksha' (entire security) via insurance by choosing the following categories. 

• Term Plan (TP)
• Health Policy - Medical (HP)
• Critical illness (CI)
• Personal Accidental Plan (PA)

Insurance also serves another purpose, to provide a lifetime annuity post-retirement. No other product is available in India which provides a guaranteed pension for life. 

For investments portfolio, the recommended asset allocation categories are :

• FD
• Small Savings Schemes
• Mutual Funds
• Equity Share
• Bonds & Debentures
• Gold
• Real Estate

The problem with investment tools is that people don't keep a long-term vision of 2 - 3 decades and start timing the market, exit from MF in panic, stop their SIP, etc. and fail to create the required corpus. Insurance has an advantage here as a policy is taken for a pretty long term, you are bound to pay the premium every year.  

If you are not a disciplined investor and can't maintain consistency in investments, better to go via insurance root. Although return would be low, compounding will play out gradually if appropriate time is given.

 

Financial blunders responsible to destroy our Life

We all do a lot of financial mistakes during our lifetime. However some of them fall into the blunder category which not only ruins our finances but also puts us back many years behind in lie journey. One should avoid all these blunders at any cost, some of them are listed below:

• Don't keep track of your cash flow from where money is coming & where it is going. 
• Not maintaining an emergency fund for contingency needs can put you in embracing situation to borrow from friends & relatives
• Taking health & life for granted. Understand there is no guarantee of health & life both and health deteriorates faster than your anticipation. Need to protect it with all kinds of adequate health, life, critical & personal insurance to provide comprehensive coverage. One accident can shatter all your financial goals. The cost of treatment is huge nowadays.
• Not setting financial goals early in life. Financial planning is a must for everyone due to uncertainty in life is extremely high.
• Spending most of your savings on showoff like parties, marriage expenses, costly holiday trip, fancy stuff, luxury car & maintaining a high-class lifestyle
• Fail to understand the difference between asset & liability. Keep on accumulating liabilities considering as assets.
• Procrastinating your investment & insurance decision and/or hesitate to take corrective action. Time is precious having value & power. Once it is lost can not be restored again.
• Taking decision-based on emotions - Frear & Greed, should not rule your investment decision. Blindly invest their hard earn money in the hope to double in a short span of time and lose everything eventually.

Money is Power

Mediocre people still hesitate to accept the fact money contributes a lot to our lives. On one hand, people want to get rich and on the other hand, they curse either the money or wealthy people around them. Both can not go hand in hand. And because of their thought process & attitude towards money, they are deprived of being wealthy. 

Money provides a lifestyle, financial freedom, luxury, comfort, lavish life, big bungalow, foreign trips, power, respect, relationship, love, health... almost every materialistic thing.  Although money is not a substitute for natural resources available to us by nature at free of cost. 

How & where we born was never in our hands, but how we will go would be in our hands. Money is not everything in life and there could be a list of things that money can not buy. However, money can buy all that which makes our life comfortable. We, humans beings are the only species on the planet earth who need money even to deliver babies. Then how can we rule out the importance & necessity of money in our life? 

Since childhood, it is been hardcoded in our brain that money is the problem of everything. Whereas the actual problem is not able to manage the money in a proper way. Money never brings the problem but lack of money does.

There are lot many quotes against the money. Make sure you earned enough before you speak against the money. To become rich, one has to maintain a very good relationship with money. It can not be like that you curse the money and at the same time you want to be wealthy.

Paisa Khuda toh nahi par Khuda ki kasam Khuda se Kam bhi nahi.

    

Beware of Tips Base Advice

Equity market participation in India is still below 5% w.r.t. the total population and this includes both direct equity and indirect equity route via mutual fund & insurance etc. There are mainly three kinds of participants in the equity market:

• Investors (short term & long term)
• Traders
• Speculators

The majority of people who take equity exposure either have a short-term horizon (< 1 year) or intraday traders or speculate in the market to get instant gains. Very few people invest in the equity market having a decade-long horizon. In fact, for any shares allotted via IPO, 90% of retail subscribers sell on day one and happy with listing gains.

Because of this mindset, the share market is still considered a place for gambling for many. People who want to participate in equity have only one thing in mind to earn maximum profit as earlier as possible. And because of this quick money tendency, many advisory firms started giving hot tips to their clients. People avail of this paid service subscription and start getting daily tips. However, the majority of them make losses eventually. They forget the basic facts that the stock market is not a place for speculation. It has the potential to create wealth in the long term on a consistent basis. Moreover, some of them even go ahead and start trading in derivative (F&O) segments on a tip basis. 

Always remember the basic rule of equity investments:

• Retail participants should either go with the mutual fund route or acquire knowledge of fundamental & technical analysis first.
• Take a long-term (>5 years) view of the equity market.
• Create a diversified portfolio.
• No one can make you rich by simply providing hot tips. If I know that particular stock is going to rise, then whether I take my own position to make me rich or start distributing tips to the entire village, think?
• The dealer (terminal operator) can not make you wealthy if his income is lesser than yours.
• It is also observed such hot tops belong to penny stocks or operator driver stocks.

Although SEBI is taking strict measures to curtail this kind of activities and also issue various guidelines that who can advise their client after taking payment from them. But SEBI can not change the human tendency or psychology of the investors who generally fall into greed. 

Financial education & awareness is the only way. We have to be more alert & cautious and understand that this market is not casino gambling. Never ever fall into the trap of so-called hot tips.

Success is a process not a mere chance!

Many people think that success is an overnight process and can be achieved if their luck starts supporting them. To get success in life (or in finance), certain steps are required to be followed over the years or decades of practice.

Step I: One needs to have a visionary outlook. Think about what exactly you want to achieve. Don't worry about resources or constraints at all. Just start dreaming day & night. Never ever think whether it is realistic or achievable or not. Find out the reason or purpose why you want to achieve that goal. This step will set your WHY.

Step II: Next step is to set a roadmap via goals setting. Dream without a goal is just desire. We need to convert our dreams into reality. Make your goal specific, measurable & time bond. You need to work on these three parameters without thinking about how that could be possible. This step will set your WHAT.

Step III: Now time is to take action or better to say massive & focused action. Don't procrastinate anything and do not think about the end result. A small baby step on daily basis is more than enough. Consistency is the key and records your activity/action. Make a journal and track your activity. This step will set your HOW. 

Getting success is not a linear achievement. you need to undergo a lot of pains, uncertainties, failures, etc. Those who have the capability to bounce back win eventually.

Yaha Party Ho Rahi Hai...

Ye Hum Hai, Ye Hamare Dost Hai Aur Yaha Party Ho Rahi Hai! (This is me, that is my friends and we are celebrating a party here). This trend & song is popular on social media nowadays.

This is one more new culture we have imported in India from abroad to celebrate the weekend after 5 days of working. Enjoyment & celebration is very much necessary and should be happening on regular basis. However, creating a hype and showoff party will cost you a lot.

Beware that spending unnecessary money on weekends just for a few hours celebration doesn't make sense unless you belong to the HNI categories. There could be enjoyment for some hours but will not get long-lasting happiness for sure. Even then, if you need this kind of celebration, go ahead but do prepare a budget for it and allocate the fixed amount.      

Pubs are jam-packed on weekends where people spend like anything. By the end of the month, they are left with no money. And if you are someone who finds difficulty with managing your finance especially during month-end, it's high time to change your habits.

Happiness & enjoyment can also be received with a simple tea party as well!

A Victim of LifeStyle Inflation

Getting Lifestyle is a new fashion trend for the youth belonging to Gen Y (Millennials) or Gen Z generation. For them having everything that provides comfort and luxury even if it is costly, branded & meant for high net worth (HNI) categories. Whether it is a big premium car or bungalow or high-end mobile or big TV or big flat or staying in a 5-star facility. 

Not everyone is a celebratory nor business tycoon and spending too much on this stuff just to show off put them into a debt trap, anxiety, and finally into depression, if they fall into a middle-class category. Maintaining a lifestyle is not an easy task unless you have a huge cash flow to support expenditures. Everyone should know their limit at least for expenses and try to maintain it as far as possible. 

One should focus on increasing your income/revenue first rather than expenses straight away. Funda should always be... first you earn, invest, and then spend. And should not be like overspending through a credit card or taking a huge loan and keeps on paying EMI throughout a lifetime.

If you have limited resources for income and belong to a middle-class family, better focus to create assets rather than creating liabilities. And this is the foremost reason why people are not able to upgrade their living status just because they keep on buying liability rather than assets. Always know what is your needs and wants. Finally, create an asset first, and from that asset, income is required to be generated to cope with your expenses and lifestyle.

Lifestyle inflation is over & above general inflation. Normally the general inflation we get around 8% p.a. appx. and add a further 4% towards your lifestyle inflation, again this depends on how deep you are into that kind of luxury & comfort. 

Let me quote some live examples... if you own a two-wheeler costing Rs. 75,000 and that provides an average of 50 km/liter. Now you upgraded to a sedan car worth 10 lacs that provides an average of 15 km/liter. Now depending upon your monthly usage, one can calculate how much it would put an extra burden on your daily expenses. Moving from 2 bhk to 3 bhk just because you have got a good salary hike or upgrading your existing hatchback car to a sedan car as you have got handsome incentives & bonuses are some of the examples of lifestyle inflation that are bound to destroy your financial lives.

It also doesn't mean that one should never upgrade in their life or maintain lifestyle. The motto should be to acquire assets first and generate returns from them before you plan to opt for another liability with you!

Staying anchored when you can't control the winds?

Those who invest in the equity market for the long term even opting for a SIP route, concern about the market crash which could happen at any given point without prior intimation. Your SIP after some point in time just becomes a lumpsum investment. Therefore whether you had invested at one go or on a recurring basis, the accumulated value is prone to volatility and market mercy. While it’s important to invest regularly, one should also have an exit plan. Now how can one protect their portfolio from such unforeseen events like a black swan? 

One strategy is a Systematic Withdrawal Plan (SWP) which is the opposite of SIP. When you set up an SWP, a fixed amount from your corpus is systematically transferred directly to your bank account at the chosen interval, and therefore, you don’t exit at one go.

In fact, there is a formula for when one should start SWP. Ideally, if your goal is five years away, one should go for opting SWP from aggressive fund to conservative ensuring withdrawal amount to be distributed over a span of 60 months. This will mitigate the risk of withdrawing money at the bottom of the market crash.

Don't wait till March for tax savings

As we already know, our Financial Year starts in April and ends in March. We get the entire year to invest for tax-saving purposes. However, people rush at the eleventh hour, and it is observed that maximum tax savings investments come in the month of March only. Logically, either your investments should be distributed throughout the year in a span of 12 months or if it is a lumpsum investment then instead of investing at the end of the financial year, one should plan to invest at the beginning of the year always. That way you get enough time to plan for your finances and therefore take care of taxes if you do so at the beginning only. Otherwise, in the last movement, you only focus on tax saving and not on the scheme or policy details whether suits you or not. 

The problems with the people have; when they plan early:

• They try to procrastinate being human nature
• They never feel they have enough to save
• Investment remains their least priority
• Want to spend first than savings
• Get tempted for spending to buy instantly / window shopping
• Don't invest unless getting a TDS deduction
• Never follow 'to pay yourself first' rule
• Don't plan anything - neither investments nor expenses

Everyone knows that spending sensibly and saving regularly is key to financial security. Yet, many are not able to save as much as they want to. Worst even, many missed the last ball too and realize only after when the financial year gets over. One needs to understand that investing in tax-saving instruments is important not just for the time being but also for the long run. When one invests in a tax-saving instrument, they save tax and at the same time save up for the various goals they need to meet at different life stages. This efficient tax planning should ideally be done at the start of the year. To go easy on the pocket, one can start something as simple as a SIP in ELSS. It ensures regularity and discipline of investment while serving the purpose of saving tax.

Mastermind Alliance

A thumb rule says you are the average of five peoples by whom you are surrounded... whether it is your personality, values, character, or net worth. You might have observed that if five friends are smokers, the sixth one also gets addicted to this sooner or later. You become the average of five with whom you spent most of the time.

This rule also applies not only in life but in investing too. If your friends are traders, you start trading in the market. If all of them putting money in FD or taken a particular policy, you also start following their footsteps. Herd bias is very common in investors in which people start chasing the crowd blindly and suffer losses eventually.

One should understand and be aware that if your friend circle belongs to a mediocre mindset, you will never ever able to get rich. The difference between Rich & Poor people is that while Rich create at least 10 different sources of income, the Poor rely on a single source only. One should always ready to grab the opportunity whenever there is a chance to create an add-on source of income. It could be passive as well as active income.

Therefore, in life or in the wealth creation process, always follow those, who already succeeded in their respective field. Unsuccessful people can not make you successful and at the same time, poor people can not make you rich.

To grow in life, one should always seek for mastermind alliance to help, learn & grow together! However, one needs to keep on upgrading their knowledge, skillset, and become aware on a continual basis. Investing in a Brain is far better than investing in a Bank!

Risk never looks risk, when generating a high return!

For many 'Risk' is only when they encounter negative returns, whereas, by definition, any unexpected outcome whether positive or negative is a Risk.

However, in the investments, we only see 'High Risk' when the portfolio is not performing, returns are muted and we struggle with negative or below FD returns. But we ignore the risk altogether when bull really resumes, suddenly we start getting huge returns, and many of us start chasing the crowd.

The rule of wealth creation says rather than watching the portfolio returns, better to monitor your asset allocation! One should not exit from the market saying it's too high or take entry just to ride an ongoing rally. Profit booking and/or top-up in Equity should always be on the basis of allocation and not because of market phases.

The perception of risk and actual risk of investing move in opposite directions. When the market crash by 40% - 50% like in the years 2000, 2008, 2020, people perceive the investments in the market as riskier while the actual risk was low at that time as valuations had gone cheap after the crash. In a bull market, the perception of risk is very low despite the market hit a new high every day. However, always remember that big returns don't come with taking big risks!

Active Vs Passive Investing

Before you decide which investment style one should go with, understand the difference between the two:

Active Investment Style: Your portfolio is being monitored by the fund manager & their team and they try to generate alpha i.e. excess return over scheme' benchmark return using their expertise and experience. However, if investment calls go wrong by the fund manager, it impacts the scheme performance adversely. Also, any change in the fund manager, the respective scheme performance may get impacted and the future depends on the new fund manager skills.

The products available under active fund management are generally all diversified or sectoral funds in the equity segment.

Passive Investment Style: Under passive investment, you don't get any dedicated fund manager as your investment portfolio is just a replica of the respective benchmark. The return generated under this style is more or less equivalent to the benchmark performance. Mostly monitoring or trading of a scheme portfolio is done under a system-based automated process that is predefined and without the interference of human emotions. The scheme just tracks their respective benchmark portfolio and becomes the replica of it by investing in the same stocks and in the same weightage.

The products available under passive fund management are generally ETF (Exchange Traded Funds), Index Funds, FOF in equity segments.

It has been observed over a long period of time (+7 years), actively managed schemes try to beat the passively managed schemes. However, in a short span of time, it may be possible that passive funds do much better than active funds. 

Although, active funds schemes are costlier than passive schemes as their expense ratio is higher due to the fund manager & their team cost, however, active funds have more potential to generate better returns, and therefore it justifies the higher cost. In the case of active funds, the fund manager pics the specific stock after due research to get the best possible return. When to buy or sell any stock, it's total in the jurisdiction of a fund manager.

However, studies have shown not all active funds are doing well and able to beat their benchmark. It is better to do some homework to select any fund house and further scheme. One should see a scheme track record over a period of time across all phases of the market, not just 3-5 years, verifying other statistical parameters like standard deviation, beta, alpha, churning ratio, expense ratio, etc. and then take a call to choose a particular scheme. 

Conservative investor may prefer the passive style who don't want to monitor their investment portfolio frequently, and those want an aggressive bet and can monitor their investment portfolio, can rely on fund manager expertise.

Should you invest & forget?

In Equity or equity MF, it is generally recommended to have a pretty long term horizon (+10 years) to get the actual benefit of compounding. Does that mean that you just invest once and forget till the next decade? The answer is absolute No! 

Every financial asset classes need monitoring and rebalancing at a certain frequency, whether it is equity, debt, or gold. It is also recommended to have a negatively correlated asset class in your portfolio so that you can book partial profit from one asset class that has performed and shift that profit to the underperformed asset class. The moto here is to book profit at fixed intervals from one asset to get it average the other one.

Although this process is simple but not easy and 90% of people fail to do it on regular basis. This requires a system, process, monitoring, awareness, discipline, and decision ability without being emotionally involved or under the influence of the market or that particular asset class. Certain;y, you need the help of an expert or professional advisor to do so for you.

 However, while rebalancing you should also look at the stock/MF scheme whether there are any fundamental changes that happened which lead to underperformance of the same. It may be because of :

• change in the objective/mandate of the scheme
• change in fund manager
• change in SEBI guideline
• change in the company / AMC management
• change in fundamental attributes
• increase in the size of AUM beyond the comfort level
• change in your risk profiling
• change in your financial goal
• change in tax laws or compliance issue

Despite having a long-term approach, it is equally crucial to monitor your investment portfolio.