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  • Featured Posted on June 7, 2013 by One Idiot The film “One Idiot” opens ones eyes to the power of taking responsibility for finances and starting early on the path to learning about saving and investing. However, there are questions that come to mind and we seek greater clarity on a few things that the movie brings forth. The IDFC Foundation has created an interesting series of videos titled “The world according to One Idiot” that answer some of these questions in an entertaining way. Listed below are the questions that our cast of characters comprising Varun and Abhi try to answer for our followers. Film 1: What is financial independence Film 2: How to be financially independent Film 3: How to pick your investments Film 4: What is SIP Film 5: Insurance: why and when Film 6: Why do you need a financial advisor 3 Simple Rules of Asset Allocation When it comes to managing your money, simplicity must be a top priority. This also holds true when it comes to asset allocation. Simplicity must not only drive you while choosing various asset classes, but also how much you choose to invest in each of them. One thumb rule that has been advised for years is to reduce your age from 100 and then, invest the resultant percentage of your money in stocks. So if you age is 30, you must invest 70% (100 minus 30) of your money in the stock market. On the other hand, if your age is 70, you must keep just 30% of your money in stocks or related instruments. But this rule doesn’t make a lot of sense in isolation. This is given that a person aged 30 may have a lot of near term financial liabilities to meet – like down-payments for a house and/or car, marriage, higher education etc. Investing a large proportion of savings in stocks, which can lose a lot in the short to medium term, can be devastating for such a person. On the other hand, an old man of 70 may have paid off all his loans, has children who are well-settled, and earns sufficient money as interest on his investments. For him, taking a high risk by way of investing a large part of money in stocks and related instruments is viable. Thus, asset allocation decision must not always be dependent on a person’s age. In fact, here are three simple rules of asset allocation that work with people of all ages. 3 Rules of Asset Allocation
  • Money needed within 1 year should be in cash: All money you need in the next one year – maybe for a loan repayment or for incurring a large expense – must be saved as cash. This cash could mean a fixed deposit or a liquid mutual fund. The reason you need to keep this money ultra-safe is because stock market can move anywhere in a one year period and in case they move downward, you may end up compromising on your financial goal. Money you need in 3 years must also be kept safe: There may be some goals that you may want to meet over the next 2-3 years – like your kid’s school/college admission fee, or for a family holiday. You must invest this money in safe, income-producing instruments like FDs, liquid funds, or recurring deposits. Money you can keep aside for five years and more must be in the stock market: Stocks have been great long term performers over the past many years. In fact, if you were to go back into the history of Indian stock markets, over every rolling five-year periods starting 1979, stocks have outperformed bonds almost 65% of times. Further, for every 10-year rolling periods, stocks have outperformed bonds almost 80% of times. SO the longer you have your money invested in stocks (or equity funds), the greater is the chance that you will make more than return on bonds. Conclusion As we mentioned in an earlier article, asset allocation is one of the most important decisions you will make in your financial life. So it’s important that you are clear and practical in this decision making. Knowing these three simple rules, and practicing them, can bring you a lot of success as an investor. Opening a new bank account – documents required Posted on November 20, 2012 by One Idiot For opening a new savings account, you have to submit following documents: 1. Recent Passport Size Photograph 2. Any Form of Identity Proof : Following documents are acceptable as valid Identity Proofs - Passport - PAN card - Voter’s identity card - Driving license
  • - Any form of identity card (College ID card, employee identify card etc) - Letter from a recognized public authority or public servant to verify the identity 3. Proof of Address : Following documents are acceptable as valid address proofs - Telephone Bill (BSNL or MTNL bill. Some banks may not accept private operators bills) - Letter from a recognized public authority or public servant verifying the residence of the customer - Electricity bill - Ration card - Letter from employer Exact documentation will vary between banks Further resources: List of banks in India 10-Point Action Plan for a Young Earner Posted on March 28, 2013 by One Idiot Noted Irish playwright and philosopher George Bernard Shaw opined, “Youth is wasted on the young.” What he possibly meant was that many young people have everything going for them physically; they’re in the best health they will ever be in, and their minds are sharp and clear. However, they lack patience, understanding and wisdom which results in so much wasted efforts. The energy that can be directed towards building a solid thought process and action plan for the future is spent on short-lived pleasures. Shaw’s words are especially applicable to those young adults who are starting a career and wondering if they should start saving and investing for their future, or spend the next few years living life kingsize. You see, I am not old enough to complain about the younger generation. And that’s why I believe youth is not always wasted on the young, if the young can realize that someday their bodies and time would fail them, and that they would appreciate what they have now. So in this post, I have put down a 10-point action plan – a manifesto – for the new, young earner to encourage him/her to begin to save and invest starting as early as possible, and take some simple yet effective steps to kick- start his/her financial life. If you are young, time is one of your greatest allies in wealth accumulation and it is the one resource you will never get more of in the future. After starting out to earn your own living, if you waste the early years saving and investing nothing, they are forever lost. So that you do not lose out on the precious time you have on your side to start making your money work for you, here is the action plan that you must (may) follow. You are free to modify this action plan to suit your needs. It’s just that this has worked very well for me for the past 10 years, and thus I am happy to share it with you. Read carefully what you see below. Try to remember it. Modify it if you may to suit your needs. This is what you must tell yourself often when it comes to managing your hard-earned money. This is your money manifesto. 1. I will pay myself first I realize that this is an excellent habit to develop early.
  • I have come to know that people who are best set for a comfortable financial future are not necessarily the ones who had the best careers but the ones who had good living and saving habits. The general equation of saving money is = Income – Spending = Saving I will follow a more sensible equation = Income – Saving = Spending In other words, I will first allocate my savings and only then spend what is left (of course, after budgeting for necessary expenses like food, housing, and utilities). In terms of priority, I will save for my own retirement before saving money for my children’s higher education. They can get education loans. I won’t get retirement loans! In terms of how much should I save, I will start with saving at least 10% of my monthly net take-home income, and gradually increase it to 30% by the end of the first year. The ultimate target will be to reach 50% of net income. 2. I will always keep an emergency fund This fund may be 6-8 times my monthly household expense. So, if I spend Rs 20,000 every month to keep my house running, I must set aside around Rs 140,000 as emergency fund – money that will lie in a liquid fund or short-term deposits that I can withdraw in case an emergency strikes. Also, I will not touch this emergency fund to purchase a gadget, pay down-payment for a car, or fund a holiday. This is sacred money, and I will use it only in emergencies. 3. I will buy health insurance As I see around me, medical innovations are making people live longer. However, costs of keeping healthy are also on a rise. A doctor’s fee has risen to match a lawyer’s fee! I must thus buy medical insurance – for myself and my family (wife, children, and parents). Even if my employer provides a medical cover for me and my family, I must still buy an independent policy to cover myself in case I quit this job in the future. The reason I must buy a cover as soon as possible is because the more I delay, the more I will have to pay as premium. 4. I will buy term insurance No ULIP, no endowment, but I will buy only a term insurance plan. I know my friends have not bought term insurance because you don’t get any money back if you survive the insurance period, but I also realize that this is the purest and cheapest form of insurance. For instance, as I have seen in case of a few friends, I can buy Rs 50 lac cover for a premium of less than Rs 10,000 per year. This premium comes to just around Rs 800 per month, a sum I may easily splurge on frivolous things. I must see term insurance as a “cash flow” insurance – it will insure the cash flows my family would need to survive, whether I am alive or not. 5. Given the huge costs involved, I will not delay saving and investing Simple calculations show me that a 23 year old who puts away Rs 6,000 a year for 10 years at an annual return of 8%, will have around Rs 87,000. If after those 10 years, he stops contributing and does nothing else till he is 60 years old, the portfolio will have grown to around Rs 694,000. The person who waits until he is 33 to begin investing will need to invest Rs 7,950 for 27 years (till he reaches 60 years of age) in order to have around Rs 694,000. In total, the 23 year old had invested Rs 60,000 out of pocket (to reach Rs 694,000 at age 60) versus Rs 215,000 for the 33 year old. As these calculations show me, there are great costs of starting late on the saving and investing path. So I must start early. As early as possible!
  • 6. I will allocate my assets wisely I have heard successful investors say that asset allocation is the most important decision in an investor’s life. I also agree that I must not keep all my eggs in the same basket. Since I am new to investing, and don’t have much idea about various investment avenues, I will keep a large part of my money ultra-safe – like in a recurring deposit or short term deposits. This is the money that I may need in the next 3-5 years. For all money that I can set aside for a period of over the next five years, I will try to find a few good mutual funds and start SIPs in them. I may, in the future, own stocks directly. But that will happen only after I learn to understand businesses and can take my own, independent decisions to buy stocks. Till that time, 100% of my stock market investments will be via mutual funds. I find a lot of my young peers trading in stocks at the very start of their careers. I will avoid that! The three most important rules of my asset allocation will be: - I will never invest in long-term assets with short-term money. - I will keep my costs low and thus never trade in and out of assets frequently. - I will not invest any money in stock market that I can’t afford to lose. 7. I will use debt sparingly I have seen what has happened to the current and next generation in the western world. Their entire future has been compromised just because their parents and grand-parents abused debt – they borrowed endlessly to fulfill their unending aspirations. I will use debt sparingly, and avoid borrowing money to meet my aspirations, expect for buying a home. I will not borrow money to buy liabilities like gadgets, holidays, or even a car. I will buy them only if I can use my own money that I may save to buy these. Even to purchase my home, I will use as less borrowings as possible. 8. I will practice Preparation + Discipline + Patience These will be my three guiding principles while saving and investing my money. I will develop into a lifelong self-learner through voracious reading in my free time; cultivate curiosity and strive to become a little wiser every day. I know if I you want to get smart in my financial life, the question I must to keep asking is “why, why, why?” I will try to keep things simple and remember what I set out to do. I will also remember that reputation and integrity are my most valuable assets – and can be lost in a heartbeat. So I will guard myself against arrogance. Einstein said that compound interest is the eighth wonder of the world. I will never interrupt it unnecessarily. Finally, I will enjoy the process along with the proceeds, because the process is where I will live. 9. I will hold on tight to my reputation It has taken me years of hard work to reach this place where I have become capable to earn my own bread and support my family. I will not do anything that will destroy this hard work and my reputation. For that, it’s very important that I take complete responsibility of my money, and never blame anyone when things go wrong. I will never do anything that makes me uncomfortable. If it doesn’t make sense, if I get a feeling in my gut, or if I just don’t understand what someone is asking me to do, I will just pass on the investment. My first objective will always be to avoid major losses. If I can protect my capital, I know I can always find ways to make money. 10. I will celebrate life, not money
  • I have seen many of my friends get into a rat race from day one of their jobs. I won’t follow that route. Of course, I know that it is good to save and invest as much as possible, I won’t compromise my present for a future unknown. This does not mean I will try to find happiness in spending money. What it means is that in the busyness of earning, saving, and spending, I will celebrate my life…and my accomplishments. I’ve also read that real success in life is not about what you earn, own, achieve or win but who you will become along the way. I will thus work towards ‘becoming’, not towards ‘having’. It’s my life and only I can make it large. What do you say? About the author: Vishal Khandelwal is the Founder & Chief Tribesman of Safal Niveshak, and an independent financial analyst & blogger. He works with small investors to help them become smart and independent in their financial lives. Posted in Discover savings, How-to guides | Leave a reply Some Advice for the Young & Broke Posted on November 30, 2012 by One Idiot In our meetings for the “One Idiot” initiative, here are some things we’ve been hearing all around from youngsters (mostly college students) with respect to their careers and finances, and our thoughts on their thoughts… “I am educated, talented, and confident, so…” Well, it’s great that you are educated, talented, and confident…but know that these things are often highly overrated in today’s society. Albert Einstein has been quoted as saying – “The only thing that interferes with my learning is my education.” Take for instance the hype surrounding an MBA in Finance or a CA. People believe that you need such financial degrees to make money in investing. Nothing can be far from truth, because if financial education was what was required to make money from investing, the experts would’ve become rich by investing their own money and not selling worthless advice to people. Education and talent are good…but only till they keep you rooted to the ground. These qualities appear to increase our confidence without improving our abilities, thus leading to worse decision in our lives (including financial lives) “Job is my birthright!” The thinking these days is – “Job is my birthright, and nobody can snatch it from me! If I lose job here, I can easily get it there.” Clearly this is a by-product of the last 20 great years that the Indian economy has seen. The youngsters have not really seen ‘bad times’, like our fathers and grandfathers did. But believe us, the stories we’ve heard from some old people, things can sometimes get really bad (look no further than the US, where the unemployment rate is creeping up, and people have lost hopes of getting jobs soon) “Dad’s there for me…” This is ridiculous! Your parents will bestow all their love (and money) upon you. That’s what parents are for, right? Wrong! It’s important for you to know and appreciate that you don’t have any claim on your parents’ wealth. Yes, you have a legal claim on their cash, property and all other assets that they’ve created for ‘you’. But know that you are not ‘entitled’ to the fruits of their long years of hard work…in the same way as your children won’t be entitled to your wealth.
  • “I have no cash…but five credit cards” We’ve seen youngsters with no intention of spending cash on something buying the stuff just because they could use their credit cards! This is absurd, and can lead anyone into a big financial problem…especially one who is over-confident about his ability to ‘pay off’ in the future and who believes that a ‘continuous salary’ is his birthright. “I already earn enough” This is the most common excuse youngsters give us when we ask them whether they’ve started saving and investing for their future. They must know that they can’t be working and earning throughout their lives…but they’ll need money to survive throughout their lives. Each rupee you save is like an employee. Over the course of time, as an owner, the goal is to make your employees work hard. Eventually, they will make enough money for you to hire more workers (cash). Subsequently, when you have become truly successful, you no longer have to sell your own labour, but can live off of the labour of your cash and the assets you’ve built up using that cash. However, it’s hard to understand and accept this truth when you are young and confident. But then, it’s only when you understand and accept this truth early in your working life can you dramatically change your financial future for the better. “Let’s go for a Cappuccino” Forget the cappuccino dear! Start saving money. Here’s a simple math. If you can save just Rs 50 per day (or Rs 1,500 per month) by stopping to pay for that cappuccino every day, and invest it for the next 25 years, you will have Rs 49 lac in your kitty (assuming an average annual return of 15%)! Even if you assume that your money will grow at a lesser rate of 12% per year over the next 25 years, every Rs 1,500 you invest per month, will amount to Rs 28 lac then. So choose now, when you are young – whether you want to survive on credit cards, or your dad or mom, for the rest of your life…or whether you want to take things in your control (you always wanted the steering wheel of your life in your hands, didn’t you?) Remember, being broke isn’t cute! About the author: Vishal Khandelwal is the Founder & Chief Tribesman of Safal Niveshak, and an independent financial analyst & blogger. He works with small investors to help them become smart and independent in their financial lives. Posted in Discover savings, How-to guides | Leave a reply What are the different investment options? Posted on November 26, 2012 by One Idiot Saving is putting aside a part of your earnings for future use. It is usually done by keeping your money in extremely safe and liquid avenues like a bank savings accounts, FDs, PPFs, etc. This way, your money is safe and even fetches a nominal interest rate of 6-9%. However, the inflation rate, which in reality is well over 10%, keeps eating into your purchasing power over a period of time. To stay ahead of the inflation, you need options that provide an interest rate of at least 12-15%. This is where investments come into the picture. Investments could be in anything ranging from a small business to rare antiques to gold coins, stocks, bonds, mutual funds, real estates, etc. It is the process of putting your money in assets which will generate relatively higher returns over time, making you wealthier with each passing year. There are various types of investment options which you need to consider:
  • Bonds (Debt) A bond is a financial asset issued by governments, companies, banks, public utilities and other large entities which can come under fixed-income securities. When a bond is purchased, your money is lent out to a company or government. In return, they agree to give you an interest on your money and eventually pay you back the amount you lent out. Bonds in a way are quite safe and stable but they come at a cost. Because there is little risk, the returns may also limited Stocks (Equity) Stock is a security issued in the form of shares that represent an ownership interests in a company. The owners of the company’s stock are called stockholders or shareholders and they receive profit or loss of the company as per the percentage of stock they own. The benefit of owning a stock is that you profit as the company profits. However, stocks are volatile as they fluctuate in value on a daily basis and the returns aren’t guaranteed. But the upside is that equities have relatively higher potential returns when compared to bonds. Mutual funds Quite simply, a mutual fund is a mediator that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. Thus, investment in mutual funds is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Alternative investments: Options, Futures, FOREX, Gold, Real Estate, Etc. Besides debt and equity, there are alternative investment instruments which are generally high-risk but high-return options which need expertise before going any further. For a novice, these are the territories best left unchartered Posted in Discover savings, Investments | Leave a reply 3 Reasons You Must Save and Invest…Starting Now! Posted on November 18, 2012 by One Idiot When you are a student, money just seems to disappear. A thousand rupees last about an hour at the pub or a movie theater but you don’t think twice before going back to the ATM to get more. This is a dangerous habit, which most students may not appreciate till they are students and are not earning on their own. It’s only when you start earning your own money that you understand its importance, and realize how your parents have worked hard to fulfill all your requirements for the past 20-25 years. Students, who learn early the importance of using money carefully, grow up into responsible adults…and that’s what we want you to grow into – a financially responsible adult who saves and invests his/her money and lets the power of compounding do the rest of the job. But you may still wonder, “What’s the reason for saving and investing…and why should I do it?” Well, here are three reasons you must start saving and investing…right away! 1. Prepare for emergencies: You may wonder – “Emergency? I’m too young for it!” Well, emergencies don’t know your age, and thus can strike anytime. For all the dreams that you might have of the future, know that it is highly uncertain. And when you are dealing for uncertainty, the mantra is always to start early and save more money. What if you don’t get a job straight out of the college? What if you meet with a medical emergency and don’t want to bother your parents with a financial burden? Of course, your parents will always be there for your when you need them and their money. But isn’t it your responsibility to help your parents in whatever way you could, especially during emergency situations? One big way will be to save from your pocket money every month. As you know, an emergency don’t know whether you are young or old, and it can strike anytime.
  • 2. Fund your higher education: In a world that has gotten highly competitive, a higher education from a reputed college comes expensive these days. Whether it’s an MBA, MD, or MS, parents have to pay through their skin to get their children get the best education. Now imagine you helping out your parents in funding your own higher education. Wouldn’t that be a great feeling? Your parents will be proud of you when you tell them how much money you’ve accumulated to contribute towards your education. Not many students do this, so you would be special! 3. Feel good about yourself: Saving money is such a good thought. And when you actually save some money, it gives you a very good feeling about yourself. Just try saving some money this month and you will know the happiness and the feeling of self-worth that will come with it. Starting today, forget spending more money at the mall – and instead spend more time with friends while saving and investing money regularly. At the end of it, your bank account may still seem inadequate, but your life will be far, far richer. About the author: Vishal Khandelwal is the Founder & Chief Tribesman of Safal Niveshak, and an independent financial analyst & blogger. He works with small investors to help them become smart and independent in their financial lives.