UTI Mutual Fund
TA K E C H A R G E O F YO U R
CENTRE FOR INVESTMENT
EDUCATION & LEARNING
IS YOUR INCOME
Sitara was a hugely successful
film star and earned an eye-
Last month, the
popping income. She had an
newspapers reported her
impressive fleet of cars,
tragic death - alone,
expensive clothes and
penniless and abandoned
jewellery and lived in a palatial
at her old age.
mansion. That was during her
peak of popularity.
Sitara did not see that her stardom would not last forever. Her income was high, but carried
a high risk of her going out of jobs. But her expenses were driven by her habits. She took too
long to curb her expenses. She survived by selling her assets, reducing herself to the penniless situation at death.
Our income may also be at risk. Even a salaried person with steady income faces the risk of the retirement income
being lower. The reduction in income at any time in future is a risk. We need to use our current income to create assets
that will generate future income for us. When we save, we set aside money; when we
invest in assets, we put that money to work.
OUR TOOLS TO
PROTECTING The first principle in financial planning is to cushion a household's future by creating an
investment portfolio that can generate additional income. Mutual funds offer a range
of investment products to meet this need.
ARE YOU READY TO RETIRE?
Amit began as a bank officer He worked very hard in his
when he was 23 years old. early years, when he had the
Not a career he chose, but time and energy. He acquired
took up to earn a steady new skills that enhanced his
income. He loved travel and employability and income. He
touring. He dreamt of being sincerely set aside a chunk of
a tour operator taking people his earnings. This he invested
to exotic places and regaling wisely to build himself a
them with stories. corpus.Now at 48, Amit is
Amit was determined to ready to retire and chase his
chase his dream. dream career.
The purpose of creating wealth is to ensure we have cushioned our income. To plan for
retirement, early as in Amit's case or even later, we need to have built enough wealth. This
accumulated wealth can then generate income for us. We need to get to a point where our
investment income equals or surpasses our regular income.
Our skills are our biggest assets which earn us income in our early years. We need to WHAT WE EARN,
save and accumulate wealth choosing growth products, so that the financial asset
WHAT WE KEEP.
makes up lesser earnings in the future.
ARE YOUR ASSETS
Tarun has always been ambitious and hard working. He has to pay EMIs for his
house and car, care for his elderly parents and provide for his wife and kids. He
is a regular saver. Everything seemed fine, until he suffered an unexpected
heart attack at an early age of 42 .
The income of Tarun's household which looked stable and adequate is now under risk,
until he gets well and resumes work. The family needs support to get back on its feet. They may also have to
manage with a lower income, should Tarun have to take it easy because of health reasons.
Tarun fell back on his investment portfolio, built through his careful savings. He partly liquidated his stocks and
mutual funds and repaid the loans, so the family is not burdened with the EMI. The lower
UNEXPECTED income would not affect the household, since there are no EMIs to pay. Tarun is confident
EVENTS of building back his portfolio through savings.
Every household should ensure that a good portion of the investments are in assets that can
be easily utilized to reduce loans and liabiltiies. Most mutual fund products are highly liquid
and readily convertible into cash.
INFLATION Saurabh retired after a long stint as
RISKS? a senior government official. He
enjoyed a relaxed and laid back
retired life, travelling, and indulging
Saurabh's pension seemed to get his hobbies. He has accumulated a
smaller and smaller over time, with decent amount of assets and
inflation. The interest income from savings and has his monthly
his saving was not enough and pension. The comfort however
Saurabh could not find any part-time began to wear off when he crossed
70 years of age.
occupation to increase his income.
Saurabh worries about outliving his savings.
He also has to make life style changes to fit his
reducing purchasing power.
Saurabh cannot work back the clock to increase his accumulated savings, nor can he risk his savings by chasing high
return investments. He can rebalance his assets, selling off what he does not need to realise some value. He can also
drawdown his capital carefully. Pension income that does not outpace inflation is a big risk for retired investors.
INFLATION CAN DRAMATICALLY
Our need for income and our ability to generate what we need changes REDUCE THE PURCHASING POWER
over time. If retirement depends on income from accumulated wealth, we OF FIXED INCOMES OVER TIME.
need to build it using growth products such as diversified equity funds.
ARE YOU SPENDING
TOMORROW'S INCOME TODAY?
Mythili never made a monthly budget, like most of us,
knowing that her income level is comfortable. When there
were unplanned expenses, she used her credit card.
She had not worried about this until her credit card bills
mounted up. She could either pay the dues or have
enough money to spend, but not both.
By using her credit card, Mythili was spending accomplished as there is no money left after
tomorrow's income today. Most of us cannot match expenses. Expenses need thought and planning.
expenses to income efficiently. Some expenses are Loans and credit cards have to be repaid, after adding
routine (utility bills); some are ad-hoc (school fees). interest charges. They can be used to make
Some expenses are small (movies); some are large temporary adjustments in income and expense, but
and need planning (replacing the fridge). Some not as a tool to spending more than we can afford.
expenses can be expected (monsoon illness); and
some are unexpected (critical illness.)
WHEN WE SAVE,WE SPEND ON OURSELVES.
Many households find that they run out of their
WHEN WE SPEND,WE ENHANCE SOMEONE
income too soon. Saving is intended but seldom
The more we spend, the less we save, and higher the risk to our future income. Mutual funds foster saving by
offering a simple folio that can be opened for a small investment amount, into which we can invest whenever we
can, how much ever we can .
WHEN DOES A LOAN MAKE SENSE?
Salim is keen to buy a house. He is tired of the increasing rents he
pays every month and the bother of shifting addresses. Buying a
house in his city requires about eight times Salim's current annual
income.The expense is too large to fit into a routine income and
needs a large lump sum amount. Salim chooses to take a home loan.
When Salim takes a loan, he allocates some of his future income to pay for it. In the process he acquires a house
which is an appreciating asset over the long run. Salim will be a happy owner of the house once his loan is repaid.
But the same is not true for his car, which only depreciates in value. He needs to understand that the loan he takes
for the car is only for the benefit of paying off in installments.
We need to recognise the problem when we overdo the facility of spending using a loan. Personal loans that are
taken for large expenses and holidays; credit card loans taken for excessive expenses; and loans from friends and
others for routinely overshooting income, are all loans that have to be checked.
A LOAN THAT They carry the danger of eating up a large part of our income leaving too little to
spend or save.
HELPS US FUND A
LONG TERM ASSET
A loan helps us incur large expenses within the confines of our limited income.
APPEAL OF A
We can build appreciating assets with loans, over the long run. Mutual funds are
accepted by lenders as a collateral and can enable us get a better rate on the loan.
DO YOU GENERATE
However, he is unable to save
regularly, because of some
Fernandes has been a unexpected expense or the other
disciplined spender. coming in his way. As a young
He ensures that his household, Fernandes' family has
loans do not take up higher aspirations for a better lifestyle,
too much of his salary. and he ends up paying for family
outings, gadgets, holidays and gifts,
leaving little for savings.
Fernandes thinks that the only way he will be able to save is by ensuring that some of his
income is set aside for saving, even before it is available to spend. He decides to enroll into a systematic investment
plan, that will debit his bank account and directly convert it into an investment.
IT IS SMARTER
Many households do not generate a regular saving, even with the best intentions.
TO SAVE FIRST,
Without saving, investments for the future are a non-starter. Cutting back on spending
EVEN BEFORE WE
is desirable but somewhat painful to most. The simplest way to ensure disciplined
BEGIN TO SPEND saving, when expenses are tough to control, is a systematic investment.
If we think we lack the discipline to save regularly, it is easier to create a system that automatically allocates some of
our income to saving, even before we begin to spend. Systematic investment plans of mutual funds are tools to
achieving this discipline .
HAVE YOU UNKNOWINGLY
LOCKED YOUR MONEY UP?
Arun likes the idea. He stretches his
Arun earns well and lives
repayment capability and buys a
comfortably, but has no savings.
large piece of land. All was well
Somehow he ends up spending
until Arun needed a large amount
all that he earns. His friend
for a family ceremony. Arun did
offers an advice - buy a nice
not want to disappoint his wife,
plot of land with a bank loan.
but how could he find the
When the repayment goes out
money? The bank was unwilling
of your salary, it is a forced
to make a further personal
saving. When the loan is
loan over and above his large
repaid, the land is yours.
Many of us overdo the forced saving bit. We lock up a large part of
OUR BASIC INVESTMENT
our income into an asset that cannot be sold easily, let alone in parts
CHOICES SHOULD BE LIQUID
as our need for money arises. We do not realise that we need to have
liquidity to support a sudden expense. We then end up with a large ENOUGH TO SUPPORT OUR
home and a household that runs on rolled-over credit card debt. UNEXPECTED NEEDS FOR CASH.
Our choice of investments must support our need for liquid cash. Our investment in illiquid assets like property should be
made only after we have a cushion of liquid investments such as mutual funds to fall back on.
DO YOU KNOW YOUR
Mumtaz has just moved into her new home. Her new car is
parked at her porch and her lockers are brimming with jewellery.
She had inherited the ancesteral home from her father. She sold
it off and bought herself things that she always wanted. Except
that the wish list went a bit too far.
She bought a large new house and then mortgaged it and bought the
car and the jewels with a loan. She could pay the EMIs with her salary
easily, she thought. The downturn brought the value of her house
down, and she also lost her job.
Mumtaz was stuck. The house, her car and jewellery had lost value and were worth
lesser than what she had to pay the bank.
Our financial transactions have to consider our net worth. The total of what we own as
WORTH, BUILDING ours has to be higher than what we owe to others. Balancing the two such that assets
ASSETS have a higher value than loans is important. Higher net worth cushions us and
ensures that we do not fall into a debt trap and end up borrowing more to repay loans.
Funding an asset completely with a loan is risky. We need some of our own money invested in it, so that even if the
asset loses value, we are not forced to sell off to repay a loan. Buying investment products with borrowed money is a
HAVE YOU DEFINED YOUR
Fatima has been working for the last twenty years and When her son decides to
has been putting money aside in her provident fund. go abroad to study, she
Every year she also buys some insurance to save tax. decides to dip into her
She thinks that saving regularly is a good habit and it savings. And she is in
must help her family have a secure future. for a shock.
She can withdraw some money from her PF, but that is not enough. Her insurance agent tells her that she needs to
wait for a few more years to realize the money; and the policies that she likes to surrender are leaving her with a big
loss. Fatima has made a mistake that many of us do - saving and investing without a proper definition of the goals.
Every investment decision must have a clearly defined objective. It is like choosing the correct train after deciding
what our destination is. We should spend time trying to see the uses to which we will put our savings. If Fatima had
estimated many years ago that she may need money for her son's education, she could have chosen her
investments with that goal in mind.
IS TO PROVIDE
The return we have to earn on our investment depends on how much we will need and
when; how big the investment should grow into will depend on the purpose it has to
TO OUR SAVING
serve. Choosing a product based on our objective is a good way to choose from
multiple investment options.
HAVE YOU ESTIMATED YOUR
If Alex can list some of the large expenses he needs to fund, those are his goals.
Buying a new car, taking the family on a holiday, buying a house, planning for
the kids' education and marriage, ensuring adequate retirement income
Alex is keen to build are all financial goals.
his investments with a Financial goals are defined in terms of time and amount. Alex needs to
target in mind. know when will the money be needed, how much will be needed. To
decide on 'how much' Alex has to factor in an assumed rate for
inflation. For example, if he needs Rs.20000 to run his home
today, if inflation is 6.5% he will need about Rs.50000, 15
years from now. Similar workings for some of the other goals
of Alex will yield these results:
GOAL GOALPOST VALUE IN ASSUMED APPROX. VALUE AT
(YEARS FROM NOW) TODAY’S MONEY INFLATION RATE GOALPOST
Car 2 years 400000 6.5% 450000
Holiday 3 years 500000 6.5% 600000
House 4 years 2000000 6.5% 2500000
Education 8 years 500000 6.5% 825000
If we are able to define our future needs, even approximately, we know how
HAVE TO BE DEFINED IN
much we need to save and invest the savings to grow over time. Starting a
TERMS OF FUTURE
systematic investment plan to regularly save for the goal, is an easy route to DATE AND AMOUNT.
executing our plans.
DOES YOUR INVESTMENT
WORK HARD ENOUGH?
Maria and her husband have worked hard to get where they are today.
They have earned and saved well. Their daughter's wedding is one secret
desire for them, an opportunity to assert their social status in their
community. Maria's daughter is only 15, but planning ahead is
what appeals to Maria.
Maria knows the approximate future amount she needs. But she has been investing her savings at 6%, scared to
take risks. She cannot save more than she currently does, given household budgets. Maria needs to get her money
to work harder. She has time on her side and should choose a long term, higher return investment.
Your investment choice needs to work for you. First, it has to cover the inflation
risk. Second, if your money runs fast, or earns a higher rate of return, you can
save a smaller sum to get the same end result. Third, investments need time to
even out the risks. Investing for a financial goal is about making these three
OF CAPITAL AND
LONG TERM GOALS It is important to tune our investments to what we want to go, how long we have to
NEED GROW TH. get there, and how fast we therefore have to run. Choosing funds based on our
needs, rather than where the stock markets are going, is a good approach.
ARE YOU READY FOR RISK?
Sitaram was happily retired, content with his pension and
tuition classes. He and his wife lived a simple life in their
A laptop, a cell phone, or a better car, have been on
his wish-list. But he thought he could not afford them,
until he met his friend Shankar.
Shankar had joined the newly opened finance Fantastic it turned out to be, soon after Sitaram had
company in town. His job was to collect deposits and deposited a hard-earned chunk of his life's savings.
pay out interest cheques. He earned a nice 4% The finance company folded up, taking away the
commission on deposits that he mobilized. Since his money of hapless depositors and leaving Shankar and
company was paying 18% on the deposits, and paying Sitaram in the lurch. If something is too good to be
depositors always on time, it was easy money for true, it cannot be true after all. Sitaram wanted his
Shankar. Sitaram's jaws dropped at the possibility of money to grow at a rate that satisfied his need, but
having his money growing at such a fantastic rate. failed to see that higher return meant higher risk.
RETURN IS ONLY HALF Investment need to be chosen carefully after understanding the risks
involved. Some risks can be taken and managed, some are best avoided.
RISK IS THE
Mutual fund products offer a high level of transparency and information to
enable us to manage risks well.
Albert is fun-loving and
adventure seeking. His
attitude seeped into his But as the markets
investments, as he indulged in crashed unexpectedly, he
on-line trading and speculating lost so much that his
with stock prices. When the savings were wiped out.
equity markets were moving
up, Albert made a lot of money.
Albert is a 27-year old graduate and knows very little about markets and investing.
Albert hardly has any savings, reducing his ability to bear losses. His income is hardly
stable with his limited educational background. Albert may like risk, but may not be well equipped to take it.
Risk is not just about attitude. It is about the ability to take on short term monetary losses. The amount of risk one can
take depends on the accumulated wealth, stability of income, ability to make informed decisions and ability to wait for
the long term. Our investments should reflect our goals and objectives as well as our realistic appetite for risk.
RISK TAKING IS ABOUT
ABILIT Y, RATHER THAN Wealthy investors tend to like high risk investments. The incremental risk may not
MERE WILLINGNESS hurt their accumulated wealth. Investors beginning to build wealth should move
TO ASSUME RISKS. from low risk to high risk choices, only gradually, over time. Not every product suits
HAVE YOU CONSIDERED
A FRIEND IN TIME?
Anita knows that she cannot earn a higher return without taking on a higher risk. She is
keen to save for the long term, for her children and for her retirement. She has chosen her
investment objective as growth. She has her salary for her income needs. What can she do
about risk that high return investments carry?
Anita can get time to work in her favour. An investment in returns that beat inflation, and enable every rupee to go
equity markets has the potential to grow at a higher rate over further. In finance we call such growth as compounding.
a long period of time. If her investment moves up and down This means, the habit of allowing returns to stay re-invested,
in the interim, but gets her long term growth, she would have without being pulled out, allows returns to compound over
achieved her goal. time. Anita can use this insight to choose risky assets that
Given the time to grow, equity investments can generate help her build a better corpus for her financial goals.
GIVEN TIME, OUR SAVING AND INVESTMENTS
CAN PLEASANTLY SURPRISE US.
When we invest for the short term, we focus on income and protection of our capital. When we invest for the long term, we
decide to take short-term risks in the interest of long-term growth. Open ended mutual fund products help us choose the
time period of our investment, with high flexibility.
LOOKING FOR THE
BEST INVESTMENT CHOICE?
Solomon is in search of the right investment opportunity to finance his goals.
Holding bank deposits may be a safe idea, but the returns may not be the
highest; investing in equity may get a higher return, but with higher risk; and
investing in PPF is safe, but it can be locked-in for too long.
Solomon should know that different investment investment in deposits hold up; when deposit rates are
avenues offer different combinations of risk, return, not large enough, equity returns make that up. A
liquidity and time horizon. There is nothing that is best portfolio that holds various types of investments
for all times and all purposes. A better approach is enables managing risks sensibly. This strategy of
diversification. This means having a combination of earmarking our money into various investments in a
various investment options and balancing the benefits portfolio is called asset allocation. It is the most
and risk. important investment
The additional benefit of diversification is that it decision that we
reduces risk. When the equity markets go down, the could make.
However good an investment opportunity looks, staking everything into it may be
TO DIVERSIFY IS
risky. Just as a balanced meal helps nutrition and balance, diversification helps
investors manage risk and balance their returns. Mutual funds offer the simplest THEM SENSIBLY.
route to holding diversified investment products.
1. Does your current household income represent the best possible under your circumstances?
2. Are you confident that your income will keep pace with inflation?
3. Have your estimated your family's income needs in good and bad times?
4. Are you building an investment corpus that can generate future income for you?
5. Do you always set aside money to save, before you spend?
6. Do you ensure that your expenses are within your current income?
7. If you have taken loans, are the EMIs less than 50% of your monthly income?
8. Can at least 50%of your investments be converted to cash if needed?
9. Have you put at least 20% of your own money, before taking a home loan?
10. Do you know if your net worth is positive?
11. Do you ensure that your saving is invested and not left idle?
12. Do you have a list of your future financial goals?
13. Do you have an investment plan to meet your financial goals?
14. Do you know that high return can be accompanied by high risk?
15. Do you choose an investment based on its return alone?
16. Do you hold a basket of investments spread across various choices?
If your answers to more than half the above questions is “No” you need to see a financial advisor to plan
for your investments and your financial future.
UTI Mutual Fund is among the largest mutual funds in India serving
over 1 crore investors. It offers over 70 products across asset classes
to enable investors to deploy their savings for wealth creation, into
professionally managed portfolios.
UTI Mutual Fund's investment philosophy is to deliver consistent and
stable returns in the medium to long term with a fairly lower volatility
of fund returns compared to the broad market.
UTI Mutual Fund is committed to adopt and maintain good fund
management practices and a process based investment
Centre for Investment Education and Learning (CIEL)
was set up in 2007. CIEL addresses the educational needs of the
investment industry through e-learning modules, web-based
assessments, classroom training and certification programmes.
Several leading banks, mutual funds and investment distribution
companies are among CIEL's clients.
To know more about CIEL's certifications and training programmes,
This booklet is being distributed as part of UTI Mutual Fund's Investor
Education Program for promotion of investors' awareness and
protection of the interests of investors.