In his first post of 2012, Hemant had asked the readers toshare what they had learnt from TFL in 2011, I have penneddown s...
“The satisfaction you get in giving something useful  to someone is far greater than in getting something                 ...
Everyone’s investment path starts with savings. There areno hard and fast rules for saving. It certainly depends onyour pe...
It is a profound mistake to assume that conservation ofwealth means putting money in the most secureinstrument. Protection...
It is important for investors to take longterm perspective in dealing with financialmatters. It is counterproductive to wo...
How much you can afford to invest depends onyour capital, your earnings, your expenses, yourresponsibilities and so on. Be...
There is no ideal model of asset allocation for all situations.    While reallocating assets age and income must be given ...
Asset allocation is based on the fact that different asset classes tend to behave differently.    While equity is volatile...
Buy a bond fund for fixed income anddiversified equity fund for equity. These arethe basics of the investment world and yo...
Sector funds are risky. You should not beinvesting in exotic funds unless you have ahuge risk appetite.               The ...
Power of compounding will turn things in yourfavor in the long term provided you start early.                 The Financia...
An investment plan can help increase the value of savings faster ifundertaken early and pursued consistently. Growth of as...
There are, to be sure, some risks in investing. Ifwitnessing the contracting and expanding of yourinvestments has a depres...
You have to decide which risk personality fits your best. Are yourisk averse? Are you risk neutral? Are you risk lover? If...
Investors have a vast department store in which toshop. The menu is virtually endless, and yourchoices are limited only by...
Most people are not psychologically ready toinvest until they feel financially secure. Security formost people is sufficie...
Those people, who worry too much, mustnormally avoid any form of credit. Some peoplesimply do not know how to use credit p...
Before starting your investments, it helps toknow what your time frame is. Are youinvesting for your short term, medium te...
Understanding your objectives and your own natureplays a large part in successful investing. Manyinvestors face great diff...
In financial matters it is prudent to protect yourself by having adiversified portfolio of investments. Diversification is...
You have to realize that fluctuations are partand parcel of the investment process. They arenot necessarily a threat to th...
Some people are of the view that atretirement your portfolio should consist of only fixedincome instruments. This is clear...
Mutual funds are best suited       to investors who do not want       to commit a great deal of       time and money to th...
Mutual funds are affordable for everyone.Even a small investor can buy mutual fundsby investing a small amount at a time.B...
In the short term you cannot expect toget large returns from your investmentsin equity mutual funds. Real growth ofmoney t...
Fund house as well as fund manager play a crucialrole in the long term performance of a fund. Afund house with a good pedi...
It may not be worth buying a higher cost fundthat appears to be only slightly better than alower cost one. There is no rea...
A large number of mutualfunds are available fromaround forty mutual fundhouses. Each mutual fund has astated objective. Ea...
Mutual funds with large stakes in just a fewsectors will likely be more volatile than themore evenly diversified funds. Lo...
A portfolio that puts mostof its assets in just a few stocks will likely bemore volatile than a fund that is spread across...
Performance comparisons must be used only tocompare the same type of fund. You have tocompare apples with apples. You cann...
Your mutual fund portfolio must be properlydiversified. A balance must be maintainedacross market caps like large cap, mid...
The decision on which funds to invest in should be made in thecontext of your overall portfolio that should have core and ...
The Financial Literates www.TFLGuide.com
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Financial Lessons from TFL

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Financial Lessons from TFL

  1. 1. In his first post of 2012, Hemant had asked the readers toshare what they had learnt from TFL in 2011, I have penneddown some Financial Lessons which I have received fromTFL during 2011, which will hopefully last a lifetime. The Financial Literates www.TFLGuide.com
  2. 2. “The satisfaction you get in giving something useful to someone is far greater than in getting something from someone.” The Financial Literates www.TFLGuide.com
  3. 3. Everyone’s investment path starts with savings. There areno hard and fast rules for saving. It certainly depends onyour personal economic conditions, your temperament andof course on the unsuspected demands that inevitably arise.How much you save depends on your age and familysituation.How much you save depends on how much you earn, andof course this changes throughout your life. It is importantto establish a regular saving habit for your own financialhealth.Savings are initially the basic component of your wealth.After a number of years your wealth will grow from theinterest on your savings and the growth of yourinvestments. The Financial Literates www.TFLGuide.com
  4. 4. It is a profound mistake to assume that conservation ofwealth means putting money in the most secureinstrument. Protection of funds in the mostconservative way can prove to be disastrous in the longterm due to inflation.Locking funds in low interest bank deposits defeats thepurpose of creating wealth. Inflation does its secretwork buy devaluing your purchasing power when youare not looking. The total avoidance of risk earlier inlife guarantees a loss of real buying power later.Riskless investors may feel better by remaining awayfrom the volatility of the financial markets, but over thelong haul their savings andLiterates invisibly erode. The Financial assets www.TFLGuide.com
  5. 5. It is important for investors to take longterm perspective in dealing with financialmatters. It is counterproductive to worryover the daily ups and downs of the stockexchanges. Solid gains in the financialworld are almost always associated withholding long term positions. The idea is tocreate wealth slowly, but surely.Successful investing is a long rangeendeavor. If you expect immediate resultsand instant gratification, you are bytemperament not suited to long terminvestments. Investing is a waiting game,one in which you will need more patiencethan money if you are to be successful. The Financial Literates www.TFLGuide.com
  6. 6. How much you can afford to invest depends onyour capital, your earnings, your expenses, yourresponsibilities and so on. Before calculating howmuch to invest, it is important to assess what youhave that can be best deployed. Your net worth statement is your first step onthe road of financial planning. This statement is alisting of everything you own against a list ofeverything you owe. The balance what remains isyour net worth. Your net worth statement provides a benchmarkto measure progress or slippage in your net worth.It indicates how your assets are presentlyallocated. This provides a platform upon which abetter financial plan can be built. The Financial Literates www.TFLGuide.com
  7. 7. There is no ideal model of asset allocation for all situations. While reallocating assets age and income must be given proper weight. It is important to remember that you do not overweigh one asset class to the possible detriment of others.Having all your eggs in one basket, no matter how strong the basket is or how carefully you watch it like a hawk is not a good investment strategy. It can prove to be a costly mistake in the long run. Beware of a situation where your basket topples, your eggs break and you are left with egg on your face.One important goal of your asset allocation is to temper your vulnerability. Hence it is prudent to diversify your assets. Asset allocation is a simple way to reduce your risk by spreading investments across different asset classes. It is also about spreading your investments over time while factoring Literates financial requirements. Cont… The Financial in your www.TFLGuide.com
  8. 8. Asset allocation is based on the fact that different asset classes tend to behave differently. While equity is volatile in the short term, over the long term it delivers the highest returns among all asset classes. Debt instruments on the other hand are very stable but they cannot beat inflation over the long term. A combination of these two asset classes can give us the best of both worlds.Asset allocation helps in avoiding efforts to time the market. Financial markets are impossible to predict. One cannot say which asset class will perform when. The best thing to do is to be prepared by allocating between assets with different risk return characteristics.A prudent approach is not necessarily ultraconservative, but it is one that recognizes definable risk and plans to take advantage of that. There are times to be aggressive and times to be cautious. Your asset allocation is forever changing, partially because of financial stages and partially because of the changing economic environment. Prudence means acting on reasonable expectations that allow for building of a diversified portfolio consisting for both fixed income and equity. You can then have best of both worlds. The Financial Literates www.TFLGuide.com
  9. 9. Buy a bond fund for fixed income anddiversified equity fund for equity. These arethe basics of the investment world and youcannot go wrong with these. The Financial Literates www.TFLGuide.com
  10. 10. Sector funds are risky. You should not beinvesting in exotic funds unless you have ahuge risk appetite. The Financial Literates www.TFLGuide.com
  11. 11. Power of compounding will turn things in yourfavor in the long term provided you start early. The Financial Literates www.TFLGuide.com
  12. 12. An investment plan can help increase the value of savings faster ifundertaken early and pursued consistently. Growth of assets will thensharply reduce the time it takes to gather a nest egg for retirement.The purpose of saving and investing is not to make you wealthy in theshort term but to create wealth in a slow but sure manner.It is shortsighted to start investing without substantial money in the bank,funds that you will not touch in the most dire circumstances.The one place where it is possible to increase the return on yourinvestment at an average rate that historically surpasses interest ratespaid by fixed income instruments is in equity.Investing in equity is the only way to achieve real growth. The oneconstant we can all be sure of is inflation. Thus the money invested indebt is being constantly eroded in terms of its purchasing power.For meeting your short term objectives invest in fixed incomeinstruments. For meeting long term goals consider equity investment. The Financial Literates www.TFLGuide.com
  13. 13. There are, to be sure, some risks in investing. Ifwitnessing the contracting and expanding of yourinvestments has a depressing affect on you,perhaps you should not be directly involved withthe stock markets. Instead, consider less volatilevehicles, such as mutual funds. There is no reasonto participate in an activity that causes anxiety andmay not be good for your health. Mutual fundinvestors can still benefit from the investmentprocess without exposing themselves to unduerisks. The Financial Literates www.TFLGuide.com
  14. 14. You have to decide which risk personality fits your best. Are yourisk averse? Are you risk neutral? Are you risk lover? If you aretotally risk averse, stay away from the investment world. If youare risk neutral, the investment world should pose no problem toyou. You have a wide variety of investment vehicles to choosefrom that will provide safety and diversification. Risk lovers canrange over the whole investment world.Before making any investments in mutual funds you must do arisk tolerance test for yourself. Try to find out how much risk youcan handle. You should know that all mutual fund investmentsare subject to market risks. There is a strong possibility of thevalue of your investment going down immediately after yourinvestment in the short term. If you cannot bear to see yourinvestment losing its value any time then investment in aggressiveequity mutual funds is not for you. The Financial Literates www.TFLGuide.com
  15. 15. Investors have a vast department store in which toshop. The menu is virtually endless, and yourchoices are limited only by your effort andimagination in the decision making process.The financial world is constantly changing andwill continue to do so. New products are createdalmost daily, and not all of them are useful foryou. A prudent investor will wait until a newcomplex financial instrument has proved itself inthe marketplace. Beware of a new financialproduct that claims to solve your all financialproblems. The Financial Literates www.TFLGuide.com
  16. 16. Most people are not psychologically ready toinvest until they feel financially secure. Security formost people is sufficient money in the bank. Undernormal circumstances you should not seriouslyconsider investing unless you have accumulatedfunds roughly equal to one year’s income in thebank.Some people are in the habit of leaving anincredible amount of funds in their savings bankaccount. Leaving excessive amount of cash in thesavings account is not needed. Cash to cover threeto six months’ living expense is suitable for mostpeople. The Financial Literates www.TFLGuide.com
  17. 17. Those people, who worry too much, mustnormally avoid any form of credit. Some peoplesimply do not know how to use credit properly. Itis better for such people to always remain awayfrom credit.Credit if not abused can be of great use. But it mustbe controlled and constantly monitored.The decision to use credit depends both onfinancial as well as psychological factors. One whotakes on too much credit does so at his/her ownperil. It is normally not prudent to get credit ofmore than 25% of your net worth. The Financial Literates www.TFLGuide.com
  18. 18. Before starting your investments, it helps toknow what your time frame is. Are youinvesting for your short term, medium term orlong term objectives? In the investment world,short term investments start tomorrow and lastupto two years, medium term investments arethose between two and five years and longterm investments are those which are made formore than five years. The Financial Literates www.TFLGuide.com
  19. 19. Understanding your objectives and your own natureplays a large part in successful investing. Manyinvestors face great difficulty in matching theirinvestments with their objectives.There are two general goals for investors to pursue-income and growth. These goals are conditioned bysuch factors as safety and diversification. Investmentobjective are few, but the investment world isenormous.Some investors invest to get a regular income. Incomeis the return you get from invested funds. Income isderived from dividend or interest. The other reason forinvesting is appreciation of capital that is, seeing yourmoney grow. The Financial Literates www.TFLGuide.com
  20. 20. In financial matters it is prudent to protect yourself by having adiversified portfolio of investments. Diversification is an attemptto deal with the problem of market timing. Averaging is areasonable formula, a trade off with market realities. By constantlyinvesting fixed amounts at regular intervals over a long time, youcan minimize the effects of fluctuations of markets.In the case of mutual fund investments, it is preferable to go forinvestments in diversified equity funds or balanced funds.Investing in sector funds or thematic funds can be risky due toinadequate diversification. Apart from selecting funds havingdiversification across market caps, it is also important to havediversification across fund houses.SIP route of investing providestime diversification by investing across different market cycles. The Financial Literates www.TFLGuide.com
  21. 21. You have to realize that fluctuations are partand parcel of the investment process. They arenot necessarily a threat to the safety of yourinvestments. The financial world may offer youpotential rewards for tolerating someuncertainty. The Financial Literates www.TFLGuide.com
  22. 22. Some people are of the view that atretirement your portfolio should consist of only fixedincome instruments. This is clearly not a correct approach.Minimum 20% allocation to equity is a must in the portfolioof retired persons. The combination of longer life expectancyand constant inflation argues for a portfolio with acontinued commitment to equity along with fixed income.Your assets should always contain some elements ofappreciation since you can never be certain about whatunexpected expenses you might face. The only way you can hope to offset theerosion of your wealth is by continuing to invest a portionof your portfolio in equity mutual funds. The Financial Literates www.TFLGuide.com
  23. 23. Mutual funds are best suited to investors who do not want to commit a great deal of time and money to the stock markets. They offer professional management relatively cheaply to small investors. They serve the purpose of safety through diversity and expert management. A mutual fund is a very useful investment vehicle of the small investor.The Financial Literates www.TFLGuide.com
  24. 24. Mutual funds are affordable for everyone.Even a small investor can buy mutual fundsby investing a small amount at a time.By buying a mutual fund you obtain theservices of a professional fund manager tomanage your money for a very small fee. Witha small investment you can buy the stocks ofseveral top companies, which may not bepossible for you to do as an individualinvestor.Thus by investing in mutual funds you areable to get the benefit of diversification byspreading your risk across different stocks.Investments in mutual funds provide youliquidity and are tax efficient. The Financial Literates www.TFLGuide.com
  25. 25. In the short term you cannot expect toget large returns from your investmentsin equity mutual funds. Real growth ofmoney takes place due to power ofcompounding only when you remaininvested in equity mutual funds for avery long time. You have to set realisticexpectations both for your goals as wellas your returns. The Financial Literates www.TFLGuide.com
  26. 26. Fund house as well as fund manager play a crucialrole in the long term performance of a fund. Afund house with a good pedigree will boast of alarge number of highly performing funds. This isbecause a good fund house will have systems inplace with a team of highly skilled andexperienced fund managers. When a good fundhouse has systems in place, the performance of thefunds depends more on the systems and less onthe individual performance of a star fundmanager. The Financial Literates www.TFLGuide.com
  27. 27. It may not be worth buying a higher cost fundthat appears to be only slightly better than alower cost one. There is no reason why a fundhouse should have higher costs than others. If afund house has higher cost, then it must justifyit by giving you higher returns on yourinvestment. The Financial Literates www.TFLGuide.com
  28. 28. A large number of mutualfunds are available fromaround forty mutual fundhouses. Each mutual fund has astated objective. Each mutualfund has some potential risk.You must spend some time forclose understanding of thefunds. This will help you tomeaningfully diversify yourmutual fund portfolio. Statedobjective and risk profile of thefunds selected must match withyour objective and risk profile The Financial Literates www.TFLGuide.com
  29. 29. Mutual funds with large stakes in just a fewsectors will likely be more volatile than themore evenly diversified funds. Look at thesectoral history of the fund to gain a goodperspective. The Financial Literates www.TFLGuide.com
  30. 30. A portfolio that puts mostof its assets in just a few stocks will likely bemore volatile than a fund that is spread acrosshundreds of stocks. But there could be rewardsof concentration. The Financial Literates www.TFLGuide.com
  31. 31. Performance comparisons must be used only tocompare the same type of fund. You have tocompare apples with apples. You cannotcompare apples with oranges.Past performance of the fund is no indicator offuture results. Do not focus on short termreturns. Check long term performance of thefund across market cycles. The Financial Literates www.TFLGuide.com
  32. 32. Your mutual fund portfolio must be properlydiversified. A balance must be maintainedacross market caps like large cap, midcap andsmall cap. There should not be any overrepresented or under represented areas.The key challenge in mutual fund investing isto choose the right funds to meet yourobjectives. The Financial Literates www.TFLGuide.com
  33. 33. The decision on which funds to invest in should be made in thecontext of your overall portfolio that should have core and satellitesegments. The core will consist of anything between 60 to 80%depending on your risk appetite. The core will provide stability toyour portfolio. It will mainly consist of large cap and large &midcap value funds. The core segment should be made of welldiversified and more predictable funds that have a proven longterm record of outperformance. Funds that rank in the top quartileconsistently over time periods of one, three, five, seven, ten yearswould be good candidates. After identifying funds, ratings can beused as the final deciding factor.The satellite portion of your portfolio could be made of well ratedfunds that show the promise of good performance in the future. Itwill consist of multi cap funds, mid & small cap growth funds,sector funds, and thematic funds. These funds are risky but havepotential of high growth. The exposure to sector and thematicfunds should be very low because of the high risk involved inthese funds.A small allocation to a sector oriented fund, a more flexible fund,or a more concentrated fund could boost your returns. The Financial Literates www.TFLGuide.com
  34. 34. The Financial Literates www.TFLGuide.com

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