How to evaluate various Investment Options

When we are investing money it means we are parting away our cash to someone for future incomes. There are three ways when an investment gives us a money:

1.       Giving money as a Loan. In this case the loan giver or Lender gets some fixed interest (some time variable interest also depending upon the terms and conditions) from borrower and also his capital investment at the end of the tenure. Here normally the returns are fixed.

2.       Become a partner in some business. Means buying shares of a business and receiving the profit share on this business. We may get a handsome profit or nothing depending upon the nature and performance of that business.

3.       Buying something whose value can appreciate in the future. Like Gold, Paintings, Land etc.

Any investments will be classified in these three terms either individually or jointly with others. But the basics will remain within these three parameters.

• So when we are lending money means like buying bonds and making Bank Fixed Deposits there is fixed return from the investments and will not be dependent on the performance of borrowers business. No matter how successful that business may become, our returns will remain fixed as decided at the beginning.
• When we are buying shares means we are part owner of that business and accordingly bear the risk and reward of that business. If business does well we earn handsome dividend and may be the value of the business also goes up, however if its doing bad we have to bear the losses also. In this case the risks are high, and the potential of reward is also high.
• In the third kind of investments it’s purely the future price of that asset, if it goes up we earn profit and if it goes down we may lose money. Here the demand supply also plays a vital role on the value of these assets. Higher the demand and lesser the supply will lead to rise in value and vice-versa.

In investing jargon, the first type (lending) is called debt, or fixed income investing. The second type (owning) is called equity investing, with stock or shares being synonyms for equity. The third one is called owning physical assets. Almost everything that we invest in can be classified as one of these asset types. For example, bank deposits or company deposits are debt while buying shares or investing in equity mutual funds is equity. While buying gold would be called as owning physical assets.

While there are a lot of ways in which investments differ from each other, there are three basic characteristics that define any investment:

Risk: The likelihood of an investment not fetching the return we expect from it.

Returns: How much returns does the investment fetch actually.

Liquidity: Whether we can withdraw our money at any time.

Each of these three factors have some nuances to them. To start with Returns, when someone invests money his main objective is to get highest possible returns with minimal possible risk. However, normally, higher returns come with higher risk. Again, the defining example of this is the debt to equity comparison. Debt investments have less risk and low returns but equity can have higher returns with higher risk. There are huge variations within equity and it’s perfectly possible to have higher risk as well as poor returns. In fact, that’s what most careless or overconfident equity investors actually get.

Risk can be defined as the likelihood of loss, or the likelihood of not getting the expected return. Generally, debt has the lowest risk and equity the highest. However, there are many variations to this idea. For example, debt investments in failing businesses (Bank’s Loan to Vijay Mallya is the latest example) can be very risky while on the other side there are many ways of managing risk levels in equity.

Liquidity is about getting your money back on demand. For example, if we keep our money in a savings bank account, we can walk into any ATM anywhere in the world and immediately withdraw it, subject to some limits. If we go into a bank, we can withdraw all of it. In some investments, there could be a penalty for liquidity. In a fixed deposit, either we have to wait for the whole term, or settle for less returns or pay the penalty. In equity shares, liquidity varies from stock to stock. Big Company’s shares could be bought or sold at any time for any amount however for small companies it may not be that easy. For physical assets the liquidity and value depends on demand and supply of that asset. For example the paintings of Leonardo da Vinci will always fetch high price due to two factors one is the quality of painting and secondly now the painter is no more so there is no further supply of paintings from the creator and hence limited existing supply.

While deciding about the investment we have to keep it in mind about these factors and may distribute the portfolio among all of them so as to diversify the risk as well as get the returns from all prospective options.

Things which can hurt you financially...

Money is very important to anyone’s life and we need to be careful while using or misusing it. There are many things which can hurt us financially. Whatever we do matters for our financial well/not well-being. However there are certain things which if we are not knowing/ignoring it hurts us most financially, let’s understand those things.

1. Thinking we can be earning forever and don’t plan for the retirement. If we don’t plan for our retirement at our early earning stage when we are earning decently we may end up with nothing when we actually need it most and may not be physically fit to earn. Remember the inflation which is a big spoiler.
2. Having an emergency fund but don’t know what emergency means. We have kept the fund for emergency but keep on dipping from it every now and then for a new TV/Mobile or outings. We may be using it recklessly without realising the importance and relevance of emergency fund and when there is a real emergency we actually don’t have it.
3. We make the budgets but don’t stick it. Normally we all have habit of making budgets (out of passion) at the start of the month but by the middle of the month we are spending on parties’ outings/shopping’s and so on without remembering what we have promised ourselves to do. Best way to solve this problem is by keeping aside our investments at the start of the month and spend only the remaining part. Remember; Income – Investments should be Expenses, not the other way.
4. We keep on buying without realising the actual utility of those things. We always want to have latest apple mobile phone/ ultra HD TV/new Car and anything new launched in the market. We like to show off the things and in the way the old ones which were bought few months or may be a year back are just lying on the corner of the home.
5. Its not just us…but our family i.e. wife, kids who will determine our finances. How our family members are spending or saving on various things also matter equally, some times more about our finances. So financial education is not just for our self but for the family members also.
6. Living on month to month basis. We are so dependent on our monthly salary that we don’t see beyond it and just manage the cash flows on monthly basis. There is no plan for future goals and how to achieve it…its like living on today without bothering for tomorrow.
7. No control over our own finances. Some time we are more influenced by our spouse/parents or friend with regard to own finances and in the way losing the focus of our own financial priorities/objectives.
8. So we started saving money its good but that’s not all needed for achieving financial goals. Savings are different from investing and for long term financial goals. We need to put the savings on work by investing it in a proper way.
9. Keep on investing on different types of assets without knowing the return and risk profile. It is like keep on moving from one road to other but have no idea where we are heading to. We need to know the risk and return of our portfolio.
10. Investments is a way to make your money work for you and yes it carries certain risk however in any part of life we have to take certain degree of risk to achieve goals. As we all know plane is riskier than car and car is riskier than a bicycle however still to achieve a distance of 5000 km we have to use a plane whatsoever risky it is. Understanding the risk and accordingly managing it properly is the smart way to achieve the goals. Similarly for short term goals debt based securities are suitable while for long term objectives we need to invest in equities.
11. Thinking managing money is child’s play i.e. taking it very lightly and doing by ourselves even though we have no proper knowledge of investments. Like Doctor is required for a good health and to keep you out of illness similarly Financial Advisor is required to keep you away from unnecessary risks and make you wealthy. Understand the importance of Financial Advisor and use their expertise rather than doing everything on our own.
12. That one stupid career mistake – like misbehaving with a woman – can destroy you financially, as well as socially and professionally. So be careful for small –small things you never know which one can hit us where.

Few tips to be financially Successful

Everybody wants to be financial successful. However to become financially successful its not just the money in your account or investments you made but our habits and behavioral pattern along with emotional quotient is equally important. Below we have outlines certain habits which are  in build to a financially successful persons behavior, these are the habits which streamlines the wealth creation and also preserves it in future.

Planning…Planning anything is the first and most important thing to succeed in any kind of venture. For Financial success we need to budget our finances, frame financial goals and decide about time frame to achieve them. Unless we know our current location and where we wish to reach, we will never be able to figure out how to reach to the destination. Once we have planned our goals then we should stick to it until unless there is very peculiar situation to modify it.

Taking decisions…We can’t sit on the shore and wish to cross the river. Decision is the key and delay can lead to monetary losses as well as create confusion and legal hassles. By postponing important financial decisions we may lead to losses and crises. The cost of procrastination can dent your financial future by significantly reducing your corpus for long-term goals. The best way to tackle this bad habit is to prepare a list of financial task in the descending order of urgency, preferably at the beginning of each financial year.

Being Proactive…. We should do the research before making any investment. We are also required to keep track ongoing rules and regulations, scams and mis-selling so as to avoid losses. Riches are churned out by people who put in time, effort and money into research, they are satisfied with being satisfied, and so they seek out the best investing option, the best career avenue, and the best way to achieve a goal. They do not compromise on the quality or suitability of a product or service because it meets their basic needs. 

Think twice before action… Many actions cannot be reversed or cost heavily if we want to change so think twice and wait before taking action and analyse all pros and cons of attractive options. Be cautious and understand all aspects Be it buying stocks that have suddenly shot up, redeeming mutual funds units at the first hint of a market correction, or changing your job just because you are offered a higher pay package are all impulsive reactions. Discipline is at the core of any aspect of financial planning. We should inculcate discipline by sticking to our decisions, strictly following the initial decided budget, and don't digress from asset allocation.

Review the past decisions/actions… Reviewing/Monitoring is critical to know if we are on course. In terms of criticality, this habit is equally important as of planning. A spectacular plan is only 50% of our final objective because, in the absence of a periodic review of our finances, we may never reach our goals. Monitoring the portfolio has a three dimensional impact: it helps to weed out non-performing assets, re-calibrate investments if the goal seems out of reach, and maintains asset allocation.  

Be prudent for debt decisions… Most people need to borrow for funding current needs/comforts by paying from future income to secure our future and improve current lifestyle. However it is important to learn the art of delaying gratifications and considering the impact of our actions, this is the reason debts are an anathema to most successful people. While some loans such as those for home and car are virtually inevitable, the financially prudent prefer to do the cost benefit analysis of these loans and avoid loans for luxurious items. Beside, stretching loan tenures is not advisable as it balloons the interest cost despite the tax advantage that some of them offer. Hence it is best to prepay costly loans at the earliest and avoid unsecured loans at all cost.

Always remember the risk… Remember there are various uncertainties and don’t forget to cover them by securing insurance, this ensures that our dependents and investments are protected, as it is not possible to predict misfortune but we can have the right tools to tackle the unforeseen events. This can be done by having the right insurance and contingency in place. Most successful people ensure that they cover all their risk adequately. 

Investing is a Game, We should be play it Smartly

If we analyses closely games are also won by proper strategy and planning like creating a wealth or long term investment plans. Lets take the most cheered game in our country yes we all know its cricket, there are many similarity exists between Cricket and Investing. Cricket is the most loved and viewd game in India and like any other game this game is also played strategically with proper planning and execution. Specifically if the time period is smaller like 20-20 format cricket, strategy is key along with careful planning and patience. We have analysed different aspects of the game and compared with investments so that how to get the best from our investments just like the Twenty20 matches, and play a strong innings.

1.     Physical fitness = Investor Awareness 

In any game Player’s performance depends on his fitness, an investor’s awareness is what helps him decide which investments to make. An informed investor won’t follow the herd or be swayed by hearsay. It pays to do your research before making any decisions. And when in doubt, always consult a professional (your coach) on what course of action to take.

2.     Role of a coach = Professional advisor

A coach brings a wealth of knowledge, experience and expertise to the field. Fund Managers play a similar role in investing. Using in-depth research and proprietary tools, they analyse every single stock or debt instrument before investing to help drive the performance of the scheme. Professional Advisor helps to understand our key strengths and weakness and guide to invest accordingly.

3.     Team selection = Asset allocation

A cricket team is made up of different expert players like batsmen, fast and spin bowlers, wicket keepers, etc. An investment portfolio too needs the right mix of asset classes from equity, debt, cash, gold, real estate etc to name a few. A fast bowler or a Match Hitter (like Chris Gayale) is similar to an equity fund. An all-rounder (like Maxwell), like a balanced fund. But the important thing is to get the right mix of players to build a strong team. It’s the same with your investments. So while making an investment, make sure that we have the right mix of asset classes to ensure that our portfolio won’t be affected by a sudden fall in any one asset class.

4.     Winning the toss = Good Start

The toss plays a significant role and ensures a good start. In investing, an early start is a good start because our money gets more time to grow and benefit from compounding. So let’s seize the moment and start right away to give the money the benefit of time. We will realise that it was our winning decision in the long term.

5.     Planning = Risk appetite

Every batsman thinks before taking a single or hitting a six and every ball that’s bowled is carefully timed and planned  whether its yorker , full length or full toss ball and accordingly dispatched to gain maximum advantage. Just as a player assesses his risk before playing, we too need to make the right preparations before investing. Determine our risk profile to decide how much to allocate in each asset class and whether the time is suitable to play hard or play safe.

6.       Taking singles = Systematic Investing 

Every run adds up. And that holds true for any investments as well through systematic investing. Monthly investments are like taking singles (like what Dhoni and Kohli do most of the time, a good running between the wicket), they ensure that scoreboard keeps on ticking. While intermediate lump sum investments could be compared to the occasional boundary, the discipline of systematic investing could result in a great score over time.

7.       Powerplay = Maximising returns 

In every match there are those overs where the batsmen aim to maximise runs in powerplay by smashing fours and sixes. Similarly in investing, there are times when an investor could look to maximise the growth of his investment. It could be as simple as entering the markets through an equity fund in a bear phase to cash in for the long term. Think of it as hitting a four or even a six by making your investment at the right time.

8.       Wickets falling = Time for review 

There are times when even the best batsmen get out and the best bowlers go wicket-less. A similar situation could occur with our investments that even after investing in good asset class they are not growing. At such times, relook at the portfolio and seek professional advisors help before making any changes to ensure long-term growth.

9.       Under Pressure = Stay invested 

The best batsman knows when to play safe and when to strike. Similarly in investing, while most investors panic when the markets are volatile, we need to hold on to our investments until we reach our goal. But the best strategy is time. So as long as our long-term goals (target score) remains same, stay invested and don’t let the noise of markets (cheers of the crowd) change the mind.

10.   Score and statistics = Goal review 

For a team batting second, what matters is run rate, required rate, projections and more. Any investment portfolio too, should be treated similarly and kept a close watch on. Periodic checks and reviews of each fund’s performance against standard benchmarks and peers determine how it has fared over time.

11.   Player rankings = Individual performance 

Every player is rated on the basis of his skill to secure a position in the global rankings. Likewise in investing, funds are ranked on the basis of their performance track record and history. It pays to do your homework and study the right kind of funds before making any investment.

The best way to learn is to do it in the most interesting way – and we believe there couldn’t be a better way of learning about investments than with everybody’s favourite game!