The lessons we can learn from the rich

The billionaires have specific habits which make them like that, we can learn few things from them to how become a billionaire and remain so.

1.   Smart Rich people live below their means

Most of the super-rich people do not splurge, or spend just to show-off. They choose modest houses, drive ordinary cars, and fly economy class. Warren Buffett still lives in the 5-bedroom house he purchased more than four decades ago for a mere $31,500. Mark Zuckerberg, founder and CEO of Facebook, drives a manual-transmission Volkswagen hatchback.

The learning

               i.        We shouldn’t buy a house on loan if we can't afford the EMI.

              ii.        EMI or rent of the house should not be more than 40%

            iii.        We shouldn’t spend more than 5% of our income on car loans.

            iv.        We shouldn’t stretch our finances to compete with others or just to show off.

2.   Smart Rich People save & invest first, spend later

There is a famous saying by legendry investor Warren Buffet “If you buy things you don't need, you will soon sell things you need,“.

Most smart rich people pay themselves first by saving and investing at least 20% of their income and spending the rest. Even if we are earning less, the disciplined saving habit will ensure a secure future and we won't have to struggle close in later part of our life. We should also make sure that we have an emergency corpus for rainy days.

The learning

               i.        We should automate our investing.

              ii.        We should ensure that our regular investments i.e. SIPs get invested as soon as we get our pay check.

            iii.        We should keep at least six months of monthly expenses for emergencies.

3.   They spend less on clothes, shoes, food

The smart rich people use their money on productive purposes. They don't usually run behind brands for designer clothes, shoes or accessories etc just for the sake of it. They spend on things that will keep them and their progeny rich in the future, not what will make them look rich in the present. This is the reason facebook;s   founder Mark Zuckerberg's in simple t-shirts or filmstar Rajnikanth is dressed in plain dhoti-kurta off screen.

The learning

               i.        We should control our expenses in those assets whose value is likely to go down only. Like clothes, accessories, cars etc.

              ii.        For example we shouldn’t spend more than 3-4% on clothes, 5-7% on vacations, and 10-12% on food.

            iii.        We should invest more in those assets which will increase our wealth, 3 They save & invest first, spend later.

4.   They look for discounts, coupons and ways to cut costs

Most of the smart rich people are smart spenders. They use discounts, sales, coupons, rewards or loyalty points to save money wherever they can. We should not forget small discounts add up to big money over time.

Whether it's US stars like Kristen Bell or Premji, who ensures his employees switch off lights in offices, they know how to cut costs.

The learning

               i.        We can use mobile apps like Paytm etc to pay bills or book tickets since they offer cash backs and discounts.

              ii.        Use discount sites and online price comparison sites to avail of discounts on various kind of purchases.

5.   Smart Rich people use credit cards wisely and limit their cash expenses

Sometimes if we have lot of cash in our pocket we indulge in buying unnecessary things.

Mostly the smart rich people don't carry too much cash. They also prefer to use credit cards wisely. There is debate whether plastic money makes us to spend more? This can be answered that prudent and disciplined use of credit card can be good rather than bad. We should repay the entire dues of the card in full and squeezing all benefits out of these.

The learning

               i.        Use credit cards wisely as this helps to keep better track of expenses.

              ii.        They offer free money in terms of rewards and benefits.

            iii.        It also creates a good credit history which helps to get loans at competitive rates when we actually need

            iv.        Now chip based cards also offer greater security from theft as compared to cash.

6.   They value quality over cost

There is a famous hindi saying “Sasta roye Barbar, Mahnga roye ek baar”.  It Means  a person who buys cheap things have to repent many times while the person who buys costly things have to repent only once. Here the costly thing does not mean costly by price but buy quality.

Smart rich people do not buy stuff because it's cheap, but because it's good quality that will last them longer. For example if we buy a cheaper home appliance, we may end up spending more on maintenance and repairs, or replacing it with a new item in a shorter interval.

The learning

               i.        We should conduct a cost-value comparison before buying a product.

              ii.        We should not buy something very expensive which is not going to be used for long and have very limited life clothes and expensive mobiles etc.

7.   They give back to society

Most of the rich people like Bill Gates, Warrant Buffet, Azim Premji have donated huge sums to charities and pledged their wealth for philanthropic purposes. Even common people also donate to the social wellbeing. However we should keep our net worth in mind while giving back to society and do not be over enthusiastic.

The learning

               i.        Before donating we should ensure our own financial well-being first.

              ii.        We should try to get tax benefits under Section 80G by donating to recognised institutions.

            iii.        This also ensures that money is used for the real benefits of the needy people

To become rich and remain so is also like a habit where we have to consciously make efforts to be careful with regard to our incomes and expenses. If we do it prudently we will remain rich forever.

Mutual funds: The Myths and The Reality

Mutual Funds are in India for decades however still there are lot of doubts in the minds of the investors. In this post we have tried to sort out various myths and the reality about them.

1 – SIP is the name of an investment product

Many people think that “SIP” is the name of some investment product other than mutual fund. We heard people saying – “I want to invest in SIP”. However SIP means SYSTEMATIC INVESTMENT PLAN, which means a way to regularly invest into mutual funds. Wherein a fixed amount is automatically debited from our account and gets invest in mutual funds on a pre-defined date.

2 – SIP is only on monthly basis

Generally people make investment on monthly basis however an SIP can also be done even on a weekly, fortnightly or quarterly basis. While monthly SIP is the most suitable for all (we all get monthly income), but at times if we want to invest on different frequency that can also be done.

3 – Just SIP and forget it

Many investors think that once they have started a SIP investment or even lump sum investment then just forget it for next 10-20 yrs. However a wise way is to constantly review (once in a year or so) the performance of the schemes and take corrective decisions. But we should not over do it and start looking at weekly and monthly returns.

4 – Once started we can’t stop the SIP in between

Many investors think that after starting SIP for X yrs, then it is a commitment and we can’t break in between and if we break then will face some penalty. However the truth is that once we start the SIP, we can anytime stop the SIP in between it may take one month normally. So we shouldn’t worry while starting the SIP as it can be stopped the day we want to stop it.

5 – Once SIP is done we can’t increase, decrease or add lum sum in same scheme

Many investors have misconception that if they have started an SIP in a fund ABC, then they can’t add additional money in the same fund under the same folio or they can not increase or reduce the SIP amount. However the truth is that we can add additional SIP in the same scheme even in same date or we can cancel the existing SIP to start lesser amount SIP. We can also add lum sum amount in the same scheme any time as per our own convenience.

6 –Once started We can’t skip any SIP payment

Many people get worried that what will happen if they skip the SIP. Mutual funds units are allotted on the current dates NAV basis, so if we do not have sufficient money in account the units will not be allotted on that day. For that Mutual funds company do not charge any fine or penalty for this, but our bank can levy a some ECS retun charge for this like Rs 200/300. However we can still invest same amount through online or physically for one time purchase after that. However it is better to be disciplined enough to make sure that our SIP’s go on time, but also does not hurt badly in case of emergency

7 – We should stop SIP when markets are down

SIP is a better and disciplined way of investing. Unless we are expert in understanding markets and how they will behave which actually no one knows, it does not make a lot of sense to time SIP’s . Its better to let them run in all kind of markets and focus on your long term goals.

Many investors stop their SIP’s when markets tank which is not right. Infact, this is the best time when we should accumulate more Mutual funds units in our portfolio, so that when markets are up, we can reap the benefits.

8 –When stock markets is high we should avoid starting new SIP

Although it’s better to wait when market is high but nobody knows that market will go up further from here or will go down. So its better to keep on investing regularly rather then trying to guess about the market.  Its better to continue withr SIP’s irrespective of market conditions. And when markets do down, it’s time to increase your SIP amount

9 – SIP is always better than Lump sum Investments

Actually we can’t say which is better. When market is more volatile SIP’s can outperform the onetime investments. SIP’s however are more suitable for a common man as it’s a monthly commitment and averages the risk of market’s volatility. But when market is continuously rising lump sum investments can give higher returns then SIPs.

10 – Lower NAV is better than higher NAV

This is a very confusing and interesting myth among investors. Many people think that a smaller NAV mutual fund is a better deal compared to a higher NAV mutual fund.  Due to this reason people rush to new fund offers just because the NAV is at Rs. 10/-.

The fact is that in case of mutual funds NAV has no significance. It’s ZERO !

Mutual funds appreciation is directly related to percentage growth in the NAV not in absolute numbers. For example if we have invested  Rs 1 lacs in a fund with NAV of Rs 10, and if the mutual fund performs great and in next 5 yrs it doubles in value, then the NAV will rise to Rs 20 hence the fund value will rise to Rs 2 lacs. However if the NAV was Rs 100 per unit, still the effect would be same as the NAV would have increased to Rs 200 and investment value will increase to Rs 2 lacs. Same in earlier case.

11 – Dividend in mutual funds is better than Growth option

All the Mutual fund schemes have both options i.e. growth and dividend. Many investors think that dividend option is better because they are getting “extra dividend or extra money” . However it’s not true.

Dividends is not extra ! , Once dividend is paid from the scheme, the NAV comes down by that margin. Further  if the fund is not an equity fund, a dividend distribution tax is first paid by AMC, which lowers the return of investor. However in case of growth option, the money remains in the fund itself.

For example, ABC fund with NAV of Rs 50 declares a dividend of Rs 5

·         Now in case of dividend option , Rs 5 will be paid to investor and NAV will come down to Rs 45.

·         However in case of Growth option, nothing is paid to investor , but the NAV is Rs 50.

12 – Mutual funds means Investment in Stock Market

Another common myths is that mutual funds are highly risky because they invest in stocks. However this is half true. Mutual funds have different schemes i.e. Debt Funds, Balanced funds and equity mutual funds. Only Equity and Balanced mutual funds invest in stocks and are risky or volatile. Debt funds invest in debentures, bonds and Government Securities which are not related to equity market. Infact some of the debt schemes i.e. Liquid funds are quite safe and can be considered as substitute to saving/current account.

13 – Mutual funds do offer guaranteed returns

Mutual funds do not offer a guaranteed return like a fixed deposit.  Returns of mutual funds are based on market value of the basket of securities in that scheme. The returns vary depending on the type of schemes i.e. debt or equity based schemes. Although the returns are not guaranteed they can be predicted based on historical returns, fund manager’s expertise, securities in the scheme portfolio and investment horizon. This is one of the main reason that many investors who want assured returns shy away from investing in mutual funds.

14 – Past returns indicate future returns for the mutual fund scheme

People think that if Scheme A has given good return in past it will continue to give that kind of return in future. But this is not true. Although past returns can tell that the fund did well in past and there is some probability due to legacy that it will perform well. But it’s not which can be 100% sure. The fund’s performance depends on the securities it has at that point of time and what decisions fund manager takes in future.

15 – More Mutual funds means Better Diversification

Normally a single mutual fund scheme invests in 50-70 stocks. So when we invest in an equity mutual fund, our money is already well diversified across sectors, types of companies etc.

When we add other mutual funds of same category, many of the stocks could be same hence giving hardly any further diversification. If we further add other similar schemes we may not be doing any diversification actually.

That is why it’s of no use to invest in 10-20 mutual funds of same category. 2-3 funds of a similar category are the fine for an investors perspective  if we want to invest more we can invest in the same schemes thorugh lum sum or SIPs.

16 – Tax saving under 80C is not possible through mutual funds

Many people who are investing in PPF and Insurance for many years think there is no alternative or better way to save tax. However mutual funds do offer 80C benefits. ELSS or Equity linked saving scheme is the category of mutual funds which gives 80C benefits up to Rs 1.5 lacs with lesser lockin period of three years.

17 – In ELSS all money can be withdrawn after 3 yrs if one is doing SIP

Many investors have this belief that is that if they are doing SIP in ELSS (tax saving mutual funds), then after 3 yrs, they can withdraw all their money. However that is not true. Each investment in ELSS is locked for 36 months from the date of investments. Which means that the first SIP which goes in 1^st April 2017, will be unlocked only in 31^st March 2020, Similarly the SIP made on 1^st May’17 can be redeemed only on 1^st May 2020.

18 – Mutual Funds means big Investments

Many small investors don’t enquire about mutual funds thinking it needs lot of money to invest. Hence they stay away from mutual funds and stick to recurring/fixed deposits and other products. The truth is that we can start monthly investment of even Rs 1,000 per month in most of the funds and for onetime basis, it can be Rs 5,000 .

19 – Mutual funds mean long term investments

Mutual Funds are the investment products where we can invest for as short as one week to as long as ten-twenty years. Liquid mutual funds are for short term i.e. a few week to equity funds where we can invest for decades. There are other products in between for short to medium term time horizon.

20 – We will lose all our money if Mutual Fund company goes bankrupt

Mutual Funds are governed by SEBI and have five tier structure. There is a Sponsor,  trust, an Asset management Company, Custodian of Securities and Registrar. The way it’s designed and regulated that it’s almost impossible for investors to lose money due to a scam or AMC going bankrupt. Sponsor sets up a mutual fund, Trustees are responsible to regulate the mutual funds and ensure it to adhere to the regulations, AMC manages the funds, Custodian keeps the securities and Registrar is responsible for registering the sale/purchase transactions and keeping the investors data. Since the mutual funds units does not lie with AMC (it just takes decision of buying and selling) but with custodian and hence they are highly secure.

21 – Investment in Mutual Funds needs demat account

Many people think that demat account is compulsory for investing in mutual funds. However it is not true, we can invest in mutual funds without Dmat account as well as through existing Dmat Account, but it’s not mandatory.

22 – Mutual funds investments needs lot of formalities

Mutual funds investment needs one time KYC formalities like we need to do for opening Bank Account. After that we can buy/redeem mutual funds in a very simple one page form or also through online. We do not need to provide all KYC documents every time we invest/redeem form the mutual funds. However selecting schemes based on goals and time horizon could be little difficult for a new person and its better to take guidance from some experts.

23 – In Mutual funds only humans can invest

Actually any one can invest in mutual funds be it individuals, HUF, Companies, Partnerships firms, trusts or societies.  All we need to do it so provide the required KYC, and then investment in mutual funds can be made. For companies who have current account money can be invested in liquid or debt funds and redeem them anytime by which we can earn money in the idle money.

24 – Mutual Funds are for young and not for retired investors

As mentioned above Mutual funds have various types of schemes which can cater the requirements of all class of investors be it a young office goes to a Middle aged executive to a retired person. A person can select debt schemes if he wants more security of his funds he can also invest in a debt oriented mutual funds, which can have some equity component for some return kick! Few schemes offer monthly or quarterly dividends (equity/balanced fund offers tax free dividend) which can be a better option for those who don’t have regular cash inflows. One can also go for Systematic Withdrawal Plan (SWP) and withdraw a fixed amount each month.

25 –In Mutual funds our money gets locked

There is another misconception that in mutual funds their money gets locked for a specific period. But the truth is that in case of mutual funds, most of the funds are open ended funds, which means that we can invest anytime and redeem anytime. Although there is some exit penalty in many of the mutual funds which ranges from 3 months to a year. However in ELSS funds (which comes under 80C) and close ended funds (which specifically tell you the duration for lock in) there are lockin.

26 – Mutual funds can’t be a substitute to FDs

Although in India Mutual funds are just 15% of total FDs, In US, mutual funds are already several times bigger than Fixed deposits with more than 67% of the population invest in them. It is also going to happen in India. Currently Indian mutual funds have around 18 lacs crore, which has doubled in last 4 yrs, and set to grow very fast in the next decade. So if someone thinks that mutual funds are some alien concept, he has to rethink. It’s very popular now in India and one of the standard investments products.

27 – Mutual fund redemption is complicated

Redemption in mutual funds is very easy and now through online apps we can do it by sitting at our home without  visiting mutual funds or registrars.This does not need any approval from anyone.

28 – TDS is applicable when mutual funds are redeemed

In mutual funds, there is no Tax deducted. We get the full amount in our bank account and then we need to calculate the tax amount and pay it later. However in debt mutual funds Mutual fund companies need to pay dividend distribution tax but the dividend in the hand of investors is tax free. For Equity schemes the capital gain is tax free after one year. But in case of NRI’s, if they redeem their debt funds, then TDS is applicable.

29 – I can’t invest in mutual funds as I can’t get money when I need it

Mutual funds are highly liquid and we can get our money ranging from instant redemption to 3-4 days depending on the fund type. In fact Liquid/ultra short term funds can be used as a substitute to Saving/Current Accounts as they can provide instant or liquidity within one day.

30 – We can’t withdraw a part of investments from mutual funds

Actually we can redeemed  any amount from Mutual funds as per our convinience. We can either chose specific number of units or the amount we want to redeem (in that case it will calculate the units accordingly). So that way, it’s a great product as unlike FD or RDs wherein we can invest and redeem any amount as per our convenience.

31 – We can’t switch from one scheme to other

There is another misconception that we cannot move from one scheme to another across the same fund house. We can switch from one scheme to another in same fund house without selling. However from one fund house to another we need to redeem from one scheme to other.

32 –Bigger and well-known brand’s Mutual funds are always better

A lot of first time investors in mutual funds investors want to go with trusted brands like LIC, SBI, or ICICI etc. The truth is that the Mutual funds are totally separate entity hence they may not reflect the same quality of performance as of their parent companies. We should not confuse with LIC mutual funds as LIC insurance or SBI mutual funds as SBI bank.

Mutual funds are totally different and specialised business, and it needs asset management expertise. A small fund can also have high quality funds and should be considered.

Mutual funds are very good investment options however they should be used wisely based on the investor’s specific needs, financial goals, time horizon and risk appetite.