Money Lessons from YOGA

21st June is celebrated as World Yoga Day, Yoga is a combination of physical, mental and spiritual disciplines and is known for its numerous health benefits. Although it has its origins in ancient India, it has spread all over the world and is practised by individuals aiming for a healthy life. Yoga mantras can also guide us on the right path to financial wellness. Let us learn few of them in this post.

 

1. Discipline is the key

The most important lesson from yoga is Discipline. When a teacher tells about yoga, the first thing that is narrated about it is that we need to do it on a regular basis without fail in order to see the best results. It teaches us that we can do great things if we are disciplined in life, Discipline does not prevent low days or downs in life but it gives us the appropriate strength and approach to deal with them.

Similarly, when we are investing money we have to be disciplined and regular. A broken SIP schedule or not following our budget for a month or so will not do. We should be strict on our plan and budget. For example once we have started investing using a SIP way, do not miss on instalments or else we will never be able to reap the best benefits.

 

2. Flexibility is Must

Yoga makes our mind and body flexible which in turn increases adaptability.

In Investment also we should be flexible in choosing the right asset, the right combination, the timing and tenure, the instalments, etc. if we stick to one plan or are stubborn with certain investment types, we may face difficulties later.

 

3. Have Patience

Patience is very important. Yoga is one of the best and most-practiced technique in order to build patience. The duration it takes to master a pose or hold your breath automatically and implicitly teach patience.

Similarly, investing also needs patience. Making impulsive and emotional investment decisions can hurt. Also, once a decision is made we should not be impatient about returns. It takes some time for money to grow and wealth to build.

 

4. Keep the Balance

We might have heard of ‘Sheersh-Asana” or the headstand. It is one of the yoga asanas which requires maximum balance. If we practice yoga regularly in a disciplined manner, we will ace the headstand and all other asanas as well. This will keep our body in perfect equilibrium.

Similarly, need to maintain a balance among our assets. The concept of asset allocation is hence important as it is a must for maintaining an equilibrium in our portfolio. A diversified portfolio is considered to be the best-balanced portfolio as it has a flavor of most asset types- equity, debt, hybrid, gilt, fixed-income, fixed-return, etc.

 

5. Learn from Failure

We cannot learn all asanas in a day and we will fail sometimes before getting perfection.

However we should understand that failure is not a full-stop. It may seem like a semi-colon for a while but never a full-stop, it is rather an opportunity to do the same thing in a different way.

In investing there will be ups and downs, but that does not mean it is the end of the story, it simply means we should try other options.

And finally like Yoga, to make your investing journey successful be disciplined, maintain a balance, exercise flexibility, have patience and do not stop even if you fail!

What should we learn from the Crisis?

We get panicked when we see that our whole life’s savings/investment reduces to half its value in a just a year. But yes this is also the reality and faced by many investors during 2008-09 crisis. The investors’ money reduced by almost 60% (assuming the money was invested in BSE Sensex) within January 2008 to March 2009 period.   It needs extra ordinary courage and patience to digest such kind of loss and remain invested. However those who continued for next two years they were back in profit  If we see the historical returns the market since has given approx. 10% average annual return if my holding period is more than five years. So what should we do where there is a bloodbath in the Dalal-Street and how to survive this kind of situations, lets us find it out.

  1.  The most important lesson we should learns from past crisis is that Stock Markets goes ups and down but will finally react to the underlying economic signals. It will recover back if the underlying economy grows. However the small retail investors typically buy when markets are high and sell when markets crash. We have seen it in 2008 crisis. The mantra is: Buy Right products and hold, don’t get into panic selling. Usually there is a sharp recovery after a crash which cannot be encashed by the immature investors except may be few experts and hence small investors are most likely to miss the recovery. Unless we are invested, we could not gain from the market recovery. The strategy should be holding a well-diversified portfolio (through diversified mutual funds) rather than just a few stocks.

  2.  The old saying “Never keep all the eggs in one basket” is always relevant especially in case of the investments.  In the past we have seen various themes like IT, Pharma, Infrastructure funds which have done exceptionally well for some time but also turned huge negative when the hype related to these sectors waned out. We need to diversify our assets in different asset class like equity, debt, gold, real estate etc., not just that within asset class also we need to diversify further like in case of equity we should spread our investments in Large, Mid & Small cap Diversified Funds, Sector funds have higher risk and should be limited to only a small portion of the total portfolio. Diversification is very important and while analysing the return part we should see the portfolio return rather than one particular class of the assets.

  3. Portfolio Rebalancing is another important thing need to be practiced in investments. Normally  when the market rises we get carried away with it and forget the prudence while increasing the allocation in that particular asset class, rebalancing has a purpose and should be practiced in a systematic way. First we should decide how much debt and equity we are comfortable with based on our risk appetite and financial goals.  Once it is decided it should be practiced and rebalancing should be done when one asset class goes up. For example if we have decided 50:50 as equity and debt and due to rise in equity market the portfolio moves to 65:35, in that situation we need to redeem the excess equity exposure and brought it back to originally decided allocation.  As we reach to our financial goals we should reduce exposure from high risk category to low risk category.  By rebalancing we also tend to book profits in between while reallocating the assets.

We have seen a very sharp growth in mutual fund investments in last two three years. These are those new investors who have not seen a long and deep market crash like in 2008-09. The points mentioned above are very important for those investor. If an investor has begun to invest just by looking at the past few years’ returns and don’t have a proper plan/strategy, he will panic and sell at the first whiff of a longer market crack. Panic selling and greed-based buying will costs much, not just money but also the trust in the markets. Hence it is always better to take proper guidance from an expert.

Why should we plan for Retirement as soon as we start working?

If we talk to some young person about retirement who has just got his first job, he may definitely laugh on us.  In India there is almost no seriousness for retirement planning and talking to someone who has just started working is too long for planning. At the mass level, people are very short sighted and plan for their short term goals, but not “long term goals”

Why retirement planning is important?

As we all know the inflation is the biggest enemy for any person who need to survive in future. Although the inflation numbers may not look very high in govt. statistics but if we talk about actual cost of living the numbers are quite different. If we assume 10% rise every year in our cost of living then for every 7 years, we require almost double of the amount to maintain the same cost of living.

So for a 30 year old person if we assume he would retire at 58 then the money required for same life style will be 16 times of the current value. Yes it’s not a small number. If a person’s monthly expenditure is 25000 today he will need about 4 lakhs at the time of retirement.

But still people don’t plan for retirement, why so? Let’s understand the reasons and also why we should actually plan it.

1. It’s too early

As mentioned above, most of youngsters feel that I have just started working so I have different priorities. The top most thing in his mind right will be “how to buy the house?” or a New Car and maybe how to get the better pay package in the next job?

Thinking of retirement at this age is simply too much when there are so many other things before that. But the fact of life is that everything comes on its time and if we have not planned it in advance we have to suffer at that time and we can’t go back to plan again. So let’s plan the things when we have time to control it.

2. My Kids will take care of me

In India there is a famous saying that our children are “Budhape ka Sahara” this holds true even today for many of us and yes we have much better social fabric compared to western countries and lot of children take care of their old parents. But still there are many people who don’t want to be dependent on their kids. They want to give the best to their kids and raise them as amazing people, but then they do not expect anything back from them.

There was a famous movie “BAGHBAN” of Super star Amitabh Bachhan which reminds us of some hard truths about life. It’s good that our children may take care of us but should we totally dependent on them?

3. Don’t have Money

This is a very common reply if we ask some youngster. It’s getting tough to save in today’s times especially if you are single earning member in family with 5-6 people in a big city. Since this is last priority for a young person and he have got so many other expenses lined up that for retirement there is no money left.

But the hard core truth is “Just because you were not able to save enough for future, no one is going to give you money at your retirement.”  So let’s control the expenses and start saving whatever little we can start with and increase it gradually.

Even if we start saving small amounts we can create a good corpus if we continue for a long time. For example Rs. 5000 saved every month can create a corpus of about Rs. 2 cr in 30 years (assuming annual return of 12.5%).

4. We can’t visualize for so long

Future is unknown and uncertain, and generally we can’t predict what will happen after 10-20 or 30 years later so we also don’t worry about it much. Therefore most of us are unable to visualize how serious it is to plan for retirement and how tough it will get if they do not have enough retirement corpus.

It’s not easy to look far ahead in future and visualize it especially when we have a very active income right now. Just like its very tough to image how it feels to be hungry, when we are easily getting 3 meals each day. Our salary/regular income will stop coming and still we have to live another 30-40 years, its not that easy we don’t have enough money to take care of regular expenses including rising medical bills.

As we become older, our health will not be at the best level and kids will be busy and struggling with their own life issues hence may not be in position to take care of in the same way we had expected.

There are various examples of successful people who died poor and struggled in their retirement life. If we do not have enough money at retirement, we do not have power. People do not treat well, and that’s the harsh reality of life.

5. So what should we do?

We should do some basics to create a retirement corpus, which will be as follows:

1. First calculate the time of retirement

2. Find out currently monthly expenses and amount required at the time of retirement.

3. Calculate the corpus required and amount to be invested to achieve it. Take professional advisor’s help to get the clear picture.

4. Invest among different asset class i.e. equity & debt to diversify the portfolio

5. Be debt free at the time of retirement

6. Be disciplined in the investment. Invest regularly and increase it as the income increases.

7. Don’t touch the retirement corpus for any other purpose.

Resolution for 2018: Be Healthy & Wealthy

2018 is almost here and we already have a plethora of plans and resolutions that we wish to accomplish. Considering that the New Year is the most motivating time to start with some new decisions which can change our life for the better, one excellent way to do it is by making some solid resolutions which can help us to be healthy and wealthy the two most important part of life. We can learn the good habits for healthy life and use them for a financial wealthy life as well.  Let’s chalked down the good habits for a healthy life and how can we learn from them to also have a wealthy life.

1.  Get up early in the Morning: Start Investing Early in Life

One very significant benefit of waking up early is reduced stress level. When we rise early, it eliminates the need to rush in the morning. We can then start your day on an optimistic note and such positivity often stays with you throughout the day. Early risers often go to bed early.

Similarly starting the investments early allows us to develop disciplined spending habits by focusing on budget and cutting expenses when needed. It gives more time to grow our investments and we get the amazing benefits due to power of compounding. Let’s understand it by an example: Ram starts saving Rs. 5000/- monthly at the age of 25 will get approx. 2.76 crs. At the age of 60. While Shyam who starts saving Rs. 5000/- at the age of 35 will get only 94 lakhs when he reached 60.

2. Have Balanced Diet: Diversify the Assets

A well-balanced diet provides important vitamins, minerals, and nutrients to keep the body and mind strong and healthy. Eating well can also help ward off numerous diseases and health complications, as well as help maintain a healthy body weight, provide energy, allow better sleep, and improve brain function.

Similarly we should diversify our capital across different investments to reduce your overall investment risk. This strategy is designed to help reduce the volatility of investment portfolio over time. For example a single scheme of mutual fund invests in 20-30 stocks and provides the needed diversification in a single investment.

3. Exercise Regularly: Invest Regularly

Regular exercise helps us to Control Your Weight, reduce the Risk of Cardiovascular Disease and Type 2 Diabetes and Metabolic Syndrome.  It also helps in reducing certain type of Reduce Cancers as well as it Strengthen our Bones and Muscles. Exercise also improves our Mental Health and Mood.

Trying to pick the top or bottom of markets is notoriously difficult, by making regular investments we can avoid timing the market. Regular investing helps to ensure that we don’t miss out on the best gains. Regular investments also helps to reduce the impact of periods of short-term volatility and gives our money the time it needs to grow, as markets will generally increase over the long term.

4. Drink enough Water: Have enough Liquidity

One of the best things we should do after waking up in the morning is to drink at least 500 ml of water. Water fires up our metabolism, hydrates and helps our body to flush out toxins. It gives our brain fuel, Improves Skin Complexion, Boosts Immune System and may even make us eat less.

Similarly we should have sufficient liquid assets. Liquid Assets are low-risk investment which can be converted to cash quickly and easily with little or no penalty. Examples of liquid assets are Treasury bills, savings accounts and money-market/liquid mutual funds. Flexibility and accessibility are just two of the ways liquid assets can help you stay ahead in the financial game. Liquidity is important. In case of emergency It is a safety net for us and our family.

5. Have Enough Sleep: Have enough Risk Cover

Adequate sleep is a key part of a healthy lifestyle, and can benefit our heart, weight, mind, and more. Sleep makes us feel better, but its importance goes way beyond just boosting mood or banishing under-eye circles. Sleep plays an important role in our physical health. For example, sleep is involved in healing and repair of our heart and blood vessels. Ongoing sleep deficiency is linked to an increased risk of heart disease, kidney disease, high blood pressure, diabetes, and stroke.

We should always have proper risk cover to face the uncertainties of life like health issues, loss of income, fire or theft at home etc. We should take proper Health insurance, life cover and also insure our valuable assets from the risks. By having proper risk cover we can have a much tension free life without bothering much for the uncertainties of life and can take also take some calculated risks in life.

6. Don’t diagnose yourself: Take Professional Help for analysing

In this day and age of limited time with doctors coupled with ample opportunity to google anything, the temptation for people to reach their own conclusions about their illness is strong. When we self-diagnose, we are essentially assuming that we know the subtleties that diagnosis constitutes. This can be very dangerous, as people who assume that they can surmise what is going on with themselves may miss the nuances of diagnosis. Another danger of self-diagnosis is that we may think that there is more wrong with us than there actually is. Then there is the fact that we can know and see ourselves, but sometimes, we need a mirror to see ourselves more clearly. The doctor is that mirror. To be fit and healthy we should always take Doctor’s guidance to know the exact problem and the right solution to cure it.

Similarly a Financial advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditure. He may identify investments that are not giving optimal returns. With the help of the advisor, we can chart out our financial goals–even the improbable and ambitious ones. The advisor can then help you create a plan to achieve these targets. He may suggest that you split your goals into short-term, medium-term, and long-term goals. This allows for better financial management. The advisor can recommend products to help you reach your goals faster. In this, the advisor would assess the risk profile, personality, and financial responsibilities. He would also explain the product features and suggest how to make the investments.

Managing your personal finances is not rocket science. People have been doing it for years with success. But it is all a matter of trial and experience. Choosing the right financial advisor is crucial to the success of any financial plan.

7. Periodic Reports & Regular visits to Doctor: Periodic review & regular interaction with advisor

Our health is our greatest treasure. Taking care of our health is utmost important. But in our daily life, we keep on looking for excuses to not visit our doctor. Be it for saving money or for other reasons like ‘I am too young and healthy to go to a doc’, ‘I don’t have time today; may be next week, I’ll get an appointment…”, we keep on ignoring our health. We ignore the fact that performing regular health check –ups from young age can actually reduce the risk of occurrence of several health issues in future.

Similarly we should have regular interaction with our financial advisor. Given the ever changing economic landscape, it is prudent to keep in touch with your financial advisor at least once in six months. This communication can take the form of a telephone call, an e-mail, text or meeting to discuss our current financial situation and any changes in our goals and needs. It is also important to have a face-to-face meeting at least once a year, or upon the event of any major significant changes in our or family’s life such as birth, marriage, divorce, death, inheritance, sale of house, purchase of house, change of job, loss of job, illness, pending retirement, or reaching Medicare age etc. Topics of discussion could include subjects such as tax situation, financial evaluation and estate planning, structure of portfolio, total assets, current and future growth or earnings, non-market related assets such as a private company or real estate.

7. Have qualified family Doctor: Have qualified & Certified Financial Planner

We should have a good doctor who is learned, honest, kind, humble, enthusiastic, optimistic, and efficient. He or she inspires total confidence in patients and develop a good relationship that by itself constitutes good treatment for any kind of ailment and the best starting point for confronting all causes of pain and suffering.

Similarly we should have a good and well qualified Financial Advisor who understand our requirements and also qualified to advise to client’s best interest in mind and can help in sorting out the income, expenses, needs, wants and financial ambitions as required for a person and his family.

If we follow these basic principles in life we may stay healthy & wealthy and live life peacefully.

Should we invest in Equity Mutual Funds or directly in equity shares?

There are two common ways, If we want to invest in equities. First option is we can open demat and trading accounts with a stock-broker to buy or sell equity shares in the stock market. Secondly, we can invest in equity mutual fund schemes.

Mutual fund is the instrument through which Mutual Fund companies pools the money of different people and invests them in different securities like stocks, bonds etc. Many retail investors think that, whether we are investing in mutual funds or through stock brokers, at the end of the day, we are investing in stock markets and therefore both types of investments are the same; hence the dilemma, whether to invest in mutual funds or directly in equity shares?

Here, we will try to understand the key differences of investing in mutual funds and investing directly in stocks.

1.   What is the Risk and Return?

As we all understand that Risk and Returns are the two most important aspects of investing. We invest our money to get returns. In certain investment products we can earn returns without taking any risk, e.g. bank fixed deposits, traditional life insurance plans, government bonds, etc. However, risk free return is the lowest expected return. Historically, risk free returns, on a post tax basis, has not been able to keep pace with inflation over a long time horizon. Hence, If we wish to beat inflation and want to earn higher returns, then we have to take some risks. Generally Higher the risk, higher the potential return, but is not always true. Higher risk and higher returns are fundamental attributes of both stocks and mutual funds, but from an investor’s perspective the question is, how much risk is the investor willing to take relative to returns he or she expects from his or her investments? A deeper understanding of risk is required.

There are two kinds of risk in equity investments, Systematic Risk and Unsystematic Risk. Let us understand both types of risks, with the help of an example.

Systematic Risk or Market Risk is a general market risk, like due to macro-economic factors, geo political reasons etc the market moves ups or down. For example when a single pro reforms political party gets majority in elections market takes it positively where as a hung parliament is taken as negative.

Unsystematic Risk is company or sector specific like Rupee exchange rate and US & European Country’s import policy could have direct impact on IT companies in India.

We don’t have any control over systematic risk and hence they are called uncontrollable risks. But we can reduce unsystematic risks to certain extent; It can be managed by understanding the characteristics of different companies, sectors and their business. how? This needs a detailed understanding and analysis of various sectors and companies. For an individual it may not be that easy however through mutual funds.

2.   Concentrated Portfolio or Diversification?

To reduce Unsystematic Risk, we should have a diversified portfolio, you need to invest in a sufficiently large number of stocks say 40 to 50 stocks to create to an adequately diversified portfolio. The share prices of the 50 stocks may range from Rs 50 to even Rs 25000 per share. As we know that we have to buy minimum one share and cannot buy fractional shares. Even if you buy just 1 share each of the 50 companies, assuming the share prices of the 50 stocks are uniformly distributed in the Rs 50 to Rs 25000 per share range, your minimum capital outlay can be more than Rs 100,000. And If we wish to buy more shares, our capital outlay will be higher. To achieve adequate diversification through direct equity shares, we will need a large capital investment.

Mutual funds, pool the money of different people and invest them in different stocks, in the right proportion, to create a diversified portfolio. The Assets under Management (AUM) of a mutual fund scheme is much larger ( few schemes have more than Rs. 10,000 crores in a single scheme) than the investible capital of an individual retail investor. Each investor in a mutual fund owns units of the fund, which represents a fraction of the holdings of the mutual fund. Therefore, by owning mutual fund units, the investors have the beneficial ownership of a diversified investment portfolio even investing, just Rs 5,000 in a diversified equity mutual fund. Hence we can get diversification benefits that would have required a few lakhs, if we had invested directly in equity shares.

Risk diversification should be an important consideration because it reduces the probability of losses. In terms of risk profile, for the same amount of investment, diversified equity mutual funds are less risky compared to investing directly in equity shares.

3.   Guesswork or Market expertise?

Generally the small and individual investors do not have the experience or expertise in understanding business of various sectors and companies which is required for right stock selections. Most of the retail investors in direct equity shares are speculative or based on guesswork or tips from friends, relatives or their brokers. If someone is investing in a stock, just because, the price has been rising for the last 3 weeks or a month or even a few months, it is still purely guesswork; just because a stock has been rising for the last few weeks or months does not mean it will continue to rise.

Mutual Fund managers have a team of analysts and fund managers who do fundamental analysis where they look at a variety of macro and micro economic factors, analysis of the companies balance sheets, income statements, cash-flow statements, management commentaries etc. Based on the forecast of these factors, employing a variety of methodologies, the fund managers and analysts forecast the future price of the asset. It needs certain set of skills and capabilities (which often includes speaking with the managements of the companies), which retail investors do not have.

A Mutual fund manager’s mandate is to outperform the relevant market benchmark returns. A good manager creates value for the investors through, what is known as, “Alpha”. Alpha is the excess return that the fund manager generates, over and above, the returns expected by the investor for taking a certain amount of risk.

4.   Trading or Systematic Investing?

Equity Share prices are very volatile it also affects the emotions of investors and thus can induce them to buy when market is going up and sell when it is falling sharply. This practise, normally, leads to losses for the investor. Historical data analysis suggests that, the effect of volatility reduces considerably, with increase in the investment horizon. Mutual funds, encourage investors to invest over a long time horizon to meet a variety of long term investment objectives like retirement planning, children’s education, wealth creation etc.

Systematic Investment Plans or SIP is a smart way to invest regularly. It helps investors to take advantage of short term volatility and invest in a disciplined manner by taking emotions out of the investment process which helps to meet their long term financial objectives. SIP also provides the advantage of Rupee Cost Averaging by investing regularly irrespective of ups and downs in the markets. This method helps us to buy units of a mutual fund scheme, both in rising and falling markets, which enables to average out the purchase price of units, resulting higher returns on the investments.

Historical data shows that, long term buy and hold is the best strategy to create wealth in the long term. Equity mutual funds provide solutions to investors to meet their long term financial goals through capital appreciation.

For someone who have lump sum funds to invest but is not sure about the market timing due to volatile conditions, he can invest in a low risk fund, such as liquid fund, and then purchase units of equity fund through a systematic transfer plan (STP). This help to average out the cost of purchase like in SIPs, along with that we also earn higher return on investment (liquid fund returns are usually much higher than savings bank interest). Such a facility is not available in direct equity investing.

Similarly, if we need regular Cashflow for regular expenses it can be done through mutual fund portfolio. Through systematic withdrawal plans (SWPs) an investor can draw a fixed or variable amount of funds from his portfolio. This way he can meet your regular income needs while, the balance invested will continue to earn returns. An investor can also opt for dividend options of mutual fund schemes to get tax free dividends.

And Finally

For small and normal investors who do not have expertise in equity markets, mutual funds are much better than direct equity investments. However If some one have the necessary stock selection and portfolio management skills, he can invest directly in shares through a stock broker. Investing in shares gives the freedom of selecting the shares and to decide when to buy or sell, while in mutual funds, investor will have to depend on the judgement of the portfolio manager. However, the knowledge, experience and judgement of a mutual fund who have team of analysts and fund manager, is likely to be much better than that of a typical retail investor. Henceforth mutual funds are more beneficial for normal retail investors, for meeting their long term financial goals.