Tuesday, July 21, 2015

New Investor - Part 2

What should a new investor do or buy?

Some time back, I wrote an article for things to be done by a new investor. After loads of feedback and suggestions, here is the improved avatar. People asked me to define each activity with respect to time and suggest few names of the products.  This is little difficult to achieve because an expert can do that in say 20 mins while I may take 2 days to shortlist any product. The time factor depends upon the maturity factor and the psychology of the person in question. However, people complain that since there were no examples and no time frame attached, things were deferred and were not done at all. So here, I have tried to attach the time frame and names of few products. I would strongly urge all to first do the analysis and then compare your product with the listed one. Do not (repeat) go by the product name. What suits me will not/may not suit you. Regarding time frame – do not beat yourself black and blue if you fail to take action in the mentioned time. The aim is to start the things sooner. We are not in a race with our friends or media or market. We just need to achieve our goals in life. To hell with Joneses.


Let us begin:
Emergency Funds: 
As in the earlier post, here too, we will begin with Emergency Funds. Build a corpus tagged under emergency funds. This money has to be used only during emergency.  This means, the money has to be touched only in case of health issues which requires hospitalization or other life threatening events. The importance of emergency funds cannot be stressed enough. Many times, people do not take this seriously and have minimum or no emergency fund corpus. When emergency strikes, they withdraw money from their investments. Now, since equity (direct stocks or mutual funds) offer very good liquidity, they are first to be touched. FD needs going in person in bank and doing some formalities. Mutual funds can be redeemed with a single transaction and the money is in saving account in T+1 or T+2 days. 
Here the liquidity does not mean profitable selling. The markets may be down when you are pulling your money out. So you may sell the equity when markets are down, practically opposite to the theory.
Read more about emergency funds ‘here’ and ‘here’.
Action:
Take pen, paper and calculator. Do not go to google and read about ‘what to’ and ‘how to’ calculate. Just punch your monthly expenditure amount and multiply by 8 (by 12 if you are more conservative). 6,8 or 12 are just thumb rule multiplication factors. Pick any value. The more, the better. 
Maximum time: 30 minutes to arrive at a value.
Actually building that corpus may take few months. Do not worry. Just be there and do that. Complete this activity.
Examples of products which can act as emergency funds holdings:
  • Savings account
  • MaxGain OD account (who have SBI MaxGain loan account)
  • Liquid funds:
    • Franklin India Treasury Management Account Fund - Super Institutional Plan
    • ICICI Prudential Liquid Plan

P.S.: Did you note that throughout, I did not spoke about returns? Yes, that was intentional. In case of emergency funds, the rate of interest does not matter. Liquidity is of prime importance.

Insurance:
Life insurance is what will be used by your family in case of your untimely death. So this is equally important (if not more). 
Again, take pen, paper and calculator. Take a stock of all your liabilities. Add all the outstanding values from home loan, car loan, personal loan, etc. Treat this figure as (a). You have ready figure of your monthly expenses from earlier calculations. If your wife is not employed, giver her 2 years of time to sort out internal grief and start working. So multiply the monthly expenses by 24. If your wife is working, multiply it by 12 or 6. Treat this as (b). Add educational expenses of your children and treat it as (c).
Now, add (a), (b) and (c) to arrive at a figure.
Time duration: 2 hours maximum
Search and re-search on the term insurance plans available. Choose the most simple available. Time for this is 2 days.
Example:
  • Kotak e-preference. Do not go for variations like premium back or step up or critical illness. Just take the plain one.
  • Aviva i-life 
  • SBI e-shield

Finalize and buy: 2 hours maximum

Big note: Only and only when you are done with building emergency funds (yes, building and not just starting the process) and bought a suitable life insurance product, go further. There is absolutely no point in playing a rugby match without protecting gear. You may be the best player but that does not mean that you cannot be injured during the play. Play safe (oh wait, stop imagining naughty adds please).

Investments:
List down all your goals: Sit with your spouse and make a list of all the goals which you guys aspire to achieve. If possible, mark each goals as ‘nice to have’ and ‘must have’. This marks will help deciding which one to pursue first. 
Time duration: 1 day

Also, sort the goals as ‘short term’ (time frame of less than 7-10 years) and ‘long term’ (time frame of more than 10 years).
Time duration: 1 day

Calculate how much you need to invest to achieve your short term goals (use tools available on freefincal.com or any online SIP tool calculators)
Time duration: 1 day

Calculate how much you need to invest to achieve your long term goals (use tools available on freefincal.com or any online SIP tool calculators).
Time duration: 1 day

Note : Short term investments should be made in debt products. Examples of debt categories are liquid funds, short term debt funds, government bonds, FDs, RDs. Long term investments should be made in equity oriented products. Equity oriented products are direct stocks and equity oriented mutual funds.

Note: The post tax returns from debt funds to be assumed are 7% and that from equity should be assumed around 12%.

Add the figures arrived after calculation of short term and long term goals. That is your monthly investment amount.
Eeekss, so much amount????
Not possible to invest so much?
Okay, check your expenses and income. Try and bring down your expenses (seriously)
Time duration to check and plan: 1 day

Still not possible? Think if you can increase income.
Time duration to think and plan: 2 days

Nopes????? – Scale down your goals. Eliminate the ‘nice to have’ goals.
Time to think: 1 day

Again nopes???? – Okay. One last ray of hope. Start with whatever you have. Promise yourself to improve your income and increase the monthly saving amount to the targeted one.

How to start:
For short term goals, pick any from the below list after small research:
Debt product examples:
  • Liquid fund: ICICI Prudential Liquid Plan
  • Ultra short term debt fund: Birla Sun Life Savings Fund or ICICI Prudential Flexible 


Income Plan
  • Debt funds: IDFC Super Saver
  • FDs from any nationalized bank


Short listing of category: 1 day
Buying that product: 2 days

For long term goals, pick any one from the below combination:
  • Direct stocks and mutual funds
  • Balanced mutual fund and small cap funds
  • Large cap, mid cap and small cap funds
  • Only balanced funds

Equity products examples:
  • Buying shares of companies after doing due diligence
  • Franklin India Blue chip mutual fund
  • HDFC Top 200
  • HDFC Balanced fund
  • HDFC Prudence fund
  • IDFC Premier equity fund

Short listing of the category and combination: 2 days (Read how to select the fund “here”)
Buying that product(s): 5 days

Word of caution: Avoid direct equity to begin with. We, the beginners, do not understand market, volatility, risks, business sense, balance sheets and loads of other parameters. Hence, start with mutual funds. If time and interest permits, study direct equity investments. If you feel confident, go for direct equity investments.

Health Insurance:
To keep your financial health intact, you must have health insurance. Confused? Let me elaborate. Adequate health insurance will make sure that you do not touch your emergency funds. This means you continue with your investments and do not bother to top up the emergency funds.
Buy any mediclaim policy available in the market. Unfortunately, all are equally good and equally bad. Buy any one which has no room limit and co-payment. However, most companies will have these two factors. So, buy any name which you like. Remember, how in our school days we use to select a random answer from 4 different options? Just do the same thing over here!!! (Here is the rhyme: Inky pinky ponky, father had a donkey, donkey died and father cried…. Zoom.. You got your product  )
Research time: 2 days
Buy time: 2 days
Examples: Apollo Munich Easy Health, Mediclaim from New India Assurance or from Religare

Will and estate planning:
You will need to take action on this section immediately if:
  • If you have more than 1 child
  • If you have married more than once (huff, you got guts)
  • If you have immovable assets in joint ownership with brother/father/sister/mother or any family member
  • Huge assets to be distributed among family members and your favorite charity
  • Do not trust wife/children/family
  • Any other condition that you can think of

Time to research: 2 days
Time to implement: 1 week

Few more notes:
Note: Please do not just go by the names of the product mentioned. Do some google and then go for it. Implementing after research will give immense confidence to you.

Note: Do not calculate total time taken for all the tasks. You will get over whelmed and will not take action. Go step by step. Check what the first task is, complete that in time and then go for the next one.

Note: I have tried to keep things simple. Let me know if you find anything vague, too simple, too complex or difficult to implement. Please leave your feedback.


4 comments:

  1. Well done dear Viren. Kiss. Simple yet effective.

    Thanks

    Ashal

    ReplyDelete
    Replies
    1. Thank you Ashal bhai. You are the pioneer of KISS

      Delete
  2. Hi, thanks for the post, very helpful. Can you please give the direct link to freefincal calculators. There are a lot of calculators there so I am not sure which one to use.

    ReplyDelete
  3. @Anonymous:
    Please refer below links by Pattu:

    http://freefincal.com/recurring-financial-goals-calculator/
    http://freefincal.com/xirr-returns-calculator/
    http://freefincal.com/retirement-corpus-guesstimator/
    http://freefincal.com/retirement-calculator-beginners-version/
    http://freefincal.com/a-step-by-step-guide-to-long-term-goal-based-investing-part-i/
    http://freefincal.com/financial-freedom-calculator/

    ReplyDelete