Infrastructure bonds - are they for me?

Well, again lot of people asking about this. Here are some facts. These are safe investments with fixed returns. They are NCD (non-convertible debentures). The interest rate offered is around 7.5 - 8 % depending on options. It saves tax by way of section 80C, where up to (and only up to) 20K INR gets deducted from your taxable income. So your effective interest rate is slightly better (but just for the year).

Are they worth investing? It is a good bet, if saving tax of about 3-4K matters to you. You could potentially see better FD rates in the future, which can easily cover for the extra 3-4 K you are saving in year 1. My recommendation, if you are tired of FDs then do this. Else wait for FD rates to rise further, ask the branch manager to provide you 10 year rates which will be half a percent lower than your 390 day rate, and put money into that. It provides flexibility of withdrawal and potentially better rates.

Happy investing!

Time to churn your portfolio

Have a lot of stocks sitting in your portfolio for years and not growing? Have an eye on a good growing trend stock? Have a stock that is a huge part of your portfolio, but did not get around to sell and churn it?

Time to make the changes. The markets though are trading at all time high, it is a period where you can look at changing your portfolio. You will get excellent returns on your old stocks (at least from last year). They may still go up. But you can also expect deep corrections while we scale to a Nifty 7K goal in the next 2 years. Use some of these to switch. Sell when you get some good prices on a given day for your stock (up 10% in a week/10 days). Then wait for corrections on the way to buy your list of stocks you wanted to.

For me, I am selling IT (watch currency trend), investing in Infra, Oil and Banks. You can take your calls...Happy investing!

What to do with the markets now?

A lot of you have been asking me on this. My view has drastically changed over the last 4 months or so. While I used to be a guy on "valuations", "PE", I have come to realize that there are phases of the market when we talk different things. The phase of the market when we talk valuations is usually during the steady phase. Market valuations determine what is a relatively inexpensive buy and what is a good long term prospect (3-5 years). The phase of the market we are currently in is the "mania" phase. In this phase "valuations" are thrown out of the window and the market gets into true "animal spirits". Here we need to rely on trends and charts (see Ashu Dutt on ET Now in the mornings). And trends will help you decide two things - stocks to buy for a short term (less than 6 months) and more importantly when to "sell". The FII inflows in the market is huge primarily because of low interest rates in the West and Japan. And this is hedging it in India for a growth. The flows have entered "mania" proportions.

The current mania is concentrated on Financial Services, so the rise is there. Look out for stocks which have a low float and a lot of dormant investors - like LIC or Government. If there is a demand for these stocks, which there will be in a mania, then they will shoot up drastically. PSU bank stocks, PSU insurance, PSU Non Banking companies are good stocks...watch IDBI, IDFC, State bank siblings, Vijaya Bank, etc. So as Ashu says, enjoy the party; but make sure you get out by 2 am, else you will get a bad hangover...happy investing!!

Stocks - Some rules

Before we begin into details around stocks, ratios, etc. here are some rules I follow. Thought worthwhile sharing them upfront.

• Even if you get a stock tip from the most reliable resource, do your own research
• If all analyst recommend buying the stock – IGNORE IT!
• If there is a buzz about the stock then STAY AWAY!
• When your mom, dad, MIL, FIL, uncles, cousins, friends, friends of friends talk about stock market – STAY AWAY FROM THE MARKET!
• When no one talks stocks, people advice you it is a dangerous thing, put into it!
• EXTREMELY important - Remember TO SELL!! Selling at the right price is as important as buying
• Be aware of taxation and brokerage costs
• Have a portfolio of not more than 20 stocks and then stick to them for 3 years
• Diversify and keep churning portfolio every 2 months
• Don't track stocks every day (if you are not a trader)
  
• RESEARCH, RESEARCH, RESEARCH

We will discuss some more fundamentals starting the next post. Happy investing!

Equities (Stocks)

Sorry about the break in between. Let us focus on stocks and the stock market for the next few days. First of all let me explain the different approaches that people take towards stocks and stock markets. There are primarily 2 types of people (like us) who invest in the stock markets. I am not here talking of institutions that invest in the stock market. There are people who invest in stocks as something that will help build their wealth. These are typically termed as "investors". A typical horizon is about 3 years. Then there are "traders". People who play on the daily/weekly movement of the stock market to make money. What we are going to talk about is primarily the "investor". I am not really a trader so don't have a lot of comments; i would only comment "stock trading" is a near-full-time profession with lot of attention the market movements. From a financial planning perspective one of the investment areas is stocks for an individual and I assume the person has a day job.

Stock markets when taken with a 3 year horizon provide excellent returns as well as reasonably good stability. While the financial crisis of 2008 has done a lot of harm in terms of confidence in this statement, I still believe in it. Let us start with some basics.

A stock is an investment into a company. You are technically an owner of the company for the percentage of stocks (or shares) that you own. This means that you are part of the company's profits and losses both. A stock (unlike a bond or debenture) is not a loan. It is an ownership of a part of the company. The stocks are traded on stock exchanges and a price mechanism or supply/demand determines the value of the stock. (We will talk in detail about valuation). Stocks can be bought in two ways, primary market - when a company floats an Initial Public offering (IPO) or from the secondary market when the stocks are already listed and different people want to buy/sell the stock. The price fluctuation once listed is caused by demand/supply of the stock (remember this!).

As an exercise I recommend going through one of the stocks listed on the stock exchange and find out these things
- Stock price - high, low, close for a day
- Market Cap
- Face value
- EPS
- P/E

I will explain these in the coming posts...till then keep trying to see for these values for as many stocks as you can...and keep noting them down. Have a good one!

Build your portfolio - Plan the investments 2 (template)

here it the template for planning

Build your portfolio - Plan the investments 2

Step two in planning your investments is minding your on-going monthly savings and aligning it to your portfolio. First write down all your monthly expenses. For example jot it down something like this

Petrol	1,000
Maid	1,000
Tel	500
Electricity	500
Grocery	2,000
Miscellaneous	2,000
Lunch	2,000
EMI	15,000
Shopping	5,000
Total expenses	29,000

Now map this with your income from all sources (self, spouse, rentals, investment income, etc) and see the balance you generate at the end of this. This will give you an amount you save every month. With that try and map it again to the kind of investments you will do on a monthly basis.

Think of the following options
1. Recurring deposits for a year (at the end you can transfer them to a FD)
2. SIP (Systematic investment plan) into a mutual fund
3. A gold scheme of say 3000 rupees. This will give you sizeable chunk at the end of the year to buy some gold jewelry
4. Stock picking. Think of some good stocks you want to keep investing into (more when we talk stock markets)
5. Of course assume you will have sufficient cash in hand based on step 1.

All this will then automatically start aligning to your risk profile. This will also help you reduce waste in terms of spends that are ad-hoc. This may sound a simple step but doing this is very critical. Also monitoring this every month will give keep you on top of your finances.

Now look at both step 1 and 2 and map it to your short and long term goals. You will see that you are now making it happen or at least in the direction to do the same. Remember, managing your money is as important as taking care of your health and more important than watching IPL matches!

I am attaching a template (in the next post) that I usually use for planning. Hope you find it useful. Happy investing. Subsequent posts I will talk about stock markets!

Build your portfolio - Plan the investments

Now here is where I differ from most Financial planners. I think a good financial planning needs to be looked at from 2 dimensions and needs to be done in a very simple way. First step is to look at all your current financial assets. And write down your balances in each of the areas. Include things like amount, amount last month, whether liquid or not and the type (bank, equity, bond, gold). These include
1. Cash on hand
2. Bank accounts with different banks
3. Real estate
4. Equities (write down just the sum - instead of listing all the stocks)
5. MFs (sum instead of listing all the funds)
6. others

Do this for each bank, each account you have. This will give you an idea of your total net worth. This will be a revelation if you have not done this before. Do this in a spreadsheet to give you ability to do some analysis. Now understand your percentage split between cash, FDs, equities, real estate, gold etc. Match this up with your risk profile and see how you fare in terms of your portfolio split. Rule of thumb - If you are risk neutral your equities should be about 40-50%. The rest should be about 10% each.

This completes step one. We will discuss step 2 in the next post. This is to look at your monthly scenario and how to map it back to your portfolio. I do have a simple spreadsheet to manage all this. Will share it after the next post...till then...happy thinking!

Build your portfolio - avenues for investments

Next step, understand the different avenues for investments (jargon - asset classes). I will also attempt to map them kind of risk/return they provide as well as the liquidity constraints they impose. Liquidity is the ability to purchase/convert the investment (jargon - monetary asset) into into goods/services. Cash is the most liquid asset.

Fixed deposits, Bank Deposits, RDs - Low return, Low risk, High liquidity
Equities (stocks) - High risk, High return (if you are not stupid), High liquidity
Bonds/PPF/Post office savings/etc - Least risk, Low return, Low liquidity
Gold - Least risk, Low return (unless there is a financial crisis), Medium liquidity (very low liquidity for married Indians!)
Real Estate (favorite amongst Indians) - Low to Medium risk, Medium to high returns (if you are not stupid), Very low liquidity
Art (if you are ambitious) - High risk, potentially very high return, Least liquidity

Mutual funds - depends on which type it is (Equity, Bonds/Gilt/Debt, Diversified. Gold, ETFs) - we will talk in detail about MFs in a subsequent post

I would suggest you take a look at the Mint Money guides (some available at http://mintmoney.livemint.com/mint-money-guides/) to develop some understanding of different type of asset classes. Once you develop a good understanding of these, we need to begin creating a portfolio. This needs to be done in two steps - current and on-going portfolio.

More in subsequent posts...Till then keep reading about the different asset types...Remember invest into areas that you know...rather than what your friend/relative advices you!

Build your porfolio - Know your profile

Understanding yourself is the key to making sound financial decisions. What kind of person I am? What kind of ambitions I have in terms of "making my money work"? Knowing this requires a lot of introspection.

A risk profiler has tools that map your risk apetite. Some links are here below.
http://wealth.moneycontrol.com/jtrisks.php
http://myiris.com/mutual/riskProfile/index.php

But the catch with risk profiler is that they concentrate on positive cases. Think of negative scenarios when trying to map yourself. A person like me does not get nervous, when my stock portfolio dips by 50% or even 100%. In fact during the downturn (much to my wife's and parent's nervousness), I was buying more stocks. However, not everyone is risk taking. And I would suggest if you are not, don't try things that would impact your health and create nervousness around you. An analogy is around buying cars. I cannot buy a luxury car. Reason, if there is a scratch on my car, I cannot sleep. The more expensive the car, the more days are lost in thinking about the scratch. Hence I stick to less expensive ones.

Knowing yourself will help tune your portfolio to rewards that make sense to you. If you dont like taking risks, stick to an average 15% return portfolio. If you like taking them try a 30%+ return portfolio, but be prepared for the roller coaster ride. An important step in doing your profile is also to check with your spouse and his/her comfort level. A better idea would be to take an average risk the two if you invest jointly.

The questions you should have answered are
1. What kind of returns you expect on investments
2. Does negative news over your wealth make you lose sleep?

As far as I am concerned, I go by the old gujju saying "In the medium term we all need to make money, in the long term we all die"... happy thinking!!

Build your porfolio - Financial goals

As kids we have been trained to believe that money or too much money is not good. And some kind of negative mindset develops towards it. Well, first change all that! Money is good, greed is good...this is what you work for and this is your fruit of the hard work you put in. To put it like an economist "It functions to serve as a medium of exchange, a unit of measurement and a store of value"

Money helps you achieve your near term and long term financial goals. Let us talk of short term goals. In the horizon of the next 1-3 years what are your targets? Some examples
1. A vacation
2. A new piece of furniture for the house
3. An anniversary celebration for your parents.
4. Wife's birthday (that might need a lot more planning)

...and so on. First step - write these down. Now think of when the event needs to occur and approximately how much money will be needed for this.

Similarly think of long term financial goals. This requires a bit of patience, discussion with people at home and of course "greed" (which is not bad according to me). Again write them down. Some examples
1. Buy a house
2. Buy some specific jewelry
3. Buy a luxury sedan
4. Go on a world tour
5. Upcoming marriage (read today's Mint - Indians spend 50% of their savings on marriages)

..and so on. Again, make a list, attach a time-frame and an approximate expense. Next step will be to look at how to plan your finances based on these goals...in the next post..till then...keep writing/thinking.

Build your portfolio

Though it may sound a bit like Financial planning with a "Wealth manager", it is a very simple concept. Think of savings that you can do every month from your salary. You put it in a recurring deposit account. Over the years, you have been purchasing gold. At some point in your life you purchased a flat, invested in some stocks. Consciously or unconsciously you have built a portfolio for yourself. This was build with some objectives in mind, again done without any formal method.

There are a few aspects that you need to consider while building or designing a portfolio
- What are my financial goals - short term and long term
- What kind of person I am..what makes me nervous, what does not - essentially your risk profile
- What are my avenues for investment
- What is my current state of finances? And what can I plan every month for investments

These are very simple things one can start thinking of. I will discuss each of these in detail, with tools you can use to plan each of these. Keep watching, and keep thinking.

Financial planning

A lot of people me around don't really do a lot of financial planning. Either it is for name sake or it is not done at all. I hear this all the time

"I don’t have time for this", "Where am I going…I will do this over the weekend", “He” takes care of it", "I earn enough money…my needs are few!", "Only rich people who earn a lot need to worry about financial planning", "Work like a donkey, since that is what life is all about" (though I dont like donkey being used in the phrase since I like them)

Well, I call all this "Utter nonsense!". Everyone needs to do financial planning. It is a must! The sooner you start, the better...the more time you can give to it, the better. It helps you plan for the future, plan for unknowns, live a better life, if needed retire early and do something you always dreamed of...and yes, all this will be possible if you manage your money better. The only way to do this effectively is to take time and interest into building and planning this.

Over the course of the next few posts, I will discuss some of they key areas for planning, as well as some of my views on how best it is done...till then...have a good one!