It’s a sin to keep money idle in your Bank Account

The best time to plant a tree was 20 years ago the second best time is now

… chinese saying

Most of us Indians are hard working middle income people trying to make our ends meet. If we could somehow learn to create a second line of income which could be proportional to our personal incomes, it could relieve us of a lot of mental and financial pressures.

We all have learnt or heard the power of savings. Only that people are unable to sometimes tell you exactly how much savings can lead to how much wealth. We try to quantify the savings in different instruments.

It is a common myth that only the rich can invest. Even the poorest with very low savings can do a great job if they invest wisely.

The Power of Compounding

Compound interest is the eighth wonder of the world.
He who understands it ...  earns it
He who doesn't … pays it.    

…. Albert Einstein








How often do we lazily leave our salaries or our incomes at our homes or in the bank accounts? Have you ever wondered why banks give salary accounts at zero balance? Have you ever wondered why it is not good business for most banks to give zero balance accounts otherwise?

The answer is simple. The money kept by you in your bank account is one of the cheapest source of cash for the banks. They pay a pittance in the interest on this sum. Around 3% maximum in most cases. The banks know well that if there are say 100 salary accounts, then at least 50 of these clients will keep the money in their bank account without withdrawing for a pretty long time. For the banks this is a gold mine.

If this is a profit for banks, whose loss is it? Of course; yours…

Scenario Wise study

Let’s take different scenarios of savings in the most popular instruments by people.

The chart below shows the profits earned from an investment of Rs. 1000

Investment	Tax (Assumed)	After 5 yrs	After 10 yrs
Savings Account(3%)	10%	Rs. 143	Rs. 310
Fixed Deposit  @8.5%	20%	Rs. 403	Rs. 1010
Gold @ Market Price	20%	Rs. 102	Rs. 947
PPF @ 8.5%	0%	Rs. 504	Rs. 1261
NIFTY @ Market Price	0%	Rs. 819	Rs. 1603
MF @ 15%	0	Rs. 1011	Rs. 3046

Assumptions/Data used:

Gold Price yr   2008 at Rs. 14200 2013 at Rs. 27500 2018 at 31000

Nifty:                July 2008 at 4093 July 2013 at 5857 July 2018 at 10211

Bank Savings

This is the most sureshot and lazy way of remaining poor. We should not park your money in the banks unless we need it in a very short time. Even for 6 months, you will be able to get some or the other fixed deposit.

Fixed Deposits

One of the most common financial instrument used for savings by most indian households. 25 years back we could find some banks offering as high as 13-14 percent interest rates, but that era is far behind us. Now the FD rates quote between 6-9% and are also adversely taxed for the rich. For the middle and low income tax is not a factor but the returns are not very high either. Should be done if your investment horizon is 1 year approx.

EQUITY

The data above clearly shows the benefits of investment in Equity. In 10 years our 1000 rupees in a good Mutual Fund will earn us a neat 3000 rupees. On the other hand keeping it lazily in our savings account is a sure shot way of squandering the opportunity and making a meagre Rs. 310. Be warned that equity investment is only for the people who can put their money for 5-10 years and there is no guarantee of positive returns in a shorter period of time.

The richest people in the world are heavily invested in Equities. The reason is obvious. They understand money. People who do not understand equities can invest in the Index Funds or Mutual funds.

PPF
For a middle income person below 10 lacs earnings it makes a lot of sense to invest in personal provident fund, PPF account. The biggest benefit is that they are tax free. They save you taxes in the current year. They also insulate you from any liability in the courts. They have a small disadvantage of lock in of money for a few years. It seems from various commentaries that government might increase the lock in period in the future.  Read for EEE investments.

GOLD

Theoretically, gold is a very bad investment. Most academicians make this assumption based on the returns in dollar terms. Indians have had a slight advantage of the falling rupee. So we have been able to make fair returns by investment in gold. In terms of our national economy, most of the gold is imported and is a huge liability for the economy. There is a major risk associated with the purity of gold. The purchase - sale gap for gold is high. Most small investors do not understand the purity and ways to check authenticity or the purity of the gold purchased.  You can circumvent that by gold ETFs.

Play like a BOSS

The power of compounding is another story which you might  want to read here. When we understand the power of compounding we will play for the long run and not for the short laps. We should diversify our savings in a way that we know our needs for the next 2-3 years and take investment calls accordingly. At a young age we can take more risks but as we age, our exposure to risky instruments should also decrease. 

Never Catch a falling Dagger

-90 %  =  - 80% - 50% 

Even if you purchased at 80% correction, you will still lose 50% of your capital if the stock falls 90%

So never never never catch a falling dagger. 

Remember: जानी ये चाक़ू है, कट जाये तो खून आ जाता है| 

Public Provident Fund

In India, for the protection of an individual's future, specially those who doe not have a job, the option of Public Provident fund is one of the best.
It is a long term investment, which the government supports with a host of tax benefits.
To me, it is a must have for any investor. So much that I would put it as the first investment in any individual's list, no matter who the individual is.

Minimum Investment: Rs 100 each time and Rs 500 for the full year
Maximum Investment: Rs. 1,50,000 per year.
Banks: SBI, Post Offices, Nationalised banks
When to Invest?: On or before the 4th of the month. After which you will get no interest for that month.
Premature Withdrawals: Upto 50% of the amount at the end of 4th year or previous year "whichever is lower" can be withdrawn after 7 years of operating the account.
80C benefits: you get tax benefits of 80C when you invest in the PPF account. You dont have to pay tax on the income for the amount that has been invested in PPF account.
Loans:  A loan can be taken of upto 25% of the amount in the PPF account subject to certain conditions.
What after 15 years? If you continue the account after 15 years, the amount in your PPF account can be withdrawn. you will keep getting interest as applicable. The PPF account can be extended for 5 years each time. You can make upto 60% withdrawals from such accounts.

Historic interest rates

Period		Interest Rate (p.a.)
01 Dec 2011 - 31 March 2012		8.60%
01 April 2012 - 31st March 2013		8.80%
01 April 2013 - 31st March 2014		8.70%
01 April 2014 - 31st March 2015		8.70%

Comparison with Fixed Deposit?

If you have a good income, go for PPF. If your income for each year is less than 3-4 lacs and you have no savings then it is advisable over FD's

The Power of Compounding

Here is the basic, the most important reason for investing in stocks! This is the simple funda that Warren Buffet has used over 60 years to remain in the top 3 richest people of the world.

Its a long post, so your patience and attention is a pre-requisite.

10 years back, I realized that getting 

• 10% return annualised is quite possible
• more than 14% is extremely good
• more 20% is God-like. (In my view almost impossible to achieve over 20 years)

To give a perspective of things. (Assuming that most of you are around 30 and that want to save for another 25-30 years when you retire or your kids get married)

You Invest Rs. 1000 today.
The Table below shows the money you will have after the end of 15, 30 and 40 years respectively.

No of years	15	30	45
Rate of Return ↓	Value after 15 yrs	Value after 30 years	Value after 45 years
6.00	₹2,397	₹5,743	₹13,765
8.00	₹3,172	₹10,063	₹31,920
10.00	₹4,177	₹17,449	₹72,890
12.00	₹5,474	₹29,960	₹1,63,988
15.00	₹8,137	₹66,212	₹5,38,769
20.00	₹15,407	₹2,37,376	₹36,57,262

What is very clear is that over this time period,

1) The savings get roughly doubled in 30 years due to 2% change in the returns
2) If you could change your return from 8% to 15%, your returns get multiplied 6 times over 30 years and 15 times in 45 years.
3) If you could change your return from 6% to 15%, your returns get multiplied 10 times over 30 years and 40 times in 45 years.
4) 6%-> 20% Returns get multiplied 40 times over 30 and 250 times over 45 years!

Did u see the last one? 250 times! that is jaw dropping indeed. 

Reflect for a minute how a person who saves 1/10th of you do could still be 25 times richer than You!  

How does that help us make financial decisions? What are the mistakes we could make?

1. FD's, Bonds, fixed interest schemes etc generally give a return of 8-10%. The tax component is 30% if your earnings are above 5 lacs, so you end up getting 6% - 7% returns annualized.
2. Insurance attached products of LIC: Give you slightly more, but they have tax benefits attached, so your savings go upto 8-10% slab
3. Stocks (most risky) give you annualized returns of 15% and have no tax attached. more over if you include dividend income the return will increase by a percentage point.

How to minimise risks?

1. Diversification over a portfolio of 25-30 stocks there is very little risk.
2. No risk no return
3. Don't invest if your horizon of invest is 5 - 10 years or less (Dont argue about this one!) 

You do not understand Stocks

1. Close your eyes, buy any index fund. (Index funds do nothing but simply buy everything that is on the index in the same ratio as its weightage. If sensex has 10% Reliance, your index fund will also have 10% Reliance. The transactions will generally suck up 1-2% but if you have no experience, this is probably the best option that you have) 
2. Read a bit, that is what this whole blog is for

Other Points:

• Not considered inflation, otherwise fixed return funds might look like the most stupid long term investment! 
• Equities are generally considered not prone to inflation. (not many other investments can boast of this one) 

In the right order

#1 What's a Stock/Share?

#2 Trading of Stocks.

#3 The Share Price

#4 Tables and Tickers

# Fast Forward!!

#5 What is the Index (Sensex/Nifty/DJIA)

#6 Dividends

#7 EPS (Earnings per share)

Aside.....

What’s Your style??

Some Myths that you need to forget right away.

Penny Stocks...

Fundamental vs. Technical Analysis.

Fundamental vs. Technical Analysis.

Fundamental Analysis is the study of the whole company in depth and is an attempt to find the future earnings, say one/two/five years down the line, thus trying to predict the share prices.

Fundamental analysis involves studying balance sheets, cash flow statements, Profit and Loss account, Fututre growth prospect, order book of the company, commodity cycle etc.. Much of this data cannot be analysed by most small investors(Including any of us). Such predictions are made by analysts who specialise in a particular field (eg. Oil companies or textile or retail or Construction companies)

Fortunately, what is available to a small investor is good enough to differentiate between a good and a bad company, or to compare two companies in the same sector. This is good enough and definitely worth knowing, to say the least.

On the other hand, technical analysis is the study of the price and volume trend over a decent length of time and trying to predict the future price movements. This analysis does not consider any events that have occured. It is strictly based on just the Chart of the share price and volume. A technical analyst should not be governed by any kind of developments that have taken place around him, but should only restrict himself to what he infers from the chart of the share price.

Technical analysis is based on the fact that the share price move stictly on the basis of the developments that have taken place on ground. ie on the fundamentals. If u agree to this principal, then technical analysis can be justified, otherwise, this is not for you. This is a very interesting field of study, specially for those who are from a science background.

I have a personal opinion, that Fundamental analysis is for an Investor, while Technical analysis is for traders. This may not be agreed by many people.