Through the Looking Glass

Rediff A book was cast in stone more than 3,500 years ago in Babylon and was found by a British professor late last century. What impressed him -- and helped him come out of a debt crisis -- were the inscriptions on how to manage one's finances. The book is now available as The Richest Man of Babylon. It's a very small book, but with some very profound thoughts. 1. Pay yourself first When we think of budgeting against our income, we typically look at our expenses: how much do I have to pay my landlord, my grocery bills, my medical expenses, my entertainment bills, et cetera. Once we have decided on our expenses, we find out what our savings will be. Financial advisors and many credit card companies (or banks) today help clients in estimating their lifestyle expenses and help them understand where their money is being spent. The old book turns this theory on its head: it says 'pay yourself first.' Before you pay others for the services that they give you, yo...

Rediff In your early 20s and planning to make your first investment? The first and foremost, keep aside three times your monthly expenses, before you begin. Next, invest in life cover and health insurance. Many recommend buying young to lower your annual premium, which is because insurance at an early age means paying low premium. If you are between 20 and 25 years of age, you could pay a relatively modest premium of Rs 6,000-Rs 10,000 annually. Once insurance is taken care of, invest keeping in mind, future goals. Establish some short-term goals like marriage and house, etc and choose mutual funds that invest in debt instruments. To expect good returns from equity funds, you should invest there for at least three years. If you have no such short-term goals, invest in mutual funds that invest in 100 per cent equity. In case, you fall under the low income tax bracket, invest in debt instruments through fixed deposits. However, if tax returns are on the higher side, mutua...

Rediff - part 6 of 6 Mutual funds offer a variety of options through which you can invest in or divest from them: each option has its own advantages and it is very helpful to know of your various options. Lump sum investment: This is the simplest manner of investing in a mutual fund. You have a certain sum of money (lets say, Rs 100) and you want to invest it in one go. You approach the mutual fund company with your cheque for the amount you want to invest. The main risk with this investing strategy is that you are locked in to the valuations of the underlying security as on a particular date. If, for example, the prices were to go down from this point, you would lose money on the entire investment. Similarly, if you have timed the investment right, you will see a good rise on your entire investment. Systematic Investment Plan (SIP): In order to avoid the risk mentioned above, you can instead invest the sum over a period of time. Mutual funds allow you to periodically inve...

Rediff - part 5 of 6 When you invest, you can look at the investment from two perspectives: to generate a regular periodic return or to invest for a long term, without bothering about the intermediate returns. Mutual funds are a great avenue for achieving either end. You can either choose to invest in the 'dividend' option or a 'growth' option to achieve your objectives. When a mutual fund invests money on your behalf and makes gains on the same, it can either return the gains to you or keep the gains in the fund on your behalf. You can use either of these options based on your requirements. However, be careful that you know the tax treatment! Dividend option: If you are someone who requires money on a periodic basis from your investments, then you should choose the dividend option. This means that the fund will periodically (quarterly or mostly, annually) return some of its gains to you. Note that the fund is under no obligation to declare a certain rate of ...

Rediff - part 4 of 6 We have seen the advantages of investing in a mutual fund. Now let us look at some of the risks and costs of investing in the same. Risks of investing in a mutual fund: The biggest risk of investing in a mutual fund is one of underperformance. When an investor decides to invest in a particular asset class, he typically expects to get the return that the benchmark of the asset provides. For example, if someone is investing in large-cap equity stocks, he would expect to make at least as much return (with similar risk) as a benchmark index, say Sensex or Nifty. Mutual funds try to maximise the returns on the funds invested through them -- but all of the funds cannot succeed an outperforming each other or the benchmark. Hence, some of them under-perform the benchmark. Similarly, the cost of investing in a mutual fund (discussed below), eats in the returns. In high return years (like the last few years, where returns have been in the high 30% in equity, 2% ...

Rediff - part 3 of 6 Having grasped the basic of mutual funds, let us try to understand why you as an investor would want to invest in them. Professional expertise: Investing requires skill. It requires a constant study of the dynamics of the markets and of the various industries and companies within it. Anybody who has surplus capital to be parked as investments is an investor, but to be a successful investor, you need to have someone managing your money professionally. Just as people who have money but not have the requisite skills to run a company (and hence must be content as shareholders) hand over the running of the operations to a qualified CEO, similarly, investors who lack investing skills need to find a qualified fund manager. Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in India, fund managers are acquiring global certifications like CFA and MBA which help them be at the cutting edge of the knowledge in the investing wor...