Plan In Advance For That Early Retirement

Plan in advance for that early retirement

Dear Investor,

It is important to decide on the corpus required on retirement to support monthly expenses. Such an amount cannot be based on vague assumptions.

 

It’s a dream of every working individual to say an early ‘Good Bye’ to the work life. It’s not impossible to fulfill this dream if one starts investing at the earliest possible time as forming a corpus for retirement would be the most crucial task. The corpus formed should be sustainable throughout the life of the last survivor. Investing early will be helpful since one can harness the power of compounding. Although when one starts investing early, the concept of retirement is vague and not clear - but it is important to start saving for this, as otherwise there is likely to be a rude shock awaiting at the time of retirement - in the form of lack of sufficient savings.

It is very important to define and write down the objectives of retirement. It is not only about budgeting but also about the goals that need to be achieved. Being specific is better while setting goals, for example - instead of mentioning travel, it is advisable to list out the places one wishes to travel to. It is alright to have a vague goal but start streamlining as you proceed towards retirement.

It is important to decide on the corpus required on retirement to support monthly expenses. Such an amount cannot be based on vague assumptions. Ideally one can consider current monthly expenses as on today excluding all EMI’s. Consider inflation on the monthly pension and one can arrive at the monthly pension that would be required at the time of retirement, however one should continuously visit and check whether such amount will be sufficient enough or whether it needs an upward revision

Another aspect that should be noted is the time span till retirement. If a 25 year old is planning for retirement, the amount to be saved each year is lower than if a 35 year old is saving for retirement.

 

Current Age	Retirement Age	Corpus Reqd. for Retirement	Investment Reqd. Monthly
25	55	10,000,000 (1 Crore)	6,710
30	55	10,000,000 (1 Crore)	33,333
35	55	10,000,000 (1 Crore)	41,667

 

 

We have assumed 8% growth rate

Start tracking your income and expenses for a couple of months before retiring and then determine how much will be needed (i.e., budget) to support your lifestyle. Apart from keeping a check on income and expenses, it is very important to keep track of assets. Traditional assets such as land, additional house, etc. could prove a beneficial source of capital in later years. Apart from one’s own investments, there are a few other sources for retirement funding such as company pension policy, government pension schemes, reverse mortgage of house, etc.

Long term investments are the best option for individuals investing early in life, since one can benefit from the power of compounding. One should also make investments towards their retirement savings via the ECS route - making the whole process automatic, and ensuring that no surplus expenditure gets in the way of your retirement planning. It is advisable for you to choose higher returns yielding investments. Higher the rate on return sooner the one's financial goal will be reached. For example if an individual invests Rs.10,000 each year at 10% then the individual has to save for 22 years 5 months to have Rs. 1 Cr, however if the same individual invests Rs. 10,000 each year at 15% then the individual has to save for only 17 years and 6 months to have the same Rs. 1 Cr.

Debts are another area which needs to be focused on. If one has high levels of debt, one will be unable to service this post retirement. Ideally, you should look at repaying all the outstanding loans as soon as possible to ensure that you are not hit with interest payments after retirement.

Sometimes it may require to change or diversify the investment portfolio accordingly to manage the risk and return. For example: A portfolio of equities could be rearranged to a portfolio of fixed income, to bring in security during retirement phase.

There are a few areas which have to be kept in mind while planning for retirement such as medical expenses, medical emergencies, big ticket purchases, and unexpected expenses. Senior citizens are more likely to require medical care, and as a consequence the medical expenses for many retired people is very high.

Summary:
•    The earlier you start to save, the earlier you can retire
•    Equities are the best option initially, and gradually shift this allocation to debt as one ages
•    Make a budget and stick to it
•    Take into account the lifestyle you want at retirement when planning the retirement corpus.

Happy Investing.

Real Estate vs. Stocks - The Argument

Real Estate vs. Stocks – The Argument

It’s a well ingrained belief among Indians that real estate is the best and the safest investment that an individual can make. On the contrary, stock markets are generally viewed through a lens of skepticism, almost to the extent of comparing it with gambling. Before pronouncing the verdict in favor of any of the asset classes, it will be an insightful exercise to compare the returns generated by both these asset classes over the past 30 years.

We assume that an average investor would have no stock specific skills and would plainly invest in Sensex, the barometer of Indian stock market. For calculating the returns generated by real estate, we will use the price data generated in some of the prestigious deals that have recently happened in South Mumbai – the most mature and the most expensive real estate market in India.

The above data clearly shows that stock market returns have been as good or better than some of the prime most real estate returns in the country over the very long term. Specific stocks such as MRF Tyres, CIPLA, Titan, etc have performed much better than the Sensex as well as the real estate.

We commonly hear about crore-patis who make their fortune in real estate but we hardly hear of people who made crores in stock markets. The only reason why the common man has been unable to benefit from the stock markets is the short term orientation. People have created wealth in real estate only because they were ready to hold on to their properties for 20 to 30 years. The very same people treat stock markets as quick money making / losing machine – they will watch prices every day, get happy when prices go up and curse the markets when prices go down. Such a behavior will not allow you to hold on to your stock investments for more than a few months, leave apart 20 years.

Genuine money can be made in the stock markets only through long term investing. As the investing legend Warren Buffet puts it “Stock market is a machine of transferring wealth from the impatient to the patient”. Another aspect that can help your investments is finding a good investment advisor / manager. As we have seen, individual stock performances can be much better than the broad market and thus having a fine stock picker managing your money can work wonders. The additional advantage of investing in stocks is that you don’t need Rs 30-50lac to start with; you can start with a small amount and compound it over many years.

Note: We have not taken into account the dividend yields and rental yields as we believe they would be similar. Also, we ignore the survivorship bias in case of Sensex and the availability of leverage in buying a property.

Recipe to become a millionaire

Recipe to become a millionaire

Dear Investor,

 

Income, howsoever large, is not likely to sustain your lifestyle when your pay-cheques stop. Since your income can and will (most probably) cease some day, you must start converting it into wealth.

Wealth is the very foundation of your financial independence.

• It is the foundation that will support you and your family in your non-earning years
• It gives you an opportunity to retire early from your vocation and live the life as you desire
• It has the ability to fulfill many of your dreams and aspirations without affecting your financial position

The income-to-wealth recipe is the basic strategy to translate your income into wealth. The five steps to becoming a millionaire are:

Step 1:  Collect all incomes from various sources
The first step i.e. inflow of money is dependent on your profession, job, business or some such source of income.

Step 2:  Filter out the Wealth Dissipaters
When you value every rupee you spend, you are spending prudently. You are making sure that the Wealth Dissipaters are not eating away your income.

Step 3:  Build protection against Wealth Destroyers
Instead of avoiding risk, you are taking calculated risks with suitable precautions built-in to protect your money from any serious damages that these risks could cause.

Step 4:  Channelize your income through Wealth Creators and Wealth Preservers
Investing your income in Wealth Creators and Wealth Preservers is the core of the Wealth Creation process. By doing o, you are endeavoring to make the best out of your money.

Step 5:  Reap your Wealth
Employ this recipe prudently, systematically, consistently and patiently…becoming and remaining a multi-millionaire will surely be a reality some day.


The terms Wealth Creators, Wealth Preservers, Wealth Destroyers and Wealth Dissipaters call for a much deeper understanding if you have to make right financial choices. They are the very essence of the Income-to-Wealth Recipe. Therefore, they have been discussed in great detail in my book 'Millionaires don't eat cakes...they make them'.

However, to give you a brief preview, the same have been broadly defined here so that you get a better understanding of this whole process.

• Wealth Creators: These have the potential to enhance the value of your money.
• Wealth Preservers: These will at best protect your capital.
• Wealth Destroyers: These could ruin and wipe out your entire money.
• Wealth Dissipaters: These will slowly but surely erode and corrode your money.

Happy Investing

Become a Crorepati ... Surely and Safely ...

Become a crorepati - safely and surely ...

Dear Investor,

You must have come across recent advt from Reliance MF stating that Rs.10,000 invested in Reliance Growth Fund in Oct 1995 has grown to Rs.5 lakhs i.e. 50 times growth in 17 years. This works out to a return of more than 25% p.a.

Unfortunately no one got Rs.5 lakhs.

Why?

Because no one showed the patience to stay invested for 17 years. If you can invest in PPF for 15-20 years and insurance policies for 15-25 years, I wonder why you don't show the same commitment with MFs. Do that and you will become a crorepati.

In fact Reliance Growth is not the only fund to show such a stupendous performance. There are many funds that have delivered more than 20% returns over last 12-15 years.


- Franklin India Bluechip has given 24% p.a. returns since launch in 1993
- HDFC Index Sensex Plus - 22% p.a. since 2002
- DSPBR Opp Fund - 19% p.a. since 2000
- HDFC Top 200 - 23% p.a. since 1996
- Birla Sunlife Equity - 26% p.a. since 1998
- Tata Equity PE - 21% p.a. since 2004
- Sundaram Select Midcap - 31% p.a. since 2002
- ICICI Pru Discovery - 23% p.a. since 2004
- UTI Dividend Yield - 18% p.a. since 2005
- Reliance Pharma - 24% p.a. since 2004
- Kotak 50 - 21% p.a. since 1998
- HDFC Tax Saver - 30% p.a. since 1996 [+ your tax savings]
- ....and many more

These are of course, returns for one-time investment. One-time investment requires lot more patience and courage as the volatility will be very high. So I would strongly recommend SIPs. This will reduce the timing risk and hence the volatility in returns.

By the way, even if you could manage 15% interest on FD for 17 years (which is impossible) you would have accumulated just Rs.1 lakh.

V.IMP.: Please don't invest in these funds merely based on the above information. Choice of funds has to be in line with your financial objectives, time frame, risk appetite and many other factors. You MUST consult your financial advisor before making any investment. The only purpose of giving the above details is to make you aware of the wealth creation potential of the mutual funds.

Happy Investing

Why do the Rich get Richer?

Why do the Rich get Richer?

You often hear the saying ‘The Rich are getting Richer….’ have you wondered why?
Five main reasons:

a. The power of compounding
b. Income far, far greater than expenditure
c. Understanding the Wealth Virtuous Cycle
d. Ability to take risk
e. Deep wealth buckets ensuring no asset class is ever reduced to zero

In the real world the word Rich and wealthy are used interchangeably, so in that context I will use the word rich here to mean and include the wealthy too.

a.   The power of compounding: When the real rich invest they can let each asset class compound without touching them for real long periods of time. If you had invested Rs 100 in the Sensex in 1979 it would be worth about Rs 20,000 today – 200 times in 33 years – amazing by any standards. However, if you were not really wealthy all the gyrations in the Sensex would have worried / bothered / scared you. That may have sent you running to the broker to liquidate. However, if you were really rich you could have invested a portion of your assets and seen a fantastic growth in that part of the portfolio.

b.   When a person (family) is really wealthy the income has no connection at all with the expenditure. You just operate like 2 different machines – one wealth creating machine and one spending machine. It helps that your income is say 10 times of your expense. So an increase or decrease (inflation) does not have any impact at all on your life style. Since you are saving/investing a big surplus of your income, you are able to compound faster too.

c.   Understanding the wealth virtuous cycle – protecting the wealth (insurance), managing it well (when you have a net worth of say Rs. 100 crores you can afford a Family Office to look after the family wealth) , and learning to live sensibly are all part of the wealth cycle.

d.   When you have a lot of money in different baskets you can take a chance with each basket. I know of a top industrialist who used to use his personal money for lending to movie making. Movie funding is a one or all kinda game – you can get 100% p.a. return or be wiped out. You also need to fund in multiples of Rs 10 crores – thus keeping the retail guys out. Such opportunities are not even available for the common man! Similarly I know of one person who bought 1 lakh shares of Infosys at Rs. 90 (discount at the time of issue, remember it devolved!!). He was holding till the listing of TCS and at that stage sold off. Only because he had (has) a networth in excess of 3 digit crores, he could hold on without getting excited about the prices. For a person with lesser networth there would have been a great pressure to ‘book’ profits.

Take the case of a boy earning Rs. 12 Lakhs at age 28 – on this salary is it possible to commit to a Rs. 35000 EMI for a house? Hardly. It is almost impossible. However, when the father has a huge networth it is possible to do so. I know of a father who has told his son ‘the month you CANNOT pay the installment, I will. Thus the son has a FREE risk transfer mechanism – if he were to lose his job, his DAD is the safety net!

e.   If you have say a big portion of your money in equities, technically it is possible that you panicked and sold off EVERYTHING in 2008. This would have meant that in 2009 when the market revived YOU would have had nothing in equities – thus the fantastic growth of 90% would have been missed. Similarly these days as the market is reviving lot of people are kicking themselves. You would be kicking yourself, right? So now when you hear the Rich get Richer….you know it is not emotional, it is mathematical!

Guide To Building Your Wealth ... Specifics

Guide to Building Your Wealth

 

1. What affects the value of money?

Money has a tendency to lose its value over time because the price of goods and services usually goes up. This is called inflation. Here are some factors that could lower the value of your money:

Inflation

Simply, inflation occurs when the prices of goods and services rise. When prices go up, people will ask for a rise in salary. That's why 10 years from now, the money you earn today will be worth less than its present value.

Interest rate fluctuations

A drop in interest rates means a smaller return on your deposits, and if the interest rate is lower than the rate of inflation, your savings will lose value. But for some investments, such as equities and bonds, the value of your investment may rise because of the drop in interest rates. This is because bond prices are inversely related to interest rates. When interest rates go down, bond prices go up and vice versa.

Economic trends

What happens in the economy you are in and in other economies can affect the value of your money. Political circumstances, GDP growth, and stock-market indices in other countries can all have an impact on the buying power of your currency.

 

2. When should I start planning for the future?

The sooner you start, the better. The example below shows the difference in accumulative savings between an Early Investor and a Late Investor, who start saving at different times. At age 36, the Early Investor starts saving

P100,000 every year at 7% per annum. If he stops saving the said amount at age 45, by the time he is 65, he would have P5,720,786 even if he only saved for 10 years. At age 46, the Late Investor begins saving

P100,000 ever year at 7% per annum. Even if he saves yearly until the age of 65, he would have only saved P4,386,518. That’s P1,334,269 less than the Early Investor who only saved money for a total of ten years. The difference is, he started to save earlier. In most cases, the sooner you invest your money, the longer it works for you and the faster it grows.

* Please see chart below

Age   Early Investor's   Early Investor's   Late Investor's    Late Investor's

         Annual Savings   Accumulated       Annual Savings  Accumulated

         Accumulated        Savings                                             Savings

36        100,000                 107,000                       - -

37        100,000                 221,490                       - -

38        100,000                 343,994                       - -

39        100,000                 475,074                       - -

40        100,000                 615,329                       - -

41        100,000                 765,402                       - -

42        100,000                 925,980                       - -

43        100,000              1,097,799                       - -

44        100,000              1,281,645                       - -

45        100,000              1,478,360                       - -

46             -                     1,581,845                  100,000             107,000

47             -                     1,692,574                  100,000             221,490

48             -                     1,811,054                  100,000             343,994

49             -                     1,937,828                  100,000             475,074

50             -                     2,073,476                  100,000             615,329

51             -                     2,218,620                  100,000             765,402

52             -                     2,373,923                  100,000             925,980

53             -                     2,540,098                  100,000          1,097,799

54             -                     2,717,904                  100,000          1,281,645

55             -                     2,908,158                  100,000          1,478,360

56             -                     3,111,729                  100,000          1,688,845

57             -                     3,329,550                  100,000          1,914,064

58             -                     3,562,618                  100,000          2,155,049

59             -                     3,812,002                  100,000          2,412,902

60             -                     4,078,842                  100,000          2,688,805

61             -                     4,364,361                  100,000          2,984,022

62             -                     4,669,866                  100,000          3,299,903

63             -                     4,996,756                  100,000          3,637,896

64             -                     5,346,529                  100,000          3,999,549

65             -                     5,720,786                  100,000          4,386,518

3. I am new at investing. What are the basic rules to investing wisely?

Know your current financial situation. Before you begin to think about investing your money, you should know how much you could spare each month. How much do you need for expenses? How much can you save? Naturally, the more you can put aside now, the better it will be for your future. It's up to you to achieve a balance between your current lifestyle and your future expectations.

Calculate your income and expenses taking into account the following:

• Mortgage Payments

• Car Expenses

• Personal Tax

• Entertainment

• Loans and Interest Payments

• Holidays

• Living Expenses

• School Fees

• Emergency Funds

• Family Commitments

Generally speaking, whatever spare cash you have after allowing for all your expenses is what you can afford to invest. You can commit a certain amount each month and consider it a monthly expense. As your salary increases, you should also increase the amount you invest proportionately. By doing this, you'll be keeping up with inflation and your money will be working harder for you.

4. I know how much I have to invest, now what?

Once you know how much you can afford to invest, you can set your objectives - why you are investing and how you are planning to use your investments. Your objectives could incorporate any combination of the following:

• Retirement

• Protection for your family

• Education for your children

• Special needs or emergencies

• Specific occasions (e.g. a wedding, buying a house, emigrating)

• Wealth accrual

Now make a list of your objectives, in order of priority, because you may not be able to afford to achieve every single goal. Divide your objectives also into long-, medium- and short-term goals. This will help you choose the type of investment you want to make. For example: if you plan to save for your child’s university education in 10 years time, it may be a good idea to invest your

money now. Let your money work for you over the years in order to reach your goal . Remember in most cases, the sooner your money is invested, the longer it works for you and the faster it grows. Think about when you will need the return as it also helps to determine the time horizon of your investment.

5. How do I determine my risk level?

Keeping your objectives in mind, determine how much risk you're prepared to take. Do you want to adopt a conservative, moderate or aggressive investment strategy? Ask yourself the following questions before you make your decision:

• Are you prepared to make long-term investments, which will allow you to take greater risks for higher returns?

• If you're going for short-term, high-risk investments, can you afford to lose some of the money you invest?

• If you're married with children, what level of risk can you take and still be certain of their future?

• If you want your money to be safe, will you be content with a moderate rate of return?

• If you opt for safe investments, will the returns be enough to cover inflation?

The important thing to remember is that, in general, you can afford to choose higher-risk investment tools for longer-term investments because, even if they go down in the short term, they are likely to show an overall upward trend over a long period of time. But for short-term investments, you will find low-risk products are a more reliable and safer option.

6. What types of financial tools can I invest my money in?

You can choose from two main financial tools with varying degrees of risk:

• Deposits

• Investments

Traditionally, savings accounts are the safest place to put your money. They provide high liquidity- you can quickly and easily retrieve your money - but offer lower rates of interest. Investment tools offer potentially higher returns but with a greater risk.

7. What investment products are available in the market?

One thing to remember about investments is that the level of return is generally proportionate to the level of risk. Thus an investment offering potentially high returns will usually have a high-risk element.

• Securities

• Stocks

• Bonds

• Foreign Currency

• Funds

8. What are securities?

Securities is the generic name for shares and other investments traded in financial markets. Individuals may invest in securities, and check the progress of their investment every day in the newspapers or on the Internet. It is possible to enjoy a higher rate of return from investing in securities than from savings accounts. Stock market securities in thriving economic climates will generally show an increase over time, and sometimes within a very short period. However, all stock markets are volatile and buying securities should not be seen as a short-term method of making money. Buying securities also costs money. Stockbrokers make various charges for their services, such as commission. Other than investing in securities by yourself, you can assign asset management professionals or companies to invest on your behalf.

Government securities (or Government bonds) are what the government gives you when you lend them money. In effect you are investing in the government. In return the government will pay you interest (known as a coupon payment) They will also pay back your principal at a specified time (the maturity date).

10. What are mutual funds?

Mutual Funds are an attractive medium- to long-term investment tool. They give investors the opportunity to diversify even a small investment in securities, bonds, currencies and commodities in markets around the world. This is achieved by combining the resources of many investors into one large pool, which can be spread over a number of different investments and over a wide geographical area. This range of investments is called a portfolio.

Funds have a number of benefits:

! Diversification, thus spreading the risk.

You spread your investment across a diverse portfolio. This is usually safer than investing in a single share. Of course, levels of risk and return also vary among different funds.

! Professional management.

Fund managers spend their working lives researching and managing investments. It would be very difficult for an individual to have an in-depth knowledge of markets around the world. With a unit trust, their expertise is working for you.

! Access to worldwide markets.

Your money can be invested in overseas markets, which may not be easily accessible by individuals. The minimum investment amounts are usually very affordable.

! Economies of scale.

With a large number of investors contributing to a single fund, operating costs and commissions can be amortised. Individual investors thus pay lower fees.

! Liquidity.

You can buy and sell trustsfunds on any dealing day (taking into account the required holding periods of some funds).

! Potential to earn higher yields.

Although most funds do not guarantee specific rates, they do give investors the

opportunity to earn potentially higher yields than time deposits since the proceeds are invested in the various bond, stock, currency or commodity markets.

10. How do I invest in foreign currency?

There are two ways to gain a return on your capital from foreign currency, either through interstate differences or exchange-rate fluctuations. Many financial institutions offer margin trading on foreign currencies. This means you can speculate on a large amount while investing only a small amount. Of course, this is a more aggressive investment strategy and can be extremely risky. You may potentially earn a very high yield, but you may also lose part of your original investment.

11. What are bonds?

Bonds are issued by governments and companies in order to raise money, and are a relatively safe investment . Bonds are like loans to governments or corporations. They are usually seen as long-term investments and can have terms of up to 30 years, although five to 10 years is the normal investment period. Many fund managers use bonds as a stable element in their portfolios.

12. How do I choose the right investment partner?

Many people in the past have lost money through unwise investments or lack of relevant information and assistance. Some have even been victims of unscrupulous brokers. If you're thinking of making an investment, here are some questions to consider:

• Are you dealing with a reputable financial institution?

• Is the company registered with the appropriate government bodies?

• Is the company large, stable, and does it have a global presence?

• If you're at all unsure with whom you're dealing with, seek the advice of an accountant, a financial advisor or your bank manager.

• Compare the services offered and the fees charged with other companies.

13. How can I research and keep track of my investments?

The more you know about what you're investing in, the better. Stock and fund prices are quoted in the newspapers and on the Internet. If you're thinking of buying shares in a particular company, ask the company or your broker for their annual report. This will give you valuable information about the company's performance, its financial situation and future plans. Many investment companies also hold seminars, especially when they're launching a new fund. Banks also host similar events for the benefit of their customers. Attending them can be informative and useful. Constant review helps to keep your investments up to date. In order to maximise the money you invest, it is necessary to review your investment portfolio on a regular basis. Your financial situation and your investment goals could change, and markets are constantly

moving. New opportunities and investment tools also emerge from time to time, and it is possible that some investments you are holding are not performing to your expectations. If that is the case, you may consider revising your portfolio.

Pl Remember 

Investment involves risk. The prospectus of the funds should be read for further details. The price of units or shares and the income from them may go down as well as up and any past performance figures shown are not indicative of future performance. So do your deliberations.