Design your SIP portfolio

 One of the most frequent advisory questions that we get from our investors is typically this - "I can save x thousand rupees every month. I would like to invest in mutual funds through SIP. Please suggest some funds for me". We are delighted to get such mails because systematic investments in mutual funds are the best way to turn savings into efficient investment vehicles. L Let me talk about a simple method to construct a good SIP portfolio. First, decide upon the asset allocation - By asset allocation what  I mean is how much money goes every month into what kind of mutual fund. It is possible to get very complicated with this, but to keep it simple you can focus on just three types of funds - large-cap oriented funds, small/mid-cap funds and debt funds. A typical allocation would be 50% in large-cap oriented funds, 20-30% in small-mid/cap oriented funds, and the rest in debt funds. To ensure stable and optimal returns, every SIP portfolio should have some debt fund component in it. It can just be a small portion - 20-25% of the monthly investment, if your portfolio is an aggressive portfolio for the long term.

Second, decide upon the number of schemes in your portfolio - Given the fact that we have three prime asset classes as above, your portfolio should have at least three schemes in it. On the upper side, it should not have more than seven-eight schemes. More than that, and your portfolio becomes difficult to track and manage. Ideally, a portfolio would have five schemes - four equity schemes, and one debt scheme.

Third, decide on the schemes - this is the last thing to do while designing the portfolio, not the first. Once you know what kind of schemes you are looking for and how many of each kind (from steps 1 and 2 above), this step becomes a simple choice. 

Reconsider that Fixed Deposit

"Inflation rears its ugly head again, as RBI prepares to raise interest rates." You hear this all the time, and then wonder why you should bother. Over a year now, we, the retail public have been getting horrendously low deposit rates from banks. And if we got a bank offering us 9% deposit rates, the interest was taxed; and at the highest bracket, our real return was only 6.3%.

I have an emergency fund — 6 to 12 months of expenses — in a safe avenue, but I don't know if this emergency will happen in 1 month or after 5 years. My putting the money in a fixed deposit yields very little; plus, I end up paying tax on the interest. And if I use a longer term deposit, I get hit by a pre-closure penalty if I should have an emergency in the meantime.

So we've got three issues — we don't get the best interest rates, we pay taxes on the interest even if we reinvest it, and we fear pre-closure penalties. Is there a way around this, retaining the same safety as a fixed deposit?

Enter the debt mutual fund. Mutual funds are assumed to have equity exposure, but that is a fallacy; in India, more than 80% of mutual fund assets are in non-equity investments, mostly fixed income products. These invest in markets where money is traded, like call money markets, fixed income derivatives, bond markets; here, what you would get for a 1-year investment with the same bank is likely to be higher than what the bank offers for retail deposits.

In mutual funds, you don't get taxed on any intermediate gains until you decide to sell. Keep the money in for two years? The fund may rack up gains, you don't pay tax. And if you decide to sell after a year, you get the additional benefit of long term capital gains tax, which I'll illustrate with an example.

Let's say you put in 500,000 into such a fund, exit after a year, and get a 9% return. That's Rs. 45,000 of gains. With long term capital gains, you get to "index" the gains; that means, they let you adjust the principal up for inflation. The 500,000 that you invested will be considered as 530,000 (assuming 6% is the announced inflation). Your taxable gain is only 15,000 — and the tax on that is, at 20% currently, just Rs. 3,000.

Compare that with making 45,000 in a fixed deposit — it will be added to your income and taxed; at the highest tax slab, you pay 30% of it, or Rs. 13,500 in taxes.

Now, consider the real world. It's hardly likely you would need the entire 500,000 you have stored for a rainy day. You might need Rs. 50,000 for an operation, or Rs. 100,000 to cover an emergency, but not the full amount. With a mutual fund, you can draw only a little bit at a time, without a penalty — and while certain fixed deposits do allow you early partial exits through a "sweep-in" facility, but most banks have started to charge a penalty for early exits.

My philanthropic pledge

FORTUNE -- In 2006, I made a commitment to gradually give all of my Berkshire Hathaway stock to philanthropic foundations. I couldn't be happier with that decision.

Now, Bill and Melinda Gates and I are asking hundreds of rich Americans to pledge at least 50% of their wealth to charity. So I think it is fitting that I reiterate my intentions and explain the thinking that lies behind them.

First, my pledge: More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day.

Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge.

Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including -- I'm proud to say -- my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money. A struggling child, befriended and nurtured by a caring mentor, receives a gift whose value far exceeds what can be bestowed by a check. My sister, Doris, extends significant person-to-person help daily. I've done little of this.

What I can do, however, is to take a pile of Berkshire Hathaway stock certificates -- "claim checks" that when converted to cash can command far-ranging resources -- and commit them to benefit others who, through the luck of the draw, have received the short straws in life. To date about 20% of my shares have been distributed (including shares given by my late wife, Susan Buffett). I will continue to annually distribute about 4% of the shares I retain. At the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs.

This pledge will leave my lifestyle untouched and that of my children as well. They have already received significant sums for their personal use and will receive more in the future. They live comfortable and productive lives. And I will continue to live in a manner that gives me everything that I could possibly want in life.

Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.)

My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious.

The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course.

Survivorship Bias

Survivorship bias is a type of selection bias.

Survivorship bias, or survival bias, is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways. The survivors may be actual people, as in a medical study, or could be companies or research subjects or applicants for a job, or anything that must make it past some selection process to be considered further.

Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance. It can also lead to the false belief that the successes in a group have some special property, rather than just coincidence. For example, if three of the five students with the best college grades went to the same high school, that can lead one to believe that the high school must offer an excellent education. This could be true, but the question cannot be answered without looking at the grades of all the other students from that high school, not just the ones who "survived" the top-five selection process.

Survivorship Bias in Equity Market

"If you had bought Praj Industries at Rs. 2 in 2003 for just 100,000 rupees, it would be worth Rs. 40 lakh today!"

We hear something like this often. If you bought Infosys in their IPO in 1993, you would make a gazillion rupees, so much that you would be reading this article in your holiday home in the Bahamas. Yet, in the early 90s , IT stocks weren't the darling of the markets - more popular was a stock called Arvind Mills, which still exists and has done fairly well for itself; but if you had plonked your hard earned money into Arvind, you would have seen a stock going from Rs. 400 down to a relatively meager Rs. 43 and now back to just around Rs 280. And that was still lucky; a number of other stocks simply went to zero.

What happened? We counted the winners. If you count only the survivors, no accident has casualties.

Survivorship bias is a classic problem with benefit of hindsight. It teaches us important lessons.

1.That what is visible isn't everything .

2.That it's critical to diversify.

For a person investing equally in a number of stocks from stock market darlings to pariahs, the losses on one set of stocks could have been made up by gains in others; remember that you can't lose more than 100%, but you can make many multiples of your investment when you win ("multi-baggers"). If you research stocks well, chances are you will have a few multi-baggers and losers - sometimes many more losers, but the winners more than make up for the losses. The winners become the survivors and investors become geniuses for discovering them; the real genius though was the diversification.

A simple rule in the trading world is to cut your losses and let your winners run.

That's counter-intuitive; many investors believe the exact opposite - that they would book profits when a stock gains a certain amount, say 10%. But should the stock fall, they will wait till they get out at "break-even", even if that takes an enormous amount of time. The problem here is that you limit your gains, and set yourself up for much higher losses - which over a longer term will lose money, even if this strategy works like a charm in markets that go up. When it doesn't work, everyone else is losing money, so one doesn't feel quite as bad. And here, survivorship bias works again -because people who win on this strategy will brag about it, but someone that lost money will probably have sworn off stocks forever.

Imagine you get a letter saying "The Sensex will go up this week". And it does. Another letter arrives the following week saying, "This week, the Sensex will fall". And remarkably, the index does fall. A few weeks of incredibly accurate information then ensues, and after six weeks you are told that further information will no longer be free; you have to pay Rs. 100,000 to get access to the "proprietary black box system". Well worth the money, you think. You pay, and find the system highly inaccurate in subsequent weeks. What happened?

The modus-operandi was to first gather 10,000 addresses of potential suckers, and to send 5,000 of them a letter saying the Sensex would go up, and the remaining a letter saying it would go down. If the Sensex did go up, they ignored the latter, and divided the "winning" 5,000 people into two to run the mails again. After six weeks, they had 150 people for whom they were incredibly accurate; and who are most likely to pay up. A good 2/3rd of this group might pay, not aware of this scam. The tricksters make a Rs. 1 crore killing from this group through a system that is about as scientific as a coin flip, and all for the cost of some postage. All the scamsters had to ensure was that they chose people who didn't talk to each other!

Survivor bias also impacts our views of what makes people successful. "Work hard, and believe in yourself", they say, "look at Narayana Murthy". But what of the millions that worked hard, but didn't make it?

"Warren Buffett is a great investor, you should buy and hold forever, like he does"

"The best business is the restaurant business. See, every restaurant today makes money."

All of the above is valid but again, not all who live by those precepts have become successful. At some point, luck and fortune play a part, a much greater part perhaps than skill itself.

"Fire those 20% of customers .......

"Fire those 20% of customers who take up 

the majority  of one's time and cause the most trouble".

 The Pareto principle (also known as the 80-20 rule, the law of the vital few, and the principle of factor sparsity  states that, for many events, roughly 80% of the effects come from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo  Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.^. It is a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients." Mathematically, where something is shared among a sufficiently large set of participants, there must be a number k between 50 and 100 such that "k% is taken by (100 − k)% of the participants". The number k may vary from 50 (in the case of equal distribution, i.e. 100% of the population have equal shares) to nearly 100 (when a tiny number of participants account for almost all of the resource). There is nothing special about the number 80% mathematically, but many real systems have k somewhere around this region of intermediate imbalance in distribution.

The Pareto principle is only tangentially related to Pareto efficiency, which was also introduced by the same economist. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

The original observation was in connection with income and wealth. Pareto noticed that 80% of Italy's wealth was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

Because of the scale-invariant nature of the power law relationship, the relationship applies also to subsets of the income range. Even if we take the ten wealthiest individuals in the world, we see that the top three (Warren Buffett, Carlos Slim Helú, and Bill Gates) own as much as the next seven put together.

A chart that gave the inequality a very visible and comprehensible form, the so-called 'champagne glass' effect, was contained in the 1992 United Nations Development Program Report, which showed the distribution of global income to be very uneven, with the richest 20% of the world's population controlling 82.7% of the world's income.

Distribution of world GDP, 1989
Quintile of population	Income
Richest 20%	82.70%
Second 20%	11.75%
Third 20%	2.30%
Fourth 20%	1.85%
Poorest 20%	1.40%

Widening Economic Inequality

The Pareto principle has also been used to attribute the widening economic inequality in the United States to 'skill-biased technical change' – i.e. income growth accrues to those with the education and skills required to take advantage of new technology and globalisation. However, Paul Krugman in The New York Times dismissed this "80-20 fallacy" as being cited "not because it's true, but because it's comforting." He asserts that the benefits of economic growth over the last 30 years have largely been concentrated in the top 1%, rather than the top 20%, though his assertion in no way negates the 80-20 principle.

In software

In computer science and engineering control theory such as for electromechanical energy converters, the Pareto principle can be applied to optimization efforts. For example, Microsoft noted that by fixing the top 20% of the most reported bugs, 80% of the errors and crashes would be eliminated.

In computer graphics the Pareto principle is used for ray-tracing: 20% of rays intersect 80% of geometry.

Other applications

The Pareto principle has many applications in quality control It is the basis for the Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing stock of goods, as well as costs of keeping and replenishing that stock.

The Pareto principle was a prominent part of the 2007 bestseller The 4-Hour Workweek by Tim Ferriss. Ferriss recommended focusing one's attention on those 20% that contribute to 80% of the income. More notably, he also recommends firing those 20% of customers who take up the majority of one's time and cause the most trouble.

In human developmental biology the principle is reflected in the gestation period where the embryonic period constitutes 20% of the whole, with the foetal development taking up the rest of the time.

In health care in the United States, it has been found that 20% of patients use 80% of health care resources.

Several criminology studies have found that 80% of crimes are committed by 20% of criminals.

 In the financial services industry, this concept is known as profit risk, where 20% or fewer of a company's customers are generating positive income while 80% or more are costing the company money.

A Winning Long-Term Stock Pick

Make A Winning Long-Term Stock Pick

Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long-term buys and which ones aren't. To invest for the long term, not only do you have to look at certain indicators, but you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives. In this article, we tell you how to identify good long-term buys and what's needed to find them. (Learn more about stock market success in 

 Focusing on the Fundamentals
There are many fundamental factors that analysts inspect to decide which stocks are good long-term buys and which are not. These factors tell you whether the company is financially healthy and whether the stock has been brought down to levels below its actual value, thus making it a good buy. The following are several strategies that you can use to determine a stock's value.

Consider Dividend Consistency
The consistency of a company's ability to pay and raise its dividend shows that it has predictability in its earnings and that it's financially stable enough to pay that dividend - the dividend comes from current or retained earnings. You'll find many different opinions on how many years you should go back to look for this consistency - some say five years, others say as many as 20 - but anywhere in this range will give you an overall idea of the dividend consistency.
Examine P/E Ratio
The price-earnings ratio (P/E) ratio is used to determine whether a stock is over- or undervalued. It's calculated by dividing the current price of the stock by the company's earnings per share (EPS). The higher the P/E ratio, the more willing some investors are to pay for those earnings. However, a higher P/E ratio is also seen as a sign that the stock is overpriced and could be due for a pullback - at the very least. A lower P/E ratio could indicate that the stock is an attractive value and that the markets have pushed shares below their actual value. 

A practical way to determine whether a company is cheap relative to its industry or the markets is to compare its P/E ratio with the overall industry or market. For example, if the company has a P/E ratio of nine while the industry has a P/E ratio of 14, this would indicate that the stock is a great valuation compared with the overall industry

Watch Fluctuating Earnings 
The economy moves in cycles. Sometimes the economy is strong and earnings rise; other times, the economy is slowing and earnings fall. One way to determine whether a stock is a good long-term buy is to evaluate its past earnings and future earnings projections. If the company has a consistent history of rising earnings over a period of many years, it could be a good long-term buy.

Also, look at what the company's earnings projections are going forward. If they're projected to remain strong, this could be a sign that the company may be a good long-term buy. Alternatively, if the company is cutting future earnings guidance, this could be a sign of earnings weakness and you might want to stay away.
Avoid Valuation Traps
How do you know if a stock is a good long-term buy and not a valuation trap (the stock looks cheap but can head a lot lower)? To answer this question, you need to apply some common-sense principles, such as looking at the company's debt ratio and current ratio. Debt can work in two ways:

• During times of economic uncertainty or rising interest rates, companies with high levels of debt can experience financial problems.
• In good economic times, debt can increase a company's profitability by financing growth at a lower cost.

The debt ratio measures the amount of assets that have been financed with debt. It's calculated by dividing the company's total liabilities by its total assets. Generally,the higher the debt, the greater the possibility that the company could be a valuation trap
But there is another tool you can use to determine the company's ability to meet these debt obligations: the current ratio. To calculate this number, you divide the company's current assets by its current liabilities. The higher the number, the more liquid is the company. For example, let's say a company has a current ratio of four. This means that the company is liquid enough to pay four times its liabilities.

By using these two ratios - the debt ratio and the current ratio - you can get a good idea as to whether the stock is a good value at its current price. 

Economic Indicators
There are two ways that you can use economic indicators to understand what's happening with the markets.

Understanding Economic Conditions 
The major stock market averages are considered to be forward-looking economic indicators. For example, consistent weakness in the Dow Jones Industrial Average could signify that the economy has started to top out and that earnings are starting to fall. The same thing applies if the major market averages start to rise consistently but the economic numbers are showing that the economy is still weak. As a general rule, stock prices tend to lead the actual economy in the range of six to 12 months. A good example of this is the U.S. stock market crash in 1929, which eventually led to the Great Depression
Understand the Economic Big Picture
A good way to gauge how long-term buys relate to the economy is to use the news headlines as an economic indicator. Basically, you're using contrarian indicators from the news media to understand whether the markets are becoming overbought or oversold. A good example of this occurred in 1974, when Newsweek  had a bear on the cover showing the pillars of Wall Street being knocked down. Looking back, this was clearly a sign that the markets had bottomed and stocks were relatively cheap.

In contrast, a Time magazine cover from September 27, 1999, included the phrase, "Get rich dot com" - a clear sign of troubles down the road for the markets and dotcom stocks. What this kind of thinking shows is that many people feel secure when they're in the mainstream. They reinforce these beliefs by what they hear and read in the mainstream press. This can be a sign of excessive optimism or pessimism. However, these kinds of indicators can take a year or more to become reality

Conclusion
Investing for the long term requires patience and discipline. You may spot good long-term investments when the company or the markets haven't been performing so well. By using fundamental tools and economic indicators, you can find those hidden diamonds in the rough and avoid the potential valuation traps.

Annoyed by mobile phones?

Annoyed by mobile phones? Scientists explain why

Ever wonder why overhearing a mobile phone conversation is so annoying? American researchers think they have found the answer.

Whether it is the office, on a train or in a car, only half of the conversation is overheard which drains more attention and concentration than overhearing two people talking, according to scientists at Cornell University.

"We have less control to move away our attention from half a conversation (or halfalogue) than when listening to a dialogue," said Lauren Emberson, a co-author of the study that will be published in the journal Psychological Science.

"Since halfalogues really are more distracting and you can't tune them out, this could explain why people are irritated," she said in an interview.

Last year Americans spent 2.3 trillion minutes chatting on mobile phones, according to the US wireless trade association CTIA - a ninefold increase since 2000.

Worldwide, there are about 4.6 billion mobile phone subscribers, according to the International Telecommunications Union, a UN agency. The number is equal to about two-thirds of the world's population, leaving few corners of the globe where public spaces are free of mobile-tethered babblers.

China has the most mobile phone users with 634 million, followed by India with 545 million and the United States with 270 million, figures from the US Central Intelligence Agency (CIA) show.

Emberson said people try to make sense of snippets of conversation and predict what speakers will say next.

"When you hear half of a conversation, you get less information and you can't predict as well," she said. "It requires more attention."

The findings by Emberson and her co-author Michael Goldstein are based on research involving 41 college students who did concentration exercises, like tracking moving dots, while hearing one or both parties during a cellphone conversation.

The students made more errors when they heard one speaker's side of the conversation than when overheard the entire dialogue.

The study shows that overhearing a mobile phone conversation affects the attention we use in our daily tasks, including driving, Emberson said.

"These results suggest that a driver's attention can be impaired by a passenger's cell phone conversation," according to the study.

It recommends similar studies should be conducted with driving simulators.

Traditional retirement possibly becoming a thing of the past

It may be time to redefine retirement.

A new survey of American workers from the Transamerica Center for Retirement Studies found that 82% of the respondents age 60 and older either are, or expect to keep working past the age of 65. Among all workers, regardless of age, 20% expect to keep on working as long as possible in their current job or a similar one.

The days of the gold-watch retirement where we have an office party and maybe some punch and cookies and never work again are more mythical than a reality.Very few workers actually envision that type of retirement and many plan to keep on working part-time even after they retire.

It even raises the question is retirement the right word.

Across all ages, many workers worry that they will be unable to save enough to last their lifetime. Outliving investments and savings was the top retirement concern for 44% of all respondents. And one-third of all workers believe their standard of living will diminish once they stop working.

Forty-plus age  represent the critical mass of Generation X. They're in the sandwich years, the time of life when most are likely juggling work, kids, and aging parents. They probably don't have a lot of free time and they also were very affected by the recession.

Only 10% of respondents in their 40s said they were confident they would be able to fully retire in comfort.

Many younger Gen Xers doubt they'll get the Social Security payments currently forecast in their benefits statements.

The only option is to save more to make up the difference.To identify money that they can save, they have to track their spending, and using apps on their phones fits perfectly with their lifestyle.

 For Gen Xers who are closer to traditional retirement age, and who have grown children have the wonderful opportunity to shovel money into their retirement accounts once the kids are out of college and out of the house. But, people seem to want to remodel the kitchen and buy the fancy car they have been putting off, but this is the final hurrah for retirement savings and they really need to make the most of it .

There are some rules of thumb whatever a worker's age.

For instance, they should stop guessing how much they need to retire and actually run the numbers. From there you can build a plan.Factor in everything from everyday living expenses ... (to) taxes and inflation.

Such strategizing is necessary, even if you never plan to stop working.

Planning not to retire is not a viable retirement strategy.At some point in our lives we'll all stop working.

(Gen X is the generation born after the Western World War II baby boom describing a generational change from the Baby Boomers. Baby boomers are people born during the demographic post–World War II baby boom , approximately between the years 1946 and 1964.   )

The Best Alternative to Pension Plans

IS MUTUAL FUND

 The Best Alternative to Pension Plans?

The first step to select a suitable retirement corpus plan is to calculate household and health expenses accounting for future inflation and arrive at the monthly investment required for smooth sailing. Though investing in traditional pension plans makes post retirement life peaceful , there are some regulations for pension plans. Also,the plans are not flexible.

Is there an alternative to pension plans? Is mutual fund the best alternative to pension plans?

Mutual Fund for accumulating your retirement corpus:

Systematic investment in equity mutual fund is a good financial practice. SIP shields the investor from market volatility and helps in rupee cost averaging (RCA).It eliminates the risk of timing the market. Monthly investment can be a mix of equity and debt till retirement. The key to accumulating hassle free retirement corpus is to start early so that the monthly payment is more affordable.

STP (Systematic Transfer Plan):  Approaching retirement, the strategy to shift corpus to Debt fund:

Shifting investments to debt 2-4 years ahead of retirement is recommended because equity is subject to market risks and it is not advisable to retain corpus in equity till the last minute. Market should not be timed for making an entry and so also exit. STP can be used to transfer funds periodically from equity to debt or vice versa under the same Asset management company. STP is defined as transfer from one fund to another fund in a systematic manner. STP is highly recommended to minimize market risks just before retirement.

SWP (Systematic withdrawal plan) The solution to post retirement expenses:

SIP is very popular in cities and it is used as a general term for referring to mutual fund investments. STP, SWP are lesser known and understanding SWP helps in making a wise investment decision to handle post retirement needs efficiently. SWP is the reverse of SIP. In SIP one makes a regular fixed investment into a fund and in SWP one withdraws a fixed amount regularly from a fund. The amount to be withdrawn and the frequency (monthly, quarterly or annual) is determined by the investor. Assuming that the corpus has completely been shifted into debt mutual funds, post retirement expenses can be met by withdrawing the money periodically. SWP paves way for regular retirement income along with appreciation of balance corpus in the debt fund.

For instance, if you invest 15 lakhs and the fund gives returns of 9% p.a. You run an SWP of Rs. 10,000 per month the funds would last for 17+ years of your requirements. In a fund expected to give returns of 9% p.a if your annual withdrawal from the corpus is only 7% your one time investment lasts forever.

In Peers like Senior citizen saving schemes (SCSS) and post office monthly income scheme (POMIS) the monthly income is fully taxable as per the applicable tax slab. SWP has benefits like

• Regularity: where the returns are fixed at a frequency determined by the investor

 • Taxation: Long term capital gains from equity are exempt in case the holding is for a period beyond a year, so the advantage is the withdrawals are tax free. "Discipline" is defined as the process of accumulating retirement corpus in mutual funds.   Mutual fund investment: Some pointers

• Ensure that SIP's do not bounce and do not stop investments when equity market fluctuates • Periodic review of investments, performance comparison with peers and portfolio changes are recommended when necessary.

Conclusion: Investing in SIPs to generate sufficient post retirement corpus is a recommended strategy as it has an edge over traditional pension plans and unit linked pension plans .Private & Govt sector employees need to start investing in SIPs and not depend on PF and Govt pension  alone." Saving for a rainy day" is the key to peaceful post retirement and an early start to retirement corpus building is the most beneficial option.

I'm Investing in a Stock, Not in a Business

Every stock inevitably has a business behind it. Ignoring the underlying business and paying attention only to the stock price is the recipe for trouble

Many investors will never pause for a moment to think about the business of the company they are willing to bet their money on. Many will just put their money where their brokers, friends and associates will tip them to. But no investment - however attractive the entry point - cannot outperform the underlying business, especially in the long term. This is one truth that escapes most investors.

Busting the myth
Many investors do not realise that Buffett is not just a successful stock picker but rather a more successful business buyer. His success has more to do with the wonderful businesses that he owns rather than their stock price movements.

Here's what Charlie Munger has to say about how important it is to pick high-quality businesses. 'We've really made the money out of high-quality businesses... Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6 per cent on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6 per cent return - even if you originally buy it at a huge discount. Conversely, if a business earns 18 per cent on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result. ('A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management & Business', Charlie Munger).

Ideal type of business
Broadly, in the world of Buffett, businesses are categorised into two classes: those that require little capital re-investment and those that continuously require fresh capital to survive. Says Munger, 'There are two kinds of businesses: The first earns 12 per cent, and you can take it out at the end of the year. The second earns 12 per cent, but all the excess cash must be reinvested - there's never any cash. It reminds me of the guy who looks at all of his equipment and says, 'There's all of my profit'. We hate that kind of business.' (Berkshire Annual Meeting, 2003).

Businesses that do not require too much capital top Buffett's list. 'Great consumer businesses need relatively little capital. Where people pay you in advance (magazines, insurance), you are using your customers' capital. But the rest of the world knows this and they get expensive. It can be competitive to buy them. Business Wire - it doesn't require capital. Many service businesses require little capital. When successful, they can be something.'

'You could run Coca-Cola with no capital. There are a number of businesses that operate on negative capital. Great magazines operate with negative capital. Subscriptions are paid upfront; they have limited fixed investments. There are certain businesses like this. Blue Chip Stamps - it got float ahead of time. There are a lot of great businesses.' (Berkshire Annual Meeting, 2010).

Searching for moats
Buffett has single-handedly promulgated and popularised investing in companies that have a strong moat. In a lecture at the University of Florida Business School in 1998, Buffett talks about searching for moats.

'Our managers of the businesses we run, I have one message to them, and we want to widen the moat. We want to throw crocs, sharks and gators, I guess, into the moat to keep away competitors. That comes about through service, through quality of product, it comes about through cost, sometimes through patents, and/or real estate location. So that is the business I am looking for.'

'Now what kind of businesses am I going to find like that? Well, I am going to find them in simple products because I am not going to be able to figure what the moat is going to look like for Oracle, Lotus or Microsoft, ten years from now. Gates is the best businessman I have ever run into and they have a hell of a position, but I really don't know what that business is going to look like ten years from now. I certainly don't know what his competitors will look like ten years from now.'

'I know what the chewing gum business will look like ten years from now. The internet is not going to change how we chew gum and nothing much else is going to change how we chew gum. There will be lots of new products. Is Spearmint or Juicy Fruit going to evaporate? It isn't going to happen. You give me a billion dollars and tell me to go into the chewing gum business and try to make a real dent in Wrigley's. I can't do it.'

'That is how I think about businesses. I say to myself, give me a billion dollars and how much can I hurt the guy? Give me $10 billion dollars and how much can I hurt Coca-Cola around the world? I can't do it. Those are good businesses. Now give me some money and tell me to hurt somebody in some other fields, and I can figure out how to do it.' (Lecture at the University of Florida Business School, 1998)

Concept of pricing power
Buffett emphasises investing in companies with pricing power. Pricing power is the closest indicator of how strong a business franchise is.

Buffett says, 'The first question is 'how long does the management have to think before they decide to raise prices?' You're looking at a marvelous business when you look into the mirror and say 'mirror, mirror on the wall, how much should I charge for Coke this fall?' [And the mirror replies, 'More'.] That's a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] 'Just another half cent a yard'. Then you get up and they say, 'We won't pay it'. It's just night and day. I mean, if you walk into a drugstore, and you say, 'I'd like a Hershey bar', and the man says, 'I don't have any Hershey bars, but I've got this unmarked chocolate bar, and it's a nickel cheaper than a Hershey bar'. You just go across the street and buy a Hershey bar. That is a good business. The ability to raise prices - the ability to differentiate yourself in a real way, and a real way means you can charge a different price - that makes a great business.' (Lecture at Notre Dame, 2005)

Return on incremental capital
Many businesses require little capital to run but fewer still can generate high returns on invested capital. Why is this important? Buffett explains, 'The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20 per cent in one year, reinvests the $20 million profit and in the next year earns 20 per cent of $120 million and so forth. But there are very, very few businesses like this. Coke has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money, but can't generate high returns on incremental capital - for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist.' (Berkshire Annual Meeting, 2003).

'Great consumer businesses need relatively little capital. Where people pay you in advance (magazines, insurance), you are using your customers' capital. But the rest of the world knows this and they get expensive.'