Small amounts saved and invested

Small amounts saved and invested every month over a period of time can create a large corpus. Therefore, Rs 5,000 saved and invested every month for a period of 20 years would grow to Rs 30 lakh at a conservative rate of 8% and at  15%, this could even grow upto Rs 76 lakh.

The SIP facility not only inculcates financial discipline among investors, it helps the investor to negate the effects of market cycles as well. SIPs help to create wealth in a convenient and time-tested manner while providing the benefit of averaging. In a rising market the amount invested will fetch lesser units while in a falling market the same amount will get more units thereby providing the investor a low average cost per unit. Consequently, it prevents the investor from trying to time the market.

SIPs works best for investors having long-term goals, say, for their child's higher education or marriage or creating a retirement corpus. In each of these cases a specific monthly amount can be allocated towards these goals.

If you have a lump-sum but wish to invest that every month systematically, you could opt for a Systematic Transfer Plan (STP) where money is debited from a liquid fund in the same fund house and transferred to the equity fund as per the period specified by you.

How Much Home Can You Afford?

Find Out How Much Home You Can Afford With a Simple Calculation

When the time is right to purchase a home, the first question you need to be able to answer is how of a home you can afford. Knowing the answer to this question will allow you to focus your search on homes within the correct price range even before applying for a mortgage.

Debt-to-Income Ratio

The most important factor that lenders use as a rule of thumb for how much you can borrow is the debt-to-income ratio.

This ratio takes into account a mortgage payment plus your other personal debt you are carrying such as car loans, credit card debt and student loans. The ratio is expressed in a percentage of how much of your income is being used to make debt payments.

The typical guideline used by most lenders is a ratio of 36% as the upper limit. Ratios above this may carry a higher interest rate or be denied altogether. Lenders also like to see that generally no more than 28% be dedicated to all housing expenses.

Calculating Your Debt-to-Income Ratio

The first thing you need to do is determine your gross monthly income. This is the income before taxes and other expenses are taken out. If you are married and will be applying for the loan jointly you should add together both incomes. Then take this number and multiply it by 0.36. For example, if you and your spouse have a combined gross monthly income of Rs.1,00,000:

1,00,000 x 0.36 = Rs 36,000

This means that your total monthly debt payments should be no more than Rs 36000, mortgage payment included.

The next step is to determine your total non-mortgage debt payments such as monthly credit card or car payments. For this example we will assume your monthly debt payments come to Rs 1000. Computing the maximum mortgage payment:

Rs.36000- Rs 1000 = Rs 35000

From this example we have determined that the most home you can reasonably afford is one with a mortgage payment of Rs 35000 which would include property taxes, insurance and possibly private mortgage insurance.

Remember, This is Only a Rule of Thumb

It is important to remember that just because the bank will lend up to that amount doesn’t mean that is what you can truly afford. This is simply a guideline you can use when shopping for a home so you are concentrating on homes that are within your price range. In reality your specific situation will dictate what type of home and mortgage payment will be best for you.

Some Financial Rules of Thumb

Everyone has a unique situation, and there are no concrete financial numbers that define success, but there are some rules of thumb that can help you gauge your progress. While following these rules won’t  guarantee success, they will put you on the right track.

How Much Debt Should You Have?

Ideally, no debt would be the best answer, but you have to realize that for some assets it is almost required you borrow money, such as buying a house.

Most experts agree that your total monthly debt payments shouldn’t exceed 36% of your gross monthly income. This is a good starting point, and over time if you can reduce that number you’ll be in pretty good shape.

How Much Home Should You Buy?

You should start by calculating your debt-to-income ratio using the 36% guideline for the sum of your monthly debts. After subtracting your other debt, you are left with a monthly payment that should be appropriate.

Another rule of thumb for housing is that you should buy a house that costs no more than two and a half to three times your annual income. For example, if you and your spouse together earn Rs25,00,000 per year, you shouldn’t spend more than Rs50,00,000-75,00,000 on a home.

How Much Money Should You Save?

One of the most widely used rules for saving is that you should save at least 10% of your income. Keep in mind, this is typically assuming you are saving additional money into a retirement plan as well. This 10% rule applies to creating a savings cushion for unexpected expenses, a college education, or other goals.

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Younger people who have more time to save should strive for a minimum of 10%, although the closer you are to retirement, you may be shooting for 20-30% depending on your current nest egg.

How Big Should Your Emergency Fund Be?

An emergency fund is used to cover expenses when there is a sudden loss of income or other financial emergency. Most experts suggest a household have between three and six months worth of expenses available in the event of an emergency.

How Much Money Will You Need in Retirement?

Many experts use the assumption that you will need to replace your pre-retirement income by 75-80%. So, if you make Rs.80,000 per month before you retire, you should expect to have a little over Rs.60,000 in income during retirement.

Another way to think about that is to use the lump-sum assumption which says your nest egg should be approximately 20 times your annual retirement expenses that aren’t covered by outside sources of income, such as a pension.

India lacks social security

MF should drive the long term retirement solutions

Mutual funds can offer long term retirement solutions. Some structural changes and supporting tax structure can improve the existing offerings, which can emerge as a great solution to plan ones retirement.

It is a cliché to state that India lacks social security. Old age is a challenge, to be precise a financial challenge for many. The family system managed to push this problem below the carpet for generations. However, the emergence of nuclear families and high flying consumer inflation will surely bring this issue to the fore. Almost 25 years after embracing the liberalization – globalization - privatisation policy, it is high time our policy makers address this issue with some amount of seriousness.

In Union Budget 2014 we saw mention of mutual fund linked retirement plans, which made many believe that the finance minister is serious about the issue of retirement planning in India. However this year Finance Minister opted to remain silent on this issue, and MF investors have to wait for one more year. Mutual funds have to gear up for next year's budget by preparing a case for long term retirement solutions. However, before one goes into what changes are required in this space, it is better to understand how things are as of now.

The Need

For years Indians have saved money using traditional means such as employee provident fund, public provident fund and traditional with profit endowment life insurance policies. However, as inflation remains stubborn at high levels and interest rates are kept low, individuals need investment solutions that offer exposure to asset classes that beat inflation need equity. Existing debt focused retirement solutions run the risk of losing out in the long term due to inflationary pressures.

Extant Solutions

One may see today we have equity mutual funds and pension funds launched by mutual funds. These are good enough retirement planning tools. However, are they really adequate? Let us take a look at -

For any retirement fund asset allocation holds the key. Franklin Templeton and UTI Pension funds offer around 40% equity exposure, whereas Reliance Pension fund comes with a 75% equity exposure in accumulation phase. Fund managers do re-balance the portfolios from time to time. With every rise in equity markets the fund manager has to sell some shares and buy bonds. Also a fall in share prices, makes them sell some bonds and use the proceeds to buy shares. This has resulted in good risk-adjusted returns in the long term by UTI and Franklin Templeton funds.

But this static asset allocation may not be of much help to all investors.

Consider couple of situations- Suresh aged 23 years, takes his first job and wants to start planning for his retirement. Being young he can start with a high exposure to equity – say 75-80%. But does he get a product with that kind of asset allocation which will offer him retirement solution? Wait – don't jump for a balanced fund.

Ramesh is now 55 years and he knows he will retire at 60. He has accumulated some money over his working life and wants to invest in retirement fund. He should ideally invest up to 25% in equity? But does he get such a product? Wait – don't jump for a mutual fund monthly income plan that invests around 25% in equity.

The most important question is when both of them reach their retirement, allocation to equity should be around 10%. Should they keep jumping from one product to another? How many Indians really are that financial literate and how many can be so disciplined? Or should there be something tailor-made?

The Ideal Product

Catch any financial planner and ask for a retirement plan. He invariably suggests high equity exposure in early years of working life. As the individual ages and approaches his retirement age the asset allocation shifts in favour of bonds – why not launch a product on these lines.

For example – Retirement fund 2050. If launched today this fund will have a tenure of 35 years and may start with 65% equity, 10% gold and 25% bonds. Over a period equity exposure should go down and by 2050, the asset allocation should be 10% equity, 5% gold and 85% bonds. Thus, towards retirement most of the money will be in safer avenues.

If such a product is put in place there will be many takers for the same. More important is it even small investors who may not be savvy.

Policy Push

To make it a grand success, there is a need of additional regulatory push. Finance Ministry should take many decisions in this direction. First - proceeds from such a fund should be made tax exempt provided the money is kept in such a scheme for minimum ten years. This may not happen now, outside the purview of the finance bill. However this should happen in Union Budget 2016.

Contributions to such funds also should be made tax exempt. Fund houses may choose to launch one scheme for every five years. For Example - A fund house today may launch retirement funds maturing in 2040, 2045, 2050, 2055 and so on. Investors should be allowed to invest any time but exits should be allowed only at the time of maturity or with hefty exit loads and subject to tax.

Mutual fund houses can launch such schemes now and stick to the long term investing mandate. This will act as a means to push government to act on the much required regulatory push we discussed above.

When to get out of a stock?

Professional mountaineers tell you that it easier climbing a mountain than getting off one. Something similar seems to be the case with equity investing as well. Seasoned investors say identifying a good stock to buy is not as hard; the tougher part is to figure out the right time to sell it.

What is  a warning sign to  keep an eye out for ? If overvaluation becomes substantial, and however you try to justify it but cannot, then it is time to sell.

 When a one starts justifying same thing in different ways repeatedly,  there is something fishy. The other sell signals are changes in the fundamentals of the company , hints of corporate governance issues and ill-planned capital allocation, which are to be considered as a red flag.The loss of the company’s competitive edge over its rivals should be a worry to the investor.

A broker’s favorite (time to sell) is when cycle turns, but one should also focus on capital erosion. It is rare for Indian companies to allocate capital sensibly for over 4-5 years. There were not more than 50 companies in BSE 500 which have allocated capital sensibly.

Investors should not be worried about whether the market is rising or falling, as long as they are invested in the right businesses.

 The  ace investor Warren Buffet is a staunch believer in ‘investing for life’ approach to equity investment.

But  the notion of buying and holding for a long time, let alone for life, is challenging. It is difficult to find Indian companies that give returns for a long period of time.

A common point is  that if something looks too good to be true, then it is actually not true. An investor can learn filtering bad stocks only with experience and judgment. One needs to be a critical observer to find the minute discrepancies.

Read your way to investing success

This may come as a surprise to many investors, but books contain knowledge and knowledge can be useful

What should an equity investor's reading list be? That may sound like a strange question to many ears. After all, it should be obvious that the only thing an equity investor needs to read are websites, forums, and messages that give out tips on which stocks have momentum. Maybe, some investors also like to read company financials, research reports or even business news. But surely that's all. What else would an equity investors need to know?

Well, according to a reading list recommended by of one of the world's most successful investors, just about anything but the above. The investor in picture is Charlie Munger, the partner and deputy of Warren Buffett, and his list of recommended books have nothing of investing, and not even much of business.

Munger's list mostly has books on science, biographies, and history. In fact, the list is dominated by science books. There's Jared Diamond's amazing book Guns, Germs, and Steel: The Fates of Human Societies is typical, as is Richard Dawkins' The Selfish Gene, and Ice Age: How a Change of Climate Made Us Human by John Gribbin.

There's a pattern to these kind of books which go beyond a narrow topic. These are multidisciplinary books that connect the dots across a wide swath of science, human history and society. Is there a connection here to the way one needs to look at events and trends and the kind of books that Munger recommends ? Cause and effect are never linear and to know what will happen to businesses one has to connect trends from many different fields.

The recent Volkswagen affair is an interesting example. The linear response would be to say that Volkswagen is going to have a bad time. However, a different picture might emerge when one combines many disparate trends: Volkswagen, similar anomalies in almost all diesel vehicles, how emission limits have changed, the way emission controls work, Tesla and other electric cars, taxi-hailing apps, and self-driving vehicles. Connect the dots and it suddenly looks possible that not just the auto industry, but the way people use vehicles and the role they play in society could be in for a deeply disruptive change over the next decade or two.

Read your way to investing success