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HindustanTimes Thu,30 Oct 2014

Profit from Proverbs

Nidhi Sinha, Hindustan Times  New Delhi, December 28, 2012
First Published: 22:23 IST(28/12/2012) | Last Updated: 22:25 IST(28/12/2012)

Follow these valuable principles which have stood the test of time, and chances are that you will get your important investments right.

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There are no free lunches
With New Year just a day away, newspapers would be full of festive offers and discounts. Before settling on one, it would do you good to hold on tight to your belief on this particular proverb.

Don't miss the star that lists the conditions. It is not uncommon to find that offers are valid only if your purchases cross a certain limit, among other conditions. A more classic case is your neighbourhood uncle who is also an agent. While you may think that he is offering advice free of cost, that is mostly not the case. Even with genuine intentions, the advice may not really suit your situation.

"Often people sell products that may have high charges and without understanding the client. I have found that people pay tens of thousands of rupees on such wrongly bought products over the years," said Suresh Sadagopan, a Mumbai-based financial planner.Kukreja adds, "If you are unable to save and invest because of lack of time, indecision or lack of trust in the system, at least put in the effort to rope in a financial planner to work for you, at a fee obviously."

A penny saved is a penny earned
This is a proverb that financial planners would vouch for. The first step to building a corpus, according to financial planners, is the act of saving even if it's a small amount. The rest, they say, will follow.

"Prioritising monthly savings over your expenses, helps you achieve your financial goals," says AmitKukreja, a Gurgaon-based financial planner.

While this proverb directly relates to money, there are several others that don't and yet would work as useful money tips for your financial life. Here are four such proverbs and what bearing they can have on your investing decisions.

In such times of high inflation and even higher equated monthly installments (EMIs), savings is a necessity. So, save now. Prepare yourself today to avoid hiccups tomorrow.

Too good to be true
If something seems too good to be true, in all probability it is so. The recent Stock Guru scam is a case in point. People were promised that they would be receiving 20% returns per month on their investments. A 20% per month return compounded every month for a year will increase your money nearly nine times, which is too good to be true and it actually came to be proven so when the promoter couple were held for duping nearly 200,000 people for an estimated Rs. 1,100 crore.

Then come schemes that promise to double your money. That sounds really good but it may not turn out to be so if you take a closer look. For instance, if the instrument is promising to double your money in, say, 10 years, which is the case with some insurance policies, your return would not be 100%, but just 7.18%. Factor in inflation at 6% and real returns would be a paltry 1.18%.

"Most normal businesses would probably not be able to support very high returns. So either the business itself is illegal or it has high inherent risk, both of which are avoidable by clients," says Sadagopan.

Don't count your chickens before they hatch
This holds particularly true for your equity investments. "Equity investments are prone to huge volatility, but they deliver great returns over time," says Sadagopan. Overall, any portfolio is built keeping in mind a goal, which is a particular number of years away. So if you have invested in equities with a long-term perspective with, say, your child's education in mind, don't get affected by short-term volatility in your returns. Equity investment needs you to be patient to show real results.

For example, if you had invested R1 lakh on 1 December 2005 for seven years in the Nifty index, your corpus would have grown to around R1,11,740 on 1 December 2012 at a compounded annual growth rate (CAGR) of 11.75%. However, if you had given in to market volatility during the 2008 crisis and withdrawn in say December 2008, your returns would have been -0.20%.

Says B Srinivasan, a Bangalore-based financial planner, "This is the crux of equity investment. We explain the same with a monkey story: if it takes six months for a plant to germinate, it is essential to support the seed for a period of six months before the plant comes out. If you provide the same seed to a monkey, it will plough it, but will take it out every day to see if it is growing. In the end, the seed will not grow. Likewise, if an investor is taking a five-year cyclical call in equity, he should go through short-term volatility to get the best returns at the end.

The early bird catches the worm
The earlier you start saving, the easier would it be for you to reach your goal, a philosophy that most financial planners would agree with.

And, the numbers clearly says so.

Take the goal of retirement at age 60 for example. Suppose you want a corpus of Rs. 1 crore at age 60, you would need to save about Rs. 7,500 per month at an assumed growth rate of 8% if you are 30 years old. Your monthly saving would have to go up to about Rs. 18,000 if you are 40 years old to achieve the same goal at age 60 at the same growth rate and to about Rs. 58,000 if you are 50 years old when you would be left with just 10 years to invest.

Srinivasan said, "This is nothing but the power of compounding. For a corpus of Rs. 1 crore, if the duration of savings is 30 years-then the contribution will be 11% and the rest would be returns accumulated, whereas if the duration of savings is five years, our contribution will be as high as about 70%."

Moreover, if you start saving early, you would have a longer term, which gives you the opportunities to go aggressive on equities that work well long term.


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