holdyourthoughts

By now you have got most of the basic issues out of your way. You know how much money you have, what is your surplus for investing, taken care of your liabilities through insurance and also built up a contingency fund. The next most important step is Asset Allocation. Simply put, it means now you need to decide how much money to invest in what. There are various investment options like equities (shares), debt, bullion and physical assets (property, art etc). One thing to understand is every investment carries some risk. The Bank FD that you think is secure carries default risk. That is the bank may become insolvent and may not be able to return your capital. Even government bonds, which are by far the safest, carry some risk of interest rate. For example, if you invest in a government bond at 8% interest for 5 years and next month the interest rate is raised to 12%, you lose out on the additional 2%. That is also a form of risk. In terms of general risk perception, equities are the ris...

One of the most important things you can do is to build safeguards. That includes things like building a cash nest for contingency, taking insurance cover for life and non-life risk factors. Let us take them one at a time. 1. Contingency Reserve: You need to have a amount set aside in cash to meet any emergency requirements. A good amount to keep aside is 3-6 times your monthly expenses. So, for example, for a monthly expense of 20,000, you can set aside 60,000 to 120,000 as a contingency reserve. DO NOT touch this reserve unless there is an emergency. This is not meant for your day-to-day expenses. 2. Life Insurance: Your requirement for life insurance will depend on your life stage, your current networth (calculated in step 1) and your dependents. Simple back calculation tells you that to get a earning of 100 you approximately need to invest 1200. So, multiply your annual expenses with a factor of 12 to get the amount you need to have insured. But, its always better to have some buff...

The second step is to understand your cash flows. If you are a salaried employee, that is fairly easy. Just look at the monthly take home pay you get. Also, look at the expenses you incur. While looking at your expenses, add things like your insurance premiums, vacationing expenses, eating out, gifts that you need to buy etc. Basically, add anything that you spend money on during the year. Now, make it into a monthly estimate. For example, Monthly Take Home Salary == 30,000 Annual Expenses (all inclusive) == 240,000 then, Monthly Expenses == 20,000 Then you have a disposable income of 1,000 every month after meeting all your expenses. That is the total money you have for investment.

The first step to any long term investment plan is to understand where we are at present. So, to start with you need to list down your existing networth. For example, you can have a list as follows: Provident Fund 100,000 PPF 50,000 Bank FD 50,000 Mutual Funds-Equity 150,000 Mutual Funds-Debt 50,000 Cash In Savings Account 30,000 House 2,000,000 Housing Loan -4,000,000 Others 0 Total -1,570,000 A couple of things to note here. 1. I am not calculating the value of any gold/silver jewellery that you may be having. Indians, typically are not very keen on selling their family gold/silver so it really does not count as investment. You can think of it as an additional bonus if you do have gold/silver. 2. I am including the housing loan you may have as a negative here under the assumption that that is your primary home and not a second home bought for investment purpose. Also, I am ...

It has been a while since I last wrote. And the market has proved everyone wrong. And, boy, how wrong were we!!! The bottoms just fell out. A lot of people are nursing their injuries of the market collapse. People have lost 70%-90% of their portfolios. My wife, who is a dedicated Bank FD investor has a know-it-all smile on her face, while I, a dedicated market buff can only put on a smile of pain. However, being an optimist, I think that this fall has probably given us (long term investors) a great opportunity to structure our portfolios. So, weed out all the bull-market excesses and start afresh with a plan. I will write follow-up posts on how and what to plan for to restructure your portfolio.