Tuesday 28 June 2016

Investment & Consumption balance for changing quality of life for better

Investment & Consumption balance for changing quality of life for better

Colgate, Nestle, Godrej, Maruti, Tata, Dr. Reddy’s, SBI, ICICI bank
Well most of you must be familiar with these brand names and a majority might also be user of their products and services for as long as as you can remember.

Have you ever thought that besides being a consumer of these products if you would have also invested in their stocks and being owner in these companies too by owing their shares, how it could have changed your life?

We present you few of these stories which will break your all myths about long term equity investment in good quality companies or in portfolio of good companies.

Maruti 800 car cost in year 2003 was approx. at Rs. 2 lakhs.
If the same amount was invested in Maruti Suzuki IPO @ Rs.125 per share in the same year, the current value of that investment would have grown to a whopping sum of Rs. 66 lakhs.
(As per current share price – Rs.4162)

Refer to below graph that shows how Maruti stocks have grown over the last 12 years.

Maruti Suzuki stock is just one of the many examples which shows that investing in consumer goods can create wealth over a certain long period of time. There are so many companies that have given outstanding returns to their investors like Wipro, Infosys, Reliance, etc.
No, we are not saying that you spend only on necessity goods and stop spending on lifestyle and status products. The idea is besides being a consumer of these products we should also make profit by investing in these successful companies.

We just need to identify the “multibagger stocks.” These are companies offering great products and   have higher growth and profit making potential for e.g. Windows, iPhone, Netflix etc.
Off course there is no guarantee that if you stay invested in a stock for 30 years you will also make crores of rupees. But if an investor does fundamental research about the stock, follow market movements diligently and stay invested with patience he can definitely create wealth for himself.
It’s wise to invest in companies/industries familiar to you. Understanding their nature of business will make it easy for you to analyze its growth potential.

“Investment is process of investing money with an aim to gain returns in future. This return may be form of interest, income, appreciation in value over a certain period of time.”

Both investment and consumption require you to part with your money. However the difference is:

Let’s have a look at another example:
Year 2001 à
Mr. A bought Royal Enfield bike (manufactured by Eicher motor) for Rs.55000.

Year 2001 à
Mr. B invested Rs 55000 in Eicher motor stock   @ share price of Rs. 17.50

No. of shares purchased = 3143 shares
Year 2016 à
No appreciation in value of physical asset / bike instead its depreciated every year by approx. 10% of more
Year 2016 à
Eicher Motor’s share price as on date is Rs. 18623.
Current value = 5.58 crores. (= 3143 units * Rs. 18623)

“If you buy thing you do not need’ soon you will have to sell things you need”
 -Warren buffet

This is so true in terms of our current life style driven by consumerism and instant gratification to one self. There is hardly any demarcation between necessities/consumer goods and luxury goods.

For a financially secure future one has to maintain an income, investment and consumption balance.

Well after reading this article please don’t start trading or gambling in stock markets, we @ http://www.fernwealth.com  are there to assist you with financial planning and for long term wealth creation.

Nidhi Srivastava
Manish Kr Pandey

Sunday 19 June 2016


“Investments, saving, retirement planning, stock markets”…these words can cause a bit of anxiety among new investors, prospective investors. It’s understood that making long term financial decisions is not an easy task but, there are a bunch of Investment thumb rules that make this process a lot easier.

By following these thumb rules of basic investing a new investor can take investment decisions without getting into complex calculations or being overwhelmed by what to do and what not to do.

These thumb rules are great to start investing. But as your income and financial liabilities grow it make sense to adjust these rules to suit your financial requirements.
In this article we will discuss some of the most important investment thumb rules:

Asset allocation strategy:

Asset allocation is one of the most important factors in determining performance of a portfolio. To a great extent the end results depend on how investor has allocated the investment amount between equities, stocks, fixed income funds and other asset classes.
Rule of Thumb # 100 minus our age should be our minimum equity allocation i.e.
If you are 30 years old 70% of your asset allocation should be in equity.

 This is because equity has the highest potential to grow in value over a period of time. Equity returns have outperformed the returns of most other forms of investments/asset classes and in the long term created wealth for investor. Long term disciplined investing in equities tends to be less impacted by unfavorable market movements and volatility.

Equities are high risk investment with higher potential returns. High risk also indicates that the investor stands to lose some or his entire investment amount if markets move downwards hence a person reaching close to retirement age may have a lesser asset allocation in equities.
At age 55, the exposure to this volatile asset class should be not more than 45%.
After retirement, exposure to equities should not be more than 25-30 % of your portfolio.

 Basing one's stock allocation on age can be a useful tool for retirement planning by encouraging investors to slowly reduce risk over time.

While this easy to follow thumb rule simplifies the financial planning/retirement planning  and  it’s  very helpful in determining investors asset allocation based on age, but it may not work for everyone.

This factor does not take into account the financial position or risk taking appetite of an individual. It takes only age into consideration and assumes that all people in a particular age category will have same financial position. This may not be applicable universally, A 50 year old individual may be earning more, have higher risk taking capacity and be in a better financial position in comparison to a 40 year old person with lower income, less risk taking capacity.

Following are the key factors that one should keep in mind while deciding asset allocation strategy:

This process will help an investor in clearly determining how much money has to be invested for short term, medium term and the long-term and opt to invest in Equity stocks or Equity Mutual funds.

How much money should we save monthly?

“Someone's sitting in the shade today because someone planted a tree a long time ago. - Warren Buffett”

 We all know the importance of savings for a safe and secure future but in today’s age of instant gratification most people prefer to enjoy today than saving for tomorrow.

After getting that dream job you want to enjoy all the financial freedom your salary provides to you, however given the high cost of living most of us gradually start living from paycheque to paycheque. In order to maintain our current standard of living and be free form financial worries at later point in life, it’s very important to do savings in a disciplined manner.

Rule of Thumb # we should save minimum 30% of our income every month.

However the amount of money to be saved may vary from individual to individual depending on factors like income, age, financial goals etc.  Also saving for retirement should begin as soon as one starts learning.

For most of young people Employee Provident Fund (EPF) becomes our default savings as we cannot avoid it. Although the amount of contribution to the EPF is only a small percentage of salary, but power of compounding can turn even a small contribution into a big sum given the long investment horizon.
Remember that Money begets money. You must save and invest a portion of your income to make your money work for you.

Also we must not aim only to save taxes. Look at the bigger picture here, the idea is to create wealth in the long run.
There are many benefits if one starts saving early.  The later one starts the more amount he will have to save.

How much retirement fund we need?

Majority of people tend to ignore retirement planning as they prioritize the intermediate goals like house, car.  Retirement planning gets least focus as

 Even those who start saving for retirement often lack clarity as to how much they should save now to build a sufficient retirement corpus. People think that whatever they save during lifetime will be sufficient for retirement but they forget to take into account the effect of inflation on their savings.

The key to retirement planning is to start early and with a view to create a retirement corpus that take care of all your post retirement expenses.

Rule of Thumb # minimum 20 times of our last yearly income at retirement day should be our retirement fund/corpus.

You should have 20 times your income saved for retirement and plan to replace 80 percent of pre-retirement income. But here retirement means a retirement at age of 60 & life expectancy of 80 – and a conservative lifestyle. But now things have changed & you would have dream/planned lot of things for retirement.

How much should be our monthly EMI’s?

Rule of Thumb # total EMIs should not be more than 35% of our gross monthly family income.

Ideally total EMI on your outstanding loans should not be more than 35% of Gross Monthly income. Due to high cost of some of the major assets like House, cars one has to take loan. It should be even lesser when you are close to your retirement.

Rate of returns ideally should beat inflation:

 “Inflation is the term used to describe the rate at which prices for goods and services are rising.  It lowers the value of savings and reduces purchasing power”.

If you are saving for your children’s education expenses you might as well account for inflation. Let’s understand better from below example -

Around 15 years back, one could have completed a post-graduation (non-engineering) in Rs.30000, while now most of the private schools charge approx. the same amount as term fee for preschool.

Take another example –

Suppose a degree today costs Rs. 250,000 per annum in tuition fees.
Considering that education inflation is around 8% per annum, the same course would cost approx. Rs. 12 lakhs in next 20 years.

 We all can relate to skyrocketing prices of essential commodities and high cost of living.

You can find out how inflation can decline/reduce your purchasing power by applying Rule of 70:
70/current inflation rate= Approx. no. of years in which buying or purchasing power of your money will be half or lesser. E.g.
Inflation rate of 7% will reduce the value of money to half in 70/7 = 10 years.

Hence we need to protect our wealth. Factors like high cost of living, unstable economy make it very important for an investor to have a portfolio that aims to beat inflation.

Investing in equities for long term is one of the best ways to beat inflation. This can be done by investing in mutual funds. There are various equity funds available ranging from large-cap, small/mid-cap to diversified funds. The compounding effect of such investments will help you to beat inflation over a longer duration.

A balanced asset allocation would consist of diversified investments in Mutual funds, Gold, Bonds, Equity, Real estate. An ideal portfolio would be able to generate good returns and beat the inflation while being consistent in returns.

People tend to use banks and insurance for investments while these tools provide little protection against inflation.

Let’s see an illustration to see how inflation affects the returns from different investments:

# Use Banks for financial transactions, short term cash management and credit management.

# Use Insurance to cover the risks.

# Use Real estate for consumption (residence) or regular income (rent).

# Use Capital market to create long term wealth for yourself.

How many years double or triple our money?

Am sure most of us wonder “When will my money double/ triple”. By following below thumb rule, we can determine how long it will take to double or triple the invested amount

Rule of Thumb # Rule of 72 & 115:
72/Rate of return= Approx. no. of years to double the money
115/rate of return=Approx. no. of years to triple the money

 If the expected rate of return on investment is 12% then:

Rule of 72 à 72/12 = 6 years to double

Rule of 115 à 115/12 = 9.6 years to triple

This thumb rule helps you evaluate the growth of your investments and also lets you make comparisons between different investment options.

Emergency Fund:

Emergency Fund helps people deal with a financial crisis i.e. in case of any medical emergency, any unforeseen event like loss of job etc.
Rule of Thumb # we should have an emergency fund that equals minimum 6 months of your household expenditure. This money can be kept in your bank account or in a liquid fund.

“Following this simple thumb rule can buy you peace of mind.”

However the size of the fund may vary depending on following factors:

Income stability
§  A person working in private sector or a self-employed professional should have emergency fund equals to minimum 6 months of household expenditure or on higher side of the range.
§  A person working in government sector should maintain an emergency fund equal to 3 months of monthly expenses.
No. of dependents
§  In case of single income household and having parents/children as dependents higher amount of emergency fund is required.
Financial liability i.e. EMI or loans
§  In case of existing monthly EMI on outstanding loans, one needs to maintain bigger emergency fund.
Liquidity of assets
§  If an individual’s existing asset allocation is mainly in non-liquid assets like real estate, PPF, FD’s etc. one has to maintain higher amount as emergency fund.

Ensure that you don’t use this amount for day to day expenses or wants. For eg don’t use this fund to make down payment of new car or for a vacation.

Where to park this emergency fund:

Most people keep the emergency fund in a savings bank a/c as they consider it to be highly liquid.

However it is not advisable to do so. After separating a month’s expense in savings account the balance amount should be deposited in liquid, liquid-plus funds, short-term debt funds that offer higher returns in comparison to savings a/c.

Please refer to below chart to see the expected rate of return from various investment options:

Liquid Funds
6 to 7%
Redemption processed in 1 working day
Liquid Plus Funds
7 to 8%
Redemption processed in 1 working day
Savings A/C
4 to 6%
Money can be withdrawn 24*7
Short term debt fund
8 to 9%
Redemption processed in 1 working day

How much should we spend on buying a house?

Rule of Thumb # Cost of our house should not be more than 6 to 8 times of our family gross annual income.

The budget to purchase house is impacted by your income and loan limit. This thumb rule simplifies the complex question. The idea is that you should not be financially burdened by housing cost while you have to manage other expenses too.

Insurance planning:

Calculate your human life value and buy appropriate cover for your associated risk in day to day life i.e. 
·         Health Insurance: Buy equal to one year of your salary amount, one family health insurance cover to eliminate day to day risk to your health.

·         Buy health insurance for your parent’s equivalent to one year of your salary.

·         Term Life Insurance & Personal accident cover: Life insurance cover & Personal Accident insurance covering all types of disabilities and loss of income should be bought but separately with Minimum cover of 10 to 15 times of your gross yearly income.

·         Critical illness cover: Buy 5-10 years of your income one critical illness cover plan for self & all family members over 30 years of age

·         Buy insurance on actual current value of your assets, like house, shop, business premises, vehicle, jewellery etc.

 These thumb rules are like taking baby steps. Following these rules and adjusting them to your financial requirements will over the time create wealth for you.


Warm Regards
Nidhi Srivastava
Manish Kr Pandey

# +91-9830040603

Saturday 11 June 2016

Gold Monetization Scheme: A golden opportunity!!

Gold Monetization: A golden opportunity!!
We Indians have a special place for gold in our hearts and bank lockers too J . After all we are one of the biggest consumers of gold in the world.

We are emotionally, fashionably, religiously and financially attached to gold that we hold in form of ornaments, coins, gold bar etc. While it’s understood that gold is a traditional investment tool and considered to be most safe asset class, just hoarding gold in bank locker/home is not wise anymore as it’s unproductive for us, for our national interest and for our economy too.

Indian government has launched the Gold Monetization scheme which aims to monetize the idle gold lying with households, trusts and institutions and put it to productive use and giving the depositor an opportunity to earn tax free interest and capital appreciation on their unused idle physical gold.

While announcing the Gold monetization scheme in Budget 2015-16, Union Finance Minister Arun Jaitley stated that –“stocks of gold in India were estimated to be over 20,000 tones but mostly this gold was neither traded, nor monetized.”

Under the Gold Monetization scheme, investor holding the physical gold owned in form of jewelry/coins/bars may deposit the same with the government. Bank will conduct a purity test in case of gold ornaments; once this is done the gold will be deposited in melted form.

The value of the gold rises along with the market prices. It also starts earning interest. The interest is also in the form of gold.

This scheme gives an opportunity to earn interest on idle gold that earns nothing when kept in home or Bank locker. It’s advisable to deposit unused gold kept only as an asset.

There are three different deposit tenures available under the scheme. At the time of maturity depositor can opt to take cash or get physical gold of an equivalent amount. The rate for the valuation of gold, at the time of the redemption, would be the prevailing market rate.

Let’s have a quick look at the key features of this scheme:

And now let’s see how this scheme can benefit you:

Individuals willing to avail benefit of Gold monetization scheme can follow below mentioned steps:

The entire exercise will be done in a transparent manner. After receiving the customer's consent for melting the gold, Purity test will be conducted to know the quantity of pure gold present. The depositor will also be informed of the net weight and gold will be melted in front of the depositor.

Interest and Redemption under the scheme:

Short Term
Medium Term
Long Term
Deposit Tenure
1-3 years
5-7 years
12-15 years
Interest Rate
To be decided by bank
Currently2.25% pa
Currently 2.50% pa

Depositor can opt for Gold or INR as per below two options:
v  Redemption of principal and interest at maturity in INR equivalent to deposited gold as per prevailing market rate.
v  Redemption of principal and interest at maturity in Gold.
Redemption of principal in INR equivalent of value of deposited gold at the time of redemption, or in gold.
v  If depositor opts to redeem principal in form of gold, 0.2% administrative charge has to be paid in cash
v  The interest shall be calculated with reference to the value of gold in terms of Indian Rupees at the time of deposit and will be paid only in cash.
Redemption of principal in INR equivalent of value of deposited gold at the time of redemption, or in gold.
v  If depositor opts to redeem principal in form of gold, 0.2% administrative charge has to be paid in cash
v  The interest shall be calculated with reference to the value of gold in terms of Indian Rupees at the time of deposit and will be paid only in cash.

The designated banks may allow whole or part premature withdrawal of the deposit subject to minimum lock-in period and penalties as applicable.

This scheme will change the image of gold from being just a secure asset to a performing and regular income generating asset. The Indian government has launched this scheme with a hope to reduce gold imports in country.

Benefits Summary for Investors if they move from physical idle gold to Government's Gold Monetizing Scheme:
  • ·         No risk and chance of impurity of gold
  • ·         No cost to be incurred in payment of making charges
  • ·         No cost to be incurred of high bank locker cost to be paid and its saving to investor
  • ·         No risk, cost to be incurred and headache for security of gold
  • ·         No bearing of any sort of discount deduction in % terms done by Jewelers in exchange of physical Gold
  • ·         No Wealth Tax
  • ·         Tax free Interest paid on Gold deposits
  • ·         No Capital Gain tax on capital appreciation of Gold price
  • ·         Loan against Gold Deposit is available
  • ·         Premature full or partial withdrawal and redemption available with respective T&C and penalties

Please refer to the below link from finance ministry on Gold Monetization scheme for further details:

Warm Regards,

Nidhi Srivastava
Manish Kr Pandey