Women and money

Women are recognized to be the best money managers when it comes to managing the household. This is widely recognized. However, in our workshops we found that a lot of women who were earning and contributing to family expenses, had left financial planning and investing decisions to husbands. Reports show that women live longer than men and so statistically will need retirement income for a longer time. This makes financial planning for retirement more important for women. Also, women usually have to leave the workforce to have children, which means they may lose out on growth opportunities, earn less and possibly end up with lower pension benefits, EPF etc. on retirement. We take a look at a few measures that women can take to make a more secure future for themselves.

First, take stock of your own assets – what you own and where it is. Write down all details of the bank deposits in your name, all insurance policies, etc. Next, make a detailed note of all incomes that you earn by way of your salary and expenses and the monthly savings and investible surplus you are left with.

Keep details of husband’s investments: It is imperative to have complete details of the spouse’s bank accounts, FDs, MF investments and demat accounts. Very few women we met in our workshops have details of the husband’s investments.

Demarcate clear boundaries: It's important to do so with your spouse for routine expenses. It will be easier to determine personal monthly expenses and hence monthly savings. It should also be clear as to how liabilities like housing loans etc. are to be paid.

Keep an emergency fund: Do not touch it unless it is a real emergency. Keep emergency funds  to the tune of 3-4 months salary in a separate deposit. When this level is achieved, one can then take the next step towards financial planning.

Goals and investing for goals The next step is to identify financial goals for herself. Goals, typically, include higher education of children, their marriage, buying a car etc. It is extremely important to correctly estimate the sum needed for their fulfillment with the time frame in mind. Also, any likely liabilities should be identified and accounted for, as this affects the quantum of investment substantially. For eg: repayment of a housing loan. In case financial planning seems too overwhelming, it is recommended take the help of a financial planner who can help visualize and plan for long-term financial goals and give investing options.

Insurance: Many women do not consider insurance, both life and health, as priority. However, with rising medical costs it just makes sense to be insured adequately. A working woman contributing to family expenses should have an online term life insurance cover and a health insurance plan along with her husband.

Retirement Planning: Retirement planning has become important in the last two decades. The joint family structure has disintegrated, children work far away from home and are involved in their lives and careers and parents cannot realistically expect their children to bear their financial liability during their retirement years.  Hence, it’s critical for every woman to plan for retirement, the earlier the better. Save and invest as much as you can.

Regular Income when not working or taking a break from work: Even when women take a break from their career, it is a good idea to earn income from working a few hours a day from home. Taking tuitions, teaching a hobby etc are common ways to earn a regular income.

Keep documents securely and in an organised manner: Utmost care should be taken to ensure that all documents should be clear in every respect, especially real estate ownership deeds, so that there is no ambiguity later.

Your financial security is dependent on your attitudes and your willingness to take your financial future into your own hands.

Do you agree with Warren Buffett's views on gold?

Warren Buffett is an investing icon, and when he speaks, investors pay attention. Buffett is well-known for not only his strengths as a businessman, but also for his rather outspoken dislike of gold. The stance is somewhat controversial given the massive popularity of the precious metal especially in India.

Gold bullion and ETFs simply have no place in Warren Buffett’s portfolio. And to hear Buffett tell it, gold should have no place in yours, either. For him, gold is simply useless, is not productive, expensive to store. Some of his sayings on gold are given below.

In 1998, he said - "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

He echoed these thoughts in a CNBC interview. He was asked, “Where do you think gold will be in five years and should that be a part of value investing?”

“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you.  Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

In October 2010, Warren Buffett said:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all —  not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything."

He says, “if you own one ounce of gold for an eternity, you will still own one ounce at its end”

So, what do Indians think of gold?

Mr. S Gurumurthy,  a commentator on political and economic affairs and a corporate advisor, in a brilliant article in Oct 2013 has nicely brought out the  importance of gold for Indians who do not just go by the  price trend and return on investment. He says that gold has consistently beaten inflation in India, been a family security to most Indians and a marketable security. He writes:

Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserve of over 20,000 tonnes by 1950.

Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation’s stocks. Indian gold habits clearly mock at modern economic theories.

Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion — almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewellery are indistinguishable. Jewellery is the working capital of families; families collateralise it for commercial borrowing.

Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganised financial sector, urbanites access bank loans.

Undervalued private financial institutions and the discredited moneylenders are the main sources of finance for the largest employment provider of the country. And the collateral for their loans is invariably gold.

There is no collateral, stocks or real estate, as liquid as gold in India. How can gold, so valuable a security for productive credit, be dismissed in India as a “barbaric relic”?

However, whatever Warren Buffett’s reasons may be, it’s hard to argue against gold’s importance to Indians.

The below chart gives the performance of gold since 1980. 

 Source: WGC

  

CAGR - Jan 1980 till date	2.69%	Hardly any returns over 35 years
CAGR - 1.1.1980 till 30.12.05	0.00%
CAGR - 1.1.2005 till date	11.86%	Huge run up from Aug 2005 to 2011
CAGR - Jan 2005 to Sep 2011	24.64%
CAGR - Sep 2011 till date	-10.97%	Negative returns from end 2011- a retreat from the highs of 2011

It’s hard to tell what the future holds for gold prices. The billionaire investor hasn’t changed his tune on gold, and it’s hard to believe that he will change course anytime soon. Indians dont just love gold. They revere it. Their reverence for gold manifests itself during Danteras and Akshaya Tritiya — the auspicious days for buying gold. The number of lady students in my workshops who will continue to go for gold schemes of jewelers is only proof of the value of gold as a security.

Financial planners always speak of asset allocation and even though prices have fallen from the highs as seen in the above graph, many advisers ask us to maintain an allocation to gold.

So what do you think? Is Buffett simply stuck in his ways, or is he right about gold?

Workshops we conduct

When do we book profits, sell equity?

Many who had bought equities and invested in equity funds in 2007 -08 and subsequently being disillusioned, have recently sold/redeemed or are confused as to whether to sell now. They have waited for a long time to recover their losses. Now that there is profit, they want to quit. In fact some of them had started redeeming equity funds from Sep. 2013!! Those who entered the market in recent times did not expect such a run-up and do not want to make the mistake of not cashing out in time. Therefore, the question - Do we sell now? Do we book profits?

Unpredictable:

Note, no "expert" can ever really know the top of a bull market - is the Sensex going to be 40000 by 2020 or will it be more?  Markets will ALWAYS remain unpredictable. What worked in the past may not work now in a different situation. In fact, we tend to look at markets that have run up in terms of how much they can fall!!. 

Simple rules may not work:

Many have rules of profit booking, to book out when a certain 'special' level has been reached. Such decisions may all prove incorrect and one may miss a large part of the bull run that happens after exit and leave us regretting. 

Investors also rightly worry about getting greedy. For those burnt badly in a bear market, the predominant thought is caution. Investors recall how they failed to get out at earlier highs and paid heavily for it. They get their daily dose of gyan from TV. The inherent unpredictability of markets make 'expert' recommendations ridiculous at times!!

Since we can never predict when that unknown torpedo will come out of the dark and smash the price of the stocks we hold, the question is: what do we do to build wealth systematically, attain goals and at the same time reduce risks?

Asset allocation and re-balancing as a way to systematically book profits:

Note - An investor, who is booking profits, is actually taking money out of equity, thus reducing exposure to equity. This really is an asset allocation decision. Each time money is moved in and out of equity markets, the investor is not 'booking profits' but re-balancing his money. What is this re-balancing?

First, one has to decide how much money one needs to have in equity based on what returns they need, the risk they can bear and when the funds would be required. Therefore, first, goals and the period should be very clear. An investor who plans to fund his own retirement after 20 years may want a higher proportion of his money in equities to allow time for growth and to beat inflation; similarly to fund your child's education 12-15 years later, you may decide to have a higher allocation in equity to beat inflation in education costs.

Based on our risk profile and goals we decide as to how much to invest in equity and how much in debt. In equity we include shares, equity mutual funds and we include fixed deposits, NCDs, bond funds, PPF in debt. (Investors can even include other asset classes like gold etc)

Let us say we have deliberately decided to have a 60-40 equity-debt ratio allocation. This allocation ratio is our strategic allocation, and is the most crucial decision one can make. Rebalancing is the deliberate, periodic realigning of a portfolio of investments to bring it back to the original target asset allocation. This way we systematically capture returns "book profits" - and reduce unintended risks created by over-exposure to one category. We do not bother about timing markets or worry too much on which way the markets would go. So, when markets go up and our equity valuation rises, we are automatically "booking profits" to bring back the ratio to 60-40 and reducing the risk of higher exposure to equity. Irrespective of where the market is, 60% of our money needs to be in equities..

An example would help us understand re-balancing:

Let us say an investor has decided to have a 60-40 ratio and has invested Rs. 60000 in Equity Mutual Funds and Rs. 40000.00 in Debt – comprising of FDs, Debt Funds etc. on January 01, 2015. 

Assuming the debt portion is worth 44000.00 on Dec 31, 2015. Let us assume that the market was good and the equity portion has gone up to 120000.00. This would mean that the equity to debt ratio in the portfolio is 73-27 , which would mean a higher exposure(73%) to risky equity. Now after taking stock, the investor should reduce exposure in equity (redeem funds - sell equity, in other words, book profits) and invest in debt to bring back the ratio to 60-40.

If however, equity component has gone down, then one should reduce debt and invest in equity to bring the balance back. 

This way not only you know how much to 'book' but you don't really care where the market is when you book profits. Following this gives you a freedom and takes out the confusion from investing.  Moreover, your focus is not on what others are doing, but on your own portfolio. 

So how does one go about this?

For a start 

• Evaluate your current portfolio
• Decide the allocation as per your risk-taking ability. You may take assistance in this from a financial planner. 
• It will be difficult to make an exact ratio and you may allow yourself a small gap -for e.g. equity may go between 57% to 63%
• The equity allocation can be increased to reach the desired level slowly, by means of SIPs. 
• Follow a policy of checking and re-balancing every 6 months - even a yearly review will be fine i.e moving assets to maintain the proportion

Re-balancing forces you to base your investment decisions on a simple, objective standard - Do I now own more of an asset than my plan call for.

Follow this and be relatively free from the emotional upheavals that market movements cause.

For those who still want to take a call - Look for potential downside

Those who still need to take a call may check market valuations (read this post) and see where the market stands today. The point to note is to look for how much downside could be there. 

When one sees too many IPOs at super high prices and  when every one and his uncle is bullish is a sure signal that it may be time to book some profits to reduce the equity proportion in your portfolio. This approach means looking for signs of a crack up. 

Market emotions cycle

Note: Investors can take the assistance of a financial planner to come to asset-allocation decisions.

My twitter handle

Workshops we conduct

How are markets valued today - Nifty PE and PB

The Nifty is above 8100 and the Sensex above 27100. Stock market indices are at all time highs.

So, where are we in terms of valuations when compared to previous highs. Two important ratios used to evaluate a share are the PE Ratio - (Price-earning ratio) and the P/B Ratio (price-to-book ratio). When evaluating the market, we take the PE and PB of an entire index to see its valuation and I have taken the PE and PB of the Nifty form 1.9.2006 and plotted on the below graph.

This chart shows the PE and PB of the Nifty from 1.9.06. We are far away from the high valuations of Jan 2008 and Oct. 2010. The Nifty PE was 28.29 on 8.1.2008 and 25.72 on 6.10.2010. The price to book was at a high of 6.55 on  8.1.2008 and 3.97 on 2.11.2010.

Today, we are at a PE of 21.22 and PB of 3.52 for the Nifty.

Source: http://www.nseindia.com/

Nifty PE and PB

Well we still have some way to go before valuations become expensive. One thing to note - as the economy revives and profits grows,  predictions of various brokerages may still turn out correct! 

SIP being the best way to invest for the long term,  here's an earlier post on how to invest using SIP properly!

Follow me on Twitter

Workshops we conduct

Some great facilities for Mutual Fund investors - 1

Mutual Funds and their registrars offer some great and must-use facilities for investors. Am sharing details of some useful facilities which I use regularly. Will do more posts on such facilities you can use as a mutual fund investor.

Missed Call to get folio balances via SMS – at no cost!

Are you aware that you can give a missed call and get the all your folio balances via SMS. The call should be given from your mobile phone number which is already registered in your folios and Karvy offers this facility free of cost. (All balances in all my folios come in one SMS mentioning each fund - folio and the value as on date). However, this facility is only available to investors of Funds serviced by Karvy as Registrar. Save this number +91 92129 93399 and try the facility. After 3-4 rings the number disconnects automatically and you will get the SMS shortly. Do get you mobile number registered in all your folios to use this facility. The same number in all folios would mean one SMS with all values!

This is at no expense to you!! (Among Mutual Funds, UTI Mutual Fund also offers this facility to its investors and the number for UTI is +91 92896 07090.  UTI Mutual Fund restricts this to 3 folios. If you have more than 3 folios in UTI, use the SMS back service as below.)

Other SMS Back Services: Both CAMS and Karvy also offer SMS back services using which you can send an SMS to a number and get back folio / transaction details vide SMS. However you may be charged for sending a request SMS as per the SMS scheme you use. I do not use any SMS package and was charged Rs 3.00 by my service provider for sending an SMS to 56767 - CAMS. The request SMS to Karvy (+91 92129 93399) cost me Rs 1.50. 

Links with details of SMS service and the information you can get:

Karvy Easy SMS Services - get one single SMS with total value of Funds, get branch address and transaction details - try the service to one single total value of all holdings in Karvy serviced funds (this is in addition to the detailed SMS listing folios and the balances)

CAMS SMS Back Service - get folio balances separately for each folio, request for an account statement by SMS, get NAV information and transaction details

Other funds also offer a SMS back service but it is better to use the facility offered by registrars as this is a one-point contact for you.

Mobile Apps:

Both the Registrars have good apps for investors. However, here CAMS scores with a superior app. Both apps enable linking of all your folios. In CAMS app, if the same email id is registered in your entire family's folios, you can have just one login - your email id. Karvy's app requires the creation of a user id and then you can link all yours and your family's folios. The links to download the apps are give here:

   CAMS iOS     CAMS Android     Karvy iOS    Karvy Android

Unfortunately these apps do not have any transaction capability. They will be useful if registrars and mutual funds allow transactions through the app. However, you can view the value of your investments, request for immediate statements through both the apps, and see the last few transactions. CAMS app also has nice charts giving you the total value of your holdings asset allocation wise and mutual fund wise break up. 

Any investor who wishes to keep track of her investments must use the above facilities. I will write more on other facilities you can use in another post.

Follow me on Twitter

Workshops we conduct  

Figure out your life before you figure out your investments

I am regularly asked - "Should I invest in equity now?"

There is no straightforward response to this question. Many factors have to be considered - the chief being - Do you know where you want to go? When do you have to reach there? Do you know where you are? Are these well-defined. Once you have a goal - a clear well defined goal, you will yourself have a hint on how to get there - i.e where you should invest. 

Three factors to consider while investing for your goals are Risk, Return and Liquidity

1. Risk: The chance that an investment's actual return will be different from what is expected. It also includes the possibility that you will lose a part of your capital / investment. For example, if you invest in equity shares today and need the money for your daughter's wedding next year, it is silly to invest in stocks today hoping to make a gain!!   The risk of loss is high. The return is not known to you. This is risk.

2. Return: This refers to the gain (or loss) from an investment. An investment is made for returns / gains and we only invest to get returns. However, a point to be noted that the higher the risk, the higher the potential for returns. For example, bank deposits are relatively risk-free. We know that currently we will get a return of about 9% p.a . The returns from stocks is unknown. There is risk, but gains can be high. The stock markets have already given > 25% returns this year!! Gold gave great returns from 2009 - 2013.

3. Liquidity: This is the ability to convert an asset into cash quickly i.e in simple language, the ease of selling of the investment/ asset to get cash. If you have to invest money now for paying your kid's college fees in about 3 -4 years, you would not invest in real estate. It is not easy to dispose off for cash. Whereas, bank deposits, mutual funds can easily and without much cost be liquidated.

Everything you invest in is going to require a sacrifice in one of these areas. If you want high liquidity and low risk, you’re going to have a low return. You’re probably going to be putting your money into something like a fixed deposit. An investment in real estate / property means lower liquidity, but could mean higher risk and returns. If you want high liquidity and high return, you’re going to have to take on some significant risk. You’re probably going to be putting your money into something like stocks and equity mutual funds.

There are different life situations that call for different investment options. So it basically depends on your goals in which your investment time horizon is intrinsic. The longer the time horizon, the more risk you can take and even sacrifice liquidity.

Equity mutual funds / Stocks have given a great return when the investment horizon has been for periods over ten years! For many people, it makes sense to invest in equity funds / stocks for the ease of rebalancing and selling them off in case they should need the money. (more on rebalancing investments later)

Remember that it is your goals and your life that is the key. The situation that you are in and what you need out of the investment will decide where you must invest - a bank deposit or gold or equity.

Without a plan, a goal for yourself, you will only invest at random, or worse still be carried away by advertisements, that neighborhood uncle who sells 'great' policies and will be stuck in illiquid, sub-optimal investments or worse still, face a severe loss.

Figure out your life before you figure out your investments. Know your goals first. The right investment becomes clearer.

Steps to financial independance

Religare Invesco Mutual Fund in a series of tweets gave gave the following pictures - a series of steps to Financial Independence. All of us should make a start to get our hard earned money working for us and these hints below are a useful primer.

1. Calculate your monthly savings. This would mean that you are at first aware of your earnings and your expenses! Therefore awareness is the first step!

2. Set aside cash for emergency expenses. This may be kept in a fixed deposit.

3. Identify your financial goals and give them a deadline for accomplishing

4. Invest your savings. Money lying in the savings bank account does not build wealth or grow and help you fulfill financial goals. Systematic and consistent investing builds up wealth and helps you fulfil goals

5. Control your expenses. In fact you must spend only after saving!!

6. Goal setting is always followed by review. Review at least once a year to find out where you are and how far you have to go!!

Start your journey to financial freedom

Follow me on twitter  @invest_mutual