Profit from proverbs

There are no free lunches

With Christmas round the corner and the New Year just about 10 days away, the newspapers and other media would be full of festive offers and discounts. Before buckling in for one of these, 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 these people sell products that may have high charges and without understanding the full client situation. I have found that people pay tens of thousands of rupees on such wrongly bought products over the years," says Suresh Sadagopan, a Mumbai-based financial planner.

In fact, if you do need financial advice due to lack of time or awareness, it’s best to take the professional way, which will not be free. Says Kukreja, “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."

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 ₹ 1,100 crore.

Then there are 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 the 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 are 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 ₹ 1 lakh on 1 December 2005 for seven years in the Nifty index, your corpus would have grown to around ₹ 1,11,740 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 whether it is growing. In the end, the seed will not grow at all. 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 ₹ 1 crore at age 60, you would need to save about ₹ 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 ₹ 18,000 if you are 40 years old to achieve the same goal at age 60 at the same growth rate and to about ₹ 58,000 if you are 50 years old when you would be left with just 10 years to invest.

Says Srinivasan, “This is nothing but the power of compounding. For a corpus of 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 in the long term. If we take the example of equity investing mentioned earlier in the story, if ₹ 1 lakh was invested in, say, June 2002, it would have yielded 16.63% CAGR in June 2012 despite extreme volatility in the past few years.