Spend, Save and Invest Smartly

How To Make That First Million In A Hurry?

What is one’s greatest desire in life? Surely it is becoming rich at a young age. Isn’t one fascinated by reading the success stories of great personalities such as Michael Dell and Mark Zuckerberg who made their millions at very young ages? Don’t these success stories motivate one to climb great heights? The question at the top of one’s mind is which is the greatest investment which can give the maximum returns? Surely the answer is Financial Awareness isn’t it? No one can steal an investment made in financial awareness and knowledge. It pays dividends for the rest of one’s life and generates the highest return on investments. It helps to capitalize on the mammoth rise in stock markets as well as the movements in the debt markets. It is the greatest investment to provide peace and satisfaction in those retirement years. Financial education and awareness costs a meager amount with no risk compared to the vast profits one can make over a lifetime. One’s mind is filled up with the half truths of investments and promises of great returns in a short time and financial awareness prevents one from falling for a Ponzi scheme. One has got to realize that the greatest financial knowledge one can gather is from self education and the will and determination to gain financial awareness at any cost. Zeal Without Knowledge Is A Runaway Horse.

How To Grow Rich Sip By Sip?

Under a Systematic Investment Plan one can invest a fixed amount every month for a fixed period of time. During periods of gloom in the stock markets as is happening now, greater number of units can be obtained at a lower cost and when the markets are in a bull phase lesser quantities of units are procured. However ones next question is "Wouldn’t A Lump Sum Investment Be Better Than A Systematic Investment Plan" .An SIP stays invested in the market in good times and in bad and is able to tap into the benefits of the stock markets on a continuous basis .A lump sum investment made at the wrong time can result in severe losses to the investor. As one cannot time the market accurately or one does not know when the market will bottom out being invested at all times through a SIP helps to make vast profits.

How Does An SIP Work?

A Systematic Investment Plan focuses on the small or one has a think small approach. Small Is Big is the approach followed in an SIP. Mr Harish discovered that an investment in a moderately good mutual fund generates returns of around 10% per annum in a single year. Mr Harish resolved that he would take up an investment in a good mutual fund by making a contribution of INR 3500 per month with a long term horizon of 10 Years through the SIP route. Mr Harish believes that a long term horizon of around 10 Years would generate returns of around 15% rather than a short term horizon of a year. Let us calculate how much Mr Harish would earn from his Systematic Investment Plan?

Monthly Investment = INR 3500
Time Period = 10 Years
Rate Of Return (Assumed Over a 10 Year Period) = 15 %
Using the SIP Calculator one arrives at a figure of INR 975300.

If one starts investing an amount as less as INR 3500 on a monthly basis through an SIP then one can gain an amount of a Million Rupees within a decade. A rate of return of 15% can in periods of a bull run in a market, be considered as conservative and much higher returns can be obtained. A period of 10 years can be considered as a decent time horizon. These investments tend to be of a lesser risk as they can benefit from the effects of averaging. Over a period of time unit prices are averaged out. Relatively small amounts are invested in a SIP and the strain is not felt on the pocket .It also inculcates and promotes a measure of financial discipline in one’s life as one may discover that it is not easy to follow a disciplined financial plan.

Have We Hit An Air Pocket

In times of turbulence the systematic investment plan tends to be our only hope. Volatility is the bread and butter of that SIP Plan. SIP’s thrive under volatile market conditions. SIP’s remain invested in the market and volatility tends to be nullified due to this virtue. However an SIP Plan does have a disadvantage in that they achieve a peak point at a certain time and if money is not withdrawn at that point then one may find their investment remains stuck at the same point as the start of the investment without any appreciation. However in these volatile times a systematic investment plan tends to be a "Beacon Of Hope In The Storm". A concept rarely spoken of is theValue-Averaging Investment Plan which tends to generate very little attention as compared to its elder brother theSystematic Investment Plan. During periods of drastic fall in the market one can Raise The Bar and the fund house has the freedom to invest more .One can invest more during such phases and raise the quantity of units held in ones portfolio.

Method Of Averages : Let us consider Mr Ramesh invests in an SIP at the rate of INR 2000 per month for a period of 12 Months starting 5th January 2012.Mr Ramesh invests in the Mutual Fund XYZ Ltd under the SIP Route on the 5th of each month.

Table Showing Averaging Of Units

Year Of Investment (2012) Amount Of Investment (INR) NAV Units allocated (Amount Of Investment / NAV)
January 2000 33 60.60
February 2000 34 58.82
March 2000 36 55.55
April 2000 32 62.50
May 2000 37 54.05
June 2000 36 55.55
July 2000 33 60.60
August 2000 35 57.14
September 2000 32 62.50
October 2000 37 54.05
November 2000 35 54.05
December 2000 36 55.55
Total 24000 694.05

Mr Ramesh owns 694.05 Units after a year or after a series of 12 investments at an average cost of INR 34.57.One divides 694.05/12 which gives 57.83 the average number of units. One has the Amount Of Investment / Average Number Of Units which gives INR 34.57.The average NAV is INR 34.66.This is a higher value than average cost. Average NAV > Average Cost NAV. (34.66> 34.57).Thus Rupee cost averaging helps in that SIP investment.

Commodities Tend To Zig When Equity Markets Tend To Zag

One noticed a general rise in the prices of most of the Blue Chip stocks during the latter part of the Year 2012.A upward movement of gold prices was noticed in tandem with the price movements of equity shares .However in April 2013 gold prices crashed resulting in a value of around INR 25000 per 10 Grams due to the Cyprus Crisis. In India the Rupee depreciated against the Dollar and equity markets have been crashing in India and across the emerging markets for the last three months .This was followed by a rapid rise in the prices of Gold and Crude Oil.A firming up of International iron ore prices has also been noticed. This gives wings to the famous saying by Jim Rogers Commodities Tend To Zig When Equity Markets Tend To Zag.

Rise In Prices Of Commodities A Thorn In The Flesh?

The last few years have been categorized by a rise in inflation in India attributed to the runaway prices of commodities in India and abroad. One knows that India is the largest net importer of Crude oil and Gold which gives rise to inflationary pressures in our country. Unlike Russia and the Middle East India is not blessed with crude oil reserves. The spike in prices of Crude and Gold in the International markets tend to throw our Current Account Deficits out of order. Soaring prices of all commodities are burning a hole in the pockets of the common man. What if one could use the arch enemy commodities to build up ones portfolio? Thinking I have lost my head.....Try Commodity Funds.

So What Are Commodity Funds?

Commodity funds mainly invest in commodities such as gold, crude oil, gold funds which invest in the stocks of gold mining Companies. These funds may also invest in metals and crude oil not only in India but also abroad. Their focus could be energy stocks mainly oil and gas, agriculture or mining. In India many people are averse to testing the waters of the Commodity Futures mainly derivative instruments and prefer to play the commodity markets through Commodity funds or mutual funds which invest in Commodities. Let us consider agricultural products such as cash crops. The commodity funds may invest in seeds, fertilizers or even agricultural implements and machinery. One notices a spike in prices of agri commodities like Cotton, Guar, and Wheat. The companies which are on the periphery of agriculture mainly seed Companies, Fertilizers and Agricultural machinery Companies tend to gain from a spike in prices of these commodities. These commodity funds take advantage of the upward price movements of commodities across the Globe by investing in a basket of commodities such as gold, crude oil, metals and agri commodities .A single good year yields returns in the range of 25-30% for a commodity fund. An allocation of around 10% is considered to be good in a Commodity Fund. Indian equities are negatively correlated with inflation. A rise in inflation causes the stock markets to crash to abysmal levels. The main cause of inflation can be a rise in prices of commodities. A small exposure to commodities in the Indian and Global market results in an appreciation in ones portfolio. Talking Of Hitching A Ride On The Back Of A Winged Monster.

Can An Investment In Gold Make One Rich?

Investment In Physical Gold:
One can buy gold in the form of bars, coins or jewelry from a reputed jeweler. This serves as a long term investment and a hedge against inflation. However their storage entitles costs for the investor. They are also taxed at the rate of 1% mainly tax collected at source for cash purchases above INR 5 Lakhs. Physical gold has no equal in spite of the storage costs and good shinny gold coins and bars gives that Secure Feeling. A well balanced Portfolio needs to have an allocation of at least 20% in Gold.

What Is E-Gold?

A Gold ETF has its prospectus vetted by SEBI and collects funds from investors. These Gold ETF’s collect money from the investors and buy assets such as Gold, Debt or may retain a Cash component. They are in dematerialized form and one is issued units. A mutual fund house purchases gold from a bank. An investor may purchase units say 1 gram, 10 grams or in kilograms. You need to have a demat account. Your purchased units are stored in dematerialized form or in your demat account. These are traded, mainly bought and sold on a stock exchange such as the NSE. Here units can be easily converted into cash. These funds usually track the price of physical gold in the international market such as London Bullion Market . The custodians are responsible for purchasing and guaranteeing the purity of the gold. These also are responsible for the custody of the gold. This gold is 99.5% pure and is generally called 24 karat gold. This gold is fully insured and is not used for lending. The Gold ETF’s are treated as gold for tax purposes. The Gold ETF needs to be held for at least 3 years to avail tax benefits under exemption from long term capital gains tax under section 54 F or Section 54 EC of the Income Tax act 1956.One will have to pay wealth tax on the market value of Gold ETF lying in your account as on March 31st of that year. The tax payable is 1% of the market value of these assets exceeding 30 Lakhs.

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