Power of time and compounding.

Rule of 72: Divide 72 by the rate of return. The resultant answer is the number of years it takes for your money to double. So for 18% returns, it takes 4 years for your money to double (72/18).

Rule of 69: This is the more accurate version of the above rule. Divide 69 by the rate of return and then add 0.35 to it. So for 18% returns, it takes 4.18 years for the money to double (69/18+0.35).

Rule of 114: This rule tells how long it takes your money to triple. Divide 114 by the rate of return. So for 18% returns, it takes 6.33 years for your money to triple (114/18).

Rule of 144: This rule tells you that how long it takes for your money to quadruple (i.e.) become 4 times. So for 18% returns, it takes 8 years for your money to quadruple (144/18).

Since we often speak about 18% returns; at this return:

for money to multiply by 2 times it takes 4 years

3 times- 6.6 years

4 times- 8 years

5 times- 9.72 years

6 times- 10.8 years

7 times- 11.75 years

8 times- 12.56 years

9 times- 13.27 years

10 times- 14 years

In our suggested holding period of 20 years; it becomes 27 times. See how compounding is back loaded. It takes 14 years to multiply capital by 10 times, where as adding another 6 years, multiply your capital by a whopping 27 times!

Assuming you hold an investment for 30 years, at 18% annualised return, the capital multiply by….., hold your breath, astonishing 143 times.

What 18% does to an investment? It makes it 5 times in 10 years, 27 times in 20 years and 143 times in 30 years.

The most important thumb rule of all is to remember the power of time and that compounding is back loaded.

Read More

ELSS - Use it Under Section 80C

As we are near to submit tax saving document in our organisation, some of us still try to find the right tool to invest amount under 80C. If you are one of them you can see this post and get benefit from this.


All of us have tax savings option of Rs.1.5 lakhs per annum under Sec.80C. Please use the limit fully. Do not let it go unutilised. If you already have life insurance premium, principal repayment of housing loan, EPF or PPF etc., please subtract those from the above the limit and invest the balance in ELSS (Equity Linked Savings Scheme).

ELSS is like any other equity fund. Since they confer tax benefit under Sec.80C, there is a lock-in period of 3 years. Anyhow, as we suggest investing in equity funds for not less than 10 years, this lock- in is not an issue. As with any other equity funds, we suggest adopting SIP route and having an investment tenure of at least 10 years.

Self employed people and others who do not have any other savings under Sec.80C may opt for a SIP of Rs.12,500 per month.

I give past performances as an example to inspire and given an idea of return potential. Past performance may or may not be repeated in future and mutual funds are not a guaranteed product.

Let me give you today an example of HDFC Tax Saver.

According to Valueresearch tool, this fund first declared its NAV in June 1996. Let us assume you started saving Rs.12,500 every month in this scheme from June 15th 1996 till December 15^th 2014. You would have invested Rs.27.87 lakhs over 18.6 years (223 months). The value of the same as on date is Rs.7.21 crores. This works out to an annualised return of 26.24%.

By disciplined and committed investing, see for yourself the possible potential. In ELSS, not only you get Sec.80C benefits; as like any other equity fund, the long term gains are also completely exempt from tax.

Considering the long term growth potential of our country, economy and markets; all you’ve to do is disciplined and regular investing. ELSS offers one such avenue for you.

Read More

Happy New Year 2015

Read More

Why do people over spend?

Get this content on internet....

There are just too many reasons why people over spend..let me give you a list of what I have seen and what I think…. 

1. Going with the wrong crowd: Get your going out crowd right. If you are a vegetarian tea drinking person, chances are you will over spend going out with a group which has non vegetarians and guys n gals who booze. This is one of the voluntary (or non voluntary) type of over spending.

2. Impressing a girl friend or wife: Impressing a girl friend is something that men do regularly – but some guys carry on with this habit even after marriage! the longer it lasts, the more it hurts.

3. Impressing friends, colleagues, business partners: Trying to impress people by choosing more expensive locales, expensive wine, food, …well it goes on.

4. Giving lavish gifts – again so that the person carries tales about this to others and says nice things about them. This is a kind of a craving for love.

5. Spending money is like a feeling of love – did Madona not say this line? scratch, scratch…you will find it.

6. Because they cannot tell their friends that they cannot afford it.

7. ‘I got a Rs. 8940 Income tax refund’ – hey dude you had paid excess tax…it is YOUR OWN MONEY coming back to you. Gimme a break.

8. When a person’s Income falls, he/she is not able to adjust to lower levels. So they fool themselves saying ‘things will now improve’ so they are telling their friends, relatives, OWN MIND, that they can afford it.

9. ‘Come on Subra…I run a big business, my factory has 33 workers, my office has 14 people working…Do not tell me I cannot eat once in a while to Leela for a drink’ – hey dude your cash flow …yuck..yes people live up to a false image. Employees accept that post retirement their expenses will fall, but professionals do such things…

10. Cannot say ‘I cannot afford it’ or say No, you do not deserve it….Many a times it is buying love  by  giving gifts. Maslow was right…remember that guy ?

11. Proving self worth: sometimes it feels good to wear a Rs. 200,000 suit, a Rs. 55,000 Pen and a Rs. 14,000 shoe. Just for some people, sometimes. Actually does not work for the real rich.

Read More

Wishing you all Merry Christmas!

This is the season of joy and the time to express gratitude. Wish you and your family a Merry Christmas and a prosperous New Year in advance. May this good times become the golden memories of tomorrow for all of you and bring abundant happiness in your life. This is the best time of year to start with a new attitude for a new beginning.

I would like to take this opportunity to express my sincere thanks to all the visitors, readers, followers of my blog for their encouragement, feedback and continuous support. Please keep visiting and share your feedback.

Wish you lots of love, joy and happiness.

Chandan

Read More

Good time in Market - you will missed definitely, if you not stay invested for long term!

At every available opportunity, we keep reinforcing the need to invest regularly for long term without timing the market.

I saw an advertisement by HDFC mutual fund and felt like sharing the data published in the same with you.

Let us assume you invested Rs.10,000 in Sensex on January 1’st 1990 and stayed invested till September 30^th 2014.

Your money would have multiplied 34 times providing an annualized return of 15.30%.

In these 25 long years, if you’ve missed just 10 best days of the market, your money multiplied only by 12 times, giving an annualized return of 10.73%

If you’ve missed the best 20 days, the returns would be on par with fixed deposits; your money multiplying by 6 times, giving an annualized return of 7.65%

If you’ve missed the best 30 days, the returns would be on par with what some banks offer for SB A/C; your money multiplying by 3 times, giving an annualized return of 5.09%.

If you’ve missed the best 40 days, you barely scraped through with a positive return; your money multiplying by 2 times, giving an annualized return of 2.78%

In fact, in the last 3 scenarios, you wouldn’t have beat inflation- which means your real return is negative.

The best way to build wealth is to choose a long term (not less than 10 years), invest regularly and stay invested for the entire tenure. Hopping in and out of the market can make you miss some best days which would significantly dent the returns you would have obtained by simply staying the course.

Read More

Network Business Concept

I had attended a session last week about a Business opportunity. In this session they are showing about the product of the company and the feature of the product.

I think before going to the product detail, If they make him understand in which way this network business help him to achieve their goal will be better.

They told me to attend our business seminar to learn more. I try to find some related stuff online and found one excellent video.

This video is very convincing and let you know the eye opener concept behind network business. If you go through this definitely you will think again and again about network business.

I am going to share this video, content of this video is in Hindi language.

Read More

Every Class Asset is Cyclical

Get this article on internet, worth to read:

Every class asset is cyclical. There is no such thing as permanent bull or bear market.

In stock markets, a bull market last on an average for 5 years and a bear market for 3 years. So it takes 8 years for equity market to go through one complete cycle. So any holding period for less than 10 years or so is speculation.

For gold, a bull market last on an average of 10 years and bear market for 20 years. So it takes 30 years for gold to go through one complete cycle. What is true for gold is true for many other commodities as well.

 I’m saying the above based on my extensive reading and understanding. Again the term ‘average’ can be misleading, as one bull market in stocks can be for 10 years and a bear market can be for 6 years. The given number is an average over many cycles. Each cycle may vary.

As far as real estate is concerned, based on what I discussed with people who have been observing real estate in the country for long time, they say the bull cycle is usually for 10 years and followed by bear cycle for another 10 years. A complete cycle may take usually 20 years.

In bull cycle, the prices may go up by 5 to 7 times in 10 years. In the subsequent bear cycle, there is hardly any movement in price; even if it is there, it is less than inflation. Prices correct usually by 20% to 25% over few years. More than price correction, there is time correction. The prices get stagnant or keep falling marginally for next 10 year period. There is no liquidity as transaction gets lesser. There is over supply and lesser demand. Rents go down and it is difficult to get tenants for the properties and many may even lie vacant.

So stock market cycle is 8 years, gold cycle is 30 years and real estate cycle is 20 years. This is only a number for broader understanding and variance can be significant in each cycle for every asset class.

Vivek Kaul, in one of his articles has mentioned that average income of a Mumbaikar is Rs. 3.54 lakhs and average cost of a flat is Rs.1.2 crores. So it takes 34 years of annual income of average Mumbaikar to buy a home.

Reading this, I thought let me share with you some thumb rules for real estate.

The value of the property should not be more than 3 times one’s annual take home pay. If your annual take home pay is Rs.12 lakhs, your house purchase value should be Rs.36 lakhs. I don’t know what the average income for a Chennaiite is. It would definitely be lesser than a Mumbaikar’s income. In the absence of data, let me just assume it is Rs.3 lakhs. A good 2 BHK in any decent suburb costs not less than Rs.75 lakhs. So a Chennaiite need 25 years of income, if he wants to own a flat in his city.

From my interaction with many people, I find that they commit not less than their 10 years income for a flat. This is not accounting for interest component.

The house price to rent ratio should be around 15. If a house cost Rs.1 Crore and the annual rent is Rs.3 lakhs; the price to rent ratio works out to 33, which is very expensive. Going by international standards, if this ratio is above 20, then the cost of owning is considered higher than cost of renting. This means you would be better of paying rent.

If the above ratio is 15, then the rental yield will be 6.7% per annum (example: Property price is Rs.30 lakhs and annual rental is Rs.2 lakhs). So the ideal rental yield should not be less than 5%.

When we bought our house, we borrowed only 40% of the property value. Make it a point to save atleast 50% of the property value as down payment; till then live in a rented place. 10% down payment means you work rest of the life for welfare of the bank. I can write a separate piece on how much a house actually would cost you.

Home loan EMI as a part of your income (debt to income ratio) should not exceed 35% to 40% (maximum). Anything beyond this may put a huge strain on you especially in a rising interest rate scenario or any other contingency in life.

Usually husband and wife take the loan together and one of their salaries completely goes for EMI. A woman’s career can have breaks due to family situations and many are not prepared for this contingency. This not only leads to financial problems but marital problems as well.

Like I say for equity markets, in real estate markets too, we should aim for decent and not exorbitant returns. Aiming for doubling in 3 years or tripling in 5 years is a road to doom. Some may click but many may fail. In stocks, someone can make even 5 times in 2 years but this is more of exception than rule. In the long run, investors as a group cannot earn more than what market gives, be it stock or real estate.

As I’m in the profession of reviewing people’s financial health, I find that once I remove the value of self-occupied property, which is usually under 20 years loan and gold jewellery, the net worth is very meager even for high income people. With this kind of balance sheet you would never be able to retire; not only that unexpected injury or disease can even make you bankrupt.

So to retire, you should have 50 times your annual expenses in financial assets. This is in addition to owning a home with zero debt. This would ensure that your retirement is stress free and you’re ready to face any contingency in your retired life.

For those who find 50 times very high, aim for at least 30 times.

So if your annual expense is Rs.12 lakhs, it is preferable to have Rs.6 crores in financial asset. In any case, it should not be lesser than Rs.3.6 crores. This is in addition to being debt free and owning a house.

This is definitely possible.

As I wrote earlier, investing regularly for long term in equity would definitely ensure not only peaceful retirement but passing on good wealth to the next generation as well.

Read More

Mediclaim and Critical Illness (CI) Policy

The major difference between a mediclaim and a CI policy is that mediclaim will only settle your hospital bills but in case of a CI policy, you receive a lump sum straight away, which can be used for treatment and compensate you for the loss of income to some extent. 

So in mediclaim, when an illness is diagnosed, you are expected to get hospitalize and get treatment, but in the case of CI insurance, the sum assured is paid the moment the illness is diagnosed (typically within 30 to 60 days). 

You are free to get treated anywhere and spend the money as you like. Mediclaim is like reimbursement whereas CI is incentivizing.

 For example, suppose Mr. Kumar buys a Critical Illness policy of a sum insured of Rs 10 lakh and contracts any of the major illnesses specified in the policy. If he informs his insurer he will be paid the entire sum insured of Rs 10 lakh. He can utilize this lump sum money to cover any expense as per his discretion and requirement.

Critical Illness (CI) policies are designed to cover certain critical illnesses, which are normally costly to treat. While different policies cover a wide range of illnesses, the most common are Cancer, Heart Stroke and Paralysis, Coronary Artery Bypass surgery, Major organ transplant (heart, lung, liver, and pancreas) and Kidney failure.

Many insurance player providing Medical Insurance and Critical Illness policies, you can consider Aviva Health Secure critical illness policy, As I have read that this company have some unique features, just check about this on their website.

Read More

Should I increase SIP contribution!!

There are two sets of people. The first one increases their SIP contribution regularly as their income increases.

The rest keeps the SIP amount constant even after 5 years of starting the SIPs.

Over a period, both our income and expenses keep increasing. Proportionately our savings and investing also needs to increase.

As we repeatedly point out, you should save at least 25% to 30% of your income. The ratio needs to be higher if you want to achieve early financial independence in life.

Once in 2 years, aim to increase the SIP amount by 20%. If you start with Rs.50,000 SIP per month for 20 years; the SIP installment needs to be as follows:

Year 1- 50,000

Year 3- 60,000

Year 5- 72,000

Year 7- 86,400

Year 9- 1,03,680

Year 11- 1,24,416

Year 13- 1,49,300

Year 15- 1,79,160

Year 17- 2,14,992

Year 19- 2,57,990

Assuming an annualized return of 18%, a fixed amount of Rs.50,000 invested every month over a 20 year period becomes Rs.11.72 crores.

If you start with Rs.50,000 and keep increasing the contribution by 20% every 2 years, again assuming an annualized return of 18%, you end up with Rs.18.64 crores.

By increasing your contribution by 20% every 2 years (or roughly 10% every year), your final corpus increases by 159%

To repeat; 10% yearly increase of SIP contribution would increase your final corpus by 159%

My question again:

Your income increases regularly!

Your expense increases regularly!

Why not your savings and investing?

Note: I could have also assumed 10% increase every year instead of 20% every 2 years. What I’ve given is only an illustration. We can play around with numbers like 10% every year, 30% every 3 years etc. Closer the frequency better would be the compounding.

Read More

Equity compound wealth over time, Amazing!!

I am sharing examples for inspiration.

Let us travel back to January 2000. Both ITC and Infosys are known names then as much as we know them now.

January 2000 to September 2014 is 14.75 years- 177 months.

Many of us had the ability to save Rs.5000 every month in 2000.

If you’ve invested Rs.5000 every month for 177 months, the total investments over the period would be Rs.8.85 lakhs. This 15 year period comprises both strong bull and bear markets.

In case of ITC, Rs.8.85 lakhs invested in above manner (with 5K a month), would have accumulated 45,159 shares which is worth Rs.1.61 crores as on September 19^th 2014. Not only that the dividend received over the above 15 year period is around Rs.22 lakhs. The dividend itself is close to 3 times the invested amount. Including dividend and capital gain, the annualized returns is roughly around 31.45%.

In case of Infosys, Rs.8.85 lakhs invested in above manner (with 5K a month), would have accumulated 4249 shares which is worth Rs.1.56 crores as on September 19^th 2014. Not only that the dividend received over the above 15 year period is around Rs.15 lakhs. The dividend itself is close to 2 times the invested amount. Including dividend and capital gain, the annualized returns is roughly around 30.79%.

So by saving Rs.10K a month, you would now have Rs.3.12 crores and would have received Rs.37 lakhs as dividend, more than recovering the invested amount.

I checked Value Research as to how much Rs.10K invested every month in the same period would have given in an equity fund. I chose Reliance Growth Fund. The value of 10K invested for 177 months is around Rs.1.66 crores, annualized return of around 24.07%.

I would not recommend direct equity investing unless you can spend 8 to 10 hours every week solely for this purpose. Also it would take at least couple of years of reading and experience to reach the required threshold.

I don’t give advice on stocks, however for those of you who want to develop expertise and willing to do the home work, I would hand hold by recommending good books and articles.

The idea of writing this piece is to reinforce the power of equity and the necessity of ‘time’ as the critical factor in investing coupled with temperament to stay through both bull and bear cycles.

Read More