Choosing a financial advisor is an important step, for most people, to creating more wealth and financial security. Whether you’re a minor investor who just wants to keep your assets safe or have several thousand dollars to invest so that you can watch them grow, a financial advisor can help you do these things. Remember, a financial advisor is not an insurance salesperson or a stock broker, but is rather a person who will help you create an overall financial plan for your current needs and where you want to go with your finances.

Also Read: 7 Reasons to be Your Own Financial Advisor

Before you choose a financial advisor, read through these ten tips, which will make it easier:

1. Avoid those who charge commissions

Financial advisors who charge a commission are more likely to push you to purchase certain products. They may care less about what’s good for you and more about their own bottom line. If you see that a financial advisor gets even part of his or her income from commissions, look elsewhere for a better advisor.

2. Look for CFP certification

Always go with financial advisors who have a current CFP – Certified Financial Planner – certification. This is the highest-quality certification that can only be earned by pasting the Certified Financial Planner Board of Standards. Plus, to keep the CFP current, financial planners must engage in continuing education, which keeps them up-to-date on the latest developments so that they can help their clients more effectively.

3. Ask for recommendations

As with most things, it’s a good idea to choose a financial planner based at least partially on recommendations. At the very least, getting recommendations can give you a place to start. Your best bet is to ask for recommendations from people who are in a similar life situation to yours, as different financial planners will have different specialties. Start with colleagues at work or friends who have a similar lifestyle to yours.

4. Ask specifics about the pay structure

It’s not enough to know that you want to avoid those who earn money from commission, though this might seem a little cheaper to you up front. You really need to know exactly how the pay structure of a financial planner works. The most common are flat fee, hourly, and percentage-based. At first, it’s probably best to start with a flat fee or hourly rate. At some points, turning over 1% or so of your annual assets to your financial planner can be beneficial, but this may also lead to an advisor who makes decisions based on her own bottom line rather than on what’s best for you.

5. Find a fiduciary planner

A fiduciary financial planner has basically promised to always act in your best interests. Non-fiduciary financial planners usually hold to the sustainability standard, which means they can get you products that are good for you, but aren’t necessarily in your absolute best interest. If your financial planner isn’t going to always, 100% of the time advise you in a way that’s in your best interest, run the other direction.

6. Use a background check

Getting a background check on a potential financial planner is a great idea, particularly if you don’t have recommendations from other long-term customers you know and trust. Also, check to see if the CFP certification for that financial planner is current by finding out who administers the credentials and calling or emailing the administrator to see if the credentials are valid.

7. Avoid those who make too-good-to-be-true claims

If your financial advisor claims to be able to beat the market every time, they’re giving you a too-good-to-be-true promise and they probably aren’t telling the truth. A financial advisor may be able to show evidence of beating the market average often, but no one can guarantee you that this will happen all the time, so if you’re getting guarantees like these, find someone who is more reasonable.

8. Get details about experience

Just because a financial planner has a CFP or another credential doesn’t necessarily mean they have great experience – it just means they studied hard enough to pass the credential test. Before you decide to work with a financial planner, get as many details about that person’s experience – from the planner and from other clients – as possible. You don’t necessarily have to work with someone who has decades of experience (you might not be able to afford this person!) but you do want to leave your finances in the hands of someone who is reasonably experienced at giving sound financial advice.

9. Find a planner who agrees with your basic financial principles

Even if you’re just starting out, you probably have at least some basic financial principles in mind. For instance, you may be willing to take on a little bit of debt, or you might wish to live basically debt free. A financial planner who essentially agrees with the things that are important to you – or who can at least convince you otherwise using well-supported arguments – is your best bet.

Paying for a financial planner

If you can’t pay for a financial planner up front, Ashyia Hill from CreditDonkey says, you could always ask if they’ll take credit card payments. As long as you can charge flat fee or hourly payments to a low interest credit card and pay them off within a few months, you’re better off hiring a financial advisor now than waiting until you have cash in hand.

Whether you’re twenty-five or fifty-five, working with a financial planner can hugely benefit your financial life. This is because financial planners can help you make the best financial choices without your having to spend hours researching the latest developments in various markets.

This is a guest post by Ashyia Hill who writes at CreditDonkey. If you also want to Write for EquiTipz, please read more details here.

For Further Reading:

1. 7 Reasons to be your own Financial Adviser?
2. Financial Plans For Younger People
3. Market Outlook and Tips for 18th August 2009
4. Top 5 Stock Tips for Beginners

When should you start considering financial planning? Many young people cannot see the point of insurance and investments, because they feel they don’t need them, or they believe there is plenty of time left. It is only when we see what benefit, we could have had if we had invested those small amounts regularly, do we see the great loss from not planning ahead. Financial planning, insurance, good lending and investments should start as young as possible. Here is a general guide for your young people, from income protection insurance, through to simple saving.

Financial planning

Financial planning sounds such a big and complicated term. In reality, it is about using your money sensibly. Financial planning can just mean making up a monthly budget and sticking to it. Financial planning implies a sensible use of your money. Money will work to your benefit if you can accumulate it. You will be able to lend more if you have gained that trust.

Savings

A standard rule for general long-term saving is simple. It should be 10% of your income. This is not saving for any particular purpose, it is purely long-term savings. This money should never be used for any purchase that is not another long-term investment, such as buying a house. If you are saving for other items, such as a new TV, you should save separately for that. Consistent saving, and consistent increases in your monthly bank balance, will put you in favour with your bank. And there are a lot of consequences to that. Read: The Miracle of Compounding Returns

Credit

We all need to get credit in our lives. Starting of small, and getting a good reputation, is the name of the game. There are too many ways to get credit, and you should be very careful about this. There are many better ways to get that new home entertainment system than signing up for a two year contract. The best initial credit to get is a credit card. And only use this when it is beneficial to you, and always make the payments back so you do not get charged interest! (Read: How are the Interest- free days calculated for my credit card?)

Must Read: 8 Mistakes to Avoid When Using a Credit Card

Before too long, you will be able to get a personal loan. We all need a car, and getting a car loan, or personal loan to fund that purchase, will put you in good stead for the biggest investment in your life, your mortgage and your home. (Read: Should I prepay my loan or Invest that money?) The early you can get a mortgage, and afford it, the better. It is easy to get side-tracked with so many offers of credit. Remember, what ever you get now, you have to pay more for later. You should choose wisely.

Future

When we are young, it is too easy to think that we do not have to think about the future, and we have plenty of time. Even if you are single, your funeral could be rather expensive. Manage future protection with the size of your life insurance and other policies. In today’s volatile business market, none of us can afford not to have income protection and health insurance. Because you are young, and your policies will be cheaper, the best choice is to manage your cost of coverage. Invest step by step. You can increase these policies over time. It is best to get your foot in the door early. Insurance and even a small amount of superannuation, even at a young age, is very important.

The key to making the most out of the money you earn is a little patience. Spread your money evenly so you are covering all your bases, and by the time you are in your 30s, you will find that you are well on your way to a successful future. That is when it will really count.

For Further Reading:

1. 9 Tips to Remember When Choosing a Financial Advisor
2. United Bk plans IPO in Jan 2010
3. 7 Reasons to be your own Financial Adviser?
4. Great Eastern Energy plans IPO Launch this fiscal Year

This post is submitted by our Guest Blogger Shaun Nichols. Shaun is the founder of debtconsolidationdetails.com where he writes articles on debt consolidation and other aspects of personal finance. Click here if you also want to write for EquiTipz.

Have you very often faced a situation where you needed cash urgently but there was no help in sight? If your answer is a yes, then you should perhaps start thinking about setting up an emergency fund. Yes, you always knew its importance, now it’s time to create one for yourself. Be it an urgent need for cash or pulling yourself out of debt, it is always wise to be prepared for emergencies.

Perhaps, the saying “prevention is better than cure” applies most aptly to a financially strapped situation. Read on to know how you can bail yourself out of such an emergency.

1) Begin with a small savings account: Whoever told you that emergency fund account got to be started big was utterly wrong! The idea is to start small. Open a savings account and deposit whatever you can regularly. The important thing is to make a habit of contributing something towards it frequently.

2) Go the traditional way: Isolate the emergency fund and make it your most important priority. Use every cent to boost your emergency savings. After paying off your bills each month, determine to set some money aside for your emergency account. A decent fund is generally equivalent to 3 to 6 month’s worth of expenses.

3) Try the frugal path: You longed for that $150 jeans at the supermarket? Well, drop the idea for the time being. Yes, curb your unnecessary expenditure and use the money to make your emergency fund healthier. Purchasing things like video games, gadgets, magazines etc. should never be on your priority list.

4) Add it to your list of bills: It takes determination but treating your emergency fund as your bill would greatly help to increase your savings. Imagine it is your payday when you have to clear your bills before you can take care for other variable expenses. The increment in your savings this way would help you to stick to your decision.

5) Make use of financial windfalls: If you have been lucky to receive a tax return or a bonus from work, don’t get tempted to spend it all at once. Instead, make use of such windfalls to fill up your emergency fund. You might want to spend a part on yourself, but make sure that the rest of it makes it to your fund.

Also Read: The Importance of Investing

6) Use a piggy bank: Get a piggy bank or anything good enough where you can safely keep your money. Whenever you get a chance, put something into this piggy bank. For example, at the end of the day you can empty your purse of all the change and use it to fill your piggy bank.

7) Sell sell sell! : Make a list of all the items that you own and get rid of the clutter from your house once in a while. You might want to sell these off on eBay or some other website. Save your earnings from these for your emergency fund.

8 ) Most importantly, stay focused: Most of the times people give in to their temptations. To save your money, you have to sacrifice on little pleasures like eating out, going for movies and the like. You can stay focused by looking at the positive aspects of your doings. Overcoming temptation makes you stronger. Also, giving in to such allurements once in a while doesn’t harm and, in fact, helps you to stay focused.

So, stop making excuses and get geared to start an emergency fund from today itself. This is the best way to be prepared for a rainy day. Sure, you do not want to rely on credit cards for emergencies and push yourself all the more into the hole!

Also Read: 8 Mistakes to Avoid When Using a Credit Card

For Further Reading:

1. Top 5 Stock Tips for Beginners
2. Reliance Infrastructure Fund: NFO Review & Analysis
3. How to Make money by Investing in a Mutual Fund?
4. Is Payday loan the right solution for you?

A glance at the TV advertisements or any Business news channel will quickly tell you that there is no shortage of firms or individuals who are eager to help you to manage your finances. Of course they offer no free lunches Still, why do people nod their heads while hiring a professional financial adviser and instead choose to be their own masters and decision makers while investing money?

I was just reading an article by Manish Chauhan on JagoInvestor “5 reasons why you should hire a financial planner?” and the thought tickled my brain that what are the excuses that people have, not to hire a professional to manage their wealth. I have tried to pen down some of the reasons which people often have when asked why they do not hire services of a professional financial adviser. I hope that you find these reasons interesting to identify a suitable category for yourself and take appropriate action.

I cannot afford financial advice

People often have this excuse that they cannot spare much money to save in the first place; affording a separate adviser on top of that is not their cup of tea. As a matter of fact, there are many financial products with which you do not pay anything extra, because you are already paying for their advice even without paying! I am referring to agents here. (Read about Commission agents earn here and here.) They receive commissions on the product by the company you bought or invested in. This goes to the people who often ask the agents only, to suggest any good investment scheme.

And the commission is financed out of the charges you pay for the product. The only advantage that you get with this is that the charges for the advice are split over the life of the product and you do not feel the pain. But actually you are paying. So, better look out for products that do not have huge commission structures built in or shout for a commission rebate. This will be a win-win situation for both you and the Agent (Financial adviser)

I am not wealthy enough to have an adviser

However large or small are the savings that you have, you have to invest wisely. What I think is, the smaller the amount that you have as savings, the safer you should be while investing and making the right financial decisions since you cannot afford to make mistakes. Some of the financial advisers are even willing to give time to the smaller clients. Maybe they think that as they grow bigger, they will grow with them while some are totally not as smaller the investment, smaller is the commission they get on the investments.

Also Read: First Time Investing – Learn How Not To Fail On Your Debut

I do not trust Financial Advisers

There is another bunch of people who want to be their own financial advisers for a simple reason that they do not trust the professional advisers. There may be some cases where the financial advisers are only looking for their benefits but it would be a big mistake to tar all advisers with the same brush for the reason that there are many skilled, knowledgeable and trustworthy advisers throughout the length and breadth of India. The trick is to spot these genuine ones and to avoid their less honourable colleagues. Definitely, the more you become aware about your finances, the less likely are you to fall prey to such fraudsters who are only in the market to make money at the cost of your trust. Go out, find a good adviser and start investing.

Advisers are just pushy Sales People

Fraud from an adviser is a rare possibility but there are other ways in which an adviser can let you down. The commission system that we talked of in the Point 1 is a less ideal way to pay an adviser who is supposed to have your best interests at heart. What I mean by this is, there are in-built incentives for advisers to recommend products to you that generate commissions rather than those which do not. You benefit from that or not, that is a different story.

A good adviser will not be swayed by the amount of commissions he gets by selling products to you. Doing the opposite will not only be unethical, but will also be bad business as such advisers cannot have a good base of satisfied customers and cannot survive for long.

You, as an investor, can avoid the possibility advice biased advice due to commission by choosing an adviser who takes fees instead.

I don’t know how to find an adviser

This is a set of people who have a plain excuse that finding an adviser is a tough job for them as they do not know how to find one. To help you with that, there are 2 kinds of advisers, one type is who act as agents of a company whose products they sell. Others act as your agent (and charge fees) and can recommend products from the full range on the market. (also called independent advisers)

People in this bucket should understand that finding an adviser is one thing and finding a ‘good’ adviser is totally another. According to my advice, one should go with Independent advisers as they can give you unbiased advice about any product without being worried about their commissions. All they are worried is their fees and of course they can offer good advise

I will save Money handling my own Finances

Whether you pay fees or your adviser receives commissions, it is true that you have to pay from your hard earned savings to your financial adviser. So, can you save that money by doing this job yourself?

Of course Yes, many people do this by not going to a fee-charging adviser. But, the people in section take care of a few things. The charges that you save by not paying to an adviser, could be trivial compared to the losses if you end up choosing the wrong product. If you have any doubts, it is better to pay and take advice rather than landing up in any problem later.

Handling my own Finances will be Fun

Not many people can be found in this bucket but as far as I am concerned, this is the best reason for being your own financial adviser. You get to learn a lot from your experiences (true for me) and also, many factors such as trust, sharing your secret information, or giving the management of your wealth in somebody else’s hands, are also dealt with.

And having this reason, if at any point in time you feel that this is not much of a satisfying and an enjoyable experience, y0u are free to find a professional adviser for yourself.

Conclusion

If you have any other reason not to have a professional adviser than just to have fun, better go for one.

I have tried to cover all the major reasons that people have in minds not to have a professional service to manage their finances. You need to decide now which category you fall in and take suitable action to start taking one step forward towards your financial well-being.

So, what category do you fall in. Please list down any other reason that people have on not to have a financial adviser, if I missed out any other class of people. What are your views on hiring a professional to take care of your finances?

For Further Reading:

1. 9 Tips to Remember When Choosing a Financial Advisor
2. Financial Plans For Younger People
3. The ETF effect – How investors can upgrade portfolios and stay out of the rat race on markets?

What is Reverse Mortgage?

A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. The finance minister of India introduced this scheme in 2007 which is already well known concept in the West. “Reverse mortgage”, as its name suggests, in simple words is just the opposite of a normal housing loan.

 Image Credit : <Link>

How does Reverse Mortgage Work?

In this scheme, once you pledge your house for the ‘reverse mortgage’, the bank will arrive at the value of the house after carrying out its due diligence. After creating the room for interest costs and price fluctuations, the bank will disburse the balance amount to you depending on the payment option that you choose. With every payment that the bank gives you, your equity in the house decreases. This line of credit is open, typically for 15 years.

Read: How Rs 1 lakh grows to Rs 50 lakh in 25 years

Even after the tenures you can continue to stay in your house. Only if you leave the property permanently, or in case of death, the lending institution will sell the property, and from the proceeds it will take the amount that is payable by you to the bank; the balance will be distributed to your legal heirs. The bank will also conduct period valuation of the property, typically after five years, to ensure that the value of the house is more than the total amount payable by you.

As per the Wikipedia Definition, A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves.

What are the features of this loan?

The draft guidelines of reverse mortgage in India prepared by the Reserve Bank of India have the following features:

• Any house owner over 60 years of age is eligible for a reverse mortgage.
• The maximum loan is up to 60 per cent of the value of the residential property.
• The maximum period of property mortgage is 15 years with a bank or HFC (housing finance company).
• The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
• The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
• The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
• Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

What happens after the death of one or both of the spouses?

If one of the spouse dies, the other can still continue living in the house. If both die, the bank will give their heirs’ two options; either settle the overall outstanding loan and retain the house, or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

Why is this scheme not popular?

Recent reports seem to indicate that a very small percentage of senior citizens only seem to have taken advantage of the facility since its coming into action. This could be perhaps because better awareness had not been created about the product.

Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property’s value, and limits the loan period to a tenure of 15 years.

The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal.

Which banks provide ‘Reverse Mortgage’ in India?

Some financial institutions that provide the scheme in India are Dewan Housing Finance, State Bank of India, Punjab National Bank, Bank of Baroda, Central Bank of India, Union Bank of India, LIC Housing Finance, Indian Bank, Andhra Bank, Corporation Bank, Canara Bank. Senior citizens are eligible for the scheme.

What are your views about ‘Reverse Mortgage’ Scheme? Have you taken the advantage of this option, and if not, are you planning to do it in future? Please put your valuable inputs in the Comment box below.

For Further Reading:

1. IPO Fever: Godrej Properties IPO in November
2. Should I prepay my loan or Invest the money?

It is that time of the year again when all the festivals are around and the New Year is here again! And you might be totally unable to make out what to gift your parents, spouse or children! Well, EquiTipz has come up with a simplified gifting strategy for you: how about some money?

EquiTipz put together some smart suggestions as per the discussion seen on various forums on how to give financial gifts a meaningful spin.

photo credit: JuJups Studio

For your Children

1. A bank recurring deposit

“Exposure to the basics of banking and managing money, could be the best thing to gift your kids,”. Start with a bank recurring deposit. If you are wondering: will my child accept this with a smile, read on. “Let your kid walk to the bank every month to make the deposit. This way he’ll feel more responsible about the money and will also be thrilled to see it grow.”

2. A child insurance plan

This will ensure that you are putting away enough for your child’s future. When he grows up and needs the money for his education or otherwise, you could give him what is his, by acting as the legal guardian. This will also give you a sense of pride!

“When buying a children’s plan, make sure to buy the plan in your own name rather than in your child’s.” Of course, your child is not going to be very pleased with it, yet. May be a little toy could complement this gift.

3. Mutual funds, a good bet

If you’d like to gift him something that can create a decent amount of wealth, you could make an investment for a specified time period. The type of financial gift, what is important is when you would like to en-cash the gift. “If your kid is three years old then you could buy some equity mutual funds with an aim of keeping it for the next 18 years till he turns 21. This will give your investment a decent time (about 18 years) to grow to a sizeable amount. A balanced equity fund could be a good bet.”

4. Money management lessons

Making children aware and careful about money and financial management, can be a great gift. Reserve Bank of India has introduced two comic books, Raju and The Money Tree and Money Kumar and The Monetary Policy, which can be downloaded from the bank’s web site for free. These books will help your kids learn their basic money lessons and also, help them make better financial decisions.

So, what about gifting one of the above to your kids and make this New Year a real money-saver? If you have any other suggestions that you are thinking to gift your beloved kids, do share them below.

For Further Reading:

1. Inflation may cross 6% by March 2010: RBI
2. United Bk plans IPO in Jan 2010
3. CIBIL Credit Report; Direct Access by March 2010
4. Great Eastern Energy plans IPO Launch this fiscal Year

The extreme volatile conditions in the recent past in the markets have led to hysterical selling by many investors. And this panic-stricken selling is not limited to stocks alone.

There were many investors who have redeemed their mutual fund schemes and have stopped their monthly SIPs too.

However, if you look at it from the other side, these (volatile falling markets) are the best opportunities to keep investing in the SIP’s and average your cost.

In case of investments, when the going gets tough (this time it went even tougher!), the tough doesn’t get going, we get driven by our emotions.

Just like it did for 27 year old Vikas Saxena!

Vikas is into a job in the IT (Information Technology) Industry and stays with his friends on a sharing basis in Pune, India. He likes to go out on the weekends and hang out with old friends. Also, he takes a keen interest in investing in stocks and mutual funds.

In December 2007, he thought of starting an investment and activated a monthly SIP of Rs 1000 into the Reliance Diversified Power Sector Fund, for a period of 5 years.

Read: 3 important things to know as a new investor!!!

Initially, when the markets were heading towards achieving new heights (in Jan 2008), Vikas carried on with the SIP as he was happy enough because during that period, his investment gave handsome gains. However, when the markets started falling, Vikas (intentionally) defaulted on his SIP and since March 2008 did not pay his monthly SIP installments as psychologically he thought that there was no use investing now. Now that he has accumulated the funds over the last seven months (Rs 7000), he wants to invest a lump sum amount now when the market have bottomed out.

He has the following questions in mind now which got me to write an article on this:

- Whether it was the right thing to default on his SIPs when markets started falling.
- If this will have any impact his overall credit rating with the bank.

EquiTipz clears Vikas’ dilemma. So, below we will take these cases one by one.

• Was Stopping the SIP installment the right thing to do?

Let’s look at two scenarios to find the answer:

Case 1: He invests the accumulated amount (Rs 7,000) as lump sum in October:

Note: SIP was made in Reliance Diversified Power Sector Fund

In this case, Vikas would have received 233.77 units at an average purchase price of Rs 47.09.

Case 2: He continues with his SIP

Note: SIP was made in Reliance Diversified Power Sector Fund

In the Case 2, he would have received 173.22 units at an average cost of Rs 63.50.

If you look at this case, at first instance, it might seem to you that Vikas made the right move by defaulting first and then paying the accumulated amount as lump sum, Since investing a lump sum at this stage would give him more units at a lower price.

But was he right? The Answer is NO!

Using this strategy cannot help Vikas to build long term wealth. Surprised?

Here’s the reason:

- Timing the markets is never possible. Even if Vikas successfully reduces his buying cost now (in Case 2), he cannot predict the market moves at all times. For instance, what if the NAV falls to Rs 30 or Rs 25 right after his lump sum investment? What would he do in that case? This is the case where SIPs come to your rescue! They rule out the effect of markets’ ups and downs.

- He initially decided to invest for a period of five years. Breaking this investment in the middle waives off the very purpose of building wealth in the long term.

- SIP inculcates investment discipline. Truly, a commitment of a small sum is all it takes to generate good returns over the long term.

Remember “If you regularly miss out on your SIPs, it may impact your corpus considerably”

Will the default hamper his credit rating?

The answer is NO.

SIP is a regular investment, unlike a loan EMI which is a regular payment (in which you owe money to the bank). The very purpose of SIP is to invest a regular sum of money at pre-determined intervals (fortnightly, monthly etc). This investment is made either through post dated cheques or electronic clearing services (ECS) in which the mutual fund system debits the amount automatically from your bank account on the given date.

If you don’t have money in your bank account for a given month, no units will be allotted to you for that month.

So, the bank has nothing to object whether you continue your SIPs or not. Hence, this will never impact your credit rating with the bank.

What are your views on this topic? According to you what should Vikas have done? Should you continue with your SIPs in bad times or quit. Please share your opinions to let us know what other alternates are available to make the most of your money.

For Further Reading:

1. Market Fall – How To Recover Losses?
2. Mutual Funds :: Advantages of Investing
3. What is a ‘Reverse Mortgage’ Scheme?
4. Should I prepay my loan or Invest the money?

For Further Reading:

1. The Importance of Investing
2. Importance of dividends
3. Aqua Logistics IPO Recommended for Long-term investors:Swastika
4. What is Stop-Loss Order? :: Pros and Cons

Stock Markets viz. Sensex and Nifty are on the Surge again after watching the downside taking down to the October Lows. You could be wondering if you should still invest in equities and go through the uncertainty from time-to-time. Tell you what, YES, you need to invest in equities. Long-term equity investing as an asset class continues to beat all other investment avenues like real estate, gold,bonds or fixed deposits etc.

That is, equities in India have grown by an average of 17 per cent per year since the last 25 years. And in the last two months only, have rosen from the March low of 7800 to the today’s 14625 which is near to double.

There have been ups and downs in these 25 years but the market always discounts the bad news, re-adjusts, consolidates and, eventually, moves up. The average return from all other asset classes (bonds, real estate, gold etc.) remains between 6 and 10 per cent range for the same time period.

Read: How to get Over the Fear of Investing

Returns of 6 to 10 per cent – Big deal?
Oh yeah, it is a big deal because of the magic of long-term compounding.

If you had invested Rs 100,000 (1 lakh) in equities 25 years ago and left it untouched, the value of this investment, today, will be Rs 50,65,782 (over Rs 50 lakh).

On the other hand, Rs 100,000 compounded at 10 per cent (the next best asset class) the value of the same would be Rs 10,83,470 (over Rs 10 lakh).

The difference = Rs 39,82,312 (over Rs 39 lakh).

This difference emphasises that equity should form a part of your asset allocation. ‘How much’ is still a matter of debate but you could use this rule.

Thumbrule

While there is no one-size-fits-all allocation for equity, a reasonable thumbrule can be 100 less your age. The result is the percentage of your savings you should allocate towards equity. As you grow, you should revisit and adjust this asset allocation.

To conclude..
All bad things must come to an end. So, here’s a mantra for you:

In a newspaper article written by Aditya Puri, Managing Director of HDFC Bank, he says, “Stay focused on the fundamentals (of your stock holdings). Every financial crisis is different but they all end. As this phase of extreme pessimism abates a bit, global investors are likely to reward India for the robustness of our systems.”

Read: 4 Golden Rules of Equity Investing

For Further Reading:

1. 4 Golden Rules of Equity Investing
2. US economy to bounce back soon: Warren Buffet
3. What are Futures and Options? – Saturday Classroom
4. Man Infra gets IPO grade of 3/5 from CRISIL