Friday, May 6, 2011

Where does one start

While I am aware that half of my readers are professionals in India and abroad who have been working for at least 5 years - this note is mainly for my MBA students who have just joined their jobs in the past one month.
In this note, I am addressing those who are starting their careers in India and what is it that you need to do to start your investment journey.
As you go through your career – you must remember that while it is important to focus on your earnings and your career growth – it is more important to focus on how you invest your savings. In about twenty years, those who did well in their investments would be far ahead financially than those who just did well in career /earnings.
One of my friends has two decades of successful career behind him but has hardly any financial assets – he has about 30 lacs in savings – but that 30 lacs is kept in savings bank accounts –earning 3.5% interest where as the inflation is currently hovering around 9%. He focussed on earnings and career growth – but did not focus on investing his savings. If he had focussed on investing his savings well, over twenty years, he would have had assets worth more than Rs 5 crores (USD 1 million).
So my advice is to spend some time learning about the various investment options. Two hours a week is all that you need to spend.
If you are an MBA, you will have a monthly take home salary of about 35K and a monthly savings of about 15-20K. If you are an engineer, you will have a monthly take home salary of about 25K and a monthly savings of about 10-15K. If you are a graduate, you will have a monthly take home salary of about 10-15K and a monthly savings of about 5-10K.
The point is that in each case, you will be saving some money every month. So the key focus is to invest your savings at as high a rate of return as possible.
So where do you start?
You start with a Demat account. Just as you all have a passport, a driving licence and a PAN card (Income tax card in India) – please open a Demat account in the bank where you have your salary account.
Once you have a Demat account, start with investing through Mutual funds through Systematic Investment plans (SIP), where you commit to invest a specific amount every month in specific mutual funds (something like a recurring deposit). Due to Indian economy’s 8% growth that is expected to continue for the next few years, investing in mutual funds that are focussed on large cap equities are expected to give about 12-15% returns per annum over a 3-5 year time horizon – by investing every month, you are averaging the market movements that happen over shorter periods of time.
The key question is how to choose the specific mutual funds where you will put your monthly investments – The broad approach to that is as follows:
¢  Compare the performance between the same types of funds –in this case large cap equity focused Mutual funds
¢  Risk assessment  - Look at the ratings from  Value research ratings and Money’s  -their ratings are fairly comprehensive
¢  Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus
¢  Management  - look at the fund manager’s record and go with fund managers who have a good past performance record

The basic ground rules of investing are:
¢  Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s
¢  Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years
¢   Spend time in educating yourself in investment areas
¢  Ignore hot tips, hot stocks etc
¢  Start early
¢  Invest regularly –look at Systematic investment plans offered by Mutual funds
¢  Buy and hold your investments and do not get into short term day trading.

Over a period of 3-4 years, you will see your net asset value fairly large as your returns would be around 12-15% per annum and tax free ( if it is equities) and you will have a reasonable sum ( along with a loan) to move into real estate where the returns can be higher than 15%.