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Investment Resolution
February 01, 2013 COMMENT comment
     
Investment Resolution
By Niku Sidhu
 
 
"Someone's sitting in the shade today because someone planted a tree a long time ago."
– Warren Buffett.

Ring out the old and ring in the new. We are all familiar with resolutions associated with the New Year that we forget the minute the fuzz clouding our minds clears from attending parties galore. There appears a reluctance to invest 
bordering on fear of unknown territory killing our resolve along the way. At Atelier Diva, we intend to assist; simplifying the hard to get terminology, expressing investment gobbledygook in layman or laywoman terms.

Investment is defined as 'an asset purchased with the hope of generating income or appreciation, and/or purchase of goods not to be consumed today but in the future in order to create wealth'. It is the use of money in the hope of making more money. With correct guidance from financial advisors, this hope can be converted to achievement.

BENEFITS OF STARTING EARLY
"Only those who are asleep make no mistakes."
– Ingvar Kamprad

The chances of achieving a financial goal increases with the time we have available. We shall presume that you are willing to put aside a sum of money that may be deployed to attain fiscal growth targets.

1. The concept of compounding can best be explained by an example. Let us suppose you have 25 years of active investment period and you invest Rs 5,000 each month in a combination of stocks and mutual funds. Presuming a return of 15 per cent per annum, you will grow a corpus of over 1.6 crores. If, however, you start five years later, and invest Rs 5,000 each month for a period of 20 years, you shall own a corpus of about 75 lakhs. Basically, a five-year head start more than doubles your corpus.

2. Pick the right combination of investment options through proper asset allocation. Depending on the time available for retirement, gauging your ability to take risk and assessing any outgoings towards loans and/ or children's education will go a long way in deploying money the best possible way.

3. Adequate medical and life cover translates into a lower premium paid if insuring at a younger age. Medical insurance covers full or partial expenses of your hospital bills in case of an emergency, depending on your policy and coverage. The insurance market has versatile single and family products. Life insurance is generally taken as cover for dependants to avoid financial difficulty if the insurer dies. It may also be treated as an annuity received in retirement years staggered over year 60 to 75.

4. Certain assets are big-ticket purchasesthat need a huge one-time effort like buying a house or a car. It is recommended to attack these issues first, which in turn will leave us the sum of money available for other investments. Tax planning should begin as soon as you join the work force and subsequently should be put into action early in the financial year. The income tax department, under section 80C, gives us incentives to invest in employee provident fund (EPF), public provident fund (PPF), insurance, home loan interest payments, fixed deposit receipts (FDR) and National Saving Certificates (NSC). Customise each opportunity to suit your requirements.

5. Amplify returns as per your tax bracket. Take the example of National Saving Certificates (NSC). If you are in the 30 per cent tax bracket, a five-year NSC with the current interest rate of 8.6 per cent will generate a yield above 16 per cent.

THE RISK FACTOR
"In investing, what is comfortable is rarely profitable."
– Robert Arnott

Assess risks when selecting stocks and mutual funds. Risk is akin to a road; we would not cross a busy road with eyes closed just like we would not stay home due risk of an accident. Risk management is essential. There is no investment avenue that does not carry some risk. The degree and nature of risk will vary as per income stream and outgoings, age and health. You can get a personal financial risk analysis from a bank or portfolio manager. A diversified portfolio would hold up to five leading mutual funds, under 10 stocks and 5 per cent gold exposure.

After adequate analysis, silent savers like provident fund and systematic investment plans are organised without too much exertion. The trick is to convert these decisions into routines leading to wealth.

At times, you will have to step out of your comfort zone to realise significant gains. Know the boundaries of your comfort zone and practice stepping out of it in small doses. As much as you need to know the market, you need to know yourself too. Can you handle staying in when everyone else is jumping the ship? Or getting out during the biggest rally of the century? There's no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don't have the stomach to see it through.

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