Five-step guide to wealth creation.

It is always easy to spend. Before you know it, all the money is gone. The end of the month sees you craving for the next pay. Very often, a portion of the next pay is alsospent before you actually see it. Saving for the future? You will say, “Forget it, I need the money today”. To avoid this situation, the easiest way to inculcate a discipline to save, is to invest about 10 per cent of your take-home salary right at the beginning of the month. You can then spend the balance 90 per cent without any feeling of guilt.

Before undertaking any investment, it is imperative for you to know what your risk appetite is. There are two elements that define your risk personality. The first is ‘risk capacity’ which is about external factors such as the number of dependents, your age, etc. Usually, most of these elements are not in your hands. You can do little about them. The second is ‘risk tolerance’. This consists of internal and mostly controllable elements such as attitude towards investment decisions, ability to cope with losses etc. After listing out specific elements of your risk personality, you would know how much risk you can take. You might be able to take greater risks in exchange for higher returns or you might want to take little risk in exchange for low, but reasonably assured, returns. All this should help you decide if you are an aggressive, very aggressive, balanced or conservative investor.
CAUTION: Don't go by conventional ideas. They might mislead you. For example, according to accepted wisdom, a 30-year old person is supposed to be more aggressive compared to a 40-year old person. But if the 30-year old person has dependents, no accumulated wealth and is in an unsteady job, he should be more conservative in investing compared to a 40-year old person who has no dependents but has wealth and is in a rock-steady job. Your risk profile should take into account your unique situation.

Now that you have figured out your risk personality, you need to know what you want out of your investments. Do you want to save for a vacation next summer? Or is it for retirement? Perhaps you want to set aside some amount for your daughter's college admission that is coming up in the next five years. Each one of these needs calls for a different strategy to follow, even for persons who share similar risk profiles. The most important aspect that needs to be kept in mind is that prices will rise with time due to inflation. For instance, if your daughter is 10 years old today, her marriage at about 21 years of age, is 11 years away. If her marriage would cost you Rs 25 lakh today, it will cost you much more when she is ready for marriage. This is because of inflation. Taking a 5 per cent annual increase in inflation, the Rs 25 lakh cost today will rise to about Rs 42.5 lakh after 11 years
RISK CAPACITY (This includes your)
x Age
x Income
x Number of dependants
x Stability of job/career
x Financial literacy

RISK TOLERANCE (This includes your)
x Personality
x Attitude towards investment decisions
x Ability to cope with losses

Broadly, check if you need the money for recurring expenses or for a one-time event like buying a house, child's marriage, etc. Recurring expenses can be usually taken care of by generating returns from safe investments like RBI Relief bonds, debt oriented mutual funds and so on. Event-based expenses can be tackled by investing in equity for a long term and converting the investment into safer debt choices closer to the event.

Risk management is the cornerstone of any financial planning effort. One of the basic principles of portfolio building is diversification. As the old saying goes, "Don't put all your eggs in one basket." This is imperative since no two investments behave exactly the same way. Investing in only one type of investment will make your portfolio lopsided and lead to higher risk. A mix of investments is the best way to bring down the portfolio risk.

We live in an era of dynamic investments. Risk and return profiles of investments are changing by the day. Couple of years ago, if you had been told that PPF was going to fetch a 8 per cent return you would have laughed at the statement. But that is exactly what has happened now. Investments have been changing since economies are in a flux and business cycles are shortening. Rock-solid investments may look wobbly a few years down the line. You have no choice but to monitor if possible on a quarterly basis, whether your investments are in line with your expectations, risk profile and needs.
The key is to undertake all the above-mentioned steps together and not in isolation. Doing so will enable you to create wealth, achieve financial security and attain freedom.
Thanks to :

Benefits of Diversification by HDFC Bank

Diversification helps reduce risk. The benefits of diversifying one’s portfolio are, of course, known to all. It helps align our investment portfolio with our financial-cum-risk profile. It protects us from any downside in one particular asset class.
As each one of has a unique financial-cum-risk profile, each one of us must:
Build a suitable mix of investment across various assets classes viz. debt, equity, real estate, gold etc.
Even among the broad asset class like debt or equity, there are sub-classes. One must diversify suitably across these sub-classes too. For example in debt one must invest suitably in Bank FD, NSC/KVP and PPF etc. Or in equity one has to diversify across large-cap, mid-cap, small-cap, sector-specific.
Going further, even within particular sub-class say large-cap equity, one has to choose a mix of individual stocks.
The overall approach is a top-down one i.e. starting from the broad allocation across asset classes, you move down to choosing individual investment options. We could invest separately in each of the individual option as per our desired allocation strategy. This approach gives us the total flexibility to choose what we want. We have full control over our financial decisions. But this approach:
Can become a bit cumbersome
Requires one to have the time and the knowledge to identify and invest separately in individual opportunities.
A fairly large corpus is needed to achieve the desired diversification
The transaction costs could work out to be high
The tax efficiency is low
Mutual Funds offer some simplification and tax-efficiency, but this so far is limited to equity and debt. We may, however, shortly see real estate and gold funds too. Even within say debt all instruments are not included such as PPF, where we would still have to invest separately. Further, Mutual Funds also offer different routes to achieving the desired diversification. The choice of route usually does not affect the overall returns, which is more a result of the ultimate choice of funds that we make under a particular route. To make the portfolio more suited to our needs and invest across fund houses, we could go in mixed schemes such as MIP or balanced mutual funds. Herein the corpus gets invested in individual stocks and bonds based on the allocation percentage. You could, for example, invest in a balanced fund where 60-65% of the corpus gets invested in individual stocks and the balance 35-40% in different bonds.
In a step further to the previous route, we choose different dedicated equity and debt funds, instead of mixed funds. The benefit of course is higher degree of flexibility to construct a portfolio more in line with our needs. By choosing different funds covering different sectors in the market, we can achieve a high level of diversification across entire market – both debt & equity. But the drawback is a further increase in the number of individual funds we need to invest in and manage. Also, at the time of portfolio rebalancing, we could end-up with a higher tax-outgo.
Given these various routes available, we can choose the one, which suits us the most from the perspective of time, knowledge and efforts that we can devote to managing one’s finances.

Avoid making mistakes while investing - Advices HDFC Bank

Each one of us can win in the investing world if we focus on some basics and implement them diligently. It is important that you know what is important about money to you. Money is a means to an end and not an end in itself. Know what your values are about money. When you know what your values are, decision-making becomes far easier and focusing on your values can motivate you to achieve. When you ask people what their values are, a common answer is 'Security of their family', but yet when it comes to ensuring that you have done something in that area, people end up buying a Rs 5 -10 Lakh insurance policies as if this amount were to last a lifetime. A rough estimate, around 95 % of the people in India might be underinsured.
Concentrate on what returns you need to achieve your goals as this can help you to stay away from risk that is unnecessary. People often look at returns ignoring the risk component. Most of us want an investment with high returns and no risk or less risk. Investors tend to focus only on returns when investing in stocks and mutual funds.
While investing look at the following:
a. What kind of stocks is this fund invested in? b. Is this concentrated in a few stocks or few sectors? c. What is the Standard Deviation and Beta?
Asset Allocation is the most important decision that an investor must make to achieve his financial goals and effectively manage risk. This means you need to focus on what percentage of your money should go into Equity, Debt, Real Estate, Gold and Cash. A number of studies have shown that a portfolio’s asset strategy is the driving force behind portfolio performance and that over a period of time, it accounts for more than 90% of the variation in overall returns. In India there is an under ownership of equity and hence most of the portfolios are skewed towards Cash & Debt (RBI Bonds, Post Office Schemes, & Endowment Plans from LIC) or Real Estate (due to the ticket size) and Gold.
Every portfolio must have an exposure to equity to maintain purchasing power. Every equity portfolio should comprise essentially of rock steady large cap stocks. At the same time it could be helpful to have midcap stock, a stock, which has potential to become a large cap. Midcaps can provide that extra punch when the aggressive streak is needed.
One of the biggest mistakes that people commit is in their selection of insurance products. People spend Rs 20000 or more for their car insurance for a cover of 6-7 lakhs but when it comes to insuring their lives for around Rs 40 Lakhs-50 Lakhs for the same premium, they prefer an investment policy to a pure term plan on the pretext that “I will not get anything back if nothing happens to me”. Most of the endowment products cost you around 30-40%, which is reflected in the returns that you receive. Some other critical mistakes include, not recognizing the impact inflation has on one’s wealth, thinking that you can time the markets, delay in making a Will, and not having a written Investment Strategy and Plan.
You must do the right thing to get results and achieve goals while staying away from stupid and costly mistakes.
Thanks : HDFC Bank

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