Lesson from " Rich Dad, Poor Dad"

“Rich Dad, Poor Dad” is one of my favourite books. If you have had an opportunity to read through it, you would have known that it is important to make money work for you rather than working for money. I replicate my favorite paragraph from the book over here.

“An important distinction is that rich people buy luxuries last, while the poor and the middle class tend to buy luxuries first. The poor and the middle class often buy luxury items such as big houses, diamonds, furs, jewellery and boat because they want to look rich. They look rich, but in reality they just get deeper in debt on credit. The old-money people built their asset column first. Then, the income generated from the asset column bought their luxuries”.

These are the age-old concepts that used to be traditionally followed in India. Of late, we see a drift towards the credit culture, i.e we consume and then earn for the consumption rather than earning and consuming. This may not be really healthy for wealth making.

Also read, pay yourselves first

Debt and Equity - Tax Impact

Equity fund - Any fund allocating minimum of 65% to equity
Tax rules and rates as of 22,Jan 2007

Factors to be considered when choosing an ELSS fund.

1. Look at the long-term track record of the fund and the fund house.
2. Don’t invest only for the reason that the fund house declares a BIG dividend. (Understand the NAV of your fund goes down after the dividend declaration).
3. Understand the nature of fund and risk involved in it. (Whether the fund is large cap or small/mid cap oriented).
4. Analyse how the fund has performed during bad weathers in stock market.Take your own call after someone’s advice carries a thorough analysis and don away alone.
5. Take your own call after someone’s advice carries a thorough analysis and don away alone.

Tax Saving-ELSS Advantage! Tax saving-Dividend Reinvestment option in ELSS –...

Small and Mid Cap NFOS

Sundaram BNP Paribas has come out with two NFOs (Equity Multiplier Fund and Select Mid cap)

1. Suitable for investors willing to take higher amount of risk.
2. Small and Mid- cap can be expected to fetch more returns as Large Caps seem to hit the top.
3. Limit fixed on the amount that will be collected during the NFO can have a positive impact on the returns.

Given the track record of the fund house in mid-cap segment , one can consider investing in these offerings if one has the right risk apetite.

Also Read, Beware of NFOs


Details of the NFO

The Power of Compounding - Compound Interest

"Compounding interest is the greatest mathematical discovery of all time". Albert Einstein

There is a story about an Emperor of China who was so excited about the game of chess that he offered the inventor of the game one wish. The inventor replied that he wanted one grain of rice on the First Square of the chessboard, two grains on the second square, four on the third and so on through the 64th square. The unwitting emperor agreed to the modest request. But two to the 64th power is 18 million trillion grains of rice - more than enough to cover the entire surface of the earth. The Emperor, realizing that he had been duped, had the inventor of the game beheaded.

So what should we do to take advantage of the power of compounding?

1. Plan our future needs and investments in advance to take advantage of compounding.

2. Let the power of compounding work by never withdrawing from the investment.

3. Start as early as possible to give “compound interest “ enough time to work.

See an example to understand the need for starting early and make the POWER OF COMPOUNDING work for you.

A and B want to retire at the age of 60 years. To take care of his post-retirement requirements, A invests a total amount of Rs. 35 lakhs towards his retirement corpus. On the other hand, B invests a total of Rs 50 lakh towards his retirement. Despite investing less, A accumulates Rs 298 lakh, compared to B's accumulation of Rs 216 lakh.
This was possible because,
A had TIME in his favour. He began investing a sum of Rs 1 lakh p.a. earlier, at the age of 25 years, up to the age of 60. B, to compensate for lost time, saved twice the amount invested by A i.e. Rs. 2 lakhs every year from the age of 35, till the age of 59 years. But he couldn’t match up with A because he did not use the power of compounding for long.

So, start investing early and use the power of compounding .

Beware of NFOs

1.Before you invest in an NFO, Study and understand the theme of the NFO.

2.Try to understand whether the offering is really new in the market or from the fund.

3.Check out the performance of similar funds (theme), the fund house and the fund manager.

4. Understand whether it is a closed ended or open-ended fund.

5. Most importantly you should know whether the fund suits your financial goal and plan.

6. DO NOT invest only for the reason an agent pushes a new fund (in most of the cases, they are paid more commission for new ones).

7. The expense ratio is going to be more for a new fund. Beware of expense ratio in close-ended equity funds.

(As per Sebi’s guideline, AMCs are not allowed to pass on the issue expenses that have been incurred during the time of floating open-ended scheme. While in case of close-ended scheme, AMCs are allowed to pass on such expenses.)

8. Do not go in for a NFO because you get units @ Rs. 10 NAV (NAV has little relevance to your investment decision).

An analysis of performance of New Funds (of last couple of years) shows not even handfuls have performed better than existing funds. So, better invest in existing funds than NFOs unless the new offering is so SPECIAL.

Balanced Fund – tax advantage on debt component.

Balanced funds are those, which invest almost equally in Debt and Equity. The Debt – Equity balance in the fund changes according to the need of the situation and the fund manager decides it.

What are the Advantages of a balanced fund?

1. It gives the leverage of investing in equity while maintaining one foot on safe debt funds.

2. No steep fall as in case of pure equity funds as you have a cushion of debts.

3. Main Advantage is on tax…If Stipulated amount of Equity Proportion is maintained in a balanced fund (65%), and then it is considered as an equity fund for all taxation purposes. i.e. Dividends are not subject to dividend distribution tax.

If you invest separately in a debt fund and equity fund for balancing your portfolio, then you will have to bear tax on dividend distributed on your debt fund(s). This tax is deducted by MFs before payment. You save this portion of tax by investing in a balanced fund.

If you are averse to investing in equity funds, then Balanced Funds may be a right option for you. (3-5 year investment period).

Do you pay yourselves first?

When one of my friends called me up and said, “ Hey your articles on investment sound ok. But I don’t have the money to invest. Will you provide with that too??”

I was surprised …He ‘s a guy who earns a BIG salary. 60% of his Net salary goes towards his house loan (EMI), around 10% for his Car loan. Rest for his other living needs.

I told him that when you have a big heart to make the Banker’s, Builder’s, Auto Manufacturers and Restaurant owners rich…(by way of house loan, buying a car and eating out)…why cant you make yourselves rich too by investing for the future.All you need is Just Rs 100 – 500 p.m to start it as a habit….It can be a simple RD to an SIP in Mutual fund.

Money grows only by time and it’s always too late to start investing (Warren Buffet started investing at 11 and feels he started too late now. to read more on this click here)

Robert Kiyosaki in his famous book "Rich Dad, Poor Dad' writes about "paying yourself first”. Whenever you save/invest money, you pay yourself (by making your money work) and you pay others when you spend or take a loan.

So, Start paying yourselves (by investing at least a small amount regularly) and get on to the path of the wealth making. If you save more, your journey on this path is going to be accomplished faster.

Gold as an Investment

Buying and Storing gold (in the form of jewels) is a household norm in India. Most of the Invaders came to India for the lure of gold.

Gold as an Investment normally keeps us to keep up with inflation or out phase it at times.

2006 was a golden year in the sense that the ROI on gold even out phased the growth of sensex. (See details below).

ROI * for year 2006
Gold - 48.47%
Sensex - 42.3%

With Mutual funds planning to offer Gold ETFs (Mutual funds that invest in gold), it will be interesting to see how gold enters the Indian household in a different form.

Lets discuss more on gold as an investment in the forthcoming articles.

*Returns are for the period Dec 13, 2005 till Dec 13, 2006 ( Source – Rediff)