Thread by @YatharthArora8

Let's Talk Money.

You don't follow the same diet plan as your Best Friend does. Similarly it is important to invest according to your needs and what works best for you.

A Thread.

1/n A common question that we hear from people when we talk about investments is
'Where is the Money To Invest?',
'We have nothing left to save',
'I have no idea where my Money goes'.

2/n We are often adviced to write down our daily expenses. Doing this results in 2 things -
1. We get bored and stop recording it in a week.
2. We are more focused on the expense sheet rather than enjoying the coffee that we ordered.

3/n Most financial plannings fail because we don't have an efficient cash flow system.
Cash Flow System: The idea is to seperate the money according to its functions so that the brain is able to map it efficiently. The 3 components of money are :
1.Income
2.Expenses
3.Savings

4/n One of the simplest and easiest way to execute this cash flow system is to have three accounts and label them as Income, Expenses and Savings respectively.

5/n Income: This account is credited with all your inflows - salary, cash incentives, bonuses, money from relatives etc. As soon as the money is credited be prepared to transfer it to the other accounts. The goal is to maintain this as a zero balance account.

6/n Expenses: This account should have all the money that you need for the current month. From EMI's to Credit Card Bills, grocery to electricity bill, car fuel to gas bills. The important goal is to ensure that more money is not needed from the other 2 accounts.

7/n Savings: Whatever left (Income - Expenses) is transferred to the Savings account. Minimum 5-10% of the Income should go into savings.

Maintaining this cash flow system enables you to keep a check on your expenses.

8/n Life is unpredictable and there can be events that are completely unplanned. A fatal accident, expelled from the job etc. For such unplanned events you need an Emergency Fund. The thumb rule is to have 6× your spending amount as emergency fund.

Where to store this Fund?

9/n
At the time of crises we will need this amount immediately. It should be easier to cash out. The better option is to go for a Fixed Deposit rather than depositing it in the Bank for better interest rates.

10/n
Medical Insurance: Choosing a medical cover for yourself and your family is really a complex task. Getting a good medic cover is probably more important than buying Life insurance, you're more likely to go to a hospital for broken leg than die.

11/n
How much cover do you need?
You need a basic cover of 3-15 lakhs per person, rest depending on the place you live and the lifestyle you follow.

What policy do you need?
There are 25 companies and each company has 8-10 policies. Comparing them and choosing one is difficult.

12/n Insurance companies have the ability to set up the game so that you loose. You need to find out if your policy gives at least these 8 benefits -

A. No clause of co-pay: This clause states that at the time of claim, company is entitled to pay only a few % of the amount.

13/n
B. Pre-existing disease clause: Company will not cover disease that you already have when you take the policy.

C. Disease waiting period: Companies pay the claim after a cool off period of 30 to 90 days under this clause. Make sure there is none in your policy.

14/n
D. Sub- Limit: It is a limitation on what the company will pay out for specific things (Eg. Only 1% of the total cover on room rent). Make sure there is no sub limit.

E. Check for exclusion: Diseases that the policy will not cover. Pregnancy, Cosmetic surgery and dental.

15/n
F. Ask how much of the costs before and after hospitalization the policy will cover. For example medicines, diagnostic tests, fees of the doctor etc.

G. Look at the no claim bonus feature: when you don't make a claim in a year, you get rewarded by the company.

16/n At the same time it is important to check the claim records of the company you are buying policy from. Look at the claim data and look for a policy that has less than thirty complaints on every 10,000 claims made.

17/n
What if you die?
Close your eyes and think about the people who are dependent on you. The financial burden adds more grief to a sudden death of the family member. You need a Life cover to protect your family's financial health if you die an untimely death.

18/n For a Life cover you pay an annual premium till your retirement and if you outlive your policy you get nothing. It's a 'waste'.
It is this belief of waste that we need to change. This is a price you lay for the Life Cover. Life term policies should not be bought for returns

19/n The day you realise that investment and insurance products are seperate things, is the day you move solidly towards building your financial security.

When should you buy it?
Buy the earliest as possible. The premium gets locked in for the duration of policy from 1st premium

20/n After you have established your cash flow system, you have an Emergency fund, medical insurance and a Life cover, you are all set for an Investment.

21/n

There is nothing called 'Enough Money'. If you find yourself short of money every month, either spend less or increase your income. There is no third option.

If you look hard enough, you will find the money to invest.

22/n
Why we resist investing for long terms?

1. Not having enough money
2. Desire to keep money in liquid for near future
3. Making a mistake
4. Lack of knowledge

23/n Waiting for a large corpus for investment is like waiting to get fit before dieting. You can even start by investing 1000 INR/month. We don't need a lot of money to start investing.

We already have the emergency fund in liquid for the emergencies in near future.

24/n People make mistakes in investment only when they choose products that are not suited for them. Long term products won't give you results in shorter term and vice versa.

Learning about investment is a one time cost that will give you lifelong returns.

25/n
There are 3 assets where people can invest:
1. Debt
2. Equity
3. Real asset

26/n
We are familiar with the word debt as borrowing of money. But in terms of investment there is more to it. Debt means the products that give you an assured return. For eg PPF, FD, bonds.

27/n These are the safest investment product and has the minimum return. Debt products are good for stability but not for growth.

Real asset has two options - Gold and Real Estate.People in our country are obsessed over buying Gold as an investment

28/n If you look at the returns Gold is the worst performing asset. Buying Gold in the form of jewellery is not an investment as you loose 30% straight away to making charges. Not more than 5-10% of your portfolio should go into Gold.

29/n After Gold the next obsession is Real Estate. The problem with real estate is that we often ignore the additional costs of maintenance that comes with it. It is a horrible, clunky investment that has lots of costs, which people forget to add to profit maths.

30/n Next comes the equity. It is the ownership of a business and the risks that it brings, either through stocks or through mutual funds.

I know you, the one reading this, is a wonderful cook. Suppose you plan to expand ur cooking business by opening new chains across the city.

31/n But for expansion you need funds. So either you take a loan or I(your friend) will give you some money to own some part of the business. The profit that the business makes is divided according to the ownership. This is where Sensex comes in.

32/n It is important to know that buying stocks is not gambling. Equity is a slow cook noodle. There are rules and regulations that each business has to follow while listing themselves on the stock exchange to attract investors.

YES.

You are an investor and not a trader.

33/n What is a Sensex?
Sensex is the Amitabh Bachchan of business channels. To understand Sensex one must know stock index number. It is a number that shows the change in price of something when you compare it with its price in the past

34/n The Sensex comprises of 30 most representative companies that are listed on BSE. These are the companies that are most traded on stock exchange. The index was set up in 1979 with an initial value of 100.

35/n When we say that the Sensex went up, it means that for those 30 companies more prices rose than fell. The opposite is true when Sensex falls. Nifty is another stock that comprises of 50 companies. To be included in the 30 companies, it needs to have a large market cap.

36/n The Sensex companies can change over time depending on the market cap. In 1986 Sensex comprised of Bombay Dyeing, ACC and many more. These exited in 2004 and now we have new set of companies.

37/n People consider Stock market as gambling because we are afraid to invest for long term. In a growing economy, stock prices go up over the longer run because those are legitimate firms who are investing in the future.

38/n

In a longer term, you get around 14-15% returns and a very diminished volatility (experimentally proven).

39/n Golde Rule
When investing in stock market, show the same amount of patience when in real estate. The investment will slow cook over the years. If you are confused with which stocks to buy the best option is to go with Mutual Funds.

40/n A mutual fund is a way to pool the money of a large no. of small investors who do not hv the time to research & hand it over to experts to manage it. This cuts the cost you need to pay to a financial advisor and your money is invested in a way that is suitable to your needs.

41/n Mutual Fund has a 3 part structure - Sponsor who sets the mutual fund. The sponsor sets up a trust and an asset management company (AMC). The money you invest goes into the trust and the sponsor appoints trustees who are custodians of the investor's money.

42/n The AMC provides plans and deals to the trustees for the investment of the fund. Mutual funds are safe from being stolen but volatility depends on the market ups and downs since it is a market linked product.

43/n There are three kinds of Mutual funds-
1. Debt funds - These funds buy bonds and debt papers issues by the government and firms.
2. Enquity - These funds buy into the stocks of listed companies.
3. Gold funds - They buy actual gold.

44/n Based on holding period of the bond & according to the quality of the debt paper bought by the fund, there are two kinds of debt funds:
Liquid funds - Average holding period of all the bonds is 3 months.
Ultra short term liquid funds - Average holding period is 9 months.

45/n Gold Funds : These funds buy gold and trade in day to day prices of the Gold. The Gold is bought in the form of an Exchange Traded Fund.

46/n Equity Funds: According to me this is the heart of a mutual fund. These funds buy stocks of companies listed in the stock market.

Why can't you buy stocks directly?
Because it takes a lot of knowledge about the company and the time to research.

47/n Active & Passive funds

Active fund is like taking a taxi to work. Your journey depends on the driver. Similarly your returns depends on the manager that invests your money.

48/n Passive funds are like taking metro to reach office. The route is fixed and driver can't really do anything. You hold on the index in passive funds.

What is an SIP?
SIP's are systematic investment plan. We earn a fixed amount every month & can invest only a small percent.

49/n So investing that saving in the form of an SIP in the mutual fund is a good way. SIP is a vehicle and not the goal. You use SIP to make investments in a mutual fund. Investing in small chunks is better than hitting once with a large sum.

50/n
Six parameters to evaluate investment oriented financial products -
1. Cost: This includes the front load cost, cost to stay on board (premium) and the cost to withdraw money.
2.Returns: This is the sole motive of an investment.
How much do you get a return on the product?

51/n

3. Lock-in: What is the time period for which you cannot withdraw your money?
4. Cost to exit early
5. Holding Period
6. Tax

52/n You don't eat the same kind of food everyday. Similarly Diversification in a portfolio is the key. Your investment should include all the different categories of products. It should not only contain DEBT funds or solely not Equity but rather an amalgation of all.

53/n If the investment is made only in FD's you loose the purchasing power of your money. Government use inflation to burden off their debt and the purchasing power is lost. If you invest only in stocks the investment is too risky.

54/n The thumb rule is to invest (100 - your age) into the equity and rest for FD's. For eg if you are 40, invest 60% in the equity and the rest for liquidity. The more closer you move towards the goal, less should be invested in equity.

55/n Last but not the least.

DO NOT INVEST IN ANYTHING YOU DONT UNDERSTAND.

Every product you buy should have a strong reason to satisfy your demands

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