1. •
For an intangible entity, time is starkly palpable. It seems to strum with glee when you
make swift gains in the market; it's a sentient savant when you suffer losses; it can be an
irksome sprinter for the ageing saver; a sluggish bore for a young trader. But mostly, time
is a capricious companion, loyal to none, yet equanimous to all.
Rule 1: Know your worth before you begin
• To reach the finishing line, you must first know where the race begins. As any
financial planner will tell you, figuring out your net worth is the first step towards
formulating a successful financial plan. The best way to do this is by drawing up a list of
your assets and liabilities. Use the table on the right to calculate your net worth.
It will also give you a broad idea of your current asset allocation. Taking stock of your
current status is necessary to help you make informed financial decisions. The slowdown
may have affected your annual increment. Volatility in the stock market may have
prompted you to stay out. Before you plan to invest, sit down and take a fresh look at your
financial situation. Once you have figured out where you stand, find out your attitude
towards investing. Your ability to take risks determines the investments you should opt for.
If your stomach churns whenever the Sensex goes into a freefall, equity is not for you. Stick
to the safety of debt options or take exposure to stocks through mutual funds. On the other
hand, if a 20-25% fall in value doesn't upset you, equity can be a great way to build wealth.
Another important trait is the keenness to conduct research before investing.

3. Rule 2: Don't invest in a product you don't understand...
Most of the people who write to us seeking financial advice have investments they don't
understand. They are likely to know every random feature of their Rs 8,000 cell phone, but
will be clueless about their insurance policies that are worth lakhs of rupees. Before you
invest, you must fully understand how the product works and how you will gain from it.

4. There are several products (especially insurance plans) that promise the moon and have
complex features. Avoid these sophisticated products if you don't understand them.
Investing in something that you do not understand is gambling with your money. Instead of
the structured products being sold in the market, the humble PPF can also help build
enormous wealth in the long term. Increase the investment by just 1% every year and you
will have a comfortable retirement

5. ...but don't skew your portfolio in favour of one asset
The above-mentioned investment rule does not imply that you concentrate your
investments in one or two asset classes. You may not understand equity, but this should not
stop you from investing in equity mutual funds. As long as you understand that the fund
manager will deploy your money in the stock market and your investment will move with
the market, it is good enough. There are investors who buy nothing but gold, or invest only
in bank deposits.

6. Rule 3: Do not invest and forget
Don't think your work is done after you make an investment. In fact, it has just begun. You
need to monitor and review your investments and take corrective measures if they go off
the track. At least once a year, you should subject your portfolio to the financial equivalent
of a CT scan. The outcome may not be very palatable, but some tough decisions are needed
to keep the portfolio healthy.
The first thing to check in your portfolio is asset allocation. It could have changed because
of the market conditions and, perhaps, needs to be rebalanced. For instance, you may have
wanted to allocate 60% of the corpus to stocks, 30% to debt and 10% to gold and other
investments, but due to a fall in the equity market and rise in gold prices, the portfolio now
has 45% in stocks, 40% in debt and 15% in gold. You need to increase your allocation to
equity by buying some more and reduce the investment in debt and gold. The next thing to
consider is the performance of individual investments.

8. Review portfolio in case of special situations
Experts say you should review your investments once a year. However, some extraordinary
circumstances may require you to review it even earlier. Here are a few such special
situations:
Marriage
Birth of a child
Salary hike
Windfall
Loans
Black swan situations

9. Rule 4: Look beyond price and past returns for real value
t is every investor's dream to buy a stock when it is priced low and sell when it zooms.
However, small investors take this a little too literally and buy penny shares trading at very
low prices. The price of a share is not an indication of its real value. A stock at Rs 5 may
actually be costlier in value terms than one trading at Rs 500.
Low price alone does not mean that the stock offers good value. To find out if a stock is
fairly valued, compare it with its peers on a few common parameters. Though the PE ratio
is a good way to identify cheap stocks, relying only on a single parameter may not always
yield the desired results. What you consider cheap in relative terms might actually be more
expensive, and vice versa. Investors have lost money in many seemingly cheap stocks, while
high-priced stocks have given spectacular returns (see tables).
This is because many of these low PE stocks may actually be costlier than their high PE
counterparts, based on other fundamentals. A high PE stock could be justified if the
company has high growth expectations, strong fundamentals, or has huge projects or
investments in the pipeline. A low PE stock, on the other hand, may be so valued because of
poor earnings growth, weak fundamentals or lack of further expansion opportunities. This
argument is stronger when it comes to mutual funds. Some investors think mutual funds
with low NAVs are cheap. A fund at Rs 25 is not cheaper (or better) than one priced at Rs
250. The low price only means it is newer. Your returns will depend on how the fund
performs, which, in turn, will depend on how the market moves.

13. Rule 5: Factor in inflation while calculating returns
Inflation affects everyone and its impact on the household budget is widely understood.
However, very few investors understand the impact of inflation on their investments.
This is a mistake because inflation should be factored into every calculation of your
financial plan.
Even a modest 5% annual inflation can widen the gap between your nominal and real
income to almost 20% in just five years.
Over 40 years, this difference can widen to over 80%. So, don't plan your future based on
nominal values.
Factor in inflation to know the real value of your income and investments.
The post-tax returns from a bank deposit, which offers 8.5% interest, will not be able to
match the rise in prices.
This is why planners don't recommend low-yield debt investments for the long term.
Instead, they advise clients to take at least 15-20% exposure to equities to be able to beat
inflation.
Inflation should especially be considered while planning for long-term goals like retirement
and children's education.
Also take into account the fact that your consumption basket changes over the years. When
you are single, education and healthcare inflation do not impact you (see graphic).
However, when you start a family, education expenses shoot up. As you grow older,
healthcare accounts for a progressively larger portion of your expenses.
Insurance is another area where inflation should be taken into account.
A Rs 1 crore insurance cover seems sufficient right now, but this might change when you
factor in inflation.

14. Even 6% inflation will reduce the purchasing power of Rs 1 crore to Rs 40 lakh in 15 years.

15. Rule 6: Buy insurance to guard against the unforeseen...
No matter how careful you are, an eventuality can play havoc with your finances. It could
be a medical emergency that racks up a huge bill or the death of the family's breadwinner.
The only way to deal with these mishaps is to protect yourself adequately. Insurance is a
cost-effective way to safeguard yourself against the unexpected. In fact, life insurance is one
of the most important ingredients of a financial plan. This one instrument secures all your
financial goals and aspirations. One should have a cover of at least 5-6 times one's annual
income. However, this is a rudimentary method and a more accurate calculation must take
into account your expenses, current assets and future financial goals. Use the table below to
find out the size of life insurance cover you need. Medical insurance is also very important.

16. he rise in cost of healthcare means that even 2-3 days in hospital can cost Rs 50,000-60,000.
A medical cover will not prevent illness, but it will allow you to access the best hospital in
your city without burning a hole in your wallet. Take adequate health cover for your
family and yourself. If your employer offers you medical insurance, take a top-up plan to
enhance it. A personal accident cover is a little known, but crucial, form of insurance. It
covers loss of livelihood due to disability, temporary or permanent. Life insurance is
payable only in case of death and medical insurance covers hospitalisation expenses, but
these policies will not pay anything if a person loses a limb in an accident or has to miss
work for a long period due to injuries. This is where personal accident insurance will come
to his rescue.
Rule 7: Don't leave tax planning till end of financial year
It is a perennial problem. Taxpayers wake up in March when their employer sends them a
notice seeking proof of their tax-saving investments. In the rush to complete their tax
planning before the 31 March deadline, many taxpayers make hasty decisions they regret
at leisure. Unscrupulous insurance agents thrive on this panic. This is the time when they
can mis-sell high-commission products without the buyer asking too many questions or

17. examining the product in detail. Who would want to go through the policy features in small
print when the premium receipt has to be submitted to the office the next day?
This is a penny wise, pound foolish approach. If you buy an insurance policy that doesn't
suit you, the entire premium goes waste. To save Rs 2,000-3,000 in tax, you could be
throwing away Rs 10,000. Your tax planning should not be a kneejerk event that happens
in March, but a part of your overall financial planning. Instead of packing your entire tax
planning into March, spread it across the year and take informed decisions. You should
buy an insurance plan only if you need life cover. Invest in an ELSS fund only if you need
to take exposure to stocks. Lock money in the PPF, an NSC or a bank fixed deposit if you
want to invest in debt. Take a health insurance plan if you need medical cover, not because
you get deduction under Section 80D. The tax benefit is incidental, not the core.
Rule 8: Be prepared for a financial emergency
Will you be able to manage your finances if you lose your job today? Financial planners
advise that one should have a buffer fund to take care of a financial emergency. This
contingency fund should be large enough to meet at least three months' worth of household
expenses, including loan repayment and insurance premium obligations. An emergency
fund should be easily accessible and its value should not be subject to fluctuations. While
an investment in equity funds is fairly liquid, its value can go down when the funds are
needed and beat the purpose of having such a corpus. Similarly, a home equity loan pre-
supposes an appreciation in the value of property, which may not always happen. A loan
will also push up the EMI, which might be tough when somebody is facing a loss of income.
Although credit cards are commonly used for emergency funding, they are useful if you
restrict the credit to one month. Otherwise, the cost is prohibitively high.

18. ...but do not keep all of it in cash
While the need for a cash cushion cannot be stressed enough, the problem is that many of
us hold much more than is needed for our short-term needs. Whether it is in your pocket or
in a savings bank account, you incur costs. For one, the opportunity cost of holding cash is
high since you forego the chance to invest it to earn a higher rate of return. More
importantly, the cash in your account will lose value if you take the adverse impact of
inflation into account. If adjusted for inflation, the return from a savings bank account will
always be in the negative. Then there are the psychological costs of holding cash.

19. Rule 9: Give precedence to retirement savings
One of the biggest challenges for tomorrow's retirees is to ensure that they don't outlive
their savings. This is a distinct possibility because of two factors: the rising cost of living
and an increase in life expectancy.
However, for many Indians, retirement is not as crucial as saving for their children.
Whether it is for their education or marriage, or even to provide them with a comfortable
life, children are the biggest motivators of savings in the country.
This can be a problem because your retirement is going to be very different from that of
the previous generation.
Guaranteed pension, assured return from government schemes, relatively low inflation and
the security of a joint family - the four pillars on which the previous generation's
retirement planning rested - have either gone or will disappear soon. What's more, you will
live longer, thus heightening the risk of outliving your money.
Before you pour money into a child plan, make sure your retirement savings target has
been met. Retirement planning should be your first and most important financial goal.
By this we don't mean you should neglect your child's needs, but you can borrow for
almost all other goals, such as child's education, marriage or going on a holiday.
No one will lend you for your retirement expenses though. The early birds, who start
putting away small amounts from the day they start working, have a distinct advantage
over lazy grasshoppers, who think of retirement planning only after the first grey hair
makes an appearance in their 40s (see graphic).

20. It is also important that you don't dip into your corpus before you retire. Withdrawing
money from your PPF account or missing the premium of a pension plan can lead to a
shortfall in your corpus.
If you want a dignified retirement, resist the temptation to withdraw from the investments
earmarked for your sunset years.

21. Rule 10: Learn to cut your losses
Many investors believe that if they select a good investment and time their moves well, it is
enough. However, the decision to sell, especially at a loss, is not as easy. Financial experts
say that the small investor's portfolio suffers more due to incorrect decisions that are not
rectified in time. Holding bad investments may be worse than not selecting the right ones.
To be a successful investor, you need to have a selling plan in place and book losses if the
situation so demands. Behavioral economists contend that our refusal to sell an investment
stems from our aversion to loss. If our investment turns out to be good, we are happy to sell
and feel good about the gains. However, booking a loss is painful, so we tend to postpone
the regret we feel at having made the wrong decision.
we choose to wait out, ignore, or worse, add more to a poorly performing investment,
hoping to average out the cost. Therefore, cleaning up a portfolio is a tough task and calls
for rational decision-making. Low-yield insurance policies, dud stocks and poorly selected
mutual funds don't offer any value to the investor, but there is a deeprooted aversion to get

22. rid of them. Many of the wrong decisions are taken when everything is looking upbeat.
Those who bought obscure infrastructure stocks at the height of the 2007 euphoria are still
holding them, hoping that they will be able to recoup their investment one day. Little do
they realise that this is a drag on their portfolio's overall return. Had they booked losses in
2008 and shifted the money to any average index-based stock, they would have got
something back. It is also important not to throw good money after bad. Don't book profits
on good investments just to plough it back into underperformers. You will only be left with
lemons. It is better to ride the winners than pump more money into losers.