Personal financial planning

www.sim
plus.co.in
Sim
plus Financial Consultancy Private Lim
ited
1

Introduction:
The concept of
Financial Responsibility
3

Frank L Netti
By law you have the
right, by nature you
have a duty, and to your
family you have an
obligation, to be a good
steward of all your
assets. 4

Personal Financial Planning
Personal Financial Planning is like
preventive medicine.
There are a few critical areas of your
financial life, about which you must
be aware, and where you must take
a few necessary steps.
This will ensure that you are
insulated from shocks on the
financial front. 5

The ultimate objective
of PFP
Financial
Freedom
6

Why bother about
Personal Investment?
7

The first reason why you
should bother about
personal investment:
Because it is not hard
to master the basics
8

Warren Buffett
“Investing
is
simple,
but not
easy.”
9

Albert Einstein
“Everything
should be
made
as simple
as possible,
but no
simpler.”
10

Burton G Malkiel The rules for achieving
financial security
through savings and
investment are
extraordinarily simple.
A small degree of self-
sacrifice may be
required.
Discipline and persistence
are definitely required,
but obtaining well above
average investment
results is strikingly
easy.
11

The second reason why
you should bother about
Because it is
critically important
12

Burton Malkiel
“We must undertake
investment
strategies that
maintain our real
purchasing power;
otherwise, we are
doomed to an ever-
decreasing
standard of living.” 13

The third reason why you must bother about
To protect yourself
from ‘financial advisers’
and the financial media!
14

Some Fundamental Concepts
Never expect
an investment advisor
to take greater interest
in your money,
than you yourself have a
duty to take.
15

Burton G Malkiel
The primary
interest of
financial
advisers is not
yours, but theirs.
They are very
good at making
money for
themselves. 16

Warren Buffett
There seems to be
some perverse human
characteristic
that likes to make
easy things difficult.
17

Some Fundamental Concepts
When a person with experience
meets a person with money,
the person with experience
gets the money.
And the person with money
gets the experience!
18

Personal
Financial
Planning
19

is the conceptualisation
and implementation of a
comprehensive plan, for the
achievement of a person’s
total financial objectives.
20

Great coaches agree that
to succeed in athletics,
you must:
Plan your play, and
play your plan.
21

Alan Lakein, expert on
time management
Planning is bringing
the future into the
present, so that you
can do something
about it now.
22

“If you fail to plan,
you plan to fail.”
23

A normal individual should address
these financial areas of concern
Insurance
Emergency Funding
Retirement Planning
Housing
Debt Extinguishment
Investment
Other Objectives 24

Types of Insurance
Depending upon individual
circumstances, a person
needs:
 Health cover
 Life cover
 Property cover
26

Insurance
 Health insurance is advised for all
individuals.
The entire family must have at least a
basic health cover.
This is the only insurance which
would be ‘compulsory.’
Life and property insurance should be
purchased only if required, and to
the extent required. 28

Health Insurance
 Choose floater policies.
 Floater health policies
generally cover up to 4
members of a family.
29

Health Insurance
Basic Health Cover
Personal Accident Cover
Critical Illness Cover
Personal Accident & Critical Illness
covers may be taken as riders to a
life insurance policy or as stand
alone policies themselves.
Taking stand-alone policies is
preferable. 30

Universal Health
Insurance Scheme
31

Frank L Netti, author of Retire
Sooner, Retire Richer
If you think good health is
everything, then health
insurance is next to
everything.
32

Important points about health insurance
Obtain quotations.
Read brochures of the lowest three
quoted plans.
Select from the lowest three quotes.
Take a health cover even if your
company gives you a cover.
Consider co-payment options
Decide between cashless claims and
reimbursement claims. 33

How to handle the claims process:
The difference between planned and emergency medical treatment.
The importance of informing the health insurance company.
Inform close family members about your health cover and documentation.
The importance of gathering bills, discharge summaries, etc., and retaining
copies of them.
34

In case of rejection of a claim, arrive at an unbiased conclusion about whether the
rejection was proper or not.
For this, first obtain the reason of rejection. Read the policy fine print and
ascertain whether the ground for rejection is correct.
If need be, consult a good insurance expert and/or a lawyer.
If the rejection is deemed improper, never beg or plead with the insurance company
for the claim to be settled.
35

Instead, send the company a notice / lawyer’s notice.
Then opt for an insurance ombudsman complaint, or a consumer forum
complaint or a court case.
The vast majority of consumer forum complaints and court decisions go
against the insurance companies.
36

A N Shanbhag on life insurance
38

A N Shanbhag on Life Insurance
There is no substitute for life insurance.
Life insurance is not an investment.
It is a social and commercial instrument to
provide financial security in the event of
death of the insured.
If dependents can look after themselves
comfortably without the amount insured,
life insurance is not needed.
39

Shanbhag on Life Insurance (contd.)
Life Insurance is like a life saving
drug.
If you need it, you must have it,
irrespective of the cost.
If you do not need it and you take
it, it can have very bad side
effects on your financial health.
40

Life Insurance –
Three Critical Questions
1. Do you need life
insurance?
Only if you have
financial dependents
42

Life Insurance – Three Critical Questions
2. How much life insurance do you need?
Enough to keep your financial dependents
in the lifestyle they are used to, ensure
that they are debt-free, and provide for
their reasonably foreseeable future
needs.
In other words, enough to compensate
your dependents for the adverse financial
situation caused by your absence.
Example….. 43

Life Insurance – Three Critical Questions
3. What kind of life insurance should
you purchase?
The only life insurance worth
considering is term insurance.
Pure term insurance is good for you.
Most other types of life insurance
are good for the insurance
companies and insurance agents!
44

Upton Sinclair, author
It is difficult to get a
man to understand
something, when his
salary depends upon
not understanding it.
45

Woody Allen
There are
worse things
in life than
death.
Have you ever
spent an
evening with
an insurance
salesman?
46

Evan Esar, American humourist
Insurance is the
business of protecting
you against
everything, except the
insurance agent.
47

Life Insurance
need not be for life!
Life insurance should be
taken when there is a
need for it, and
discontinued when the
need for it disappears. 48

Property Insurance
•Householder’s
insurance
•Insurance of structure
and vital equipment in
the case of apartments 49

An important point
about insurance…..
Buy insurance to
fulfill your need, not
the need of the
insurance agent or
insurance company. 50

Eric Tyson, Personal Finance for Dummies
The point of
insurance is to
protect against
losses that
would be
financially
catastrophic to
you, not to
smooth out the
bumps of
everyday life. 51

Clarity about the
role of insurance
Insurance is for
protection.
Investment is for wealth
creation.
52

Important – Obtain Quotations
Insurance has been privatised.
This means increased competition and greater
choice.
So, never forget to obtain quotations from all
insurance companies for your health, life and
property insurance requirements.
Quotations can be obtained from insurance
brokers. If you don’t know one, email me.
The best and most economical option is to
obtain insurance quotations online from the
individual insurance companies or insurance
portals.
53

The most important type of insurance –
SELF-INSURANCE
Although bad things happen to everyone, you can reduce the odds of them
happening to you, by following a few simple rules:
Don’t smoke or indulge in substance abuse.
Exercise regularly.
Don’t consume alcohol. If you must, enforce strict moderation.
Wear seat belts and don’t drive under the influence of alcohol.
54

Self-Insurance
Eat the right foods, and maintain your proper weight.
Get enough rest.
Get regular medical, dental and vision checkups.
Keep a positive attitude, smile and laugh a lot.
Following these rules doesn’t mean you won’t need insurance, but it is virtually
certain you will lead a better life.
55

Emergency Funding
• Have some contingency
money in a savings bank
/ flexi-deposit account or
money market account.
• In other words, have a
minimum cash buffer.
57

Emergency Funding
• Build towards at least 12 months of
normal living expenses, depending
upon your needs, existing levels of
insurance, number of earners in the
family, etc.
• Special situations may require higher
emergency funding.
• All emergency funds should be
placed in highly liquid investments. 58

Emergency Funding
• If proper insurance is in place, you
may not need to go beyond one year’s
normal living expenses for an
emergency fund.
• If both husband and wife have
reasonably stable jobs or other
independent income, the quantum of
family emergency funding need not
exceed 12 months’ normal expenses. 59

Emergency Funds
can be placed in:
Flexi-deposit accounts
Liquid mutual funds
Short-term floating rate mutual
funds
Longer term bank fixed deposits,
provided there is no loss in case
of premature redemption 60

Important …..
Emergency funds must
preferably be placed in
joint names, under the
“anyone or survivor” mode
of holding.
61

Important…..
Liquidity and safety are
important when
deploying emergency
funds, not returns.
62

An excellent strategy
for deploying emergency funds
Place the funds in liquid, short-term floating rate or short-term funds.
Transfer the capital appreciation to a low-cost index fund.
Your capital remains intact and is available in an emergency.
Overall, your emergency fund can give excellent returns and grow quite
satisfactorily, in a 5 to 10 year time-frame.
63

Thumb rule for a normal
Emergency Fund
One year’s normal living expenses,
rounded off to the next higher Rs
1 lakh.
Example:
Normal living expenses: Rs
30,000/- per month.
Emergency fund: Rs 4 lakhs. 64

Benjamin Franklin (1706 – 1790)
For Age and
Want, save
while you
may;
No Morning
Sun lasts a
whole Day.
66

Retirement Planning
Most employees have retirement
benefits such as Statutory PF,
Recognised PF, Unrecognised PF,
Gratuity, Superannuation Fund,
Pension, Retrenchment
Compensation or VRS
Settlements.
For the self-employed, as well as for
others, there is the PPF.
67

Retirement Planning
• However, it would be very foolish to
depend only on these retirement
benefits to fund retirement.
• There is also a wrong notion, that
planning for retirement should only
start when a person approaches
retirement.
• Nothing could be more dangerous.
68

Old Chinese Proverb
Do not wait until you
are thirsty, to dig a
well.
69

Retirement Planning
A retirement fund should be
started the moment a person
starts work.
You are responsible for your
comfortable retirement, not
the government or your
employer. 70

Retirement Planning
With increased life spans,
increased attention should
be given to retirement
planning.
A person can easily live even
more than 30 years after
retirement. 71

Carl Richards,
www.behaviorgap.com

Retirement Planning
You have a responsibility to
accumulate enough to take care
of yourself and your spouse for
the remainder of your days.
One of the greatest gifts you can
give your children is to be
financially independent in your
old age, thus ensuring that you
don’t become a financial burden
to them. 73

Retirement Planning
‘Retirement management’ will become increasingly important.
What do you want to do in retirement?
Live a life of leisure?
Do volunteer work?
Embark upon a second career?
Continue education?
Read, write, teach, consult?
Join or form recreation / personality development clubs?
74

Retirement Planning
In retirement, uncertainties
are greater than certainties.
Proper retirement planning
and a sufficiently large
retirement corpus help in
dealing effectively with
uncertainties.
75

Retirement Planning
The best private retirement plan would
be sustained systematic investment
into well diversified equity linked
savings scheme (ELSS) mutual funds.
Long-term returns on equity in
emerging markets such as India: 14
-15% CAGR.
Long-term returns on equity in
developed countries: 9 - 10% CAGR. 76

Retirement Planning
So long as interest on Public
Provident Fund (PPF) is tax-
free, this would also be an
excellent retirement avenue
for the conservative investor.
Present returns on Public
Provident Fund: 8.7% CAGR
77

Avoid “retirement products” of insurance
companies, like annuities and pension plans
Eric Tyson, Personal Finance for Dummies:
“Insurance company insolvency (bankruptcy) can risk the safety of your
investment in an annuity, whereas the value of a mutual fund depends only
on the value of the securities in the fund.
If a mutual fund company fails, your securities investments aren’t lost because
they are held separately from the assets of the fund company itself.”
78

Eric Tyson, Personal Finance for Dummies
Insurance annuities
come with
significant charges
for early
surrender.
(Investment) plans
with mutual funds
don’t include
these charges.
79

Retirement Planning
From the financial year 2005-06 onwards, Section 80C of the Income-tax Act, 1961,
provides a marvellous opportunity to build a tax-advantaged retirement fund of up
to Rs 1 lakh per annum, using, among other things, PPF & ELSS.
However, watch out for possible changes that may be brought about if the Direct
Taxes Code is implemented in the Financial Year 2014-15.
80

Retirement Planning
While the income-tax exemption
under ELSS may be a sweetener,
it should be borne in mind that a
retirement fund is of vital
importance in its own right, and
must be started, whether or not
there is a tax benefit attached to
it.
81

Retirement Planning
Investments into a retirement
corpus are for the very long term.
A time horizon of 10 years would
be considered short in a
retirement plan.
Just as an emergency fund must be
utilised only in an emergency, a
retirement fund must be encashed
only upon retirement. 82

‘Sacred’ areas of a Financial Plan
Insurance – health, life, property
Emergency Funding
Retirement Funds
One residential house
Unless a life and death situation arises, and
emergency funds and insurance are
insufficient, the accumulated corpus of a
retirement plan should never be touched,
until actual retirement. 83

Retirement Planning
For successful retirement
planning, it is not necessary that
large amounts be invested.
Small amounts are fine, provided
they are invested at regular
intervals, for a long time.
84

The power of sustained
systematic investment (data as
on 30 June 2013)
Fund: Franklin India Prima
SIP of Rs 1,000/- per month
Period: 19 years and 7 monts
Amount invested: Rs 2,35,000/-
Present value: Rs 25,80,420/- !
85

Warren Buffett
“It is not
necessary to
do
extraordinary
things, to get
extraordinary
results.”
86

Gerald L Moorman, CPA
You do not have to start
out with a lot of money.
What you want to do is
end up with a lot of
money.
87

Benjamin Franklin
Human felicity is
produced not so
much by great
pieces of good
fortune that
seldom happen,
as by little
advantages that
occur every day. 88

Dr William J Bernstein
Probably the
most relevant
definition of
risk is the
likelihood of
running out
of money.
89

Charles D Ellis
Risk is not
having the
money you
need,
when you
need it.
90

Burton G Malkiel
The risk in old
age is not of
premature
death.
The risk is that
you will live too
long and outlive
your assets. 91

Retirement Planning
Starting early is best,
but if you have not
started early, start
NOW.
92

93
Old English saying……
‘One of these days,’
is none of these
days.

PPF – Rs 50,000/- per
year for 40 years.
Assumed return 8% CAGR.
Rs 1.40 crores

PPF Rs 25,000/- p.a. and Equity Rs 25,000/- p.a.
for 40 years. Assumed returns: PPF 8% p.a.
Equity 14% p.a. Average portfolio return
11% CAGR.
Rs 3.23 crores

Equity - Rs 50,000/-
p.a. for 40 years.
Assumed return 14% CAGR.
Rs 7.65 crores

Burton G Malkiel
Persistent
saving in
regular
amounts,
no matter
how small,
pays off.

Robin Sharma
The price
of
discipline
is always
less than
the pain of
regret. 99

A recommended
change of equation
Change from:
Income – Expenditure = Savings
To:
Income – Savings = Expenditure
100

How much should you save
for retirement out of your
monthly income?
A good thumb rule would
be to save 10% of your
take-home pay or net
income for retirement.

Withdrawal strategy
from a retirement fund
A good withdrawal strategy after
retirement, is 5% of the fund value
per annum or 1.25% of the fund
value every quarter.
Register quarterly Systematic
Withdrawal Plans (SWPs) for 5
years at a time.
This will automatically lead to higher
withdrawals, as the fund value
increases over time.

Understanding a
vitally important difference…
Retirement Fund versus General
Investment Fund
A retirement fund is to take care of the
financial needs of the individual and
his/her spouse from retirement till
end of life of the survivor among
them.
A general investment fund is to meet
all non-emergency, non-normal and
non-retirement financial needs, until 103

Do not underestimate the impact of
even a one percentage point
difference in return, over the long run
Rs 100,000/- invested at 10% CAGR
for 40 years will grow to Rs 45.20
lakhs.
Rs 100,000/- invested at 11% CAGR
for 40 years will grow to Rs 65
lakhs.
Rs 100,000/- invested at 12% CAGR104

Retirement Funding – Choose a mix of:
Employees Provident Fund, especially to the extent that there is a matching
contribution from the employer.
Public Provident Fund (PPF)
Systematic investment into asset allocation funds and balanced funds
Systematic investment into diversified equity Funds and diversified index funds.
Systematic investment into a well-diversified portfolio of blue chip stocks.
Yielding Real Estate.
105

Extinguishing Debt
“Neither a
borrower,
nor a
lender be.”
- William Shakespeare
107

Extinguishing debt
Extinguishing debt means getting rid
of debt or not getting into debt in the
first place.
Learn to distinguish between
acceptable and unacceptable debt,
productive and unproductive debt.
Any debt which is designed to
automatically extinguish itself is
better than open-ended debt. 108

Debt Extinguishment
Viewed from this angle, term
loans like housing and
educational loans are much
better than credit card loans,
personal loans, overdrafts,
etc.
The worst type of debt is credit
card debt. 109

Debt Extinguishment
Never create a
situation where you
head for a debt trap.
111

Eric Tyson
The
financially
healthy
amount of
bad debt
is zero.
112

Benjamin Franklin, Poor Richard’s Almanack
But, ah, think what you do when you run in
debt;
You give to another power over your
liberty.
If you cannot pay at the time, you will be
ashamed to see your creditor;
You will be in fear when you speak to him;
You will make poor pitiful sneaking
excuses, and by degrees come to lose
your veracity, and sink into base
downright lying;

Debt can hamper PFP
The whole objective of Personal
Financial Planning is to put you in
control of your financial life.
Never forget that when you take a
loan, some other individual or
entity is in control of your
financial life, to the extent of
repayment of principal and
payment of interest.
115

Thumb rule to estimate how
much debt you can take on…
First, ensure that all loans taken
are term loans, and for
productive purposes.
Second, ensure that monthly
repayment of all loans put
together, does not exceed 25%
of ‘take-home’ family income.

Housing
Everybody should aim to acquire his /
her own dwelling place.
Given the present tax benefits and
housing loan interest rates, this is
probably the only instance where we
would not object to taking a loan.
It should be remembered that acquiring
a house is important in its own right,
regardless of any tax benefits
attached. 118

Housing
A house or apartment is essential for
a person who has not already
acquired a residence, or is not
fortunate enough to inherit one.
The right time to start thinking
seriously about acquiring
residential accommodation is about
five years after starting work.
119

Frank L Netti
Sound investment will
decrease the time during
which you work for money
and increase the time
during which money will
work for you.
121

Understand the
Investment
Tripod
122

The Investment Tripod
Investment can be for:
Parking funds
Earning regular returns
Growth
123

Pure Parking &
Emergency Funding
Savings bank accounts
‘Flexi’ accounts in banks
Liquid, short-term, short-term floating rate
mutual funds
Long-term bank FDs with no prepayment
penalty.
The same investments can be used for
keeping emergency funds. 125

Investing for
regular returns
126

Investment for regular returns
Post Office Monthly Income Scheme
8% Taxable Government of India Savings Bonds
Senior Citizens Savings Scheme (for persons of 60 years and above)
Post office time deposits
Bank fixed deposits
Short and long-term floating rate mutual funds and Fixed Maturity Plans
Regular withdrawals from your PPF account.
127

A vitally important point about
“regular returns” investments
Regular returns investments are
advised only when you need
regular returns.
When you don’t need regular
returns, follow a balanced asset
allocation plan, with a
considerable focus on growth
investments.
128

Investment for Growth
Equity (stock market investment)
and Real Estate are the only two
avenues of investment that have
consistently beaten inflation and
increased the wealth of investors
in the long run (10-year plus time
horizons).
130

Equity & Real Estate Returns : 1979 - 2013
BSE Sensex 01.04.1979 : 100
BSE Sensex 30.09.2013 : 19,894
CAGR : 16.59%
Average appreciation in Indian real estate
: 200 times
CAGR : 16.60%

A word about Bullion…..
“The great strength of gold throughout
history has not been that you make
money by holding it, but rather that
you do not lose.”
- Timothy Green
Understand that ‘investing’ in gold via
the ornament route is a fool’s game.
132

Investment in Real Estate
Real estate is an excellent long-term,
wealth-enhancing avenue of
investment.
However, real estate suffers from some
drawbacks, such as:
Poor liquidity
Difficulties in verification of title
Requirement of large amounts of capital
for even a single purchase 134

Drawbacks of Real Estate Investment
Requirement of large amounts to make
additional purchases even if prices are
lower
Presence of black money in transactions
High stamp duties on real estate
purchases
Cumbersome purchase and sale
formalities
Administrative difficulties, e.g., absentee
landlordism, land mafia 135

Drawbacks of Real Estate Investment
Difficulty in computing actual
expenses in respect of real estate:
Maintenance (e.g., periodical painting),
repairs, renovation – usually paid out
of normal income or liquidated
assets, and not subtracted from
property income
Property taxes
136

Equity Versus Real Estate in India –
the role of registration duties & taxes
Equity Real Estate
Purchase (Rs, lakhs) 100.00 100.00
Registration fee & stamp duty 00.00 07.00
(Karnataka)
Equity advantage 07.00
Sale price (Rs, lakhs) 200.00 200.00
LTCG tax (assumed at 12% on RE) 00.00 12.00
Equity advantage 12.00

Real Estate Investment Options
for the Common Investor
An apartment
An independent house on a plot of
land
An independent commercial building
on a plot of land
Commercial space – showrooms,
shops, offices, warehouses
Agricultural land
Real estate mutual funds 138

Investment in Real Estate
If you have a special interest in, or
talent for real estate investment, by
all means invest in it, bearing in
mind that the time horizon for real
estate is ten years.
If not, most good Indian real estate
consultants advise that you invest
in real estate only to the extent that
you have a use for it. 139

Purchase of Real Estate assets
Consumption, for example, housing
Investment, to earn long-term
appreciation and rental income
Considerations when purchasing
real estate for consumption
Consideration when purchasing real
estate for investment – Burton
Malkiel’s advice 140

Purchase of real estate assets for investment –
Burton Malkiel’s advice
The rental yield must be equal to or greater than the yield on short-term bonds.
Example:
Cost of a 2-bedroom apartment in Mangalore: Rs 65 lakhs.
Rent per annum: Rs 1,44,000/-
Rental yield: 2.22%
Present approx. yield on S-T bonds: 8.5% p.a.
141

Professor Burton G Malkiel
142
The rentalThe rental
yield mustyield must
be equal tobe equal to
or greateror greater
than thethan the
yield onyield on
short-termshort-term
bonds.bonds.

Know why
you must invest
in equity
144

Warren Buffett
"The best protection against inflation is
your own earning power.
If you are the best teacher, you will
command earning power and get your
share of the national economic pie,
regardless of the value of the currency.
The second best investment is in a good
company."
145

Equity – Reliable Truth No.1
In the long-run, the
market always goes
up.
147

Warren Buffett
In the 20th century, the United States
endured two world wars and other
traumatic and expensive military conflicts;
the Depression;
a dozen or so recessions and financial
panics;
oil shocks;
a flu epidemic; and
the resignation of a disgraced president.
Yet the Dow rose from 66 to 11,497. 149

Equity – Reliable Truth No.2
The rate of growth of
equity investments
comfortably exceeds the
rate of inflation.
150

Performance from 1981 to 2011 (Source: Central
Statistical Organisation website and Handbook of
Statistics on the Indian Economy)
CPI Inflation : 8.30%
Standard Gold : 8.79%
Silver : 10.19%
Bank Fixed Deposits : 9.17%
Public Provident Fund : 10.72%
Equity (BSE Sensex) : 16.75%

BSE Sensitive Index
01 April 1979 : 100
01 Oct 2013 : 19,517
CAGR : 16.52%
153
GoldGold
1950 : 100
2013 : 29,915
CAGR : 9.47%

BSE Sensitive Index
01 April 1979 : 100
01 Oct 2013 : 19,517
CAGR : 16.52%
154
GoldGold
1979 : 937
2013 : 29,915
CAGR :

Know the dangers
in equity investment
155

“A stock
broker is
someone who
invests other
people’s
money, until
it is all gone.”
- Woody
Allen 156

Burton G Malkiel
“While everyone recognises
that brokers make their living
by charging commissions,
Wall Street still manages to
conceal one very nasty secret:
The financial ‘experts’ know
precious little more than you
know.
157

Burton G Malkiel
“In fact, I will go out on a limb and tell
you that the experts have no idea what
stocks you should buy to provide
superior future returns. A blindfolded
chimpanzee throwing darts at the stock
pages can select individual stocks as
well as the ‘experts’.”
- From: ‘The Random Walk Guide to Investing: Ten
Rules for Financial Success’
158

Burton Malkiel
The
stockbroker’
s real job is
not to make
money for
you, but to
make money
from you.
160

Benjamin Graham
If I have noticed anything
over these 60 years on
Wall Street, it is that
people do not succeed in
forecasting what’s going
to happen to the stock
market. 161

Warren Buffett
“We’ve long
felt that the
only value of
stock
forecasters is
to make
fortune
tellers look
good.” 163

Burton G Malkiel
There are only three kinds of
financial prognosticators:
Those who don’t know
Those who don’t know they don’t
know, and
Those who know they don’t know,
but get paid big bucks to pretend
they know. 164

Benjamin Graham (1894 - 1976)
Wall Street
people learn
nothing, and
forget
everything.
166

Wall Street people learn nothing,
and forget everything!
Jeremy Grantham, US investor and asset
manager, was asked, “Do you think we
will learn anything from this turmoil?”
He responded, “We will learn an
enormous amount in the very short
term, quite a bit in the medium term
and absolutely nothing in the long
term. That would be the historical
precedent.” 167

A brutal truth about equity investment
In a rising market, you do not
need the advice of experts to
make money.
Any trash you buy, will
appreciate.
In a falling market, the advice of
the best experts will not
prevent you from losing money.
168

Sign in a fund manager’s office
“Do not confuse brains,
with a bull market.”
169

170
The Greater Fool Theory
“Stupidity,
well
packaged,
can sound
like
wisdom.”
- Jeremy
Siegel
170

To invest successfully, you need not understand beta, efficient markets, modern
portfolio theory, option pricing or emerging markets.
You may, in fact, be better off knowing nothing of these.
That, of course, is not the prevailing view at most business schools, whose
finance curriculum tends to be dominated by such subjects.
Warren BuffettWarren Buffett

In our view though,
investment students need
only two well-taught courses
–
How to Value a Business,
and
How to Think About Market
Prices.
Warren BuffettWarren Buffett

Know
HOW
you must invest
in Equity
174

The stock market
as an avenue of investment
The world’s best writers on equity investment will always urge you to “buy the market.”
That is another way of saying, “buy the economy” or “invest in the economy.”
In this era of globalization, the time will not be far away, when equity investment means
investing in the global economy through the medium of equity.
175

Therefore………
Investing in the stock market is
investing in the economy of the
country.
No one can call himself/herself a stock
market investor, unless he/she
invests in the economy of the
country.
Anyone doing anything else, is a mere
punter. 176

Refer to the paper
A GUIDE
TO EQUITY INVESTMENT
177

Equity Investment Myth:
You need to actively
monitor your portfolio
and constantly buy,
sell and churn.
178

Let your life be active
and your
investments be passive!
179

John Bogle
180
“Buy
right
and
hold
tight.”

Warren Buffett
“Inactivity
strikes us
as
intelligent
behavior.”
181

Warren E Buffett
“Lethargy, bordering on
sloth, remains the
cornerstone of our
investing strategy.”
(Sloth: indolence; extreme laziness; habitual
disinclination to exertion. 182

Equity investments are
for the long-term.
The time horizon of
equity investments is at
least 5 years.
183

Rakesh
Jhunjhunwala
“Be greedy,
but be
long-term
greedy.”
184

Warren Buffett
“Always invest
for the long
term.”
“Our time
horizons are
forever.”
185

Warren Buffett
“If you are not
willing to own
a share for ten
years, then
don’t own it
for ten
minutes.” 186

Time horizon – Jason Zweig
If, after checking the value of your stock portfolio
at 1.24 p.m., you feel compelled to check it all
over again at 1.37 p.m., ask yourself these
questions:
Did I call a real estate agent to check the market
price of my house at 1.24 p.m.?
Did I call back at 1.37 p.m.?
If I had, would the price have changed?
If it did, would I have rushed to sell my house?
By not checking, or even knowing the market price
of my house from minute to minute, do I prevent
its value from rising over time?
187

Warren Buffett
“The stock market
is a mechanism
by which, money
is transferred
from the
impatient to the
patient.”
188

Four equity investment strategies
Invest in a well diversified portfolio of blue
chip stocks
Invest in well diversified equity mutual
funds, index funds and ELSS funds
Use systematic investment plans (SIPs) to
invest in diversified equity funds, index
funds and ELSS funds.
Use systematic transfer plans (STPs) to
transfer funds from safe debt funds to
diversified equity and ELSS funds. 189

John Bogle
Successful investing is
about owning businesses
and reaping the huge
rewards provided by the
dividends and earnings
growth of our nation’s -
and, for that matter, the
world’s - corporations.
190

Reference papers:
1. A Guide to Equity
Investment
2. Good Investment
Options
in the Indian Debt and
Equity Markets
192

Systematic investment
is good for you
193

Anthony M Gallea,
Senior portfolio manager, Smith
Barney
Investing is a strange
business.
It’s the only one we know of,
where the more expensive
the products get, the more
customers want to buy
them. 194

195
Systematic InvestmentSystematic Investment
Normal Systematic
Qty Rate Amount Amt Rate Qty
+100 @100 10,000
+100 @70 7,000
+100 @40 4,000
+300 21,000
7,000
7,000
7,000
21,000
@100 70
@70 100
@40 175
345
+300@Rs.70/-pershare +345@Rs.60.87pershare

Systematic Investment
Systematic investment
automatically enables right
pricing.
Systematic investment makes
investment a habit.
“If you work on an investment,
It will work for you.” 196

The ultimate objective
of good investing,
is to obtain
above average returns
at below average risk. 197

“A winner is not one who
never fails, but one who
never quits.”
“Winners never quit.
Quitters never win.”
198

Warren Buffett
Risk comes
from
not knowing
what
you are doing.
200

The “Zero Risk” Systematic Transfer Plan
Invest Rs 1 lakh in a liquid, short-term floating rate
or short-term mutual fund.
From here, transfer Rs 1,000/- per month to a
diversified equity fund or an index fund tracking
the NSE-50 index.
There will be no risk to capital at any point of time,
regardless of stock market conditions.
The STP can be doubled/quadrupled when the
market falls by more than 25% / 50% from its
previous peak.
You can expect excellent returns in a period of five
to ten years. 201

Eliminating Risk via a Zero-Risk STP
On 8th
January 2008 (BSE Sensex 20,873),
an investor invested Rs 4,00,000/- in a
Zero Risk STP involving Franklin
Templeton Mutual Fund.
The Rs 4,00,000/- was placed in the
Templeton Floating Rate Income Fund.
Four systematic transfers of Rs 1,000/-
each per month were registered to the:
Franklin India Blue Chip Fund
Franklin India Index Fund (Nifty Plan)
Franklin India Prima Plus, and
Templeton India Equity Income Fund. 202

Eliminating Risk via a Zero-Risk STP
The investment values on 9th
March 2010 (BSE
Sensex 8,160) were:
Fund Investment (Rs) Value
(Rs)
Floater 3,56,000/-
3,85,714/-
Nifty Index 14,000/-
9,891/-
Blue Chip 13,000/- 9,066/-
Prima Plus 13,000/-
9,030/-
Equity Income 14,000/- 8,942/-
Total 4,00,000/-
4,22,643/-
203

The importance
of Risk Elimination
Value of the Rs 4,00,000/- Zero Riks
STP investment after a fall of
60.91% in the stock market from
08.01.2008 to 09.03.2009: Rs
4,22,643/-
Value of a lump-sum investment in
an index fund that tracked the
Sensex in the same period: Rs
1,56,360/-
204

Dr Raghuram G Rajan
Not taking
risks one
doesn’t
understand,
is often the
best form of
risk
management.205

Warren Edward Buffett
• “The first rule of
investment is, do
not lose.
• And the second
rule is, do not
forget the first
rule.
• And that’s all the
rules there are.” 206

Lump sum investments
in equity & equity
mutual funds must
preferably be made
with a
margin of safety
207

Sir John Templeton (1912 -2008)
“The time to invest
in stocks, is when
you have the
money.
History shows that
time, and not
timing, is the key
to investment
success.” 209

Return ranges for rolling periods on any day
from 3rd
April 1979 to 28th
February 2007 (Sensex)
Period Min. Return Max. Return
1 year - 54% + 268%
2 years - 26% + 143%
7 years - 08% + 43%
12 years + 02% + 34%
15 years + 11% + 28%
20 years + 13% + 21%
25 years + 15% + 18% 210

Benjamin Graham’s
“The
Margin of Safety”
Approach
211

Benjamin Graham & David Dodd,
Security Analysis, 1934
Margin of safety is the difference
between the intrinsic value of a
stock and its market price.
Accurate calculation of intrinsic
value and margin of safety can be
quite laborious.
The end results may not be
accurate, and such undertakings
may be well beyond the capability
of the common investor. 212

Benjamin Graham & David Dodd,
Security Analysis, 1934
A simple interpretation of
Benjamin Graham’s margin
of safety would be:
Ensure that you do not pay
too high a price for stocks.
How can you do this?
213

Margin of Safety - Step 1
Be aware of the PE ratio
ranges of the market.
Historically, the PE Ratios of
the popular indices like the
BSE Sensex and the NSE-50
(Nifty) have ranged between
10 on the lower side and 30
on the higher side. 214

Margin of Safety - Step 2
Be aware of the
market highs and
lows, and
percentages of high
to low falls.
215

BSE Sensex worst falls –
Aftermath of the Harshad
Mehta Scam of April 1992
22 April 1992 : 4,467
26 April 1993 : 2,037
Change : - 54.40%
216

BSE Sensex worst falls –aftermath
of the Tech Bubble (February 2000),
the Ketan Parekh Scam (March
2001) and the 9/11 Terrorist Attacks
(September 2001)
11 February 2000 : 5,934
21 Sept. 2001 : 2,600
Change : - 56.18%
217

BSE Sensex worst falls –
aftermath of The Global
Financial Crisis, 2008…..
08 January 2008 : 20,873
09 March 2009 : 8,160
Change : - 60.91%
218

What modern stock
market history teaches us
Historically, falls in the
market have not
exceeded the 50% mark
by much, except during
the Great Depression,
1929-32. 219

Worst fall of the DJIA –
aftermath of The Great
Depression 1929-1932
03 Sep 1929 : 381
08 July 1932 : 41
Change : - 89%
220

Step 3 – Thumb rule for
determining the Margin of Safety
PE ratios of the popular
indices must be 20 or
less; and
The popular indices must
be at least 25% below
their last peak. 221

Step 4 – Applying the Margin
of Safety on 15 February 2013
PE ratio of the Sensex: 17.49
PE ratio of the Nifty: 18.21
Present Sensex versus last
peak in percentage: -
7.32%
Present Nifty versus last
peak in percentage: - 6.73%
222

Applying the margin of safety
If a margin of safety exists, lump sum
investments into index or well
diversified funds or a mix of these,
should be fine.
If not, go for five-year STPs or ten-year
STPs.
If a margin of safety does not exist,
lump sum investments can also be
considered in good asset allocation
plans such as the FT India Dynamic
PE Ratio FoF.
223

An important exception
to the margin of safety
Any investor who has a long-
term systematic investment
plan in equity or an equity
mutual fund, need not follow
the margin of safety, provided
the investment is continued
uninterrupted for at least 5
years. 224

A Strategy for All Seasons –
Another exception to the
Margin of Safety
Whether a margin of
safety exists or not, the
“Zero Risk Systematic
Transfer Plan” is a
strategy that can be used
by anyone at any time for
fearless investing.

J P Morgan
“Bear
markets are
when stocks
are restored
to their
rightful
owners.”
226

Warren Buffett
"The best protection against inflation is
your own earning power.
If you are the best teacher, you will
command earning power and get your
share of the national economic pie,
regardless of the value of the currency.
The second best investment is in a good
company."
228

Investment for Growth
Equity (stock market investment)
and Real Estate are the only two
avenues of investment that have
consistently beaten inflation and
increased the wealth of investors
in the long run (10-year plus time
horizons).
229

Eric Tyson’s recommended
growth investments
Equity
Real estate
Your own small
business
230

Entrepreneurship
‘Big’ business versus ‘small’ business
Capital-intensive business versus
business based on human capital
Short-gestation versus long-gestation
businesses
What kind of business must you start?
“If you truly love what you are doing,
you will never have to work a single
day of your life.”
231

What kind of business
must you consider starting?
What are your interests, hobbies,
pastimes?
What are your skills?
What are you passionately interested
in?
Can you monetise these interests &
hobbies?
In short can you leverage, and earn a
living from your human capital, which
is the most valuable asset you have?
232

What kind of business
must you consider starting?
Remember – the higher your human
capital, the lower the equity capital
that you need, especially in small
businesses.
There is nothing like starting low-
capital, short-gestation, cash-
generating businesses, based on
your human capital.
Such ventures also carry the lowest
business risk. 233

Examples of high human capital,
low equity capital businesses
Food – production, training
Photography
Breeding of pedigreed animals
Breeding of domestic pets
Animal training
Compering shows & conducting events
Grafting plants, gardening consultancy
Leveraging internet & IT skills
Fine art – sales and teaching
234

Commercial art
Interior designing
Freelancing your expertise
Vehicle consulting, auto ancillaries
Travel consultancy
Music – performance, teaching
Sports coaching and consultancy
Teaching – yoga & fitness, public speaking, self-defence, etc.
235

Real estate consultancy
Repairs of sophisticated gadgets
Tailoring & embroidery, upholstery, fashion design
Accountancy
Tax-preparing & tax-consultancy
Surveying and loss assessment
Handyman services
Recruitment
236

Translation
Financial consultancy
Desktop publishing, proof-reading, editing, technical writing
Sourcing materials and services
Gardening and landscaping services
Growing & grafting rare plants
237

Give entrepreneurship a chance
You are your own boss
Educational qualifications do not
matter.
Needs tremendous effort and constant
commitment – business is not for
everyone.
A good deal of businesses fail.
But businesses based on human capital
have a relatively high success rate.
No retirement age.
Never thrust an existing business on 238

The setting up of a
GENERAL INVESTMENT FUND
What is a General Investment
Fund?
It is a fund to take care of all
non-normal
non-emergency, and
non-retirement expenses.
240

Examples of non-normal, nonemergency
and non-retirement expenses
Children’s education
Buying a vehicle
Down payment on a house
Renovation of a house
Children’s marriage
Other family functions
Family vacations
Charity
Selective financial intervention & support
241

Other Objectives
A general investment account takes care of
these non-normal, non-emergency and
non-retirement financial needs.
Constitution of a general investment account
– the right mix of debt, equity and perhaps,
real estate.
When in doubt, a debt : equity mix of 50:50
should be quite all right.
Try to allow three to five years to pass
between initial contributions to a GIF and
first withdrawals from it. 242

Strategy for a General Investment Fund
Asset allocation funds or a fund of funds
that meets your asset allocation
requirement can be used for a general
investment fund.
Examples: FT India Dynamic PE Ratio
Fund of Funds, FT Life Stage Fund of
Funds – The 30s Plan, HDFC Swing STP.
Try to invest at least 15% of your monthly
take-home income to build a general
investment fund, if there are housing loan
repayments.
If there are no loan EMIs, contribution to a

Other Objectives
Estate and succession
planning
Importance of wills for NRIs,
especially in foreign
countries
HUFs, Private Family Trusts
Housekeeping 244

Other Objectives - Housekeeping
Filing tax returns correctly and on time.
Ensuring that all investments are in joint
names or with nominations registered.
Educating spouse and children about
finance and investment.
Reviewing investments regularly.
Making minimal changes only if
required.
Difference between reviewing and
churning. 245

Ensure that every member of the family
obtains (subject to age eligibility):
a passport
a driving licence
an election identity card
an income-tax PAN card
a bank account, with debit card and
cheque book issued
the UID (‘Aadhaar’) card. 246

Examine whether family members
need to:
Complete KYC formalities for
mutual fund and equity
investment;
Open a client account with a
member of the BSE/NSE; and
Open a demat account with a
depository participant. 247

How much wealth
should you build?
Unsatisfactory financial position at
retirement:
No debts
A residential apartment / house
Financial assets, income from
which just takes care of normal
living expenses.
249

How much wealth should you build?
Satisfactory financial position at retirement:
Health insurance
Emergency fund
No debts
Financial assets, income from which takes care of normal living expenses; and
Additional equal amount of financial assets reserved for growth.
251

How much wealth should you build?
Good financial position at retirement:
Health insurance
Emergency fund
No debts
Financial assets, income from which just
takes care of normal living expenses; and
Additional amount of financial assets
reserved for growth equal to twice the
amount of principal deployed for regular
returns. 252

Jack Welch,
former chairman, General Electric
Control
your
destiny,
or
someone
else will.
253

Robin Sharma
Knowledge
that
remains
unapplied
is
worthless 254

Financial
Planning –
A Plan of Action
255

Financial Planning - Plan of Action
1. Take health
insurance to the
extent required for
the entire family.
256

2.Take personal
accident cover to the
extent required only
for bread winners of
the family.
257

3. Take critical ill
insurance to the
extent required for
the entire family.
258

4. Take pure term life
insurance if required,
and to the extent
required only for
bread winners of the
family. 259

5. Take property
insurance & House
Hold Insurance if
required, and to the
extent required. 260

6. Establish a family
emergency fund equal
to at least one year’s
normal living
expenses.
261

7. Plan for retirement, NOW.
Max out on your EPF contributions, if you are
employed and eligible for EPF.
Open PPF accounts for all members of the family
and contribute to them.
Start systematic investment into equity or equity
mutual funds.
Yielding real estate investment too is fine for
retirement, if you can afford it.
Sustained long-term investment into a mix of
EPF/PPF and equity/equity mutual funds and real
estate are the best options for retirement funding. 262

8. Acquire a house,
especially if you have
not done so already,
and are not likely to
inherit one.
263

9. Get rid of debt,
especially
unproductive and
open-ended debt.
264

10. Build a general
investment fund across
different types of asset
classes.
Always diversify.
265

11. Have a good idea of
your other financial
objectives, and build a
general investment
account, to achieve them.
266

12. Learn to differentiate
between short-term and
long-term monetary
needs and invest
accordingly.
267

13. Guard against
hype, excitement
and costs in
investment and
insurance.
268

14. Keep your documents
in order & review your
finances and financial
papers at least once a
quarter.
269

15. Don’t neglect estate
and succession
planning.
Make a will.
270

16. Ensure that all
investments are in joint
names or with
nominations registered.
271

17. Don’t neglect tax
work.
Be tax-efficient,
wherever possible.
272

18. Ensure that every adult
family member has a
passport, an IT PAN card, an
election identity card, a
driving licence, a bank
account and a UID (Aadhaar)
card.
273

19. Examine whether family members
need to:
Complete KYC formalities for mutual
fund investment;
Open a client account with a member
of the BSE/NSE; and
Open a demat account with a
depository participant. 274

Winning!
Winning doesn’t always mean
being first.
Winning means constantly doing
better than you have done
before.
Financial Planning enables
everyone who implements it, to
emerge a winner.
275

“Someone’s
sitting in the
shade today,
because
someone
planted a tree
many years
ago.”
- Warren Buffett
276

Financial Planning for
Young People just starting work
1. Take out health insurance even if
your company provides you with a
health cover. Choose a floater.
2. Take life and property insurance
only if required.
3. Start an emergency fund equal to
one year’s normal living expenses.
277

Financial Planning for
Young People just starting work
4. Open a PPF account and start a
minimum contribution to it.
5. Start an SIP into an ELSS or equity
mutual fund.
6. Plan for a house about five years after
you start work.
7. Do not get into unnecessary and
dangerous debt like credit card debt,
personal loans and personal overdrafts. 278

Warren Buffett
“It is not
necessary to
do
extraordinary
things, to get
extraordinary
results.” 279

Simplus Financial Consultancy Private Limited
# 296, Ground Floor, 12th
Cross, 9th
Main,
2nd
Block, Jayanagar, Bangalore – 560 011.
080 – 26578496
www.simplus.co.in
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