Enrichmentors Wealth Builder Advisory

March 2013

The basics of building wealth How to buy right?

Enrichmentors Wealth Builder Advisory March 2013

Building Businesses, People, Health & Wealth successfully over 30 years

What is in this Issue From The Editor’s Desk

Arun Singhal is the Founder and Principal Mentor & Managing Partner of Enrichmentors India. He founded Enrichmentors in 2007 to help individual investors build their wealth successfully in addition to providing business consultancy to Small and Medium Enterprises. He learned about building wealth successfully from his personal experiences in debt and equity markets in India over these years and now offers advisory services to individual investors about how to build their wealth by investing right in Debt and Equity markets in India now. He received his AMFI certification in 2011 and is an authorized mutual fund distributor for all the mutual funds. He also teaches Wealth Management at IIPM. He operates out of his office in Mumbai and can be contacted at arunsinghal@hotmail.com.

Dear Reader,

I started the Wealth Builder Advisory some time back in the form of sharing my knowledge

about which stocks in India Equity Markets to buy and sell and when. Over the period of

time, I learned more about other financial instruments like Debt and Equity Mutual Funds

and also realized that investors need some basic advise about how to build their wealth

successfully. Providing buy and sell recommendation is not good enough! So here is my first

advisory on the very basics of how to build your wealth successfully!

The basics of building wealth is really simple and known to every one- Buy low and Sell

High. Yet, only few people are able to build their wealth successfully. Why?

The first challenge is to know what to buy and knowing when it is low enough for you to buy.

The second challenge is decide how much to buy that day. How much of your fund should

you invest on the day you feel that it is the right time to invest. And the last question in

buying right is to decide how should you invest in the thing you decided to invest.

The next set of challenge to decide what to sell, when, how much and how? Without selling

the thing you bought your profits are only on paper! So it is as important as buying right to

sell right in building the wealth. Surely, few things you may never sell like a house you want

to live or Gold you want to keep for your daughter's wedding. But then you need to decide

what is for keeping and what for selling.

When I started investing my own life savings in 2007, I started based on ICICI Securities

Principles of Investing. It was a good starting point. As I went along, I made a lot of

mistakes and learned more about these questions. In this issue, I want to share my

learnings about right buying with you in this issue that you don’t make the same mistakes!

So take a look and see if I am making any sense. If yes, tell others and if no, tell me so

that I can correct myself!

Enrichmentors Wealth Builder Advisory March 2013

The basics of building wealth How to buy right?

This wealth builder advisory attempts to answer the following questions.

What are the various asset classes you can invest into?

When is the right time to invest in these asset classes?

How much should you invest at a time?

How should you invest in these asset classes?

What are the various asset classes you can invest into? I see six different asset classes you can take a look at based on your return expectation and

risk profile in increasing order Fixed Income Assets

• Savings Bank Accounts (SB) • Fixed Deposits (FD) • Government Bonds (GB) • Provident Fund (PF) • Debt Funds (DF)

Insurance Plans (IP) Commodities (C) (Gold, Silver, Copper, Crude Oil, Grains, Coffee, Sugar etc.) Property (P) Equity (E) Venture Funds (VF) Higher the return you want, higher the risk you must be willing to take!

Building Businesses, People, Health & Wealth successfully over 30 years

Enrichmentors Wealth Builder Advisory March 2013

When is the right time to invest in these asset classes? Let us look at each asset class and see what is right time to invest in them. Fixed Income Assets. In general the best time to invest in them is when the interest rates are expected to fall. Savings Bank, Floating rate assets and PF remaining exception to this. In a falling interest rate situation as it exists today, the investments in FDs, Government Bonds and Debt Funds is a good choice. In the falling interest rate market, the value of these fixed interest instruments goes up as the interest rate falls. It is prudent to keep some money in your savings bank to meet the next 5-6 months

expense required. The whole idea is that in an unlikely scenario of not having any income from your job or business, you should be able to meet your financial commitments. However, this money will earn you a return or 4-6% pretax only. You can also use the option to invest in Liquid Debt funds to get higher return of 6-7% post tax. But if you have more than six months expenses in your savings bank, you have an opportunity to get higher return by investing in other instruments.

When the interest rates are high and expected to fall, you can invest in 3-5 years Fixed Deposit, Government Bonds and Debt Funds. You can get better return on your funds by investing in Debt Funds if you are in the higher tax bracket.

Provident Funds are a very good investment option for every one as they provide as today 8- 8.5% post tax return.

In terms of life stage, the most financial wizards tell you to invest more in fixed income assets when you get older. I don’t agree. I would leave for you to decide what part of your total assets do you want to keep risk free and what do you use to play for higher returns. If at 80 years age also, you have the appetite to keep 70% of your funds for higher risk, then why not invest only 30% in Fixed Income Assets!

Insurance Plans While Insurance plans may be most miss sold products, they have

their own place in your investment portfolio. Insurance plans are most needed when you don’t have the adequate funds for your future needs. If you have earned enough for all your future needs, you then don’t need any insurance plans.

Pure Term plans are good for people who have started working and have dependents. They don’t give you a return on your investment but they provide required funds to your dependents on your death which they otherwise not have.

Child Plans are good for building up funds for your children’s education. So when you have

your children born, think of a Child Insurance Plan. As you grow older and build your own wealth, your need for insurance plans keep

reducing.

Building Businesses, People, Health & Wealth successfully over 30 years

Enrichmentors Wealth Builder Advisory March 2013

When is the right time to invest in these asset classes? Let us look at the remaining asset classes and see what is

right time to invest in them. Commodities including Gold Buying commodities is a subject in itself and requires you to

be knowledge with the business seasons and cycle of the commodity.

Gold is a good investment any time if you are buying for your

children. Otherwise, you need to see it fall significantly, say 10%, to start buying. Time of stability in the world are possibly a good time to buy as it is expected then that Gold Prices would be at a low!

Property Property business also has it own cycle and you can know the

property rate off their peaks so that you can consider buying it. But more appropriate time is when the equity or commodities are at their peak, you have made your money there and found a specific property that you have liked and see the potential of its appreciation.

Alternatively when the economy is under recession or

deflationary pressure, the property prices are also expected to be low. In India, it is also good time buy a property when the interest rates are high as the market will be depressed condition

Equity Every significant fall, say 10%, is an opportunity to invest in

equity when the valuation are attractive ( less than Price to Earnings Ratio of 15 in general) because you will never know when is it the lowest! But you need to invest in staggered manner.

Investment into equity need to go up as proportion of your total funds as the Price to Earnings Ratio keep dropping. The best time to buy equity was when the NIFTY was at 8500 and an aggressive 90% allocation could have been justified. At the current level of Nifty at 5800 a 50% allocation between Debt and Equity will be more appropriate

Venture Funds You can consider Venture Funds only if you are willing to wait

for 5-7 years to get returns along with the risk of getting no returns as the investments will be made in the start up companies. The gains are made in venture capitals by exiting the starting company after 5-7 years through an IPO where a multiple levels of gains are possible though never promised

You can never determine if you are buying at the best

time at the lowest rate., you can only buy at a low enough rate and be ready to buy more if it goes lower!

Building Businesses, People, Health & Wealth successfully over 30 years

Enrichmentors Wealth Builder Advisory March 2013

How much should you invest at a time? You need to begin by deciding your overall portfolio strategy based on your life stage and

needs in future. The portfolio strategy needs to answer the question that what % of your capital should you invest in each of the categories. How do you decide the %ages?

There is no magic formula in deciding these %ages. Here are some guidelines I have found

useful. 1. You need to build a basic safety net of Fixed Asset Class portfolio which can see you

through in tough time of no job or no business. The income from this fund should be adequate for your to manage your basic family needs. The best place to invest these fund are in a Fixed Deposit with monthly interest pay out or a Debt Mutual Funds with monthly dividends. I guess this becomes the first priority and needs to be done before anything else. You can invest all that you have into this fund and keep investing month till you reach your required level.

2. Having taken care of today, you can now starting thinking of the future. The first thing to plan for future will be your children. Based on what level of education do you want to provide you can determine the amount of funds required to be invested in a good Child Insurance Plan. Depending on the funds available, you can invest in lump sum or monthly installments. Lump sum investments grow faster if done in right funds than monthly installments. But monthly installment will be the right option if you need to borrow from your future earnings!

3. If you don’t have a own house to live, investment in property is most appropriate as it saves you the rental and provides you the appreciation in addition to the security to your family. The amount you should invest depends on your financial condition. It will be ideal if you can invest in one lump sum in a nearly completed property though it may cost you more than investing in 3 year projects. This way you can be sure of what you are buying. 3 year projects when completed look very different from what you had imagined and you are generally unhappy about the gaps in promises and actuals.

4. Commodities including Gold and equity investments are best done in staggered manner. The surplus fund available after meeting above needs need to be allocated between the Debt, Gold and Equity based on the market conditions. When equity valuations are high with PE in excess of 17 you may keep your exposure to equity to 10% of total funds. When it starts dropping you can keep shifting funds from Debt funds to equity in a staggered manner. This is against conventional wisdom and required courage to invest in falling market. But when else will you invest in equity, if not in falling market! Waiting to guess the bottom is hazardous and never works out.

5. Venture Capital normally require a investment on minimum of Rs 25 L. They take the total fund in the installments of Rs 5 L minimum

You will never know when the opportunity to invest will come and it will come

when you least expect it, So always keep some cash in the form an FD that can be broken or a Debt fund than can be encashed!

Building Businesses, People, Health & Wealth successfully over 30 years

Enrichmentors Wealth Builder Advisory March 2013

How should you invest in these asset classes? Let us know look at the ways you can use to invest in these asset classes. Fixed Deposits There are many ways of making an FD right from using an agent to making

online. I prefer making the FDs online linked to my savings account so that I can break them prematurely when required and get my savings account credited within a day. This makes the FDs reasonably liquids for investment in other asset classes or any expenses. Of course you need to pay the price for premature closure.

Government Bonds Government Bonds also can be made online now a days and the

account maintained online. Opening a Online Demat account linked to your savings bank account is really useful as you can then make the investment in Government Bonds online without having to write the paper application and a cheque and waiting for cheque encashment and finally keeping all those Bond paper safely.

Provident Funds Provident Funds investment so far were needed to be done by going to

approved banks and depositing a cheque along with a pay in slip. You can now invest in PPF also online. Many leading banks provide you to open a PPF account and invest online

Debt Funds Investment in Debt Mutual Funds can be more either through a paper form or

online and through an mutual fund distributor or direct. If you are knowledgeable about which mutual fund to invest and can switch funds on your

own, you should invest directly with the Mutual Funds because your will get higher return up to 0.3% annually. You can use paper or online version based on how comfortable with on line transaction and having internet banking account.

You need to go through a Mutual Fund distributor or agent if you are not sure about which fund to invest and when to switch funds. You are likely to gain more than what you will be paying your mutual fund agent or distributor through right selection of the funds to invest and timely advise to switch funds. Of course, you need to select a capable Mutual Funds agent or distributor.

Insurance Plans Traditionally the insurance plans have been sold and missold through

Insurance agents. You now have the options of buying the term plans directly from the insurance companies at substantially reduced charges. Other plans have still to be purchased through an insurance agent yet.

Property Most first hand property is bough directly from a builder though there are agents

in the background. The key thing in property is to assess the quality of construction, the utilities and the approach. This can be best done after the property is built and is ready for possession. The other critical thing is the verification of the ownership of the property. It would be very useful to buy the property through a loan of a good bank which will ensure that all such things are taken care of.

Gold & Other Commodities If you are buying the gold and other commodities for making

gains in short of long term, it is best bought through the ETF for Gold and commodities exchange for other commodities.

Equity (Shares) Equity should be bought directly only if you have adequate time and

knowledge to research which shares to buy and track their prices at least daily, that too 2 times a day- opening and closing hours. If you don’t have the time or the knowledge it is better to buy Equity Mutual Funds instead of relying on the broker recommendations

Venture Funds Venture Funds are sold through the private placements by the Venture Funds companies like ICICI Venture etc. You should ask your bank relationship manager to keep you informed on when they are available.

I guess that is what I have to share in this issue about the basics, more later! Building Businesses, People, Health & Wealth successfully over 30 years