Tell me Your Financial Problems, Questions & Concerns. I want to write more about Your problems & Help You with solutions.

In recent times, I have been making conscious efforts to write more on topics which are useful for readers and not just for me. And I get numerous mails from readers asking me to help them out with following issues:
  • How (& why) to switch from safe FDs to Mutual funds?
  • How to get rid of complex insurance products and what to do next?
  • What is the best combination of safe savings (FDs, NSCs) and risky investments (Stocks, MFs)?
  • Should I buy a house or continue staying on rent?
  • Should I invest in MF when my time horizon is less than 5 years or even 3 years?
  • I have just started earning. How should I manage my cashflows?
  • Should I pay my loans and invest simultaneously?
  • Why do I end up with no money at the end of every month?
  • How to rationalize my portfolio of 30+ mutual fund schemes!
And that’s not all. I even get questions like these:

Now its really tough to reply to each one of these mails individually. There are just too many and each and every one requires, a lot more information about the individual’s finances, before anything can be said.
So I have decided to do something, which is better for all of us.
I am floating a small survey, where you can share your financial problems / questions / confusions. I will then collate all these points and start writing about as many of them as possible.
This will serve two purposes:
  • I will do the research and try to come up with a solution to the problem. I will do a post about the issue. It will help me, as well as you in getting a different perspective (if not the final solution).
  • Once the post is published, the approach can be questioned / debated and streamlined basis feedbacks and comments received from other readers.
So go ahead and click the button below. Don’t worry…it’s a short 2-5 minute survey. And it will also help you in gauging your financial fitness.

Note – You can choose not to disclose your identity if you feel like.
If the survey does not open on clicking the button above, please click here.

I plan to write on all the topics which I can gather from the requests I receive. So please share as many queries and questions as possible.

Mailbag: Should I take a Loan to Invest Now? (because Markets are making New Highs everyday)

This is going to be a short post. It’s more of a warning for those who have questions like one in title of this post….in their mind.

Yesterday, I received a mail from a reader asking me the following question:

My portfolio has moved up almost 50% in last 3 months. Some shares of small companies are up more than 100%. Do you think it is a good time to invest more? I don’t have lots of spare cash to put in markets but I am thinking of taking a personal loan to invest. A loan would cost me around 15% and that is much less than what can be easily made in these rising markets.

I replied to this reader’s mail instantly and without any hesitation.

But I felt that right now, there would many people thinking on similar lines. And that is because in recent times, markets have been moving in just one direction. And that is upwards. And this gives a perception that it is very easy to make money in stock markets.

My personal interaction with people tells that they have now started feeling that Fixed & Recurring Deposits offer just 8% in one year….whereas some stocks can give that kind of return in a day. True. It is possible. But can we be 100% sure about this? Can we be 100% sure that we will be making 5% to 8% every day kind-of-a-return on regular basis in stock markets?

The answer is no. I can’t do it. I am pretty sure nobody I know has done it. And neither have people like Warren Buffett done it. And since we are not sure about the returns, it would be a big mistake to borrow money for investing. 

It’s possible that when you take a loan and put that money in markets, your expectation is that markets will move up, like they have been doing for a while now. And probably in a year’s time, you will make much more from your investments than 15% interest that you need to pay on your personal loan.

But what if markets do not rise as expected?

What if returns are less than 15% in one year?

What if markets just stay at same levels after one year?

And what if markets fall…say by 15% in one year? What will you do then?

I hope you are getting what I mean here. 

Market returns are unpredictable. You can never be sure of returns or losses which come your way in markets. But if you take a loan, your EMIs would be predictable and fixed. You can be quite sure that you will have to pay around 15% every year for the loan.

I have seen people make this mistake in 2008 during Reliance Power’s IPO. People took loans, liquidated FDs to invest in the hottest IPO of that time. And what happened after that is known to everyone. Everyone lost money. Those who borrowed to invest lost much more than just money. They lost their sleep and faith in markets.

So, please understand that its not wise to borrow and invest in markets.

Even if you are 100% sure that markets will go up, please don’t borrow money to invest. If you do, I think it would be the biggest financial crime you can ever commit.

Note – Some months back, someone asked me just the very opposite question. I have a loan. Should I pay it back before investing? 

Seems like the question of this mailbag post is a side-effect of a bull market 😉


Mailbag: I have a loan. Should I Pay It Off Before Investing?

Note – I have written about Paying Off Loan Vs Investing for Future debate in detail recently. You might want to read that article – Pay Off Loan or Start Saving & Investing?

In this post, I am trying to give a suitable response to mail I received from a reader named Shivangi. A part of her mail is given below:

I have a loan with outstanding amount of Rs XX lacs. I want to save and invest for future also. But everyone in my family and  friends are telling me to clear off my loans before even thinking about saving or investing for future. Please advice if this is a prudent thing to do or whether one can clear loan and invest parallely?

To be honest to everyone, I may not be the best person to answer this question as I myself have not been in this kind of situation. But I will try to arrive at some conclusion using rational and common sense as my tool.

Readers are welcome to share their own suggestions for Shivangi in comments section.

Mailbag Readers Question Answered

Two Important Considerations

One thing which is not known here is the type of loan which Shivangi is referring to. This is important because different loans have different interest rates and different tenures. For example,

Home Loan : 12% : 20 Years

Personal Loan : 20% : 1 Year

Car Loan : 12% : 5 Years

Loan from Family : 0% : Flexible Tenure

And so on…

Another important thing which needs to be considered here is that when one is planning to invest or save, what is the expected rate of return?

This is because if you are paying 20% in interest for a personal loan, and you want to save your money in fixed deposits, which give an after tax return of 6%, then you are really not being financially intelligent.

Once you have knowledge of these two key important pieces of information, i.e. Interest Rate (&Tenure) of Loan and Expected Rate of return for investments, you need to do a little bit of prioritization…
Debt Prioritization

Now this is very important to understand. A loan taken to invest in a property, which brings monthly rent may not be a bad loan. It is creating an asset which in turn will become a cash-generating machine. But if you buy a car at same interest rates, it is a bad loan as the value of car would depreciate with time. And it will not earn you anything during the time you use it (unless it’s a commercial vehicle).

Please note that by using the word ‘BAD’, I do not mean the bad loans which are a major concern for PSU banks.

Then there is credit card (type-of) debt. Almost everyone will tell you that credit card debt is bad. And generally speaking, they are right. The effective annual interest rate of credit cards is close to 40%!! So in case you do have credit card debt, you should target to clear it off as soon as possible and with a priority greater than anything else.
5 Steps To Invest & Pay Off Loans Simultaneously

Pay Off Loan Or Invest & Save
The Decision

All in all, it is indeed difficult to create an investment or savings portfolio, if you have number of loans running. But it is not impossible. Read the steps below and then I will tell you the most important thing:
  • First of all, you need to recognize the high interest loans (credit cards, personal loans).
  • Get rid of them as soon as possible.
  • Now pay off loans taken to buy liabilities (cars, gadgets) which do not produce a stream of cash.
  • Initiate creation of an Emergency Fund which takes care of unforeseen money requirements.
  • Now if you have any long term, low cost loans (property loan) running, you can think of investing simultaneously as you go on paying off that loan.

And now for the most important and toughest part…

Before you even think of following the above steps, you need to be willing to change your lifestyle as well. And that is because you can only make sensible financial decisions when you are ready to temporarily change and cut down the discretionary expenditures. By discretionary expenditures, I mean buying of goods and services which can be postponed till the time you are financially secure. Just sometime back, I was shocked to know that people are buying wrist watches on monthly installments!! Now according to me that is heights of financial stupidity.

Anyways.. I hope that above information helps Shivangi in her efforts to pay off loan and simultaneously create a stable investment portfolio.


Mailbag: I want to gift a Dubai trip to my wife. How do I fund it?

I think that after reading the title of this post, many of you would have become interested in knowing more about the person behind such a ‘noble’ thought. 😉 
Unfortunately, all I know is his name – Amir. Ever since I started a section to handle personal finance questions, this had to be the most interesting question and I decided to address it as fast as possible. For the benefit of readers, I would summarize Amir’s question below –
Amir’s 5thWedding Anniversary is due in 2015. He wants to take his wife to Dubai for 5-6 days to mark this special occasion. He also wants to make provision for shopping in Dubai. His question isn’t clear as to when exactly does he wants to go, but I would assume that it’s in second half of 2015. He also says that he can pre-pone his trip to take place in 2014. But that according to me might defeat the very purpose of 5th year celebrations. He wants to know whether he should fund this trip using credit cards or share market trading.
How To Fund My Dubai Trip?
I checked a number of flights, hotels and holiday packages for a 6 day trip to Dubai. And my preliminary research showed that it would cost around Rs 55,000 per person for a decent stay in Dubai for 6 days (including airfares). Additionally, one needs to pay another Rs 5200 per person for Visa. This brings the total for two persons to approximately Rs 1,21,000. Now the next figure which I would add to this amount can vary from person to person. It’s the shopping budget. And as far as ladies are concerned, any budget for shopping is less. So to keep matters simple, I assume that the couple would shop for around Rs 50,000 plus. This takes the total to Rs 1,71,000. 
And just to make provisions for contingencies, travel insurances and other unforeseen expenditures, I have decided to round off the estimate to Rs 2,00,000.
Now, Amir failed to provide the following important information(s):
– Monthly Surplus (Income from all sources – Investments – Expenditures)
– Exact time of travel
– Shopping Budget 🙂 (I have already played safe with my assumptions here).
Now to decide how to fund this trip, we need to know when Amir needs to travel. I will assume that he plans to travel between Sept – Dec 2015. This means that he needs to be ready with funds by August 2015. This leaves us with 21 months (starting December 2013). Now I still don’t know his monthly surplus. But what we do know is that Amir needs to arrange Rs 2,00,000 in 21 months.
Now a simple recurring deposit of Rs 8900 per month for next 21 months, earning a 7.5% interest per annum can do the job. It’s that simple. 
As far as taking a Credit Card debt is concerned, one must understand that it is the costliest form of debt and at times can cost you more than 35% per annum in interest costs. And you don’t want to pay 35% interest on Rs 2,00,000 for next few years, isn’t it? 🙂
Another option which Amir mentioned was stock markets. I would not suggest this option even though you have close to 2 years as your time horizon. I personally think that over a short term (less than 5-7 years) stock markets can be risky with high chances of capital erosion. You may be a good stock picker and may be able to make the required amount in less than 21 months. But I have no access to knowledge about your stock picking abilities. 🙂 And also, just imagine a situation that you decide to go ahead with your decision of making money in stock markets to fund this trip, and god forbid, markets take a dive in July 2015 and you are left with inadequate funds to pay for your trip. What will you do then? You may decide to take Credit Card debt and go ahead. But why would anyone want to take chances with such an important event of your life? It’s better to keep it simple and go for a simple recurring deposit.
Note – I have made assumptions regarding the trip and shopping expenditures. The real costs may be higher or lower, and consequently, your monthly RD contribution would also be higher or lower. Consider this to be disclaimer from my end. I don’t want your wife to come after me for miscalculating  her shopping budget. 🙂

Mailbag: How do I make an Emergency Fund?

A lady reader (Aarti) asked a genuine question in the newly created Contact section of Stable Investor. 

“I don’t understand stock markets, but wait eagerly to read other articles on your website. 
Everywhere on your site, you advocate that one should make an Emergency Fund. As a novice, how should I start making this emergency fund?
I feel its very tough for me to save money. And every month end, I am almost broke. Please help.”

In this post, I would try to help the lady create an Emergency Fund in 5 easy steps.

Emergency Fund, as the name suggests is there to handle emergencies. A job loss, illness, accidents, etc. An emergency fund should have sufficient funds to cover your expenses in case you loose your job, meet with an accident or have some unplanned expenditures? 

Emergency Funds
Remember God in good times and Emergency Funds in bad times

You can take following approach to create your own emergency fund –
Step 1: Calculate your total monthly expenses
This is the first step and you should not get this one wrong. When calculating expenses, it is necessary to calculate your family’s expenses and not just your own. This should include everything from expenditure related to food, rent, loan repayments (EMIs), transportation (fuel) costs, monthly insurance premiums, monthly investments (SIPs in mutual funds), medicines, telephone bills, electricity & water bills to more discrete expenditures like eating outs, gifts, festivals etc.
Step 2: Decide how much you would like to save
This totally depends on your level of comfort. There are different opinions about how much money you should put in an emergency fund: 3 months, 6 months or 12 months worth of expenditures. But don’t worry about others. Its your emergency fund and only opinion which matters is yours. Ask yourself how much you would need to feel secure, and make that your target for an emergency fund.
Step 3: Open an account
Once you have decided how much you need to put in your emergency fund, it is time to decide where to keep your money. One major requirement of emergency funds is liquidity. This means that you cannot park your money in mutual funds, stock markets, gold or other illiquid assets. The best option would be to open a Savings Account. You should open an account exclusively for this emergency fund. Or otherwise, you would be tempted to dig into your emergency fund account for non-emergency requirements. Though saving accounts don’t offer much as interest, it is important to understand that what they do offer is ‘liquidity’. Some banks offer close to 6-7% on Savings Account, which is quite decent considering the liquidity these savings account offers.
Step 4: Determine how much you can save regularly
Emergency funds aren’t built in a day. It takes time and regular savings on your part. Analyze your finances and determine how much you can afford to put towards your emergency fund every month. Don’t worry if you start small. Even a small amount will do as when you start saving, you realize the importance of such a fund and the risk of not having such a fund.
Step 5: Automate it
If possible, make arrangements to allow automatic transfer of funds to this emergency account. This can be done on a pre-selected date every month. This is advisable as it brings discipline in saving and also prevents you from making any rash expenditure as you would always have the thought of automatic-emergency-fund transfer at the back of your mind. 🙂 

And it is my personal experience that if you don’t have to think about it, savings are much easier.
5 steps to create emergency fund

Dead Monk’s Advice: Don’t risk your emergency fund by going after higher returns.

Many of your ‘well-wishers’ and so called financial experts will tell you that you can easily earn more than 7% if you are ready to invest in MFs, stocks etc. But beware. Do not listen to them. 


Read the following scenario…
A little common sense would tell you that one should not take risks with emergency funds. Suppose you invest you emergency fund in stock markets. During recession, you lose your job. It is common knowledge that during recession (when you lose your job), the markets would be down, i.e. your investment would be quoting at prices lower than your purchase price. Hence, you would have to book loses in case you want to use your emergency fund. This would not have happened if you had stuck to safer savings bank account.

As of now, you might feel that you are not in some kind of emergency situation…
dont wait start now
Suppose you earn Rs 50,000 every month. Your monthly expenditures are Rs 25,000. You want to build an Emergency Fund of 6 months, i.e. (6 Months x Rs 25,000 = Rs 1,50,000). Assuming, you are able to put away Rs 10,000 every month, it would take you 15 months to create an adequate emergency fund.
emergency fund time required
Timeline for creating an Emergency Fund – (Click To Enlarge)
So start now as 15 months is a long time and you would not like to face an emergency without having a fund to handle it, isn’t it?

Mailbag: I am 45 years old & want to accumulate shares of good companies for next 20 years

A reader aged 45 had the following query. Though he asked the question on Stable Investor’s Facebook page, I thought it would be a good idea to share it with loyal website readers to know their views.
So here is his question:
“I am 45 years old and wish to invest in equities for long term. My goal is to create a corpus, which I may use when I’ll cross 65. Hence in which Indian companies should I invest? I plan to buy stocks of the chosen companies regularly in small quantities in “buy-and-forget” mode. I don’t want to be bothered about daily price fluctuations or viability of company’s business. Please recommend a few companies which you think would keep performing well for years to come. I assume that at whatever price I buy these stocks, I would eventually have significant capital appreciation over the next 20 years.”
Now this is what I think:
I am assuming that you are adequately insured and have sufficient money in your emergency funds. With this assumption, I would say that it is always advisable that one should invest in multiple asset classes, so that there is no concentration risk. I am assuming that since you plan to invest in the so-call-risky asset class, you already have decent positions in less risky ones like PPF, PFs, NSCs, bonds, FDs & RDs etc.
Now Buy and Forget kind of investing requires that you pick companies which you are sure are going to survive for next 20 years. These are companies which essentially, have a greater ability to suffer than other listed companies.
Once you have taken care of survival, you need to shortlist those which have a good probability of flourishing in next 20 years. Just these 2 filters would reduce the list of probable companies to less than 10-15. And that in itself is a pretty manageable number.
But having said that, I would digress a little from this topic of direct equity investment. You can, or rather should consider routing a substantial part of your planned monthly investments through index funds. You might argue that investing in index funds would eliminate the probability of picking up multibaggers, even when considering a 20 year time frame. That’s correct. But this would also eliminate the possibility of ending up with stocks of companies which might be very close to being shut down at end of 18-19 years of your stock accumulation period.
Now no one would want to accumulate shares of a company for 19 years, only to find that when he requires that money in 20thyear, share prices have crashed down and business is about to close. 🙁 So, I would suggest that you should give index fund investing a serious thought.
Sometime back, I had suggested a similar approach to two young readers who also intended to invest for next few decades! You can read those discussions here and hereBut if you still want to go ahead with a Direct-Equity-SIP sort of a program where you buy few shares of companies every month for next 20 years, you should stick to companies which pass the following criteria –
Provide products and services which would have increased demand in years to come and are ideally placed to benefit from India’s demographic profile over next 20 years.
To meet this demand, these companies should depend as little as possible on debt and should be able to fund their expansion through cash flows itself.
The companies should be run by trustworthy and proven management. You don’t want to handover your hard earned money to companies which are not run by people whom you would personally not like to interact with. Isn’t it?
Personally speaking, dividend paying companies ring a bell for me. But you can choose not to consider this criteria.
So once you have shortlisted companies according to these criterias, you would have very few companies which you would like to invest for next 20 years.
One such company which comes to mind is ITC. You can create your own list of such companies.
It is always better to have a framework (structure) before you go ahead picking specific stocks. Hopefully, this post will help you in coming up with a correct framework to pick stocks worthy of long term investments.
This is what I feel should be done by the reader. What do you all think?

Mailbag: 22 years old & ready to invest for 25 years!!

A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂
So in this post, as we promised, we will try to address our young reader’s query.
But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.
Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.
But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.
We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.
  1. You are ready to invest 25K every month NOW.
  2. You don’t have any liabilities NOW.
  3. Your income (salary, etc) will increase every year for next 25 years.
  4. Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
  5. Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
  6. You and your family are adequately insured.
  7. You and your family have adequate health insurance.
  8. Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂
What We Suggest
  1. Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
  2. From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
  3. For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil.  So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.
Problems which you might face in future
Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.
So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.

Hope that helps. Others are welcome to pour in their thoughts.

* – Thanks our reader Hemant Bhatia for bringing this to our notice.

Mailbag: Why do you choose such simple criterias for shortlisting stocks?

We received a question in comment section of our last post on selecting 10 stocks to buy in next market crash. The question asked was very simple, but relevant…

“Why do you guys choose such simple filters for shortlisting stocks? There are more comprehensive and well proven methods of doing the same.”
We will first explain a little about these 5 filters and then answer the question –
Filter 1: Management (Atleast Decent)
The last two words of this filter, ‘atleast decent’, make this a completely subjective criteria. We believe that we are average investors. Hence, we are the last ones to receive company / promoter related news, leave alone insider information. Hence, in the event we do come to know that management is not trustworthy (read decent), then it means that there is more negative news which has not even come out in public domain. Isn’t it? Hence, we will prefer to stick with companies with ‘known decent’ promoters / management.
Filter 2: Not Highly Cyclical
Some experts say that one should buy cyclical business at high PEs. It is at these times, when things are about to turn around for better. They may be right. And sometimes, it seems logical on face value of the argument. But we are not sure. Frankly, we haven’t devoted adequate time to analyzing cyclical businesses. And hence, we don’t understand them too well. Also, highly cyclical businesses are highly uncertain. Such companies are at the mercy of the economic cycles. So it’s better that we avoid such companies.
Filter 3: Atleast Average Growth Potential
If the underlying business does not have any growth potential, then how can we expect the stock to move up? We should never forget how Kodak, a great company which did not embrace the advent of digital photography and how it paid the price with its bankruptcy.
Filter 4: God Dividend Record
We just love dividends. That is all we have to say. 🙂 But we have a reason for it. You can read it here.
Filter 5: Are we ready to hold the stock for 10 Years?
Mr Buffett once remarked, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”Being self-claimed long term investors, we ourselves would like to hold stocks of great businesses. We would love to act like owners of companies. And when a great company is going through tough times, the owners don’t sell and runaway. They stick with it. They know that when times will change, the company would be back. And in a much better shape.
So now, we are back to our original question…
Why do we use such simple filters??
The primary reason for using such simple filters is that these have worked for us. It is easier to evaluate stocks on these filters than more complex quantitative ones. Though we do use such quantitative metrics in our case studies of individual stocks, we always prefer to keep things simple. We try to stick with proven businesses. We try to find indicators of overall pessimism in the market, so that we can be a little sure that we are being greedy when others are fearful. We know that by following these filters, we are simply eliminating the possibility of finding those 50 and 100 baggers. We are restricting ourselves to a very small universe of 40 (or max 50) stocks. But we accept this tradeoff. We don’t want to lose money in stock markets by taking very risky bets. We know what we are good at and we will prefer sticking to our strengths. Over time, we will increase our expertise in other areas and may be, would be able to find the next multibagger. As of now, we are happy to lay a strong foundation for our long term portfolio.
We hope this post clarifies the doubt which our reader(s) had. 🙂