|How to divide 10K among 3 different Mutual Fund Schemes|
If you belong to the same generation as me (born in mid-late 80s), then chances are that you would have heard about NSCs, but would not have invested in them. But if you are of a generation prior to me, then chances are high that some of your money might be invested in this instrument.
|National Savings Certificate|
But there is another problem with NSCs. These instruments have a lock-in of 5 years and 10 years. Now this is an extremely long period for our impatient generation. But there is a way in which this lock-in can be managed in a way that an investor receives some money at the end of every year. The approach which I’ll discuss increases the liquidity of NSCs, with a little help from Fixed Deposits. This approach reduces the return a little. But that is a price we need to pay for increased liquidity. 🙂
|NSC Ladder : Click to enlarge|
This is what exactly happens –
- 1st Tranche: Invested Rs 20,000 in FD for One Year – Received Rs 21,600 at end of Year 1 – This sum is invested in NSC for 5 Years – Received Rs 32,750 at end of Year 6.
- 2nd Tranche: Invested Rs 20,000 in FD for Two Years – Received Rs 23,545 at end of Year 2 – This sum is invested in NSC for 5 Years – Received Rs 35,699 at end of Year 7.
- 3rd Tranche: Invested Rs 20,000 in FD for Three Years – Received Rs 25,901 at end of Year 3 – This sum is invested in NSC for 5 Years – Received Rs 39,271 at end of Year 8.
- 4th Tranche: Invested Rs 20,000 in FD for Four Years – Received Rs 28,232 at end of Year 4 – This sum is invested in NSC for 5 Years – Received Rs 42,805 at end of Year 9.
- 5th Tranche: Invested Rs 20,000 in FD for Five Years – Received Rs 30,073 at end of Year 5 – This sum is invested in NSC for 5 Years – Received Rs 45,597 at end of Year 10.
Pay Yourself First. This has often been referred to as the Golden Rule of Personal Finance. So what exactly does it mean and how can you do it?
|Save & Invest before Spending|
- In case you are planning to save for your retirement, ask your employer to automate your PPF, EPF, VPF deductions. In this way, you would have saved for your retirement, before even getting any money in your wallet!! 🙂
- If you are interested in stock markets, you should make regular monthly investments (SIP) in good mutual fund schemes. This can be automated via an ECS mandate to your bank.
|You Action Plan to pay yourself first.|
|Always calculate the real growth rate of your investments|
What is CAGR
Investopedia defines CAGR as –
“CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.”
Formula for calculating CAGR
A simple formula for calculating CAGR is,
A simple tool to help you calculate CAGR
We have created a simple CAGR Calculator, which you can use to calculate real returns for your investments. To download this calculator, click on this link. You will be taken to a Google Spreadsheet. Go to the File Menu, and click Download. Once the spreadsheet is downloaded, you can fill up the required numbers and the CAGR or Final Amount or Years will be calculated accordingly.
|Click on image to go to the CAGR Tool|
Starbucks has finally opened its first store in India. Being in Mumbai, we got an opportunity to check out the store on very first day. Lucky us… 🙂
|From Starbucks (India) website|
Now, if this amount was invested on monthly basis (SIP) in a good mutual fund scheme, then assuming 15% pa growth, the amount would have become Rs 1.65 Lacs in 10 years. You can calculate the same yourself by using a SIP Calculator.
|A Snapshot from SIP Calculator (Source: HDFC MF)|
(Latest Update) – You can read an updated and more detailed analysis of the PE and other ratios here.
We decided to use this insight to boost our SIPs.
For our analysis, we started with SIP of Rs 5000 every month, from January 2000 and kept on investing till December 2011. A total of Rs 7.25 Lac was invested in 145 instalments. Now we add the Boost. Whenever markets PE fell below 15, an additional Rs 5000 was invested in that month i.e. a total of Rs 10,000 was invested in that particular month. This happened in 23 of the 145 months and an extra Rs 1.15 Lac boosted the normal investment of Rs 7.25 Lac. This took total investment to Rs 8.40 Lac.
So what is the current value of the investment? Did the boost help in earning higher returns? Read further. The investment of Rs 8.40 Lac stands at a Rs 23.8 Lac. And if SIP was not boosted by Rs 1.15 Lac, it would have stood at Rs 19 Lac.
In an earlier post about timing the markets, we saw that it doesn’t make sense in trying to time the markets. If earning a better-than-average return is the aim, it is enough to invest regularly in a disciplined manner rather than trying to time the markets.
Let’s suppose that you as have decided to invest at regular intervals. This type of investment can easily be executed by means of SIP or Systematic Investment Plans.
Above data shows that on increasing our investment by 15.9% (Investing more when market is trading at lower valuations), our overall investment value increases by 25%.
So to summarize,
- You should understand that there is no point in trying to time the market.
- Best way for common investors to enter markets is to invest via mutual funds and take the SIP route.
- If you are ready to track overall market PE regularly, you can augment your SIP investments as detailed above.
- But even after discussing the benefits of regular investments in markets & redundancy trying to time the markets, if you want to time the markets by investing in direct stocks, you should stick to shares of large & stable companies (Read about how to find Large Caps selling at massive Discounts!)