MONEY WISE

1. Start with the Absolute Basics: Emergency Fund and Insurance.

Effectively, not having an emergency fund is like a car driver refusing to wear a seat belt because it feels less comfortable.

Secure your foundation. Before any investing, ensure you have an emergency fund covering six months of expenses, easily accessible in liquid funds or linked fixed deposits. This prevents forced selling of investments during downturns, saving you significant losses and providing peace of mind during job loss or health crises.

Assess insurance needs. Life insurance (specifically term insurance) is crucial only if others depend on your income. Calculate the corpus needed for dependents' lifetime expenses, accounting for inflation, and buy sufficient term cover. Health insurance is non-negotiable for yourself and family, considering high medical costs; explore floaters and super top-ups, and get separate plans for parents.

Hygiene first. These basic steps are non-negotiable "hygiene" factors. Without adequate emergency funds and insurance, you are financially vulnerable, and any investment gains could be wiped out by unexpected life events. Prioritize these before venturing into riskier assets like stocks or mutual funds.

2. Initially, Focus on Earning and Saving More Than Returns.

The first crore you make will largely come from your income, from the work you do.

Income is paramount. In the early stages of your career, the biggest driver of wealth accumulation is increasing your income and saving a significant portion of it. Small percentage returns on small savings yield negligible absolute gains compared to the impact of a higher salary.

Saving habit matters. Cultivate a consistent saving habit, even if initially parking money in low-return, safe options like fixed deposits. This builds your first nest egg without exposing meager savings to market volatility, which could be demotivating if losses occur.

Invest in yourself. Instead of chasing high investment returns on small amounts, consider investing in skills, education, or courses that can significantly boost your earning potential. A Rs 10,000 course leading to a Rs 25,000 monthly salary increase offers a far greater return than any market investment on initial savings.

3. Understand Asset Allocation: Divide Money into Risk Buckets.

The choice of whether a person can take more risk depends on only two things: Can I take risk? ... Must I take risk?

Bucket your money. Once basics are covered and you have a respectable buffer (e.g., 8-10 months of expenses), divide your savings into different asset classes or "buckets" based on risk tolerance and goals. Common buckets include low-risk (fixed deposits, debt funds) and high-risk (stocks, equity funds).

Risk tolerance factors. Your ability and necessity to take risk depend on personal circumstances:

• Ability: Do you have liabilities, dependents, or lack a safety net? More constraints mean less ability to take risk.
• Necessity: Does temporary loss of capital cause significant stress? High anxiety suggests a lower allocation to risky assets.

Allocate based on goals. Different goals have different time horizons and risk profiles. Long-term goals like retirement (10+ years away) can tolerate higher equity allocation (80%+), while short-term goals (under 3 years) require minimal risk (30% equity or less). A simple starting point is 50% risk, 50% non-risk if unsure.

4. Mutual Funds: Outsource Investing Wisely, Go Direct and Index.

But with only 0.2 per cent expense ratios, there’s no room for commissions. So, no one pitches index funds to you.

Mutual funds simplify. For those lacking time, skill, or inclination for direct investing, mutual funds pool money and hire professional managers. This is a sensible approach, but be aware of potential conflicts of interest where fund managers or distributors prioritize their fees.

Choose Direct plans. Always opt for "Direct" plans over "Regular" plans. Direct plans have lower expense ratios because they don't include distributor commissions, leading to better net returns over time. Avoid paying hidden, lifelong commissions for services you may not receive.

Consider Index funds. Index funds passively track market indices (like Nifty or Nasdaq 100) and often outperform actively managed funds after accounting for fees. They offer low costs and inherent diversification by mirroring market leaders. A simple strategy is a mix of Indian and international index funds for your equity allocation.

5. Stocks: A Deeper Dive Requires Effort, Beware of Traps.

It was soon starting to become a full-time job.

Direct stock investing. Buying individual stocks requires significant effort: understanding company fundamentals (revenue, profit, balance sheet, cash flow), analyzing cycles, evaluating management, and interpreting news. It's complex and time-consuming.

Beyond the P&L. Don't just look at profits. The balance sheet reveals crucial information like debt levels, working capital efficiency, and hidden assets/liabilities (like DLF's receivables or Amazon's reinvested cash flow). The cash flow statement is harder to manipulate and shows true cash generation.

Market dynamics. Stock prices are influenced by more than fundamentals:

• Cycles: Industries like steel or chemicals have price cycles requiring careful timing.
• Value Traps: Stocks trading below intrinsic value may stay cheap if promoters don't unlock value (e.g., holding companies).
• Technical Analysis: Price patterns and trends can be traded, but require discipline and risk management.

6. Beware of Scams, Mis-selling, and Sharp Practices.

‘There’s a sucker born every minute, and he’s going to help me make my monthly quota’ is the financial service provider’s mantra.

Question everything. Be highly cynical of financial products or advice promising high returns with low or no risk. If it sounds too good to be true, it almost certainly is. This includes guaranteed returns far above market rates or tips based on "inside news."

Avoid mis-sold products. Be wary of advice from those who earn commissions, like bankers or insurance agents, who may push products that benefit them more than you. This is rampant in:

• Insurance: Avoid mixing insurance and investment; buy pure term cover separately. Products promising money back or high guaranteed returns often have exorbitant hidden charges and low net returns (often below FD rates).
• Real Estate: Don't buy purely as an investment based on hype. Prices don't always rise, liquidity is low, and hidden costs (maintenance, taxes, registration) are significant.
• Credit Cards: Never revolve credit. The interest rates (often 50%+ annually with GST) are predatory. Pay off balances in full, even if it means taking a cheaper personal loan or selling investments.

Understand the fine print. Scams and sharp practices often exploit loopholes or rely on customers not understanding complex terms and conditions. Educate yourself or seek advice from fee-only advisors who are not incentivized by commissions.

7. The Power of Compounding and Long-Term Holding.

Money is made largely when you sleep.

Compounding is phenomenal. Even seemingly modest returns (like 12-17% annually) result in massive wealth multiplication over long periods (20+ years). Don't underestimate the power of time and consistent growth.

Stay invested. Avoid constantly trading based on rumors or market noise. Frequent buying and selling, especially during volatile periods, often leads to missing the market's best days. Most gains come from staying invested through ups and downs.

Patience pays. The author's father's portfolio, held for 20 years despite market swings and a low survival rate of companies, generated a 50x return. This highlights that inaction (not selling) and patience can be more profitable than active management, allowing compounding to work its magic.

8. Focus on Portfolio Returns, Not Individual Stock Performance.

The individual stock returns are not useful to concentrate on.

Diversification is key. Don't put all your eggs in one basket. A portfolio approach, holding multiple investments across different asset classes and sectors, is crucial. This mitigates the risk of any single investment performing poorly or failing entirely.

Winners drive returns. In any diversified portfolio, a few winners will likely account for the majority of your overall returns. You don't need every investment to be a superstar; the success of a few can compensate for the underperformance of others.

Manage position size. Avoid letting individual stocks become excessively large parts of your portfolio, even if they perform well. Set maximum limits (e.g., 25%) to manage risk. Conversely, don't hold too many tiny positions (under 1%) that won't impact overall returns.

9. Plan for Necessities, But Don't Forget to Enjoy Life.

Fear that you’ll die after you’ve worked your ass off, without a tale to tell.

Balance saving and spending. While planning for long-term goals like retirement and children's education is essential, don't hoard money unnecessarily. Life is unpredictable, and you can't take wealth with you.

Spend on experiences. Allocate funds beyond necessities for things that bring you joy and create lasting memories. This could be travel, hobbies, or indulging loved ones. These experiences enrich your life in ways money saved cannot.

Avoid regret. Don't let the fear of not having enough prevent you from enjoying the present. Consciously decide what you need for security and future goals, and feel empowered to spend the rest on fulfilling experiences.

10. Build Personal Leverage: Get Your Assets Working for You.

Essentially get to a stage where you can get your assets working for you, instead of you having to work.

Beyond salary. A salaried job offers leverage of 1x (work = pay). As you gain experience and contacts, your leverage increases. Starting a business can offer much higher leverage (e.g., 20x) by employing others.

Financial leverage. Investing allows your money to work for you, potentially offering infinite leverage (income with no work). The goal is to build assets (investments, business ownership) that generate income passively.

Tax efficiency. Different income sources are taxed differently. Salary income is often taxed highest, while long-term capital gains from stocks are taxed at lower rates. Building wealth through assets can improve your overall tax efficiency.

Last updated: May 12, 2025