Mujhe mil jo jaaye thoda paisa…
If I get some money…
Have you heard this song? If yes, I will certify that you had an awesome childhood.
It sings of that ‘if condition’ of getting some money, then I will go to a party, I will buy a car, etc; albeit in a funny way & taking potshots on advertisements of those days. If i get money, that’s the natural reaction right?
How much can we spend?
This question reminds me of the movie “Malamaal”, where the protagonist would get a big fortune as inheritance, only if he can spends 10% of the fortune in 30 days. The protagonist runs out of idea at the end, on what to spend on.
In reality, we spend and think of spending on multiple things, but we save too. We save for rainy days, we save for repaying debts, we save for kids’ education, marriage, we save for house/car/jewellery/vacations/, etc.
But save where?
Depending on one’s financial health and quotient of love for money, we act for earning money. Once earned, a frequently observed & experienced outflow is towards daily needs, then debts, then short-term goals & last comes long-term goals.
If still there is surplus, you have a problem —
Allocating towards daily needs is a no-brainer. One uses cash or keep it in a bank account, linked with Debit card, or use a credit card, and delay the payment by a month.
For rest, what will you do? Depends on who you are right?
When I was a kid, I used my “gumboot” shaped piggy bank.
Once on the job, and till I got married, a very obvious answer to surplus was “Fixed deposit (FD)”.
FD & NSC are the most loved investment instruments of India. I am 100% sure, you must have invested in either, atleast once.
In my case, I attribute that to lack of information of other instruments.
And I believe, that many of you are still in that state. You would be either making FDs, NSCs, buying the nth real estate or buying gold.
Any other avenues? Are there any? One which starts with S?
Over a cup of tea or lunch at your office or while commuting in bus/train or while waiting for buffet to start at a marriage — when people give their deep insights after thorough studies on multiple subjects — you might have heard a statement, starting from “Aajkal” or “Basically aajkal”, many people invest in shares & mutual funds.
Really? Ask this “aajkal” guy, the source of data.
Coz, this link suggests that there are around 2–4 crores who invest in shares, either directly or through Mutual funds. If we assume that half of our population earns, that’s less than 10% of earning population. The link suggests that barring Gujarat & Maharashtra, no state has more than 5% of population investing in stock market. (Note: AP & Telangana was not part of survey).
So contrary to “aajkal” guy, neither aajkal, nor in past, have sizable no. of people preferred stocks & MFs.
So, while even today, not many are investing, should we?
Who does not have that friend of a friend, who earned like crazy in that single stock. You need not be a Gujarati for that. You must have heard his/her success story.
If you are in Gujarat, then the amplification is more (we are loud), and also, the exact opposite stories also play out. That guy lost everything in one stock. The stories of transition of patis, from road to crore, and vice-versa, is common in Gujarat.
When my acquaintances, say at the workplace or any new social setting, try to judge and size me, they ask to confirm — You don’t eat non-veg, you don’t drink, your Dad is in business and you do share market.
For the last generalization, I reply that I did stock market in past, as allowed naturally and with consent, but then had a heart and finger burning incident, so bid adieu. We Gujaratis have this tradition of losing in a penny stock atleast once in a life time, and we love tradition.
Yes, so that burning was in 2008 collapse, triggered by the sub-prime crisis. However, my burning is attributed to I treating share market involvement as a quick buck thing — a fling rather than “true love” (deep).
After 2008, I got married, and Kanksha always wanted something or the other (this is a joke, and I already apologize in advance), so the outflow was towards daily needs and repaying loans of education, car and partial payment of home loan. No surplus to think of shares or anything else.
In 2014, started generating some surplus and again came the question. Where should i keep this money? Shares?
This time, i thought of giving a proper thought before plunging. I, being a layman, thought of consulting a financial planner, but instead opted to first understand whats and hows of the game.
I started reading related topics and about financial planning. This helped me understand following salient points of investment instrument in general — how to rate and decide an instrument, and eventually where to plunge.
- Each instrument has several evaluation parameters.
Commonly known parameters are
a. Rate of interest/ Return on investment (ROI) — It is generally a % number, which conveys that in a year, your investment will yield % of the total amount invested. So 8% will yield 8 rupees, for Rs. 100 invested, after one year.
b. Type of return — guaranteed or tentative
Guaranteed is when the instrument promises the yield in writing. The best example is an FD. Unless the bank collapses, one can expect the return as promised.
Tentative is dependent on multiple factors. For eg, if business performs well, If the price of land increases, if the demand for a commodity increases & supply decreases — the investment will grow; if not, it will remain stagnant, or degrade.
c. Maintenance — Each instrument needs to be maintained. The maintenance can be as straight forward as maintaining your real estate in terms of wear & tear, or more nuanced like tracking the progress regularly, or more subtle like checking the health of a co-operative bank.
d. Risk — Each instrument has a risk. NO instrument comes risk-free. The perception of risk — high/low/medium/5kg/2 liter, is a personal call, typically influenced by historical performance or hearsays or tips or faith.
e. Tenure — Some instrument comes with fixed tenure or a lock-in period, other either comes with a best practice thumb rule like “hold it for three years” or while some are elusive.
2. There is no magic in any form of investment.
Take my money, and come back with double the investment in 1 year. Sorry, Sir. Investment certainly doubles or triples, but at its own pace & if it is meant to.
3. Consider inflation rate along with rate of interest
Over the period, in a developing country like India, inflation rises. So if the rate of interest is less than inflation, the overall perceived gain is negative.
Simply put, if a mango costs Rs 100 today, it will cost 108 after a year. If you invest 100 today & your ROI is 6%, it will become 106 after a year, incapable of buying that mango.
4. Income tax is also a parameter associated with an instrument.
The yield is an income to you. Some yields are treated as capital gain, which eventually gets added in some form, to your income, and hence taxable.
Certain instruments might be tax friendly.
5. Miracles or windfall gains are rare. Exception and not a norm.
Well, this is philosophical. Just like I am great at most of the things, but you poor thing is miserable in most — can’t help, right? I am an exception, but you are not.
Equipped with this clarity and few more pointers, I started managing my surplus.
In next post, I will talk of my action plan, some comparative study of different instruments, what i opted for and lessons learnt — for those who want to DIY, the financial surplus management.
The next part of the post can be read here.
