Managing money wisely

• Inflation, taxes, government policies, geo-political situations and economic cycles affect all investments. 
• The day you part with your money, you have taken a risk. Bigger the risk the greater scope for higher returns.
• Holding cash is worst form of investment, which depreciates with time in an inflationary economy like India.
• Understanding risk and managing prudently helps protect wealth and generate higher returns. Saving at the beginning of career alone is not enough. What you do with savings that will help staying ahead is more important.
• Bank fixed deposits are fairly safer but its interest rates falls short of inflation rate.
• Debt mutual funds that invest in bonds for short-term goals returns increase as bank FD interest rates fall. The average returns of such funds over a period of five years are around 12-17%. While FD interest is taxable, debt mutual funds held for three years or longer, you can adjust your gains against inflation, with indexation. Any capital loss can also be offset against capital gains on other investments, like shares or properties sold. 
• Debt is not a bad thing, if used correctly. While education or home loans are good debts, credit card debt or a personal loan, to buy something you could live without, is a bad debt.
• Staying debt free is important because debts carry much higher interest burden than what you earn on your investments. As retirement approaches one must become completely debt free to have peaceful retired life.
• Stocks carries considerable risk although liquidity is good. Hence invest that much money which you can afford to lose. Stock or commodities trading, while returns could be high, risks are also higher if traded without research & strategy.
• It is always good to buy blue chip stocks when the markets are down, at a time when nobody is buying and everybody's selling, for long term holding. Investing in long-term equity mutual funds (MFs) is an option. The risk is higher if your holding them is for few weeks or months.
• Overall, the Indian stock markets have returned a good 10-11% compounded annually over a 10-year period, despite the ups and downs.
• Opting for a systematic investment plan (SIP) where you invest a fixed amount of money every month regardless of market fluctuations suits for investing salary surplus amounts.
• The basic principle of investing is to reduce your risk as you get older. A common thumb rule is that individuals should hold a percentage of stocks equal to their age in bonds, government debt and other safe assets and rest in equities. For a 30-year-old, 30% of the portfolio should be in bonds, government debt and other safe assets and rest 70% in equities.
• If you are in your 20s, 30s or even 40s and have years before you retire then "take some risks and opt for more volatile investment that will potentially give you more returns in the long term". However, if you are retiring in the next few years, depending on your circumstances, invest in a conservative manner.
• Always look at big-ticket expenses (child's education or marriage, retirement) that you could incur over the years. Keep aside money for contingencies and have a plan for a fixed monthly income after retirement (through pension, post office or mutual funds monthly income plans, senior citizen savings schemes, FDs and bonds). Not everything will go as per plans, but planning is imperative.
• Insurance is a premium for someone to pay your family a big sum of money, if you die. That premium is just a cost. For peace of mind, it is important to take insurance that covers health, disability, accident, life and property, you should only buy the cover you really need. The life insurance cover's simple thumb rule is to multiply monthly expenses by 300. You may not need life insurance if no one is dependent on you.
• Remember insurance payments are not investments. Insurance is good. Investment is good. Combined into a single product, they make you poorer.
• Real estate, with low risk over long term, is great investment usually with very high returns but with very poor liquidity. Therefore invest into real estate that much money which you may never need it. 
• Investing in rentable properties is a good idea to get some monthly income.
• Spread the Risk. Research carefully and diversify your investments, placing pre-decided amounts in different asset classes: equity, mutual funds, bonds, FDs and property. Rebalancing and realigning your portfolio at definite intervals, according to your goals and risk appetite, is a good idea.
• Invest in tax saving instruments like PPF, ELSS etc for minimizing tax outgo.
• Spend wisely. Overspending is a bad habit. Before you buy anything ask yourself: Am I buying this because I want it or do I really need it? Can I live without it? And, can I really afford it?
  Remember the words of Warren Buffett: "If you buy things you don't need, soon you will have to sell things you need."
• As lifespans lengthen, the need for money between the ages 70 and 85 increases because of medical expenses, medical insurance premium etc increases. At this age, people need house help and insurance doesn't cover everything. The costs involved in maintaining an older person, who is not fit, is much higher than the expenses of an average person.
• Beware of credit cards which are good, if used judiciously. Otherwise small print terms and service charges are bound to make you poorer, in case of reckless spending using card.

Whatever you decide to invest in, do it regularly. Do not watch your investment too often. Do not speculate. Stay invested for the long term. Your money will not only be safe, it will grow many times over. 

Neither a borrower nor a lender be,

for loan often loses both itself and friend ... Polonius

Indians under a mountain of debt

It’s not just India which is under a mountain of debt but also Indians who are rapidly shedding inhibitions towards taking loans. With the rampant spread of credit culture, the average Indian is paying around one-fifth of his or her monthly salary towards repaying debt.

For aspiring Indians, debt is no longer a bad word. From white goods to kids’ education, loans are increasingly a favoured option. Until few decades back, households mostly believed in saving for big ticket expenses. Today, they would rather take a loan for any expenditure; be it a a microwave oven, an LCD TV, a car, house and even education. The huge discounts and offers being given by e-commerce firms and consumer product brands are supporting the trend. The phenomenon has been aided by the spread of microfinance institutions and self-help groups in rural India and easy EMI schemes in urban areas.

The off-take of credit has been going up due to rising disposable incomes, increasing consumerism and easier access to credit. Real estate and consumer durables have led the growth in credit. In the last few years, high value goods have been coming under attractive schemes. A lot of credit is being used for creating assets like household gadgets and appliances. Some credit is also being taken for education of children, both in India and abroad, and that is an investment than debt.

Some of the biggest loans are taken in the real estate and auto sectors. About 70 per cent of cars are bought on EMIs. The loan phenomenon will increase further due to demonetization. The rising credit culture would have been a matter of concern had it been used for discretionary spending such as travel and vacations which is just blowing up the money. Creating credit is not necessarily bad especially in cases where it is also improving life style.

It is asset-based credit and helping create more liquidity, which is good for the economy. While living on loan seems to be gaining currency, there is little worry about payment defaults. There is an increasing level of credit discipline among rural people. The default rate is much lesser in consumer credit as against corporate credit. This is because a retail customer has to build his/her credit score, and multiple validation takes place before credit is extended. A lot of assets are given on mortgage, reducing risks.

My View:
The rising debt culture is OK in stable economies without any disturbances and growing steadily year after year. In case of disturbances or economic contractions, who ever is saddled with loans and loses job or bulk of income, will simply become a pauper on the street. All his equity in this loan based purchases will simply vanish. With assets vanished, credit scores below mark and saddled with liabilities, one will have to live on family assets or charity.

For single earners in the family with meager family assets & support and risk aversion people , staying away from credit based purchases and building assets base for some time is better. In this leveraged world, money and its manipulations are OK for high net worth people who can absorb shocks but people with fragile asset base and dependent on monthly earnings staying away from loans & EMI's is better, for peace of mind.

While it is fascinating to buy gadgets & things with least payment and pay monthly EMI, and if one computes the total interest outflow, over two decades, due to credit based several purchases, it works out to be mind boggling amounts. The mortgaged housing & car loans carries moderate interest charges. The unsecured personal loans, which carry higher interest rates. Credit cards usage is OK for convenience of payments and very short term credit purchases. But if used for medium/long term credit purchases, the interest charges are worse than personal loans.

Staying away from credit and saving 25-40% of earnings, is worthwhile for peaceful living.