How to wake up fresh with a smarter alarm

Most of you might not know that your brain is in various phases while you sleep. Yes, even if you think you are a deep sleeper, you aren’t in the “deep sleep” stage the entire time you are in the bed. The brain alternates between various stages and there are times when you are in deep sleep and times when you are in the light sleep stage.

The problem with traditional alarm clocks are that it is based on a fixed time and what stage you are during that time is totally dependant upon what time you started sleeping (not what time you went to bed). Waking up to the “nuclear warning” sound of your alarm clock while you are in deep sleep is the worst way to begin your day.

You can wire up your brain and monitor what stage you are in and ask someone to wake you up at the right moment. But It is too costly and no human would be willing to monitor and wake you up every single day.

The alternative is to use the various sleep monitoring apps available for your smartphones. These apps use the accelerometer in your smartphone and detect the minor movements you make when during the lightest stage of your sleep. Using that, it can wake you up at the right stage and you would wake up refreshed and not wanting to kill everyone.

SleepTime alarm set screen

SleepTime alarm set screen

The app I use is SleepTime by Azumio, which is available for both iPhone and Android phones. All you have to do is set up a Alarm Time by which time you “should” wake up. The App chooses a 30 minute window before the set time. Whenever you are in the lightest stage of your sleep within that 30 minute window, it wakes you up. It also has nice graphs of your sleep stages and how often you woke up, etc. It is interesting if you love to measure metrics about everything.

The alarm sound is also very light and pleasant sounding (much relief to my wife) and since you are in the lightest stage of the sleep, even the lightest sounds is enough to wake you up. I tried similar apps long time before but the old android smartphones were more of a battery extractors and the phone died out before I could even finish a night’s sleep. Constantly monitoring the accelerometer is a battery drain.

But nowadays batteries are much better and on my iphone I lose about something like 20% of battery from a fully charged state. I did try this app many days and I have definitely been woken up at the lightest stage of my sleep to the lowest volume. There was an exception on a day or two, but that was because I was too tired to wake up because of not enough sleep (I am a night owl).

If you are a normal living person and want to wake up fresh everyday, do try SleepTime. You would notice a small difference in how you wake up.

Learn Social Psychology on Coursera

Ever wondered why people do what they do? How simple things that is not very noticeable, alters human behaviour. Why we like some people and dislike someone else? How some can be very persuasive when they talk to others?

social-psychology-courseraAll this can be understood from the online course on Social Psychology, from Coursera. It is a 6 week long course and the workload is about 4-8 hours per week. It is taught by Scott Plous of Wesleyan University who has also made parts of bonus materials free for students. Also students of this course get to subscribe to the Social Psychology Network for the lowest rate of $10.

The course starts from Aug 12th, though early subscribers have had the first week’s modules available as an early release. Plus, if you complete with enough credits, you could get a Statement of Accomplishment.

I have the nasty habit of starting these courses and not sticking with it after 2-3 weeks. But now I am determined to follow through as I have blogged everyday for more than a month. This shows that if I want to, I can make something as an habit. Maybe I will have to cut down on my blogging (to 1 or 2 posts a week) and spend more time on these courses and my other hobbies.

Overall this is looks like a nice introductory course to have a basic understanding of how people think and I do want to complete this course. I have already finished 6 lecture videos of the first week’s modules (released early) and must sit down for the first assignment.

Bonus: To make you interested in this course, here is a nice video (part of the course) that demonstrates the effect of Change Blindness – Colour Changing Card Trick.

Tracking your workouts using your smartphone

For a long time, I was tracking my workouts (which was just plain walking and jogging) using an iPod Nano which had a simple pedometer. It could track how many steps you take and how many long runs you do and a very simple calorie calculation.

From Wikipedia

From Wikipedia

It worked great as I can listen to podcasts and also silently tracked my workouts. But it doesn’t work for cycling. There are however a few options where you could buy a cheap cyclocomputer which can measure your average speed, max speed, workout time, distance travelled in a trip, etc.

If you want to track more info about the route you take, you can use some of the costlier GPS solutions which track the elevation gradient, draw your route on a map, etc.

Or if you want to just start tracking your workouts today, there is however a device which you already have in your pockets – your smartphone. There are apps for both Android and iPhone which allow you to track the speed, distance, route, etc., all using the built-in GPS.

There are two apps that seem popular among the community. Best part is, both these apps work for running/jogging/cycling.

Strava: This is a free app for both iPhone and Android. It does have a monthly subscription for premium features. It looks very polished and seem to work really great for me. Can track your average/max speed, elevation gain, calories, routes, etc. It also has social features where you can follow the activity of your friends and even compete on segments for the fastest time. It also works with some of the other GPS devices you may have.

Endomondo: It is also very similar and has the same functionality of tracking speed, elevation, route, etc. Can work on both iPhone and Android or any GPS enabled device. Free, though there are membership plans for some advanced features.

You can choose either of these and start tracking your workout easily. The only problem is having a heavy smartphone in your pocket, which is easily solved if you can get an armband for you phone.

Once you are into serious training and want to track really long distances, you can choose to get a GPS device which does its job well and integrate with your account on either of these two sites. Till then, I will be using my smartphone app to track my workouts.

Nifty BeES – the only equity investment you would need

Yesterday I explained enough about the equities market to help understand the basics. Now in this post I will tell about a single Scrip that you can invest which has low risk and can return gains equal market gains. Indian equities market has given an average annual growth of about 16% over the long term. Imagine a stock which will give you 16% annual returns if invested over 30 years.

If you don’t want to understand anything and don’t want to think about your equity investment, just remember this one sentence. It will work for 95% of people.

Buy N shares of NIFTYBEES every month.

Thats it. Simple right? For example, If you have a surplus of Rs.10,000 every month that you want to invest in equities – close your eyes and instruct your broker to buy Nifty BeES for the Rs.10,000. At today’s rate (Rs. 576) you would get about 17 shares of Nifty BeES. Investing every month, you would have a few hundred shares of it in a few years, which would continue to grow as long as you stay invested.

Now for the longer explanation.

What is Nifty BeES?

Nifty BeES is an ETF (Exchange Traded Fund) by Goldman Sachs, which tracks the Nifty Index. To explain in simpler terms, Goldman Sachs has a computer program which takes your money and uses it to buy the equivalent number of all 50 stocks that the component of Nifty Index. Each single share of Nifty BeES is priced at 1/10th of the Nifty Index.

If Nifty is at 5700, the price of Nifty BeES would be (about) Rs.570. So if you buy 1 stock of Nifty BeES, the ETF would have invested in all of the 50 shares in Nifty. But you can say one can’t buy all of the stocks with just Rs.570. Right, but when lakhs of people buy it, the fund can buy enough stocks and your returns will be weighted according to your investment.

Why not buy specific company’s stocks?

You might be very interested in investing in specific company’s stocks because thats what everyone does and the people on TV are so experienced and say that they have 100% strike rate in picking winning stocks.

Do they really? No. This is a common problem when it involved finance matter (just like in astrology). They don’t talk about predictions that failed. Instead they make you focus on how their choice of one particular stock earned them 60% returns. They don’t talk about the 10 other stocks which made investors lose more money than they earned in that 1 winning stock. People are easily affected by “confirmation bias” and it greatly affect their investments.

Remember no one can select winning stocks every time. And you won’t know in advance which prediction would work out and which wouldn’t. If you invest in all the predictions they make, you would end up making more loss than profits.

How about mutual funds?

Mutual funds are managed by humans who check the fundamentals of a company and try to guess when to invest in a company and when to exit it. But like I said they are no better than the financial experts you see on TV.

Add a small fee that you need to pay the fund manager to handle your money, called “Expense ratio”. You would end up losing money before even making a bit of profit. All this for just some mediocre stocks picked by some human.

How is Nifty BeES different?

Nifty BeES is an index fund – your value of the investment would increase if Nifty increases, and it would fall if Nifty decreases. The value of Nifty is closely tied to how the Indian economy performs. If all the industries are doing well, nifty would definitely increase.

Whenever a company is removed from the index and a new company is added to the index, the ETF automatically makes the adjustment in the investment. It is exactly as if you are investing in these 50 front line companies. When invested in the long term you would definitely have increased your investment multiple times.

How is it less risky than buying a company’s stocks?

It is definitely less risky than buying a separate company’s stocks. Because you are investing in 50 stocks spread over about 22 sectors. How much more diversification do you need? Even if one particular sector is not performing well, say metals/sugar, there would be other sectors which would be performing well, like IT industries because of higher dollar price. Your investment would grow even if a few sectors underperform. Incase of a total bear market, your investment wouldn’t fall as badly as investing in a few companies.

Why not buy these 50 companies individually?

You can buy all the 50 constituents of the Nifty Index individually and get the same effect. But the advantage of buying Nifty BeES instead is you can invest a very small amount every month and it would grow at the same rate as Nifty. To buy even a single share of all Nifty companies you would be needing a much higher investment.

Managing the weightage of the different companies and reshuffling the portfolio whenever a company is taken out of the index and a new one is inserted, would be a headache. Which is easier, tracking 50 companies in your portfolio daily or tracking a single ETF once a month, just for 5 minutes to see how much profit you earned? Thats why the ETF has computer programs which do this automatically. And since it doesn’t have any human to make any decisions, you are protected from someone’s mistakes.

How do you buy it?

Buying Nifty BeES is very similar to buying a company’s stocks. Ask your broker or goto your online trading website and search for the scrip “NIFTYBEES” and buy the required quantity. Some brokers even have an option to invest a fixed amount or buy a fixed number of shares every month, called Monthly SIP (Systematic Investment Plan).

If your broker has that option, choose that and automatically every month your money is invested in Nifty BeES and you don’t have to even think about it. When you retire 30 years later, you would be sitting on a nice, fat load of profits than any of your friends. And the best part is, you wouldn’t have to pay a single rupee as taxes for any of this profit you earn (after 1 year of investment).

Just trust me on this and invest in Nifty BeES regularly. This is more than enough for 95% of a common man’s investment needs. Especially for beginner, start with Nifty BeES for 3 years and see the difference it makes vs your friends who invested in some new company.

Everything about Equity markets

For many, investing means buying shares in the Stock Markets. You should be knowing that it isn’t the only place to invest, equities are a very important piece for any serious investor who wants to grow his wealth.

Let me first explain a few basic terms that you might hear when asking to invest in equity market.

Shares/Stocks: This is the first word that you might have heard. This means a “share” of a company. If you own a “share/stock” of a company, you are a part owner of the company. You can own any number of shares of a company (willing to sell its shares) if you can pay the cost for it.

DeMat Account: Just like your savings account holds your cash, a DeMat account will hold all your shares. Long time back, companies issued share certificate which was a piece of paper saying the holder own N number of shares. There was a risk of theft and if the certificate was burnt or torn, very hard getting it back. But now everything is stored electronically in your DeMaterialized Account. Also you can do transactions ultra fast.

Dividends: Profits earned by Companies are split amongst its investors based on the number of shares they hold. Usually companies announce one or more dividends every year based on its performance.

Share market/Stock Exchange: These shares can’t be sold or bought in the nearby groceries shop. There is a special marketplace called stock exchange where buyers and sellers meet and do their transactions. In India, there are three such exchanges where you can buy/sell company’s shares – The Bombay Stock Exchange(BSE), National Stock Exchange(NSE) and Multi Commodity Exchange (MCX).

SEBI: Securities and Exchange Board of India, is a regulatory authority who monitors the exchanges, brokers and investors. They have a set of rules and guidelines, which everyone must adhere to. Any problem that the investor has with their brokers or the company, they can complain to SEBI and they would take immediate action to rectify it. SEBI’s primary duty is to protect the investors by making things as transparent as possible.

Nifty and Sensex: You must have heard these terms used pretty often in news, especially like “Nifty has gone up”, “sensex has fallen”, etc. These is just a number that shows how the overall market has performed over a time period. It is what is called an “index”. If the index has fallen, it means most of the stocks in the market has decreased in value. If the index has risen, it means most of the stocks in the market has increased in value.

The reason I say “most of the stocks” is these indices are composed of many shares from a wide range of sectors like banking, infrastructure, IT, capital goods, engineering, automobiles, etc. Nifty tracks the value of 50 such companies and Sensex tracks the value of 30 companies. It shows up as a number whose calculation is based on the weightages of particular companies in the index.

There are other popular indices like Bankex, Bank Nifty, CNX IT, etc., but these two are the most popularly discussed index.

Stock Broker: A Broker is a third party who acts as your representative in the market whenever you want to buy or sell a stock. He charges a very small percentage of the transaction you make. Eg: if you bought something for Rs. 1000, he would charge maybe Rs. 5 as brokerage (just an example).

Scrip: This is a short form for the stock you are looking at. Eg: the stock of Infosys would be under the scrip name “INFY” and of State Bank of India would be called “SBIN”. Mostly you wouldn’t need to remember this as lot of sites allow you to search using the company name. Note: Do note that it is SCRIP and NOT Script.

Bullish/Bearish: When people say the market or a stock is bullish, they mean it is rising. When they say its bearish, they mean it is decreasing in value. Sometimes the market or index or stock can be in a bullish/bearish phase for several months together. Investing in the beginning of a bullish phase and selling before the bearish phase is the wisest thing to do. But even the most experienced investors can’t predict it accurately. bull_and_bear

How does the price of a stock increase or decrease:

This is confusing to many of the first time investors. Who determines how much to pay for a stock? Answer: the people in the market. It is based on the basic law of demand vs supply. For a quick explanation: Lets say you want to buy a stock of some company. You ask goto the exchange and ask if someone is willing to sell you 1 stock at Rs. 100. If you find someone willing to sell at that rate, then great. You just pay him the money and you get your stock (not that simple as it involves brokerage, etc). If there isn’t anyone to sell at Rs.100, you can see at what rate everyone are quoting and you find that the minimum price they are willing to sell it is Rs. 110. Not you can choose to either take up the offer (by paying Rs.110) or wait a little longer for someone to come in and sell at Rs. 100.

You and the other participants in the market are actually deciding what price to buy or sell a particular stock. Usually the last traded price is quoted on the exchange websites or your trading site to give an idea of the current going rate of the scrip. That will save you from quoting Rs. 100 for a stock which averages around Rs. 2000.

How does one start to invest?

It is pretty easy for anyone to begin investing. All it requires is a PAN card and some address proof. There are many brokers who can help you buy and sell shares. Most banks also act as brokers. You need to ask your broker/bank to open a DeMat account and trading account. If you use a bank, they will link your savings account with the trading account (and would call it a 3-in-1 account). Else your broker would have ways to transfer money into and out of your trading account.

There is a small charge you need to pay every year for maintaining your Demat account. Also there is a very small percentage of all your transactions that the broker takes called as “brokerage”. Usually you can negotiate your brokerage to a lower one. But as you are an investor, it doesn’t matter as the number of transactions you would be making would be very small. It doesn’t matter if you pay a couple of rupees extra.

It would take about a week or so to open all these. You can choose to trade online or through phone. Online is pretty easy and you could call for a demo in the broker office. You would be given a user ID, password and a transaction password and you should enter these every time you need to login to the system. A bit tiring, but if you buy once a month or even less, shouldn’t be much of a problem.

How to buy a stock

Buying a stock is quite easy. Once you know what company you are going to invest in, you call your broker or goto the online trading site and say you want to buy N shares of the company X at the current market price or at some fixed limit price. Eg: Buy 10 shares of HDFC Bank at Rs. 650. Buy 100 shares of INFY at the market price (which means buy at whatever rate the sellers are selling).

However this is just the technicality. What is more important is the part you need to do before buying the stock: identifying the company, understanding its business, analyzing its financial status, calculating a value for it now and in the future, etc. A lot of things need to be considered before you even go to the broker to give your buy order.

I just bought a stock, it doesn’t show up in my Demat account yet

Even though all transactions are done electronically, it would take 2 more working days for you to see the stock you bought today. It is called T+2 days settlement (T is the transaction date). Similarly when you sell, you would get the money 2 days after you sold it.

How to sell a stock

Selling is also very similar to buying. Except you can only sell something you have bought earlier (Not entirely true, yes you can sell without owning a stock). But for an investor, selling means, selling your stocks which you have in your Demat account. Hopefully you would be making a profit by selling, by selling it at a much higher rate than you bought it for.

Selling can be done during the following three cases:

  1. You need back the money you put in and would like to get it back immediately. You don’t want it to grow to multi-millions and are contented with what you got now.
  2. You bought at a low price and now sitting at on a nice profit (paper profit, till you sell it and get the money in your bank account). You realise that the stock has reached a peak or plateau and there is nowhere else for it to go than down. There can be various reasons for it – maybe the technology is obsolete or the management has rotted the place.
    So you book your profits and get out before the others drag you down.
  3. You bought it at a high price and now the stock is selling at a much lower price. You want to get out of the stock trying to save as much as possible. You want to cut your losses (which is very important incase you chose the wrong company). This is called stop-loss and is very important for traders. Investors generally don’t have to worry about it as long as the company they chose is good.

This shows you how to make profit. “Buy low, sell high”. Simple. Thats it. You buy something for low and sell it for a higher price and pocket the difference. Eg: You bought State Bank of India for Rs. 1000, five years back. You sold it for Rs. 2000. Your profit: Rs.1000. See how I said 5 years and not 5 days.

Thats how it works. It takes a long time to earn significant profits. You can’t become a millionaire in a week. Don’t believe if someone says so.

What to buy/sell and when to buy/sell

Always remember this rule. “You need to decide what to buy/sell and when to buy/sell. Not someone else.”

Whatever decision you make in the stock market will affect you and your money. There will be many who will suggest you companies to buy because they heard some rumour. Or saying it looks cheap. Whatever you hear, remember the company you choose should be your decision. No one else will be affected if you lose your money.

Remember investing in equities is one of the most riskiest way you can put your money in some place. If you are willing to take the risk, you will be rewarded handsomely.

Tomorrow I will post on how to put your money in a scrip which has the least risk of erasing your wealth and at the same time returning returns which mimic the market’s returns.

Cycling after 9 years

Today’s post isn’t about money or investments. Instead it is cycling. It was something I used to enjoy when I was a kid, which was the primary mode of transport from home to school. But soon, I got my license and stopped cycling.

After 9 years, I was looking back at cycling and found that there is a good community around bicycles. Even though cycles form a very small percentage of vehicles on the road in India, young people have started cycling – both as a hobby and also competing amongst others.

I wanted to start cycling again after a 9 year break for various reasons:

  • I am not so badly out of shape, that I need some form of exercise. Running and jogging? Nah, I wasn’t motivated enough because all I could run around was the neighbourhood. Gyms? I don’t want to pay the money and let the membership go waste.
  • I do need some time out of my home office as I was getting bored and irritated sitting behind the desk all day long.
  • I want a new hobby and also to meet some people who are passionate about it. And Chennai does have a lot of groups who are interested in cycling.

I read through various forums, articles and learnt a lot about the various types of bikes and finally last week I went and got a very simple bicycle.

montra-jazza-blue-new

I did cycle for 4 days getting up early in the morning – not very long distances, but enough to make me go out of breath (given that I weigh quite a bit more than 9 years back). I couldn’t get up early then because of my cold and a painful sore throat.

But I am determined to cycle regularly and I find it is fun. I seemed to have forgotten all the fun I had cycling so many years back. I don’t cycle because it is green and saves the planet and is faster to commute in traffic or other reasons. I cycle because I need a hobby and I find it is fun.

You should also try it too. A quick search would get you lot of information about cycling, maintenance, etc. But I would suggest starting out with this thread which discusses about the various types of bikes and which is best suited, especially for Indian readers.

P.S.: Check out my stats in my Strava Profile.

How long is long term investment?

In all the previous posts I have been saying to invest in the long term for equity. Ask any good financial planner, they will also say you should invest in the long term. So you can ask how long is long term? 1 year? 5 years? 10 years? 30 years?

Actually, people have analysed past data from sensex from 33 years and have found out that holding your investment for 7 years yields the maximum return irrespective of the time you have started investing (in a bull/bear market).

They defined targets with 8% (average inflation rate), 10%, 12%, 15%, 16.2% (33 years market average return). Staying invested for minimum 7 years is all it takes to hit these targets.

Does this mean you take out all your money after 7 years? No. Of course not. The longer you stay invested, the better your returns are. The famous example always given is “if you bought 100 shares of Wipro for Rs. 100 each (Rs. 10,000 investment) in 1980s, it would’ve grown more than Rs. 395 crores by the year 2010.” Phenomenal growth by just staying invested in 30 years.

Remember that when you think you want to make money in short term.

 

How to invest in gold the right way

gold-coinIndians have an unexplainable love for gold. We can never have enough of gold. That is the reason jewellers go and announces various “auspicious day(s)” for buying gold. We also think that buying gold is a valid form of investment.

People always say that gold prices doesn’t always decrease (which isn’t exactly true if you look at historical prices). But Gold is an important asset class and everyone should have part of their investment made in gold.

Gold acts as a nice hedge against inflation as it increases along with inflation (mostly). So lets see what are the various forms one can buy gold in India.

Ornamental Gold

The truth is ornamental gold is never an investment. Because while we buy a gold jewellery, there are numerous extra charges which we have to pay for like making charges, wastage, etc. Sometimes, these all add up to even 30% more than the cost of the gold.

And when you go to the same shop to sell your jewels, they just give you money for the percentage of gold you have in the jewel. Thats right, all the making charges, wastage you paid is all your expenses and you don’t get it back.

Apart from that, most shops would want you to buy back some new jewels from them instead of giving you the cash. They would attract you with new designs and models and you would end up paying even more money from your pockets to get the new jewels.

Ornamental gold has an emotional value attached to it. People buy it for weddings or special occasions and wouldn’t want to sell it. The most that they can do is get loan by keeping the jewels as collateral and you would be paying extra money as interest. It isn’t that easy to convert gold jewels into money in an instant.

Gold Bars and coins

So how about buying gold as bars and coins. Most shops and banks/post offices sell 24 carat gold coins and bars starting right from 1 gram. They have a purity certificate and since it is in the form of bar/coins, they don’t have making charges/wastage. And they also assure you that, while selling back you would get the exact gold rate on that particular date.

So does that mean you can go ahead and buy it and store it in your safe and sell it when you need money? Not that easy. No bank or post office would buy back gold coins which they sold to you (even if it were just a few hours back). They just sell gold to you and their transaction is done. For selling, you would have to go to some gold shops and sell to them.

And what would these gold shops do? Right, ask you buy jewels from them instead of paying you by cash. Is there no way to get back money you “invested” in gold coins? You can, but you won’t get back that day’s gold rate. You would get only a discounted rate and so you are making a loss.

How else to “invest” in gold?

Now you are fed up and asking “How the hell am I supposed to invest in gold?”. There are two ways you can really invest in gold and get back money whenever you want to. Enter the world of Gold ETFs and E-Gold.

Gold ETF

ETF stands for Exchange Traded Funds which is a fancy way to saying “you give money to someone to help manage some security”. In the case of Gold ETFs, you pay money and buy N units (1 gram) of Gold. It is bought and sold like shares of a company in the stock market (NSE). Its all stored electronically in a special account of yours, called DeMat (Dematerialized) Account.

You pay the fund a small fees to manage your gold (though there isn’t much managing to be done). There is no problem of security, as all your gold stays in your account and cannot be opened/stolen by anyone else. The price of the gold ETF would track the price of a one gram 24 carat gold in the market.

There are many companies which sells Gold Fund and you can practically buy any one of them and you would have invested in gold. I would suggest the Gold BeES, because it is easy and can be bought directly from the NSE.

E-Gold

Then what is E-Gold? E-Gold is also an electronic way to buy and sell gold. Only difference is you would be buying Gold directly from the National Spot Exchange. You pay for whatever the price of 24 carat Gold was at the precise moment. No need for any fees to be paid to some fund house.

It is a good method of investing if you want to buy physical gold at a later stage. You can use the gold accumulated in your DeMat Account and buy jewels from the shop, without having to risk storing/safe guarding the gold in your safe.

Which form to buy?

For investing your money, always choose Gold ETFs or E-Gold. It doesn’t make a difference to both if you intend to stay invested in the long run. Both these are very liquid – meaning, if you suddenly want money you can tell your broker to sell X units of your gold and you would get back money immediately, without losing anything on wastage/impurity/etc.

But if you are buying gold for some wedding or as a gift to your wife so that she can wear gold to a function, you have no other option than to go and buy the gold jewels. But do remember that this money you spent to buy gold is an “expense” and not an “investment”.

Remember the difference between these and you would make sure you don’t “spend” more on gold and instead “invest” in it. Remember it is not advisable to invest all your money into gold too. There is the equity market where you would get much better returns if you are willing to stick around for the long term.

Why you need to diversify your portfolio

Yesterday we saw the various options where you can invest your money (and also save tax). But you should make sure you shouldn’t put all your money in a single place. The risks are either you wouldn’t earn enough returns on it or you may lose all your money. That is the relationship between risk and reward.

More risk = More reward.
Low risk = Low reward.

The best solution to this, is to split your investment into various asset classes, so that you minimize risk and also get better reward.

Let me show you some examples of why putting all your money in one asset class is bad.

Investment Cycle

For quite a few years, everyone were investing in Gold, thinking it would always increase in value. But this year, after reaching new highs it began to drop quickly. Everyone who invested when the value of gold was reaching new highs, are now at a loss. And it would take many years for them to get profits.

This doesn’t apply just to Gold. There were many who invested in the equity market because the market was reaching new highs in 2008. But those put in all their money then, still are yet to recover and would take a few more years to become profitable.

So did people who had all their money in fixed deposit in 2003-2004, they didn’t participate in the bull run of the equity market. Their returns would have been very low than those who invested in shares.

What does this teach us? Every asset class follows a cycle. When one particular asset class is bullish, others wouldn’t be giving you any returns and sometimes would even be negative.

The best way to protect against this is to invest in all types of asset classes. But now is the question of how much to put in each class.

What percentage, in what?

It isn’t easy to say how much one should put in equity vs debt vs gold vs real estate without understanding your financial profile and risk appetite. But there is a simple rule of thumb that should work out, especially to find out how much one can invest in equity.

Take your age and subtract it from 100. That is the percentage of your investment that can be in equity. So if you are 25 years old, you can have 75% of your investment in equity market. “But, but, you said Equity was risky. I don’t want risk”. Yes. equity is risky, but if you keep invested in the long term, you minimize all risks.

Since you are just 25, you still have a long way to go and can thus put in more money a risky investment. The remaining 25% can be split into fixed deposits, gold, etc. By investing a majority in shares you would get a better return than just fixed deposits. When you grow older, you should slowly shift your investments from equity to debt which is more safer (but also rewards less).

TL;DR: Don’t put all your eggs in one basket. Split your money into different asset classes. Younger you are, the more risk you can take.

What is section 80C of Income Tax

Many employees would have heard from their HR or finance department asking to give details about investments made under 80C. So what is this 80C? Let me explain with an example.

Lets say you earn Rs. 5 lakhs salary per year. For upto Rs. 2 lakh, you don’t have to any tax. That means, you would have to pay 10% of the amount which exceeds Rs. 2 lakhs, i.e., 10% of 3,00,000 = Rs. 30,000. You have to pay Rs. 30,000 as the income tax for the financial year.

Now lets assume you invested some money (Rs. 1,00,000 which is the max) which come under the section 80C of Income Tax Act, this entire money is now tax deducted. Meaning, you will have to pay the 10% of just Rs. 2 lakh = Rs. 20,000. You save Rs.10,000 on your tax bill. You already invested Rs. 1 lakh in some investment product + you also save an extra Rs. 10,000 (which would have gone to the government). How cool is that?

Investment Options under 80C

Now you may ask what are the options one has to invest under 80C. Here is a list.

PF/EPF – Employee Provident Fund: Employers (having more than 20 employees) should deduct a percentage of your salary and deposit in your name in a EPF account. This deduction is counted against 80C and you can use the same account even if you switch companies. All the money they put in here will grow and be useful when you retire in the far future. The best part is the interest you earn is also tax free.

PPF – Public Provident Fund: Any person can open a PPF account in SBI or ICICI bank or post office and deposit money in it every year. It is useful if you work for yourself or you work for a very small company. It must be maintained for a minimum of 15 years and can be extended by 5 years after it matures. Minimum contribution is Rs. 500 and Maximum contribution is Rs. 1 lakh per year. And it earns 8.7% which is also tax free like EPF.

NSC – National Savings Certificate: You can purchase National Savings Certificate from any post office or online in some banks. Period of NSC is either 5 or 10 years and it earns an interest rate of 8.5% as of today.

But remember, the interest you earn through this is considered an income and will be taxed separately every year. You can however choose to reinvest it again.

5 year Bank Fixed Deposit: Banks have a fixed deposit which can be used for tax saving purpose which has a term of 5 years. It would earn somewhere around 8.5-9.5% depending on the bank. The money you put in will be locked in for 5 years and can’t be prematurely withdrawn. The interest earned is taxable.

5 year Post office Time Deposit: Just like banks, post offices too have fixed deposits called Time Deposit. The 5 year term plan has tax savings benefit and earn 8.4% interest. The interest is taxable.

National Housing Bank Suvriddhi: NHB also has term deposits for 5 years which has tax benefits. It earns 9.25% interest rate and has a minimum deposit of Rs. 10,000 or multiple of it.

Life Insurance Premium: Any premium you pay for life insurance can be claimed under 80C for tax saving purpose. This is the main reason people take endowment policies which has huge premiums and very little cover. But after April 1, 2013, only premium equal to 10% of sum assured will be allowed under 80C. So you can’t pay Rs.50,000 premium for just Rs. 1 lakh insurance cover.

My suggestion as mentioned in a post before is to take a term insurance and invest the remaining money in the other options which earn a better return.

ULIP – Unit Linked Insurance Plan: This is another life insurance product, but your money would be primarily invested in the equity market. So if the equity market performs well, you would get better returns. If not, you money can be lost. It is not advisable to invest in ULIPs as you should never mix investment and insurance.

Pension Fund: There are a few pension funds (LIC or other private insurers) which can give tax relief for the financial year. This comes under the section 80CCC, which is part of the 80C when it comes to the calculation of the Rs. 1 lakh limit.

NPS – National Pension Scheme: Money invested in NPS in Tier 1 scheme is deductible from Income Tax under the 80CCD section. But the aggregate deduction from 80C, 80CCC and 80CCD can’t exceed Rs. 1 lakh. So if you have already invested in other products, there isn’t much you can do here.

ELSS – Equity Linked Savings Scheme: This is a mutual fund schemes which has a lock-in period of 3 years (the lowest lock-in period) that is approved for tax savings. Your money invested in ELSS funds are invested in the equity market and you would get better returns if the market performs well. It is risky, but if invested properly and in the long run it can earn better returns.

Another good news is any dividend you earn is tax free and also if the market doubles or triples your investment in 3-5 years and you take all your money out, you don’t have to pay even a single Rupee as tax. Any equity invested for more than 1 year comes under long term capital gains which has no tax.

Tuition Fees: If you have kids going to school or college, the tuition fees paid for their education is tax deductible.

Home loan Principal Repayment: If you take a home loan, you can claim the principal paid every month for tax deduction under 80C. Do note that only the principal can be claimed under 80C and during the initial years of the loan repayment, you would be paying most of the interest. Only during the later stages you would be paying more of principal and less of interest.

Stamp Duty & Registration Charges for Home: If you bought a house, you would have paid stamp duty and registration charges. You can claim this under 80C if you bought it in that financial year.

Why save tax?

You might be wondering why I am asking you to save tax rather than investing in high yielding products and becoming a millionaire. Money can’t grow suddenly, it grows slowly and exponentially if done the right way. But before that, we need to make sure that we make sure that we reduce our tax bill as much as possible.

Section 80C has excellent investment opportunities which also helps you save tax. This extra Rs. 10,000 you save on taxes every year can be invested properly and earn you a nice extra money when you retire. Or you may choose to use that money to go for a trip. It depends on you. But remember, any money you can save is money you earn.

Which option to choose?

Now you might think which of the following options are better? Remember, there are a few products in there which are risky like ELSS and ULIP and others which are very safe like PPF, bank deposits, etc. Also remember the returns you can earn is directly proportional to the risks you take.

The first investment you should make is buying a term insurance. Lets say the premium is Rs. 10,000 for a sum assured of Rs. 1 Crore. The remaining Rs. 90,000 should now be invested in partially in risk free products and partially in risky products. So that overall the risk is mitigates and your returns are higher than sticking to a risk free product.

Lets take an example: Your company deposits Rs. 20,000 as EPF and you have a term insurance with premium of Rs. 10,000. You have Rs. 70,000 to invest. You can now invest about Rs. 40,000 in ELSS, buy a 5 year term deposit for Rs. 10,000, if you have a kid you can claim the tuition fees and also claim the loan repayment for your new apartment. Overall if you add all your investments make sure you reach the goal of maximum Rs. 1,00,000 so that you gain the maximum benefit.

Now you may be wondering how splitting the money into different products help you. Its called portfolio diversification and lets see that in tomorrow’s post.

P.S.: Want to know why the government provides tax relief for these investments? Because these investments help growing the economy of the nation in some way or the other. Be it investing in the equity market (long term) or education of your children or building news houses – they all contribute in some way to the making the nation better. So the government gives tax benefits for these investment.

P.P.S: Also don’t think of these as evading tax. You are actually saving tax and in the most legal way. Also helping to make your country better. You getting more money out of your investment is an added benefit.