How to Invest and Track your Investement

Investing can be thought of as a way to make your money work for you.

Why invest?

1.                To stay ahead of inflation. Investing ensures that the purchasing power of your money is not just restored but it improves year after year.

2.                To meet your financial goals. Invest allows you

to build wealth by making your money earn steady returns and grow over a period of time

1.                Investing is different from saving.

2.   
             Investing is not gambling.

1.        Investing is different from saving.

2.          Investing is not gambling.

3.    Investing is only as risky as you want it

4.       Investing is not a get-rich-quick formula!

5.    Like all other aspects of financial planning, investing is for everyone

Check your risk tolerance

Before beginning to invest you should really need to answer a few questions to check your risk tolerance. Questions like—how comfortable you would be:

a.       If your investment changes in value every day.

b.       To see your investment decreasing at times.

c.       If your funds are locked for a certain period and you may not      get them exactly when you want.

                                                     Process of Investing

Can I Start Investing NOW?

Asma says

     I am a 19-year-old economics student. Ever since I read about investing, I wished I too could invest. But I do not know how to start, as I do not have any source of income. I am a full time student and get a pocket money of Rs.1000 a month from my parents for my needs. Most of this money is used for petrol in my scooty, eating out in college canteen, an occasional new dress, some books/CDs and beauty care. My fees and college books get funded by my parents separately. I seriously wish to invest, but does not know how and when I can. Should I borrow some money and start investing?

Dear Asma,

You are only 19, a student and thinking about investment. Good thinking lady! If you indeed start investing today, you have up to 40 years of productive life on your side to invest. I cannot imagine the amount of wealth you would build by investing for 40 years. Time is on your side. Now get the money too! How?

Firstly, you are above 18 years of age, so you can independently manage all your investments. Consider this, you get Rs.1,000 allowance for your ‘wants’ (not all that you spend on are your needs). Now if you can find say Rs.500 (to start with) from that money—in a month or two or three, you can get going. Of course you would need a savings bank account to start with. If you do not have one in your name, then open one right away.

    Assuming you have a bank account, then your investment options with a starting sum of Rs.500 are listed below:

1. 50 units of a newly launched mutual fund from any reputed asset management company. Through a systematic investment plan (SIP) you can keep investing every month.

2.Demat account and at least 1 share of a well known ‘A’ list company (Yes you can buy a single share at a time. Then you can build more as you earn more)

3.        Recurring deposit account (it earns more interest than a normal savings account) that allows you to invest amount as low as Rs.50 every month.

     Should you borrow to invest? The answer is—NO. Never invest money that is not yours and investable. Now the question remains how to find that Rs.500. You will have to figure that out. 

    But if you ask my personal opinion, for a cause as good and great as investment, it makes sense to cut down your expenses from eating out, buying a new dress every month or even beauty care. What say?

Get Set Invest!

Mrs. Bharati

Step Zero – Check your readiness— do you have ‘investable’ money!

Take the following quiz to know whether you have any investable money to start investing. Please note that the amount of money you have to invest is not significant. You can start investing with an amount as low as Rs. 50 per month. Hence, the words like ‘healthy’ ‘good’ ‘satisfactory’ are subjective and completely to your discretion. The quiz intends to answer the significant question—is that Rs.50 investable?

Place a tick alongside the statement/s that is/are true about you.

1.  I have a healthy balance (income minus expenses) every month.

2.  I always allocate a portion of my income for investing (long term saving), savings for goals and for stabilizing my  finances separately (refer section 1).

3.  I can handle any financial emergency (income loss, heavy  expense) for at least 4 months without touching my long    term savings.

4.  I have no debt or I have a strong plan to repay all the debts              without needing my long term savings.

5. I will not have a big problem to manage my regular  expenses even if I lose a part of my investable money.

6.  I can easily forget about my long term savings for at least a year.

7.  I have complete knowledge of my financial position 

8.  I have no misunderstandings about investing (refer Box 3A).

If all the above statements are true for you, then you can consider yourself ready with investable money.

Step 1 – Understanding your investment needs.

(Write on the space provided, refer to your goal setting worksheets in section 2 of this book. You can use separate sheets for different goals and investment needs).

1. My financial goal _______________________________________________________

_____________________________________________________________________

2.    I would need Rs. 100000 (Amt1) to reach the goal

3.    The investable money I have at the moment is Rs.  5000 (Amt 2)

4.    The time I have to meet the goal  in 10 year.It is called T (note it may be in days/months/years)

5.    The time in years I have to meet the goal _N ____________ years

Formula to calculate the time in years N, If your original timeline T is in days then N = T/365, if it is in months then N = T/12, if in years then T = N

6.    More investable money I can save during this time  (Amt* 3) Rs  10000 

7.   Balance money I would need to raise Rs. (Amt*        _____ ) Use formula to calculate the balance Amt 4 = Amt 1- amt 2 –amt3
     
    (in our case it will be Rs 100000- Rs 5000- Rs 10000= Rs 85000)

8.    To meet the goal, I should get _R ____________ % per year rate of return Formula to calculate the rate of return R Amt4 = (1+ R/100)^N

The formula is used by Std. X students, so do not allow it to scare you.

in our case Rate of Return Will be calculated as Rs 85000 = (1+R/100)^10

9.    How much risk am I willing to take? (Tick the statement you find appropriate )

a.      High: I can handle a decline in my investments of up to 20% while I am willing to invest for high returns.

b.      Moderate: I cannot risk my capital (invested money). But I can take a risk on the returns. I do not expect steady returns.

c.       Low: No major risk for me. Even if that means lower returns, I want my money to earn steady returns. 

10.         My investment need to meet my financial goal is to:

gain about Rs.(Amt.4)_________ in (N)_____ years taking high/ moderate/low risk. My investment objective to meet this need:

To invest for (N)______ years in an investment channel or a mix of channels that may be high / moderate/ low in risk involved but can give approximately (R) ______% returns annually.

Once you have clearly defined your investment objective, check if it is realistic. E.g., to invest for 1 year in a low risk investment channel to get a 20% return annually is far from reality.

Step-1 The Various Investment Channels

1. Lending it

If you lend your investable money to government, banks or businesses by buying their bonds or opening a fixed/recurring deposit account, these organizations will pay you interest for allowing them to use your money.

Your money thus can earn steady returns by way of interest.

2. Buying share in business capital and profits

By buying share in profitable businesses, your investment can grow in two ways:

a.The company may pay you a dividend—your share of profit

b.     The shares of the company may increase in value.

3.Buying an item of value

You can buy things that may increase in market value, such as gold, land, house or collectibles like a piece of art or even stamps. You can make money by selling the asset for more than what you paid for.

Although not an investment channel, starting your own business may well be considered as an investment option. If you have the aptitude and necessary skill/talent along with a profitable business idea and a huge risk taking capacity, you may want to consider this as an option.

Commodities like gold, silver or even land are traditionally known to rise in value along with inflation and hence secure your purchasing power despite inflation.

Investment Channel	Types of risks involved	Expected returns*
Lending it to institutions	Interest  Rate  Risk—The  interest  rate,	From 5% up to 10%
n Fixed Deposit (FD)	though mostly stable may change with	Other benefits-
n Recurring Deposit (RD)	economic changes and hence affect your	1. Relatively stable returns
	returns.
n Post Office Small Savings	Credit Risk—A small risk of organizations
n Government Bonds	you lend to, not paying back. This risk is
	lesser while lending to the government.
n Corporate Bonds
	Liquidity Risk—These are generally fixed
n Debt Mutual Funds
	period investments. It is not easy to
	withdraw them before maturity.
Buying Shares	Market Risk—the price of stocks is set by	Around 10-20%
n Offered directly by	the market forces—supply and demand.	Other benefits-
	If there is a high demand for a stock,
companies through an	the price will rise. But if there is more	1. Tax exemption on long term
Initial Public Offer (IPO)
	supply than demand for the stock, the	capital gains – Gains from
n From stock markets	price will fall. So expect fluctuation in	trading stocks over a longer
	market prices and thus value of your	term (more than 1 year) are
n Investing through equity	investment from day to day.	exempt from income tax
mutual funds	Capital  Risk—Risk  of  losing  all  the	2. Being a part owner, you get to
	money you invested, depending upon	vote for some company
	what stock you invest your money in.	decisions
Buying items of value	Market Risk—as in the case of shares,	Returns are variable based on what
n Commodities like oil, Gold,	the market price for assets change based	you invest in, where and when.
	on demand—supply gap.	Other benefits-
silver, etc
	Liquidity Risk—It may be difficult to sell	1.These investments essentially
n Land and real estate	off this investment e.g. selling land or	inflation-proof your money. And
	real estate in parts. Or finding takers for	with prices going up, you can
	art when you want to sell it.	expect to make profits.

Step 2 – Investment channels for your investment needs.

1. My investment need to meet my financial goal is to gain about Rs._________ in _____ years taking high/moderate/low risk.

This is a need for (tick whichever appropriate):

• Securing against inflation

• Earning steady returns

• Growing money

My investment objective to meet this need:

To invest for ______ years in an investment channel or a mix of channels that may be high moderate/low in risk involved but can give approximately (R)______% returns annually.

2. The investment channels suitable for me to meet my investment objective are:

Place a tick in the box/es alongside the investment channel/s you find best suited for your need.

Fixed deposit
Recurring deposit
Post office schemes
Bonds/ Debt Mutual Fund

Shares
Equity Mutual Fund
Gold/Silver
Land/ Real Estate

               

     Other __________________________________________

3. Get more information from authentic sources on the investment channels you’ve ticked

Step 3 – Summary of all your Investment needs

Use the following guideline to fill up the summary table given below.

1.  Investment need: Write the description of your investment needs in the top rows. On the row below write if it is a need for securing the purchasing power/earning steady returns or growing money.

2.    Expected Returns: Mark Low in the table if you expect an annual return of up to 5%, Moderate if you expect an annual return between 5% to 8%, High if the expected annual return is above 8%.

3.   Risk Tolerance: From the previous worksheets, mark the risk you are willing to take for that specific investment need.

4.    Investment term: Write short-term if you wish to be invested for less than a year, medium-term if it is between 1 to 2 years, and long-term if the investment term is more than 2 years.

5.   Suitable investment channels: After working the worksheet in step 2, you would have collected basic information on the various investment channels. And maybe you would have even thought of some channels that seem to be most suitable for you. Write these channels in the last column alongside their respective investment needs. 

No.	Investment need	Expected	My Risk tolerance	Investment	Suitable investment
		Returns		term	channels
1.		High/	High/	Short/
		low/	low/	medium/
		moderate	Moderate	long
2.		High/	High/	Short/
		low/	low/	medium/
		moderate	Moderate	long
3.		High/	High/	Short/
		low/	low/	medium/
		moderate	Moderate	long
4.		High/	High/	Short/
		low/	low/	medium/
		moderate	Moderate	long

Step 4 – Designing your Investment Portfolio

Worksheet 3.4 - My Investments at a glance

No.	Investment Need	Investment Channel/	Investible Amount	% of Total Investment
		Asset Class*See box	(Amt. 2+Amt. 3)	(formula below)
1.
2.
3.
4.
	Total Capital*		Rs. Capital	100%

To calculate percentage composition of each asset class in your portfolio:

% of each asset class =Amount for that asset class X 100 / Total Capital

The key to any good investment strategy is to balance the risks and returns—minimize the risks and maximize the returns, to a possible extent.

This is possible through what is known as diversification of your investment portfolio. It may seem to be a very complex thing. But simply put, it says ‘do not put all the eggs in one basket’.

To start with, if you have lesser funds for investing, it would make sense to stick to just one or two types of investments. But as you go on building the portfolio, it is important to diversify.

A well-diversified portfolio is like a balanced whole meal. It should constitute investments in different channels to serve the 3 main investment needs:

1. Securing the purchasing power of your money over a long term.

Invest in—Gold, silver, land. Largely known to counter inflation, these assets can even appreciate significantly and give bigger gains in long term.

2.Earning steady returns with a practically no (or low) risk to the invested money. Invest in—FD/RD (deposits), bonds, post office savings schemes, debt mutual fund.

3.  Allowing your money to grow by taking some measured risks.

Invest in—Shares, equity mutual fund.

The proportion of each would depend on your risk tolerance and the time/stage at which you start investing (i.e., with the time you have with you to stay invested)

For older people, such as retirees, bonds/deposits are an important type of investment because they give steady, assured returns at a higher rate than savings accounts. But for long-term younger investors, ‘growing money’ to have a wealthier future may make more sense. Therefore, a smaller portion of investments earning steady returns and a bigger portion of the ones that would help you ‘grow your money’, is advisable early in life, with the balance gradually switching as you reach retirement.

 Step 5 – Balancing your investment portfolio.

Use the following checklist to check and balance risks and returns in your investment portfolio

1.     I am investing only the ‘investable’ amount in this portfolio.

2.     I have more than one asset class in my portfolio.

     

3.          The composition of my portfolio is in line with my risk tolerance.

If it is not then balance it. Reduce equity portion to reduce risk.

4.            The percentage of equity in my portfolio, does not exceed (100 minus my age).

If it does, then understand that you may be taking more risk than you should at your age. If you wish to balance this, sell some of your high risk—return equity portion.

5.    The portfolio is in line with my investment needs.

6.   First time check of the portfolio. My current asset allocation is right for my investment needs.

If it is not, then work out the proportion that best meets your needs You’ll need to maintain this allocation - your target asset allocation

7.        For periodic reviewing later, My allocation is according to my target asset allocation

If it is not, then balance it by selling/adding equity or debt 

Step 6 – Asset Allocation in your investment portfolio

Worksheet 3.6- Target Asset allocation in your Investment Portfolio

No.	Investment channel/	% of total  investment
	Asset Class
1.	Cash
2.	Debt
3.	Equity
4.	Others
	Land/gold/
	Commodities
	Total	100%

Step 7 – Tracking your investment portfolio.

Month: __________________

Asset Class I - Cash

No.	Description	Amount
1.	Cash in hand	Rs.
2.	Savings account 1	Rs.
3.	Savings account 1I	Rs.
4.	Savings account III	Rs.
	Total Cash (Amount C)	Rs.

Asset Class II - Other items of value

No.	Asset	Holding at start of			Bought this month		Sold this month		Net holding
			month		Units	Amount	Units	Amount	amount at
		Units		Value					month end*
				(amt)
1.	Gold			Rs.		Rs.		Rs.	Rs.
2.				Rs.		Rs.		Rs.	Rs.
3.				Rs.		Rs.		Rs.	Rs.
4.				Rs.		Rs.		Rs.	Rs.
	Total of asset class II (Amount O)								Rs.

* Net holding amount = Holding at start of month + Value of asset bought —Value of asset sold this month at month end

Month: __________________
Asset Class III - Equity		Target portfolio allocation = _________%
No.	Description	Amount Invested	Interest/	Maturity	Value at	Today’s
			Dividend	period/ date	maturity	Value*
1.		Rs.	Rs.			Rs.
2.		Rs.	Rs.			Rs.
3.		Rs.	Rs.			Rs.
4.		Rs.	Rs.			Rs.
	Debt Mutual Fund	Amount Invested as at	Transaction	this month	Units	Net amount**
		the start of month	(+if bought/ - if sold)
			Units	Amount
5.		Rs.		Rs.		Rs.
6.		Rs.		Rs.		Rs.
	Total of Debt (Amount D)					Rs.

Worksheet Guidelines

1.    Stock/ Equity mutual fund—enlist all the stocks and/or mutual fund that you have invested in.

2.    No. of Shares/Units—write the number that you have at the beginning of the month.

3.    Value at start of the month—Net value at last month end will be your value at start of this month.

4.    Transactions this month—if you have bought the same shares/mutual fund write a (+) before the no. of units and the amount. If you have sold any units write a (-) sign. If you have both bought and sold you may want to write the transactions one below the other in the same cell of the table. Use a different row if you have bought a new share/mutual fund

5.    Net holding at month end (in units/amount) = Your initial investment + transaction this month if it is a buy (+) transaction, the units/amount will be added to the initial, if it’s a sell (-) it would be subtracted from the initial investment.

  

*Note for calculating today’s value of your debt investment:

Today’s value = Amount invested + All the dividends received so far

(Assuming, that you haven’t touched your debt investment since you invested in it)

**Net amount in debt mutual fund is calculated the same way as net amount in equity mutual fund. Refer to the previous worksheet.

Month: __________________
Asset Class IV - Debts		Target portfolio allocation = _________%
No.	Description	Amount Invested	Interest/	Maturity	Value at	Today’s
			Dividend	period/ date	maturity	Value*
1.		Rs.	Rs.			Rs.
2.		Rs.	Rs.			Rs.
3.		Rs.	Rs.			Rs.
4.		Rs.	Rs.			Rs.
	Debt Mutual Fund	Amount Invested as at	Transaction this month		Units	Net amount**
		the start of month	(+if bought/ - if sold)
			Units	Amount
5.		Rs.		Rs.		Rs.
6.		Rs.		Rs.		Rs.
	Total of Debt (Amount D)					Rs.

*Note for calculating today’s value of your debt investment:

Today’s value = Amount invested + All the dividends received so far

(Assuming, that you haven’t touched your debt investment since you invested in it)

**Net amount in debt mutual fund is calculated the same way as net amount in equity mutual fund. Refer to the previous worksheet.

 Step 8 – Profit/Loss Review of your Equity Portfolio

Use the table below to review your equity portfolio for returns on your equity investments. It is advisable to do this review at least every 6 months or more often if you do frequent transactions (buy/sell). Use Microsoft Office Excel or a pen and paper for every review. Refer guidelines given on the next page.

Review Date:

No.			1.	2.	3.	4.		5.	6.
Stock name							Mutual
							Fund
S		No. of shares
A		sold
L		Sale date
E
		Sale Rate
Amount recovered A = No.
X Sale rate
		Purchase
		date/s
Purchase
		Purchase
		cost/s
Amount invested I = No. X
Purchase Cost
Profit/Loss R = A - I
% Returns

Worksheet Guidelines

1.    Use the worksheet only for the no. of shares/mutual funds you have sold during your review period. Calculate the amount invested for only such number of shares. E.g., if you bought 100 shares of ABC Co., but sold only 50 during the review period, then calculate only for 50 shares.

2.    To correctly determine profit/loss for shares of the same company bought and sold at different times or prices, use the ‘FIFO—First In, First Out’ rule. Consider the dates and prices of the shares purchased first in your sequence of transactions and move one by one. E.g. in the above example, if the 100 shares you have bought at different times, say;

40 shares @ Rs. 12 on April 1, and

60 shares @ Rs. 11 on April 10 and sold 50 shares @ Rs. 15 on October 31,

then entry into your worksheet columns should look as the one shown below.

No.	1.
Stockname	ABC Co.
No. of shares sold	50
Sale date	31/10/09
Sale rate	Rs.15
Amount recovered	Rs.750
Purchase date/s	1/4/09, 10/4/09
Purchase cost/s	40@ Rs.12; 10@ Rs.11
Amount Invested	Rs.590
Profit/Loss	Rs. 160
% Returns	27.11%

You may want to use separate columns for the same stock bought/sold on different dates/prices for simplicity of calculations.

3.    You may want to add all the fees and taxes you paid while buying the shares to your amount invested. Similarly subtract the fees and taxes from the amount recovered while selling those shares.

4.    Note that the % returns are for that period of time during which you are holding those shares. In the above example it is 27.11% for the 7 months between purchase and sale.

Step 9 – Review of your investment portfolio

Use the table below to review your entire investment portfolio for asset allocation as on the review date. It’s advisable to do this review at least every 6-12 months, and then balance your investment portfolio as per your target allocation. Refer to Step 6 worksheet for target allocation and Step 7 worksheet of your review month for value of your individual asset classes. Also, refer the guidelines below.

 Review Date:

No.	Investment channel/	Target asset	Value of Asset class		Current asset allocation
	Asset Class	allocation Refer	Refer Step 7
		Step 6
1.	Cash		Amount C	Rs.
2.	Debt		Amount D	Rs.
3.	Equity		Amount E	Rs.
4.	Others		Amount O	Rs.
	Land/gold/Commodities
	Total	100%	Rs.		100%

Note that the target asset allocation would change with your age.

Other factors remaining constant, if your allocation % in the yellow and blue columns does not match, then you would need to balance your investment portfolio. Refer Step 5 for guidelines.