Saving money is sometimes jeopardized with being selfish or self-centered, not to mention the fact that if you save money you are considered too traditional and antiquated, meaning to say, you do not know how to enjoy life. On the contrary, to save money is one of the wisest lessons that any person should do in view of whatever money he has for future urgent and necessary needs, more so for the rainy days.
Here are some valuable tips that you must take into account before you go on enjoying with your hard-earned money. Not reading this article may one day make or break your life. Thus, take time to spend a few minutes reading and understanding this article for your own financial welfare and other benefits.
Let us begin by reading W. Somerset Maugham’s classic short story regarding “The Ant and the Grasshopper”.
Once upon a time, there is this story, in a field one summer day, a Grasshopper was hopping about, chirping and singing to its heart’s content. An Ant walked by, grunting as he carried a plump kernel of corn. “Where are you off to with that heavy thing?” asked the Grasshopper. Without stopping, the Ant replied, “To our ant hill. This is the third kernel I’ve delivered today.”
“Why not come and sing with me,” said the Grasshopper, “instead of working so hard?”
“I am helping to store food for the winter,” said the Ant, “and think you should do the same.”
“Why bother about winter?” said the Grasshopper; “we have plenty of food right now.”
But the Ant went on its way and continued its work.
The weather soon turned cold. All the food lying in the field was covered with a thick white blanket of snow that even the grasshopper could not dig through. Soon the Grasshopper found itself dying of hunger.
He staggered to the ants’ hill and saw them handing out corn from the stores they had collected in the summer.
Then the Grasshopper knew:
Moral: It is best to prepare for the days of necessity.
So we cannot say about the future, we must prepare for future happiness or tragedy that come in our life without information for this money saving and god grace is necessary. lets talk about money saving.
How much should you save?
Whether you save regularly or irregularly, a question often comes visiting: “Am I saving enough?” Saving the right amount is crucial for at least two major reasons.
- It is only when you save money that you can invest in options such as fixed deposits, public provident fund, stocks, mutual funds, real estate and gold to create a future income for meeting small and large requirements, such as the education and marriage of your children and your retirement, holiday enjoyment, future parties.
- It is necessary to prepare for the future, current needs also have to be taken care of. Equally important, we would like to have a life and enjoy it with our families.
- But the problem is that beyond a point, the more you live it up, lesser are the chances of accumulating enough savings for a minimum decent standard of living in the future. Clearly, drawing a balance between the present and future holds the key. The good news for you is that the balance is achievable if you follow certain rules that we present here.
Thumb rules for equity investing
1. (100 minus your age). If equity is the best bet for brisk growth of our savings, then the logical question is how much should we invest in them either directly or via mutual funds?
The standard rule of thumb to determine your ideal equity exposure is a simple formula that suggests you subtract your age from 100. For example, if you are 35, then 100-35 or 65 per cent of your portfolio should be exposed to equity.
While this can be taken as an indicative formula, it would not, of course, be applicable to everybody at every point in their lives. For example, if you are a 30-year-old and part of a double income family with one young child, you could put in 70 per cent of your investments into the market.
However, if due to a sudden turn of events, you also have to provide for dependent parents and siblings, you should change your allocation and tweak down your equity exposure.
2. Keep debt-equity proportion constant. If the age-based thumb rule does not apply to you, use a tactical allocation thumb rule. Here, you start off by investing, say, 60 per cent in equities and 40 per cent in debt, and continue keeping the ratio constant at all times.
If you find at the end of the year that equities have done well, you should trim your equity exposure in the next year, the assumption being that there is likelihood of a market downturn. However, in times of a long-running bull market, like the one we have been witnessing, this strategy may not be ideal.
3. Factor in the trend. This thumb rule on trend-based asset allocation is the opposite of the previous one. The assumption in this one is that if the stock markets are going up, then that is the trend of the cycle, and you should enhance your equity exposure for the next year. Of course, trends could change and you might be trapped with a high equity exposure in a falling market.
How to follow the thumb rules.
Since the thumb rules tend to contradict each other, you can adopt the following approach. Use the ’100 minus age’ formula if there is nothing exceptionally different in your profile and the assumptions fit you.
Keep that as the guiding number, and tweak it upwards or downwards depending on your specific circumstances. If you are in your mid-30s and single, you could invest more than 70 per cent in equities. If you are 60 and do not see yourself retiring for another eight years, you could invest more than 40 per cent.
How many mutual funds are enough?
Once you decide how much money you should place in equity, you need to figure out how much to keep in equity mutual funds and how much in stocks, if at all. Then, you will also have to figure out how many equity funds and stocks to buy.
The truth is that there is no magic number, though the number of funds in your portfolio should give you adequate diversification without making your returns suffer. Let’s first examine mutual funds and then stocks.
How many mutual funds?
You can target up to about 10 equity mutual funds. Apart from 10 being an easy number to track, academicians like J.L. Evans and S.H. Archer have shown in their research that most of the risk reduction due to diversification takes place in an aggregation of 8-10 securities.
Which categories of mutual funds?
Typically, if you’re venturing into equities for the first time, you can start with an exchange-traded fund (ETF). ETFs are low-cost cousins of index funds and invest in all the securities that lie in their benchmark index in the same proportion in which the index has them.
ETFs don’t have risks associated with fund managers. They aim to give you returns in line with the market, so you don’t lose or gain more than what the market does. Says Mumbai-based financial planner JayantPai: “It’s not possible for active funds to outperform the market on a continuous basis. ETFs ensure that your returns are at least in line with the market.” One ETF tracking a large-cap index like Nifty or Sensex should do fine.
Diversified equity funds.
One ETF in your equity portfolio can be supplemented by a couple of diversified mutual funds, including equity-linked savings schemes. This will form the core of your portfolio and provide a baseline of expected growth.
As diversified equity funds invest in around 30-50 or in an even higher number of scrips, chances are the same scrip will feature in more than one fund if you have too many funds in your portfolio. Also, ensure that these schemes are different in styles.
Mid-cap funds and thematic funds.
You can supplement your core funds with higher growth investment options. One of them is mid-cap funds. Though there are 26 mid-cap funds in the market, almost all of them target the same universe of stocks and there are negligible differences among them.
Then, there are thematic funds that invest according to a theme, such as infrastructure. You can invest in one mid-cap and one thematic fund.
How many stocks are enough?
After gaining equity experience through equity mutual funds, you can invest directly in stocks. Financial planners believe there isn’t much merit in holding top-line equities as they would be anyway present in your mutual funds.
“Target some good, small companies that your funds may not have,” says Pai. Although Nifty has 50 scrips and Sensex has 30 scrips, you don’t need to hold as many, as tracking would be a problem then. Here, too, 10 sounds like a decent number. “Ensure that these 10 scrips are from different sectors,” adds Pai.
Best Reading:
- Steps In E-filing Tax Returns
- Easy Steps to Tax Filing
- Tax Planning For First Timers
- Advantages and Disadvantages of Online Banking
As a conclusion, you can be the best and only person to decide in view of whatever way or you’re your life would go. As Prof. Dumbledore once said in the phenomenal movie “Harry Potter and the Sorcerer Stone”, it is definitely your choices, and your choices alone which will bring you to your desired destination…nothing more nothing less…Therefore, winning the savings game is about succeeding in providing for the future without losing out on your present. It is here that thumb rules serve as great guideposts. They show a happy middle path that lies between the ways of the ant and the grasshopper. In the end, you still win. Win-win situation is hence the best ending in view of this quest towards success. Happy investing folks!
Comments on this entry are closed.