Multiplying Money Like Your Tummy!

Rather than making more pennies, the single biggest concern for many working professionals seems to be saving and making their investments multiply. Besides being a great social media bragging vehicle (Dude, I picked that stock; it gained 10 times in 3 months, worship me!); sound investment strategies are a great tool to feel secure emotionally and physically. The article looks at some of these principles for the overstressed, sleep deprived, social media savvy, easily depressed working professional operating out of his or her swanky glass office!

Multiplying money is simple if executed like a zombie!

It is advisable to keep your money invested in the following vehicles.

There is a reason why your grandmother used to recommend safe investments. The first investment vehicle that should be exhausted are fixed income instruments. The age old paradigm of your age being the percentage investment in fixed income instruments holds largely true. Given the rate at which careers are evaporating overnight, the paradigm is best shifted to your age plus 20% that should be invested in fixed income instruments. Provident Fund (PF) with an assured return of 8.8% is a natural choice which your company invests in by default. A Public Provident Fund (PPF) account with an assured return of 8.0% should be tapped into every year for you and your immediate dependents. In addition, extra amounts can be parked as part of Voluntary Provident Fund (VPF) giving an assured return of 8.8%. A quick bug to your company HR representative can tell you how to invest in it. It is also advisable to invest in National Pension Schemes which are longer term instruments serving the purpose of tax exemptions and retirement building. Fixed deposits are not advisable in case your income falls in the highest tax slabs. A sound portfolio in fixed income instruments can yield returns between 8 - 9% every year. Given the inflation rate hovers around 4 - 5%, a sound fixed instruments portfolio can lead to a real income gain of 3 - 4% every year!  

If you read financial literature, equity investing is often equated to inebriated angels dancing to your favourite item songs. While the mark of a man’s chest is to brag about how well he understands equity investing and how he made millions in it; everything other than what you read that follows is false bravado. As mentioned in the paragraph earlier, it is advisable to invest 80 minus your age % in equity markets. This investment is best split across three broad buckets. One: to invest in a direct large cap exchange traded fund. In large caps, it is highly unlikely any fund manager can make an incremental return over how the markets are moving (alpha in financial parlance) and hence an exchange traded fund that mimics the index works best. Large cap index funds generate around 10 - 12% return over a period of time. Two: to invest in a multi-cap fund where the fund manager can invest in any company across industries and company sizes. Multi-cap funds generate about 12 - 14% return over a period of time. Three: to invest in the US equity markets. Irrespective of naysayers, the American economy is bound to stay the strongest for two decades and our currency is expected to hit Rs. 100 / US Dollar in course of time. Investing in the US equity markets is an instrument to diversify your holdings and benefit from currency depreciation. Equity holdings generate a return of about 12% over a period of time. It is fairly easy to understand why, they generate returns in line with the GDP of the country (7 - 8%) added to inflation (4 - 5%)!

While investing in real estate sounds very cool, it is not monetarily lucrative in India. The rental yields (rent received from a tenant divided by the value of your real estate) in India adds up to at  best 3 - 4%, which is significantly lower than your opportunity cost of capital in a fixed income instrument like a Public Provident Fund or a Voluntary Provident Fund (interest income in the range of 8 - 8.8%). In addition, the risk of illiquidity in selling an old house or preventing termites, human or animal, encroaching upon your farmland are very serious concerns. Real estate is a vehicle for your primary residence and not to make moolah over! In case you are still unsure, ask all the financial developers who stand outside Siddhivinayak temple every morning feeding stray cows hoping their empty flats see the light of a buyer!

While gold has been a historical favourite for Indian households; given its lacklustre returns, it is best advisable to avoid or keep 5% of total portfolio in gold traded funds to encourage diversification. Purchase of actual gold as an investment is a strict no-no as their value immediately plunges once you buy them. Remember how your white elephant, sorry your fancy car, lost value as soon as it left the swanky showroom!

A penny not lost is a penny saved!

The single biggest lesson in money management is not to lose money especially if it is your hard earned money. Incase it is your father in law’s money, well that is a different matter altogether! In behavioural psychology, the pain attached to losing a penny is three times more than the joy attached to earning the same penny back. It is advisable to be prudent on the following fronts.

You are better off gambling at a roulette table in a casino rather than investing in alternate currency. Irrespective of how attractive bitcoins seem, they are weapons of monetary destruction. They are not recognised, unsound given there is no underlying asset and subject to wild fluctuations. Irrespective of how many heroic stories you might hear of someone buying a BMW because of a harmless investment made in bitcoins five years ago, it is best avoidable. If you were so lucky, you would have been rapping in Gully Boy and not reading this article! Regarding other unconventional indices like wine index, liquor index and paintings; it is best recommended to invest in it with your boss’ money! You won’t have to go through a long drawn notice period of three months.  

From a stock picking perspective, it is best to avoid picking an individual stock or invest in a mutual fund that specialises in a particular industry (e.g. technology, pharmaceutical, infrastructure) . While there is merit in the argument of buying individual stocks of quality large cap companies (e.g. HDFC, Tata Consultancy Services, Hindustan Unilever); it is advisable to buy a large cap index fund that replicates the large cap index exchange. A research conducted once indicated that a group of chimpanzees were better than picking individual stocks than an Ivy League educated stock picker! If you want to pick individual stocks, it is advisable to hunt down the three famous chimpanzees!  

Equally important to maintain a short term safety net!

While multiplying money is about being detached and long term, it is prudent to maintain an emergency corpus in fixed deposits which is readily accessible for an unforeseen emergency. An amount equivalent to six months of operational expenses should be stored in this account. In addition, to avoid exorbitant medical expenses, an insurance plan covering your entire family should be looked at very seriously.

As a good habit, all account statements of financial assets should be refreshed every year. At the end of each year, it is advisable to keep the latest copy of your investments of your banks, provident fund (PF), public provident fund (PPF), national pension scheme (NPS) and mutual fund accounts.

To multiply money, attitude is everything!

The biggest mistake people make while trying to make money multiply is to read beautiful articles authored by financial pundits and venom, sorry, wisdom spewing books written by balding, pot-bellied men and follow their financial advice blindly. If it were so easy to multiply money, the financial pundits would have made a fortune themselves and not have been chasing you to read their books or blogs!

The single biggest attitude that is important in money management is to be boring and defensive. Testosterone, passion and aggression, contrary to common consensus, is bad for multiplying money. They only lead to losses. To be safe, boring and un-innovative is the best course of action.

If you don’t understand a financial instrument, don’t invest money in it. If the financial instrument sounds too good to be true, don’t invest money in it. If your best friend asks you to invest in something saying it will hit the roof by tomorrow, don’t invest money in it. Also, stay away from your friend! If at a coffee conversation, some dude brags about how he picked a penny stock and made millions on it; stay away from that guy! If the pretty journalist on TV asks you to invest money in her chosen financial instrument, don’t invest money in it. When in doubt, avoid investing. If you still find her pretty face on TV irresistible, at least delay your financial decision by a fortnight! No matter what the television advertisements promise, money management is not equivalent to buying a deodorant. No Brazilian supermodel will run after your generous belly if you buy her advertised financial instrument!

In conclusion, financial safety is extremely essential in leading a less stressful life. A penny saved is a penny earned. There is no better way to multiplying money than by being boring, detached, unemotional and downright unglamorous!