5 Elements of a well-planned financial portfolio management

Posted on October 24, 2008August 22, 2019 by Jagoinvestor

Everyone is concern when it comes to investment. But lot of investors does the mistake of focusing on investments only and not on their portfolio. Having a good financial portfolio is also as important as an investment.

This article will talk about 5 things every financial portfolio must have and we will see that it should be good for almost every type of investor . We will try to judge it over the important parameters discussed in my one of the earlier Article : Pillars of Success

financial portfolio

What is mean by a financial portfolio?

Financial portfolio is a road-map which you can use to achieve your future financial goals. It is build up by considering your risk appetite and investment objectives. You can handle your own financial portfolio or you can also take help of the professional financial managers which will make it easier for you to reach your financial destination.

Your investments alone can not help you to build a healthy portfolio, there are some other elements also which are important as much as your investments.

Let’s see the Five most important and must have things that each and every financial portfolio must have:

1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.

For India :

Aegon Religare Life Insurance
SBI Life Insurance
Max New York Life Insurance
LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

2. Health Insurance

This is extremely important to have a health insurance now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs/$10,000) depending on your budget .

3. PPF

Each and every financial portfolio much have debt exposure and PPF (for India) is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available , with post-tax returns of 8% , its a must have in each portfolio .

4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the undebatable growth for Indian economy , no can afford to miss Equities for long term investments.

5. Contingent/Emergency Fund (Cash + Liquid Funds)

Each and every financial portfolio must have good amount of cash and liquidity to meet unforeseen and emergency expenses. Other wise you will have to liquidate and break you investment products which may attract penalties and may not give you enough cash at the time of requirement which can create problem .

Better to have money equivalent to 3-4 months of expenses in emergency fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustive list . Depending on your profile and requirements you should have other products as well. but i would say this will solve 90% of the problem . Let looks how a finanacial portfolio consisting of this 5 things passes on 4 parameters called Pillars of Success ?

1. Capital Appreciation :

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPF would provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity :

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management :

Term Insurance and Health Insurance will take good care . SIP will take care of the market volatility. some other techniques like Hedging using Derivatives and being well informed will manage extra level of risk .

4. Goal Oriented :

Each and every product is for a specific and important goal , as described above .

For Non-Indian Readers

Hi all , the article is specifically with Indian context , but article is helpful for each of you , please find the similar products in your country .

Conclusion

Each and every financial portfolio can be different and should match the requirement of the investor , But these 5 things are such that it can be for any kind of investor . Just like we have master key for any kind of lock , we have these products for any kind of investor.

If you have an query ask us in the comment section.

How to hedge your Portfolio using Derivatives

Posted on September 24, 2008February 6, 2019 by Jagoinvestor

When it comes to invest in equities or mutual funds lots of people becomes concern about their investments. This article is surely for you if you invest in Equities (Direct shares or Equity Mutual funds). In this article I’m going to tell you how to hedge your portfolio using Derivatives.

Risk Management of Portfolio using Derivatives

Many people might have seen their investments go down to anywhere between 20-50%, if they invested in Indian Stock markets around Dec 2007 or Jan 2008, and they might be wondering if it will go more down in value .

Just like we know take life Insurance to cover the risk of Life, Home insurance or car insurance to cover the risk if anything goes wrong, Can we also take Portfolio insurance?

What does insuring the portfolio means?

What does insurance means? It means securing something from some event which can cause loss or damage. We ensure our Lives, our homes, our Car. What happens when nothing happens to our lives, Home or Car.? We pay a small price for it and that is a kind of fees, which we pay for the security.

In the same way, we can also insure our portfolio, we can make sure that our loss is limited, the loss is always limited. If you are one of those who invested in Equity mutual funds or Shares during 2007 or Jan 2008, and you are sitting on a loss of 30-60%, you will understand this very well.

Anyone who invested Rs.1,00,000 in stocks or mutual funds has loss of anything from 30,000 to 60,000 (depending on his investments). Just wonder if they could insure their portfolio and make sure that there loss cannot go beyond a certain limit. That would be wonderful. We are going to discuss this today.

How to insure your portfolio?

There is no specific product or service for this , you have to manage it using Options (Derivative Products). ( Read it in Detail)

I assume that you now understand what are Options and how do they work , what are call and put options and what is expiry date, in case you have not read about it, please read it at above links (try first link to get basic info).

If you have invested in Mutual Funds

Ajay has invested Rs.2,00,000 In Equity mutual funds in Aug 2008, Nifty is around 4,200. He has invested his money for 4 months and would like to withdraw his investments in Jan 2009. He is a smart investor and knows that markets can crash and there is no limit to how much down it can go, so he decides to minimize his risk.

For this he has bought Nifty 4200 PA DEC-2008 trading at 200, for which he spent Rs.10,000 (Rs.200 * 50 lot size).

Now let’s see 3 different cases and what happens to his portfolio

1. Markets boom and goes up to 5,000 : Nifty has gone up by 20%

I am assuming that his investments followed and his Rs.2,00,000 has grown to Rs.2,50,000

Value of his Nifty PUTS : 0

Profit from investments : 50,000
Loss in Puts : 10,000

Total Profit : 50,000 – 10,000 = Rs.40,000

2. Markets Crash by 25% and nifty goes down to 3,100.

His investments follow and now its value is around 1,40,000, but his PUTS will be valued at 1,100 (4200-3100). So its value at the end would be 1,100 * 50 = 55,000.

Loss in investments : 60,000
Profit in PUTS = 45,000 (55,000 – 10,000 investment)

Loss = Rs.15,000

Here you can see that Out of his loss of 60,000, 45,000 is covered from PUTS.

3. Nothing happens and markets are still at 4,200.

His investments will be almost same, and his PUTS will expire with value 0.

Profit from investments : 0
Loss from Options : 10,000

Total loss : Rs.10,000

In all the 3 cases, we should note that in all the cases his Losses are minimized.

Let us also take an example of Shares.

Ajay bought 300 shares of Reliance @2,000 on 1st Jun 2008. He wants to sell these shares around Dec 2008.

He senses that markets are uncertain, so he buys 4 lots of RELIANCE 2,000 PUTS DEC 2008 @100. One lot of Reliance options has 75 shares, that’s the reason he buys 4 lots, so that he has total 300 shares control.

What does it mean? It means that on Dec 2008, he has the right to see 300 shares of reliance @2,000 and for this right he has paid Rs.100 for each share.

The maximum loss for him is now Rs.100 per share.

Let us see the 3 cases.

1. Shares price has gone up to 2,500.

Profit in shares = 500 * 300 = 1,50,000
Loss in Puts = 100 * 300 = 30,000

Total profit : 1,20,000

2. Shares price remain same at 2,000

Profit in shares : 0
Loss in Puts : 100 * 300 = Rs.30,000

Total Loss = 30,000

3. Shares price go down to 1,500

Loss in shares = 500 * 300 = 1,50,000
Profit in Puts = 500 * 300 = 1,50,000 – (30,000 investments)

Total Loss = 30,000

Again, we can see that in any case his loss is capped by 30,000 (5% of his investments of 6,00,000)

So options can be used to hedge or security. Watch this Youtube video to understand.

Summary

So the main idea of options is to use them to minimize the losses. If there is loss in investments, the puts will end up in profit and we will have very less loss or maybe we can get some profits only. The same way, if people do short selling they can use calls to minimize their losses.

So if you have invested in Shares or mutual funds and want to minimize your losses, use options or Futures as Hedging tools.

How to calculate Insurance Requirement

Posted on September 16, 2008February 6, 2019 by Jagoinvestor

There are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.

Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.

Life insurance

How much should be the Insurance cover?

You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.

This is pretty easy to answer, The life Insurance amount much be enough to –

Pay off all the debts
Should be able to provide monthly income which is good enough to cover family expenses
Any emergency or unplanned needs for future.

How to calculate the Sum Assured?

While deciding the total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.

Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:

Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.

Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)

Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)

Calculate the annual expenses of your family

Decide the number of years for which you want to provide insurance cover

Consider this amount for as a sum assured for your life insurance cover.

Let’s take an example.

Example :

Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.

His debts and future expenses.(total : 47 lacs)
Home loan of 24 lacs (remaining)
Car loan of 3 lacs.
His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

5,00,000 in Fixed Deposits
3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.

We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.

Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.

Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).

So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.

Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..

They receive 70,00,000, Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 – 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).

Money left = 46,00,000 – 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.

At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.

So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.

Why it is necessary to have as life insurance cover?

Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.

Life insurance requirements

Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.

In case you have not read my previous articles on Life insurance, please read them

How much will the Life Insurance cost him per year?

As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.

So whats the final formula?

Insurance cover = A + B + C – D

Where,

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency.

D = Your investments or Assets (excluding HOME)

If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.

Please read my earlier articles on Term Insurance to understand more.

I would be happy to read your comments.

How to do PORTFOLIO REBALANCING

Posted on July 24, 2008August 22, 2019 by Jagoinvestor

Today I am going to talk about something which is one of the extremely important tool for risk management and also something which is encouraged if you want stable returns from your investments. We are going to talk about the investments in Equity and Debt.

portfolio-rebalancing

How Re-balancing the portfolio will help in –

Risk Management
Stability
Maximize returns

Understand the pros and cons of Equity and Debt

EQUITY

Pros : High returns, Low risk in Long term, High Liquidity
Cons : Risky, not suitable for short term investment

DEBT

Pros : Stable and assured returns, Good investment for short term goals
Cons : Low returns

Equity + Debt :

When we combine Equity and Debt, returns are better than Debt but less than Equity, but at the same time risk is also minimized compared to Equity and Debt, and when we apply technique of Portfolio Rebalancing, both risk and returns are well managed.

What is Portfolio Rebalancing?

The first step to understand is that each person must divide his investments into Equity and Debt in some ratio, it can be 40:60, 50:50, 60: 40, 75:25 or any ratio, The ratio depends on a persons risk taking capability and return expectation.

For an example let take the ratio to 60:40, portfolio rebalancing is nothing but rebalancing your portfolio in same ratio, in case they got changed after some months or years, as you wish. Preferably the good time is every 6 months or 1 yr, but not 15 days or 1 month.

Why Do we do it?

You have to understand that each person should concentrate on both returns and risk.

Case 1 : Equity:Debt goes up.

Action : Decrease the Equity part and shift it to Debt so that Equity:Debt is same as earlier.
Reason : As our Equity has gone up, we could loose a lot of it if some thing bad happens, we shift the excess part to Debt so that it is safe and grows at least.

Case 2: Equity:Debt Goes Down.

Action : Decrease the Debt part and shift it to Equity, so that Equity:Debt is same as earlier.
Reason : As out Equity part has decreased, we make sure that it is increased so that we don’t loose out on any opportunity.

Limitations Lets also talk about the limitations of this strategy, once your equity exposure has gone up, if you rebalance and bring down your Equity Exposure, you will loose out on the profits if Equity provides great returns after that, or if your Equity exposure as gone down and you bring up your exposure from Equity and if Equity does bad, then you will loose more.

Understanding the Game of Equity and Debt

But, we already said in the start that our primary concern is managing risk and profit is secondary. Let us understand that markets are unexpected and they can go in any direction, so better be safe than sorry. Many people are confused that if there equity has done very well then shall they book profits and get out with money and wait for markets to come down so that they can reinvest.

Portfolio rebalancing is the same thing but a little different name and methodology, so once you get good profit in something which was risky you transfer some part to non-risk Debt.

When we say Equity we mean shares or mutual funds which are related to Stock markets, which tend to go up and down, if it goes up, there are high chances that it will come down and when it comes down, its highly probable that it will move up again.

Lets us now see the most interesting part : Examples

Ajay has Rs 1,00,000 to invest and he want to invest it for 5 yrs and the 5 yrs returns are 30%, -35%, 40%, 60% and -30% .

Lets look at his money and its growth in 3 different mode
– Only Equity
– Only Debt
– Equity + Debt in some ratio (without Portfolio Rebalancing)

(click on this image to see in large resolution)

We can see here that Debt performed better than Equity, because of the uncertain movement in returns, also the Equity+Debt performed better than Equity but not Debt.

Let us now see the performance of Equity + Debt (with portfolio rebalance)

So now, every time our Equity and Debt ratio changes, we will rebalance it.

Ratio = 30:70
Investment = 1,00,000
Equity = 30,000
Debt = 70,000
At the end of 1st year (Equity return = 30% , and debt = 9%) :
Equity = 30,000 * (1.3) = 39,000
Debt = 70,000 * (1.09) = 76,300
Total Capital = 39,000 + 76,300 = 1,15,300

Now we will rebalance the portfolio

Equity = 30% of 115300 = 34590
Debt = 70% of 115300 = 80710

Now This is our new Equity and Debt investment

At the end of 2nd year (Equity return = -35% , and debt = 9%) :
Equity = 34590 * (1-.35) = 22484
Debt = 80710 * (1.09) = 87974
Total Capital = 22484 + 87974 = 110457

Now we will rebalance the portfolio

Equity = 30% of 110457 = 33137
Debt = 70% of 110457 = 77320

In this way we keep rebalancing the portfolio and lets see its performance for 5 yrs

(click on this image to see in large resolution)

Here, you can see that The column (E+D with PR) is the our main column which shows the performance with portfolio rebalancing. Here we have example for two ratio’s 30:70 and 70:30, we can clearly see that at the end of every year the final corpus for rebalanced portfolio was always greater than the non-balanced portfolio for both the ratio.

For ratio 30:70

Year 1 : 115300 vs 115300
Year 2 : 110457 vs 108517
Year 3 : 130671 vs 126142
Year 4 : 162424 vs 155595
Year 5 : 158039 vs 147452

For the 70:30 ratio also we can see that rebalanced portfolio outperformed the non-balanced portfolio.

Also you can see that for most of the years re-balanced portfolio outperformed “Only Equity” and “Only Debt” except 1st year and 4th year.

1st yr is very easy to understand why it happened and for 4th year, the returns were positive again after 3rd year and we made more profit in “Only Equity” portfolio because of high concentration on Equity side, but you can see that in 5th year, when there was a negative return of -35%, then the “Only Equity” fell heavily, but the rebalanced Portfolio fell very little because we have rebalanced it already and dropped our Equity Exposure to be safe.

Conclusion

So at last the question is what is the ultimate conclusion of all this talk.

Each person has his own Equity and Debt diversification, if the person is high risk taker his Equity component will be high else it will be less, every time your Equity and Debt component changes you have to see that it matches your risk profile, if it does not you bring it back to your level.

By bringing Equity exposure from high levels to your level, you are managing the risk you can take and by increasing the Equity exposure to your level back (in case it went down), you are making sure that you don’t miss out the chance.

Other reason is that Debt always increases, Every time your money goes up in Equity from your comfort level, you take that money which is earned by risk and shifting it to a safe place which will rise for sure though with less speed. Equity is linked with Stock Market and they tend to go up and down always and you don’t know when will it happen. So better manage that risk by Portfolio Rebalancing.

Please comment of this article to let me know how you feel about this article, Feel free to comment on anything which you feel is wrong .

Also, the example taken for this article was self made and does not represent any real life situation, but for sure its possible and similar scenarios have happened in our Stock Markets

8 Important steps to improve your financial planning

Posted on May 19, 2008February 6, 2019 by Jagoinvestor

What is Financial Planning? Its a little stupid definition, but its just planning you finances. You plan your Investments in such a way which meets your financial goals over time.

You must be very disciplined when you do this, you must know from where you the money is going to come to you and how are you going to save or invest it, and in future how are you going to achieve your goals.

Financial Planning

Steps in Financial Planning

1. List down your Goals

Prepare a list of financial goals. It can be any requirement like Buying Home, Car, Child Education, Child Marriage, Vacation, Retirement etc. Along with this there must be a very clear timeline associated with the Goal. Something like “I want to buy a Car after 3 years, which will cost 10 Lacs at that time”.

2. List down Your Cash Flows

Prepare the list of your cash flows, cash flow means, how money is coming and going? Any money coming in is Cash inflow and Any Expenses is Cash outflow.

It it help you understand how money is coming to you and how is is utilized and how much is remaining for investing purpose.

Example (yearly) :

Cash flow

By Doing this , you can get very clear of how you are going to get money and how you are going to spend it, and how much you are left with to spend.

3. Understand and figure out your Risk-appetite

This is a very important part of financial Planning, Risk appetite is the amount of risk a person can take while investing. How much money you can afford to loose in order to earn high returns defines your risk taking ability.

For Example:

If you are ready to loose 60% of your money , your risk appetite is high
When you are ready to loose 25% of your money , your risk appetite is moderate
If not at all ready to loose your money even 1% , you are not at all a risk taker.

It depends on you which category you belong in. it depends on individuals Psychology, Family Conditions, Attitude etc.

Generally people in there early age have more risk appetite as they have less responsibilities and more freedom to invest. Later when they get married and have responsibilities, they cant risk money to loose.

4. List down your Financial Goals

At this point, you must be clear with your goals. Financial goals are the list of things for which you need money and you must have a predefined target time.
Example:

Ajay earns Rs 3,00,000 per year with Rs 1,00,000 left for investment, he has moderate risk appetite.

Goals:

1. Buy a Car within 2 years worth 5 lacs.
2. Vacations in New Zealand worth 8 Lacs within 4 yrs.
3. Buy home worth 40 lacs in 10 years.

Here, Goals are not compatible with amount invested per year and with that kind of risk-appetite.

Therefore, Goals must be realistic and achievable, it must not look totally irrelevant.

Watch this video to know the financial planning services by Jagoinvestor :

5. Make sure your Goals are realistic

At this point you must make sure that your goals do not look unrealistic and unachievable. If they do, then you must either lower your goals or increase risk appetite or increase the investible amount per year. This gist of the matter is, Be Realistic !!!

6. Make the Plan

Once you are done with all these steps, Its the time for the planning.

For each goal you must devise a systematic investment plan, by choosing the correct investment instrument. For example: For your child Education make sure you invest in something which is not very risky for the time period you are going to invest in that. You can invest in equities for that, as Equities are not risky in very long term and generate great return.

But for a short term goal like vacation in 1-2 yrs, don’t invest in equities, rather go for a debt fund or a fixed deposit.

In this way, you have to be clear how you are going to invest for achieving your goals.

7. Review and Take advice

Revise your steps and make sure everything is correct. If you are unclear about anything meet some one who is more knowledgeable than you, See a financial planner or a knowledgeable friend.

8. Take Action and keep Reviewing

The last step is to take Action and start executing the plan with discipline and make sure you change you goals, risk appetite as time passes and these things change over time.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

What is Diversified Portfolio and how to create it ?

Posted on April 17, 2008February 6, 2019 by Jagoinvestor

Today we will discuss How to build a Diversified Portfolio and hence and strong portfolio and why we need it? If you don’t understand a lot of terms and terminologies related to investing and finance, have a quick look at terms and terminologies page to quickly understand the terms. it will take 5 minutes.

Diversified portfolio

What is Portfolio?

Your investments all together is your portfolio, as simple as that. So, if i have

10,000 in shares
20,000 in real estate
1000 cash

that’s my portfolio

What is an Asset Class?

An Asset class is something where we can invest and build assets. If i buy a Home or land, i build an asset in real estate category, if i buy anything in shares or mutual funds (equity), i create assets in Equity asset class.

(Dont know what is mutual fund, click here)

They are just categories. Following are some asset classes:

Equity : Shares, Equity Mutual funds, Derivatives (Future and Options)
Debt : Fixed Deposits, PPF, NSC, FMP (How to find the best Fixed Deposit)
Real Estate : Land, Flat, Commercial Plots, Home
Commodities : trading in commodities, leave it if you don’t understand
Gold or Silver : Recently these are also counted as Asset classes
Cash : that’s the hottest thing 🙂

Now what is a Diversified Portfolio?

As the heading says, Diversified portfolio is a portfolio which is not heavily invested in some asset class, but has balance over every asset class, There is no thumb rule that what percentage of your portfolio shall go in which asset class. It depends purely on :

What is your Risk appetite
Goals (short , medium and long term)
Economy and Political atmosphere
Current market over long term

Why Diversification?

When you diversify you investments over different asset class, not only your money gets diversified, but also risk, so if some particular asset class is not performing well, it will affect only that part of your portfolio and not whole of it.

Obviously it also effects the returns, you returns are collection of returns from all the asset class, so even if some asset class did not perform over a period, it doesn’t affect you hardly.

Watch this video to know how to diversify your portfolio:

Every asset class provides some thing like :

Equity : Very High returns , Volatility , Liquidity
Debt : Low but Secure returns , No liquidity
Real Estate : Good returns , stability , No liquidity
Gold : Hedge against inflation , Stability
Cash : High liquidity

Every asset class provides some thing good and some thing bad . Diversification helps in getting all benefits in some or the other way and being at the center of all. With diversified portfolio you get all the elements of : Good returns, Stable returns, Liquidity, Security

Lets see some examples :

1. Anyone who was heavily invested in “Debt” around 2003-2004 didn’t get high returns from the zooming stock markets (equity) for 4-5 yrs

2. Anyone who was heavily invested in Equity around start of 2008, saw his investments go down by 40-60%.

3. Anyone who is totally invested in Debt cant get instant money if required, either he has to take some loan over those investments or break his PF or FD etc.

That does not mean, non-diversification always hits …

1. Anyone heavily invested in Equities before the bull run of stock markets in 2003 onwards made fortunes (but at their risk).

2. And people who had most of there money in GOLD in 2007 got the highest returns compared to any asset class.

3. It totally depends on person to person. I hope this point is cleared. Also , inside every asset class , another level of diversification is important. Like in Equity there are different categories like Large Cap , Mid Cap , Small Cap . Read Magic of SIP

In Mutual funds there are sectoral funds , equity diversified , balanced funds , debt funds , liquid funds etc . Another level of diversification is also necessary to achieve high level of diversification .

Case study

Ajay a software engineer earning Rs 35,000 monthly (post tax) with a Family of 3 (1 wife and 1 kid) has following portfolio

Expenditure : 20,000 per month

Portfolio :

Tax savers Mutual funds : 1 lacs (locked for another 2 years)

Real Estate (a land in his native place , pahari in UP) : 3.75 lacs

Fixed Deposits (for 5 years) : 2 lacs

PPF : 3 lacs

Cash (in bank) : Rs 25,000

Insurance Payout : He pay 55,000 per year as life insurance premium for an endowment policy, for which he is insured for 12.5 lacs for 20 years. he started this policy before 4 years.

His Future plans

1. His goals are to buy a home in another 5 years for which he need down payment of 3-4 lacs
2. Want to save 10 lacs for his son education in 10 years
3. He want to retire early with monthly income of 45,000 at least . Read 6 steps of retirement Planning .

This Portfolio looks like diversified, and yes it is, but not in a well mannered way.
The asset wise allocation is

* Equity : 10%
* Debt : 37.5%
* Real Estate : 50%
* Cash : 2.5%

His overall Portfolio Shortcoming

His exposure to different asset class is not well balanced according to his over all situation

Life insurance is very less and and not at all enough . For this he is paying a hefty amount every year which adds a lot to his burden.

His Equity Allocation needs to go up

And Debt allocation needs to go down

His cash needs to go up for liquidity. none of his investments in any asset class provide liquidity or near term liquidity, If he needs 1 lacs suddenly he cant get it, or will get it after breaking his FD.

Read a Nice article on Power of Asset Allocation .

Suggestions :

The first thing he must do is to restructure his portfolio.

1. He shall surrender his existing Endowment policy and take a Term Insurance 35-40 lacs for 20 years for which he will pay around 13000-14000 per Annam. he will save surplus of 40,000 per year because of this.Also when he surrenders the policy he will get back around Rs. 2.4 lacs back.

2. He must invest more in Shares and Mutual funds (as his risk taking capabilities is more because of his less age and less dependents)

3. The land in his native place is not appreciating in value much faster unlike other places like other real-estate hot spots. He shall consider buying his home sooner and sell his land at native place. if he sells his land he will get around 4 lacs.

4. With the money he gets from surrendering policy (2.4 lacs) and selling his land (4 lacs), he will get around 6.4 lacs and he should utilize this money as the down payment for new flat and rest he can take as Home Loan. (Want to know how EMI on home loan is calculated? click here ) He can do it later if he wants (when he can afford the monthly EMI)

5. He shall consider increasing his Cash to a level which can meet his contingent needs if any arised.

As per the standard rule, he shall have at least 2 to 3 times of his monthly expenses as contingency fund, which is totally liquid.

6.Also apart from Cash and investing in Tax saver mutual funds, he shall consider investing in some non-tax saver mutual funds which also gives him near liquidity.

7. He may leave the debt investments as it is. If he wants he can break his FD in case he is going for the Home loan, he can increase the down payment part from this money.

8. In case he is going to take home loan after 1 year , he can also take some loan on his PPF , at least for some part he will pay less interest than the home loan.

9. Also he shall invest some money in GOLD, to give more stability and security to his portfolio.

10. At last he shall consider taking a Family floater Health Insurance plan, which helps him to secure his Family from and health problems or illness.

Recommended Portfolio

Apart from His Home (considering he takes Home soon)

Equity 65% ( Direct shares 20%, Equity Funds 60%, Balanced Funds 20%)
Debt 20%
Gold (ETF) 10%
Cash 5%

Conclusion

Diversification does not say that you have to invest in some money in every asset class for sure, the idea behind it is just that the risk is minimized by diversification and the portfolio is more stable. Happy diversifying 🙂 and Leave comments …

How to calculate home loan EMI?

Posted on January 18, 2008November 11, 2019 by Jagoinvestor

Taking a loan on EMI is a good option, but do you know how to calculate EMI? It’s not just about a Home loan, it can be any loan EMI.

In this post I will tell you how does the monthly EMI for Home Loan is calculated and how increasing Tenure does not help much after a certain point.

How to calculate EMI on loan

What is EMI?

EMI is an abbreviation of Equated Monthly Installments. The name itself explains what does it exactly means. It’s a monthly installment that a borrower has to pay to the bank or the financial institute from where he has taken the loan.

This EMI depends upon the principle amount of loan and tenure i.e. years for which the loan has been taken.

How to calculate EMI?

EMI can be calculated on the basis of 3 terms, which are as –

Loan Amount
Interest Rate
Loan Period

The formula for calculating EMI is given below.

home loan EMI formula

Where,

L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

A lot of people do not know that increasing the tenure only leads to increase in Interest amount payable and nothing else . The decrease in EMI is not proportional to the increase in Loan tenure.

In Housing Finance, Equated Monthly Installments (EMI) refers to the monthly payment towards interest and principal made by a borrower to a lender. Have a look at the example given below to get a clear idea about it.

Example

Assuming a loan of Rs 1 Lakh at 11 percent per annum, repayable in 15 years, the EMI calculation using the formula will be :

[su_table]

EMI =	(100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] – 1)
EMI =	916 X (5.161846 / 4.161846)
EMI =	Rs 1,136

[/su_table]

Note at i = 11 percent / 12 = .11/12 = .00916

You must have got an idea about calculating EMI. Some people think that increasing the tenure of EMI is a good option because it will help to reduce the EMI.

EMI Calculator:

[CP_CALCULATED_FIELDS id=”9″]

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 12% interest rate.

Ans: I did a bit of my so-called “mathematical skills” … and found out that EMI is of form

EMI(n) = C1 X C2^n / C2^n-1 , where
C1 = L * i
C2 = 1+i

So the difference in the EMI value for n+1 and n is nothing but

by a bit of calculation I got :

EMI(n) – EMI(n+1) = C1 x (C2^2n – C2^n) / (C2^2n – 1)

and when n becomes very large … and applying limit, we get

Lim C1 x (C2^2n – C2^n) / (C2^2n – 1)
-> Inf

=>

Lim C1 / C2^n
n->Inf

and as C2 > 1 (C2 = 1+i)

=>

Lim C1/C2^n = 0
n->Inf

Or in other words, if we differentiate the EMI formula … we get a constant …

It shows and proves that the difference in EMI value is not very significant compared to the change in tenure and at one stage its almost of no gain to increase the tenure.

To show this argument: I would like to present an example, considering my old question:

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 10% interest rate.

See the table given below. In this table, i have shown how EMI changes with increasing tenure, and also the difference in your old EMI and new EMI you will have to pay after increasing the tenure.

[su_table]

Period	New EMI	Difference between old & new EMI
10	39645
15	32238	7407
20	28950	3288
25	27261	1689
30	26327	934
35	25790	537
40	25474	316
45	25286	188
50	25173	113
55	25104	69
60	25063	41
65	25038	25
70	25023	15
75	25014	9
80	25008	6
85	25005	3
90	25003	2
95	25001	2
100	25001	0

[/su_table]

From this table you must have realized that after a particular time there is no sense in increasing the tenure because the difference between your old EMI and new EMI will be in some rupees which is negligible.

So it is advisable not to extend your loan tenure to much just to reduce the EMI.

EMI calculators of different banks

Interest rate on loan is different for different banks. So the EMI you will have to pay is also different from bank to bank. In the table given below, I have enlisted some top banks and their EMI calculators link. Click on the links to check the EMI of different banks.

[su_table]

ICICI bank	https://www.icicibank.com/calculators/home-loan-emi-calculator.html
SBI	https://www.sbi.co.in/portal/web/home/emi-calculator
Union bank	https://www.unionbankofindia.co.in/EMICal.aspx
HDFC bank	https://www.hdfc.com/home-loan-emi-calculator
Axis bank	https://www.axisbank.com/personal/calculators/home-loan-emi-calculator
Bank if India	https://www.myloancare.in/home-loan-emi-calculator/bank-of-india
Bank of Baroda	https://www.bankofbaroda.com/baroda-home-loan.htm
Indian bank	https://www.indianbank.in/emi_calc.php

[/su_table]

Tips before taking loan on EMI

Check the EMI’s of all banks before tanking loan
Don’t extend your loan tenure just to reduce the EMI
Negotiate with your agent or loan providing institute when you are planning to take a big amount of loan
Pay your EMI on time
Make sure you have a good credit history and you are eligible for home loan before applying.
Do not expect from a sales person in a bank or the institute from where you are lending money to tech you how to use it. If you are taking a house loan then research for all the related expenses on your own and spend it accordingly.
And finally, collect all the documents after repaying your loan.

Taking loan is not a bad thing and it doesn’t carry a risk with it, but its only then when you manage it properly. If you have any doubts regarding this information please leave your query in the comment section.