Tag: Intermediate Level

Creating Wealth for Long Term through Equity

Posted on by Jagoinvestor

We are going to discuss today, a huge wealth creation by investing with discipline over long period of time. We often think that investing a small sum of money will not be able to generate huge Wealth and we need to invest huge amount of money.

wealth creation

Creating Wealth

Its obviously true that more money will create more wealth, but we are going to see today that we underestimate small savings and how small investments over a long period of time can generate fortunes.

How much wealth you can create, if you earn around $1000 /month (Rs.40,000 per month) and can invest 10% of that amount every month for next 30-35 yrs. I am assuming you are a 25 yrs old and retiring at the age of 60 (though i want to retire at 40). Total dependents are 3-4.

And monthly expenditure is Rs.25,000 ($600/month).

What kind of wealth can this person create?

Can he invest Rs 5000 ($125) in a diversified Equity Mutual fund per month till his retirement. I hope the answer can be YES

As we said that he is investing in Equities, What kind of return should we expect? 5% , 20% or 50%, but Wait … Equities are risky, it can be negative also !!! that’s very true … but People may not know that Equities are extremely risky in short term, but its almost not at all risky in long term, and if the long term = 35 yrs, then forget it, you can get some great returns.

Risk in Equities are inversely proportional to the investment tenure. Well that’s a different topic to talk about (And i will post an article on that soon , keeping an eye !!!) Just for the data, Indian Stock markets have given return of 17%+ CAGR return in 28 years, from 1979 (inception) to 2007. We are talking about Sensex.

So, to be safe we can easily consider 15% CAGR return in Long term (remember LONG TERM).

Coming to the point, It may happen that during initial years, our investor may face difficulty investing this much money considering, he may have other important things to take of and later he may have more responsibilities. But during is career life, his salary will also rise and then 5000 will be a small percentage of his salary.

So assuming he can do the investment we are proposing, what kind of retirement corpus he can build? Guesses?

I am sure most of the people will be thinking the following way:

He invested 5000 * 12 in a year, which is 60,000, and then he does it for 35 yrs , so he invests total of 60,000 * 35 = Rs 21,00,00 0 (21 lacs). And he will get some return of 15% every year. if we take 15% of this 21 lacs, it will be around 3,00,00, so total corpus = 24,000 and also as this is compounded , his interest will also keep growing at 15%, so it will be more than 24,00,000 , so lets take it 50,00,000. Fine …

Ok , let take 70,00,000 (70 lacs) to be safe. This is a calculation done not exactly by the proper annuity formula, but a workaround, which a general person can think of.

How much does he generate with this strategy

You can also look at my another article on Early investing and power of Compounding to get an idea about early investing and how compounding is a great tool. But keep going ahead if you are enjoying this article.

How to create wealth

So the question is What will be his corpus , can it be anywhere near to 70,00,000 . The answer is that his actual Wealth will be way beyond this amount. After doing the actual calculation i can see that it will come around 7.43 Crores (Rs 74 million) .

But how is it possible , such a big amount !!! .

That’s because of compounding power . The interest earns interest and that again earns interest and this keeps on going. Initially the interest earned is very small , but as the time passes , the amount keeps growing and the interest also grows at an unbelievable amount.

Can you believe that this investor will earn more than 1.04 Crores only in interest in his 35th year (last year) , more than 4 times the money he actually invested whole his life. That’s all possible because of systematic and consistent investing with out fail and because of Power of compounding.

That’s the reason why one of the greatest Scientist Albert Einstein said “Compound interest is the 8th wonder of the World”.

So it that all we are going to talk about today , NO !!! We have more to talk on this topic.

Why does this investor takes pain of investing that 5,000/month all this life. What if he invests just 10 yrs and leaves that money to grow for another 25 yrs. What if this is his plan till retirement.

The sudden thing which will come to your mind is that he invests for 35 yrs and created wealth of 7.43 crores , What if he just invests for 10 yrs .. it should be 10/35 * 7.43 crores = 2.12 Crores . Is that true ?

Will it actually be 2.12 Crores only. The answer is NO !!! . Then the question is how significantly different will his Wealth be in this case. The Answer is 5.88 Crores. Yes it will not be significantly less but just 21% less .

So Just by not investing for 71% tenure he actually gets 21% less money , that’s not a bad deal !!!

But wait , What if he wants that same 7.43 crores at the end , and still wants to invest for 10 yrs. the obvious way out is to invest more than his regular 5,000 per month . The question now is HOW MUCH MORE !!!

The answer is Rs 1420 more . Instead of 5,000 , he should invest Rs 6,420 per month for 10 yrs and then leave the money to grow for rest of 25 yrs. And he can generate wealth of Rs 7.43 Crores.

Watch this video to know how one can use Equity to create wealth over long term:

What we can learn from this

So there is a learning here and a very important thing to note , that more pain we take in the start , the better it is . In the initial years of career , its possible for people to invest more , as they have less responsibilities to handle and less dependents.

So it may be feasible for them to invest heavily in the initial phase of there career, which will benefit them for long term . Now see this person . Instead of investing 5,000 for whole of 35 yrs , If he chooses to take a little more pain in the initial 10 yrs and manages to invest Rs 1,420 more per month, then he can save investing for 25 yrs of his life and still can generate same Money.

One great question now !!!

What if our investor is ready to invest his 50% salary (20,000) per month for starting 2 yrs and then let it grow for rest 33 yrs. He is ready to heavily invest first 2 yrs of his career and do some sacrifices like not spending too much , no vacation , no fancy spending and all.

Can he still beat the target !!

Will he be able to generate the same Wealth for himself like in earlier examples !!

So here you go !!! , He will not only achieve the target , but exceed it.

His Wealth will be 9.24 Crores (Rs. 92.4 million) at the end of 35 yrs. I know that’s an Eye-opener . So now you know that the best time to invest was 5, 10 or 20 yrs ago , but if you missed it , don’t worry 🙂 . there is another golden chance and that’s NOW !!! .

please let me know what you feel about this article , that helps me to refine and write better articles.

Thanks, Happy Investing.

Note: The formula used for calculation is called Annuity. https://en.wikipedia.org/wiki/Annuity_(finance_theory) See formula under “Annuity Due” on this wiki page

Cost of Ignorance and it’s consequences on financial life with some real life experiences

Posted on by Jagoinvestor

There are two kind of losses

1. Loss of money because of wrong decisions
2. Loss of potential profit because of lack of knowledge or having wrong information (I like to call it loss)

cost of ignorance

I personally feel and realized most of the losses happen to people because of the second point. Today after so much of progress, India Personal Finances still has some very immature characteristics. Indians have one of the highest saving rates in World, but we fail to invest our hard money in the best way.

What happened because of lack of knowledge

– Every insurance agent told that insurance is important, but not the best product for a person which suits him/her. They made Insurance policy synonymous with an Investment product to our average Indian. They packaged those Money back and Endowment policies as must have products for any married person with family.

– People love numbers, they love to get back 30 lacs back by investing just 10 lacs in a 20 years. They were never told about inflation, about decreasing purchasing power of money. Hence they can figure out that 30 lacs after 20 years is less than today’s 10 lacs, so actually they are getting cheated (yes, i like to call that cheated)

– Ask people what is an ETF, FMP, STP or REMF? Its like asking people what is LIC in 1957-58 or asking some one what is Mutual funds in early 90’s. These are important financial products of future, but people are not able to get benefited because of no knowledge.

– People who invest for long term (5-10+ years) still invest in FD’s and bonds, I don’t say that its wrong, but they do it because they don’t know that equity is best for long term, they know there is risk but don’t know that it almost no risk if they are investing in Equity for 10+ years.

When it comes to personal finance, people are almost clue less … Every one wants high returns but without any risk of loss. Everyone has heard about mutual funds giving 40-50% CAGR in 2005-06-07, but not even few know how what role did there excellent management and stock picks played to generate those returns.

Let me tell you what happens when you don’t know a lot of things.

See some of Real life examples :

Example 1 –

One of my classmate has taken ULIP, she pays 25000 per year as premium … She didn’t knew that there are high allocation charges of 18-20% in initial years… She didn’t knew that she can switch her investments in other safe options in ULIP if markets are down …

On the top of that she is given an Insurance of 1.25 lacs (i am not sure how it helps with her insurance needs) …

Example 2 –

One of my friend took LIC policy and pays 60000 per Annam as premium, he heard that it will save him tax … he did a great job in choosing the policy, returns are good … Insurance is fine .. but when asked if he has any financial dependents, he was clueless… I am not sure why the hell he took insurance at all then …

Example 3 –

One of my friend had put 100% of his investments (around 1.4 lacs) in Equity (80% shares and rest in mutual funds in early 2007 … when i asked on what basis he has invested all his money in Equity .. he said he needed good returns because this money will be used for his brother education in another 2 yrs …

I told him that they are risky and more than his risk appetite … he ignored it, saying that his money is almost grown by 70% already and gave him decent returns which he expected …. then came Jan 2008 crash and now his total investments are worth 80,000-90,000, he had invested in small -cap companies which gives nightmares to even great investment guru’s …

Example 4 –

Lot of my friends have invested in Mutual funds in lump sum in Dec 2007 or Jan 2008 and didn’t take SIP instead of my telling them several time that SIP is the the systematic approach and will bring down there average cost … and returns in volatile markets …

All of them have 30-40% loss at the moment, but all those who invested through SIP have loss of around 10-12% only … .

Example 5 –

I know many who earn good money, have good risk appetite and long term financial goals to meet … but they invest in what? NSC and Money back policy of insurance schemes … Any one who is out of his/her mind and is totally insane will invest in NSC or KVP in today time …

They take money back Insurance policy of 3 lacs or 5 lacs for 25 yrs or 30 yrs … I wonder how will that 5 lacs help them in 2035 when average monthly expenses of a medium class family will be around 1 lacs/month … they pay hefty premium of 30k, 40k or 50k in today’s time to get back the kind of money back after 30 yrs which will just pay there 1 yrs expenses …

They do it because they cant see not getting money at the end if they survive for all the money they have paid … they stay away from Term insurance because they don’t get any thing in the last .. So what if for 20 lacs insurance for 25 yrs they just have to pay 4200 total every year … they don’t get anything at last .. so better not to take term insurance .. its not giving anything … that’s what they feel …

Whats the solution?

It takes Rs.30 to buy “Outlook Money” and Rs.20 for “Money Today” (or read online : https://moneytoday.digitaltoday.in/index.php?latn=1 ) and 5-6 hrs to read all of it .

Just Rs.100 and some hrs per month can help anyone save thousands or lacs (depending on there investments), but it takes discipline and regularity

How to evaluate Returns from Investments

Posted on by Jagoinvestor


Which return is better return, 40% or 30% ?

There is no doubt that 40% is more better return. But is it a right way to judge the return just by seeing the number. we ignore another important factor called as “RISK” involved. In most of the cases, people really don’t consider evaluating the return in relation to RISK taken to earn that kind of return.

Which is better?

1. 30% with High risk
2. 20% with moderate risk

In this case , 2nd is better than 1st , as the Return per unit of risk is better than the 1st case. (considering High risk is 3 units , and moderate is 2 and Low is 1 .

So the actual measure of return should be, Return per unit of risk

REAL RETURN = ABSOLUTE RETURN / RISK TAKEN

There are many balanced mutual funds which have given little less return than diversified equity funds , and hence can be called as much better investment tolls because there was much lower risk involved with them , in case there was any fall in markets , these mutual funds would have fallen less than equity funds. Many mutual funds advertise there products only on the basis of returns and don’t care to tell investors that there is high risk involved with the products.

If you are given 2000 for climbing a tree and 5000 for jumping from one building terrace to another , the first choice is much better. In that case you don’t go for the second option just looking at 5000.

If today all banks start giving 12-15% assured return on Bank deposits, Equities investments will fall to great extent , because bank deposits will have much better returns considering the risk involved.

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

Tax Treatment of Equity , Gold and Debt

Posted on by Jagoinvestor

Tax Treatment

Equity Mutual Funds and Shares

Short Term Capital Gain : If you sell it before 1 yr , the profit is called STCG and taxed at 15% (revised in 2008-09 budget) ,So if you make profit of 10,000 on shares or Equity mutual funds , you pay 1,500 as tax.

Long term Capital Gain : No tax

Other Points

– Dividend income from any kind of mutual funds are not taxable.

Profit from Sale of House or Land

Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at 20% on profit.

Your profit = Sale Price – (Cost price after adjusting indexation , as per the cost inflation index)

Long term capital gain tax can be saved by investing the capital gains in some other residential property or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years.

Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.

Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to your income and taxed accordingly.

Short term capital gains can set off against any LTCG or STCG within 8 yrs.

Other Points

– Capital Gains from Agricultural Lands are not taxable.

– A person holding more than one residential property would be liable to Wealth Tax on the market value of the second property.


Profit from Jewellery

Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .

Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)

Don’t know what is GOLD ETF ? Read this article , CLICK HERE

Profit from Fixed Deopsits , PPF , NSC

Fixed Deposit : Interest Earned added to the income and taxed accordingly.

PPF : Interest earned not taxable

NSC : Interest earned taxable

Things you didn’t knew

Posted on by Jagoinvestor

 

There are many things we hear and believe , but they are little different in reality, which helps if we know.

– Do you know that When you take an SIP for 6 months or 1 years or for any period , the first installment (which you make by cheque) is not counted for inside the tenure of your SIP. So if you take a SIP for 6 months , you make 6 payments other than your initial payment with cheque , so total is 7 payments.

– The short term capital gain period is 1 yr , means 365 days , but it does not work exactly that way , its 12th month other than your buying month. Means if you buy shares or MF on 12th May , 2008 and sell on 13th May , 209 it is still short term capital gain , to call it long term capital gain , it must see it after 12 months after May , 2008 (your month of buy) . which means you shall sell it on or after 1st June 2009.

– Suicide is also covered in Life Insurance after 1 yr of policy (atleast its there in my policy with SBI Life Insurance).

– ULIPS : The deductions availed under sec 80C is taken back if you surrender your ULIP before 5 yrs. If you surrender your policy in 4th or 5th year , then all hte premium paid till date will be added to your salary for that current year and you will have to pay tax on that too. ULIPS just put restriction on paying of premium fr the first 3 yrs, but offer tax benefit under 80C if you hold it for minimum 5 yrs.

– If you repay your housing loan by taking another loan , you can continue to claim tax benefit on the interest amount paid for new loan under sec 24.

– Tax deduction is available for the prepayment charges paid for the home loan .

– If you face any problem or defecieny in service from banks, you can complain at www.bankingombudsman.rbi.org.in same as

– Dividend distribution tax is levied on the Dividend which you recieve , and it also affects the fall in NAV . So NAV falls not just to the extent of the dividend declared , but also by the tax which mutual fund company pays to govt (12.5% on dividend + 2.5% surcharge also , under sec 115-O )


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

The impact of bad decisions on your wealth creation

Posted on by Jagoinvestor

“You only have to do a very few things right in your life, so as long as you don’t do too many things wrong.” – Warren Buffet. What should be your motive as an investor? – To earn great return on your investments with minimum risk, right?

bad decisions

We generally take good amount of risk to get more return, and many times we get it 🙂 … It might happen that if we make good profit 2 times , we make 1 loss also because of the high risk we take. And we think its fair getting the losses, and you are right if you think so. We cant get profit always, if we take risk we have to accept losses.

But is it a good strategy?

Its questionable, lets explore on this topic today. Lets try to find answer of a question, what is better?

1. Taking high risk for high return at the cost of losses some times.
2. Avoid getting losses at the cost of just moderate return and not great return.

Case Study :

– Robert do not understand much about investments, but still invests in high risk high return instruments like shares and risky mutual funds. He invests Rs.1,00,000 for 5 yrs and gets returns of 50%, -35%, 30%, -20% and 45% for 5 yrs.

– Ajay does not take much risk and invests in something which gives him better returns than conventional FD’s or PPF, but has risk component much lower than Robert case. he earns return of 8%, 17%, -10%, 20%, 15%.

Who has more money at the end?

Robert : 1,00,000 * (1 + .5) * (1 – .35) * (1+ .3) * (1- .2) * (1 + .45) = Rs.1,47,030

Ajay : 1,00,000 * (1 + .08 ) * (1+ .17) * (1 – .10) * (1.20) * (1 + .15) = Rs.1,56,940

Observation : A fixed deposit will give similar kind of returns 1,00,000 * (1 + 8.5/100) ^ 5 = Rs.1,50,365

Why did this happen?

Getting 0% profit overall is better than getting X % loss after getting X% profit. if you get 40% profit and then 40% loss on your investment of 1,00,000, it will first become 1,40,000 after profit and then it will become 1,40,000 * (1 – .40) = 1,40,000 * .6 = 84,000, which is a loss of 16%.

So even if you get 40% profit, a loss of 28.57% is enough to wipe out that whole profit earned.

If Robert never got those losses and only profit, his final amount would be Rs.2,82,750. Just loss of 35% and 20% ate way most of it. On the other hand Ajay, who put more efforts on avoiding losses on the cost of getting less return way rewarded more at the end.

The return percentage required to cover the losses is more than then percentage loss.

Watch this video by Harsh Goela. In his talk, Harsh Goela talks about the stigma surrounding stock markets. He clarifies how it is different from gambling and how proper knowledge and avoiding reckless indulgence can yield profitable results.

Learning and Moral

What do we learn from this article and the examples above?

The important part of investments are not earning great returns but taking measures to avoid losses. Earning high returns must be secondary goal, the major goal must be to avoid losses at any cost though we have to compromise on moderate returns. Because one loss is enough to wipe out major portion of your profits and the hard work you take to earn great returns.

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

Difference between Growth and DIvidend option in mutual funds

Posted on by Jagoinvestor

People are confused , really confused …

There are 3 Mutual Funds Options (Growth , dividend , dividend Re-investment) and we will discuss those today. There are lot of misconceptions and myths which add to confusion in the world of mutual funds and agents use it against investors and make them fool …

Growth vs Dividend Option in Mutual Funds

Different Options in Mutual funds

1. Growth Option

Under this option you get the units at the time of buying and you have same number of units till the end. The NAV keeps changing according to performance.

2. Dividend Option

This is the most misunderstood option in mutual fund.

Dividend option in mutual funds means that you will be repaid some amount of your investments every year and it will be called as “dividends”, this helps those people who want some regular returns every year from their investments in mutual funds.

People think that dividend is something extra which they receive other then their investments which is not true 🙂

Dividend is declared per unit basis, if you have 100 units and MF declares dividend Rs.4 per unit, you receive Rs.400, and you think that your earlier investments have the same worth, where as it decreases by the amount you receive as dividend, because its paid out of your investments only.

The NAV of the unit goes down after paying dividend proportionately.

Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100, you will have 1000 units. dividend declared : Rs 20 per unit

How it works :

You will get Rs 20,000 and then your remaining worth will be Rs 80,000 and as you have 1000 units, the NAV will go down to 80. So your actual worth is same as Rs 1 lac. The only advantage to you is that you are getting liquidity with your investments and getting regular cash every year, unlike growth option.

Agents generally lure investors to invest in NFO’s claiming that if company declared dividends, they will get more dividend compared to existing funds as they will have more units, Which is nothing but a idiotic myth 🙂

3. Dividend reinvestment

In this option ,the step is as follows

  • Re-adjust the NAV assuming that dividend is paid.
  • After that buy more units of same MF with that dividend money and allot it. So ultimately the number of units increases and the NAV goes down. In this case dividend money is not given to the investor but re-invested in the same scheme.

Example : Let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs.100, you will have 1000 units. dividend declared : Rs.20 per unit

How it works :

Your dividend will be Rs.20,000 , and NAV will come down to Rs.80 like it happened above. Now this 20,000 will be re-invested in same mutual fund and you will get extra 250 units (20000/80).

Your Total units = 1250
NAV = Rs.80

Worth = 1250 * 80 = 1,00,000

Which one is better Dividend or Growth?

It depends. There is no thumb rule to decide which one is better then the other, it depends on the situation and your needs.

Watch the video to learn more about growth and dividend option:

When is Growth Option better?

If you are a person who earns well and does not need regular money back from your investment and if you are looking at long term investments then growth option is best for you because your investments gets compounded, which does not happen on the dividend part in dividend option as it goes back to investor and its never part of future growth.

When is Dividend Option better?

If you are a person who need regular money every year from investments for some purpose, It may happen that you have more responsibilities and more dependents and if any small money which you get extra every year is helpful to you , in that case you can go for dividend option.

Conclusion : Different options in mutual funds are for different types of investors, before investing just see what do you want from your investments and take appropriate option.

Returns in long term from Dividend and Growth :

Below is an example which shows the returns from similar funds with growth and dividend options and there performance over 3 years.

options

 

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

All about TAX in 2008

Posted on by Jagoinvestor

There is just one word which can describe the year 2008-2009 tax structure … GREAT. This article will tell you everything about tax in 2008. Following things will be discussed :

1. Tax Slab in 2008 for salaried employees

2. How much will you save?

The exemption limit for the year 2008 is 1.5 lacs, which means that if your taxable income is upto 1.5 lacs, you don’t pay any tax.

income tax

What is Taxable Income?

The pay which you get has many components, like HRA, conveyance allowance and others.

Out of this income, some things are deductible on your hand and after deducting you arrive at an amount called Taxable income, on which you have to pay income tax.

Taxable Income = Your Gross Salary – (HRA) – (Investments under Sec 80 C) – (Conveyance allowance) – (Health insurance Premium, Sec 80D) and some more things which you may claim.

The slab for the year 2008-09 is as follows:

Exemption Limit for Men = 1.5 lacs
The Exemption Limit for Women = 1.8 lacs
Exemption limit for Senior Citizens = 2.25 lacs

3% Education cess also on the tax amount after tax and surcharge (if any)

What is surcharge?

* If salary is above 10 lacs, a 10% surcharge will also be applicable.

Example : Ajay earns Rs 14 lacs

Total Income (14 lac ) – amount under sec 80c (1 lac) – HRA (Rs 70k , for example) – Conveyence allowance (9,600 , 800*12) – health Insurance (10k , max 15k) under sec 80D (its seperate from sec 80C) = 14 lacs – 1,94,800 = 12,05,200

Now lets do tax calculation :

0 – 1.5 : 0
1.5 – 3 : 15,000 (@ 10%)
3 – 5 : 40,000 (@ 20%)
5+ : 2,11,560 (@ 30%)

= 2,66,560 + surcharge (10% of this amount)
= 2,66,560 + 26,656
= 2,93,216

Now education cess will also be applied : @ 3% , so 2,93,216 + 3%
= 2,93,216 + 8796.48
= Rs. 302012.48

This is the total tax payable.

Note: education cess is charged after surcharge is applied and not before.

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

4 reasons why you should consider gold as an investment option for next 2 years

Posted on by Jagoinvestor

There are many reasons why we shall look beyond conventional Fixed Deposits, PPF and high growth Shares and Mutual Funds. Gold is always seen as a thing to own and only for consuming as ornaments, for jewelry but seldom as an investment purpose, in fact silver also for that matter.

But now there are many reasons to invest in GOLD, just like people invest in Shares, Mutual funds, PPF, NSC, and Fixed Deposits.

gold investment

Reason 1: Stock Markets are becoming risky and uncertain

Stock Markets are in Bad shape for at least short or medium-term at least. No one knows whats going to happen in 6 months or 1 year or 2 years. Long term may be good but still, a medium-term perspective is not very clear.

Not only the Stock Market but the whole of financial Markets are uncertain if you consider problems like Inflation, dip in projected GDP growth of economy, etc.

Reason 2: It acts like a hedge towards Inflation and Foreign currency

As the Indian currency is gaining against Dollar and other currencies, Rupees is set to become more strong in the coming years. Gold has an inverse relation with Dollar.

https://news.goldseek.com/SpeculativeInvestor/1171382460.php

In the future as Dollar weakens, GOLD will become more strong.

Reason 3: Its a relatively less known investment option and has high potential in future

Looking at history, and every time we see that an investment option starts becoming popular and by the time most people know about it, it already gives most of its returns and becomes a talk of past.

GOLD has started gaining attention as an investment option and becoming popular and still in its middle stage, if not early.

So it’s the time to ride the boat.

Reason 4: Future High Demand and less supply

In future gold is going to in high demand and it’s already in less supply, so according to the demand-supply logic, the prices are bound to go up in the near future. Indians account for 23% of the world’s total annual consumption and overall global demand has increased 15% year on year

Gold demands were an all-time high in 2007 and expected to increase in the coming years due to mismatch in demand and supply.

Reason 5: More Diversification

Before some time back, diversification of portfolio was limited to Equity, Debt and Real Estate and some cash, so that your risk is spread across different class of assets. GOLD has evolved as another asset class and not it help in diversifying your portfolio.

What’s the best way to invest in GOLD?

It really depends on the person and situation and the motive of investment.

ne can invest in GOLD directly by buying gold in physical form like jewelry, gold biscuits, gold bars. It all of these require some maintenance and some problems are associated with investing in a physical format like :

  • No surety of purity, you can be sure that you got the same purity as promised.
  • Preserving cost: if you have physical gold, you will invest in bank locker etc for secure storage.
  • Risk of theft, mishandling, etc.

To avoid all these problems, we have an alternative way of investing in GOLD, called Gold ETF’s, read it next …

Read about Gold Funds (Click here)

What is GOLD ETF’s

Gold ETF’s are a special type of ETF’s (Exchange traded funds), ETF are not covered here, but view them as open ended mutual funds, which are traded on stock exchange just like normal stocks. You can buy units on Stock Exchange, each unit is equivalent to one gram of gold or .5 grams of gold.

So if you want to invest in 100 grams of gold, you can buy 100 units of a GOLD ETF from the stock exchange, you can buy it just like any share from the stock exchange.

gold ETF’s price changes real-time, as they are traded on the stock exchange like shares.

Watch this video to know why there will be an increase in gold investment in upcoming years:

In India currently, there are Five Gold ETF’s.

– Benchmark Gold ETF (Stock Code on NSE/BSE: GOLDEN) (the first one in the country)
– UTI Gold ETF (Stock Code on NSE/BSE: UTGOLD)

and other 3 from Reliance, Quantum and Kotak listed on NSE.

Gold has returned 38% in the last 1 year and 170% in the last 5 years (absolute). And it looks great in the future.

You can easily enter and exit from GOLD ETF’s unlike physical gold.

How investing in Gold ETF’s scores over Physical gold like Bars or jewellery?

Comparison of GOLD ETF’s vs GOLD BARS vs Jewelry

Consider you are investing Rs.1 Lacs in Gold, there are 4 parameters to judge.

If you purchase Them

– Jewellery: Making charges of 15-20%
– Gold Bar: 10% to 20% mark up charges by banks.
– Gold ETF : 1.5-2.5% entry load

If you Sell

– Jewellery: 10% – 20% is lost due to Purity issues.
– Gold Bar: Banks do not take it back, so the premium paid at the time of purchase is written off.
– Gold ETF: Brokerage of 1% or even less.

Maintenance Charges

– Jewellery: Insurance charges and locker charges (if you put it in the locker)
– Gold Bar: Insurance charges and locker charges (if you put it in locker)
– Gold ETF : 1.5 – 2.5 %

Tax Implications

– Jewellery: Long term capital gain of 20%, but after 3 years. 1% wealth tax
– Gold Bar: Long term capital gain of 20%, but after 3 years. 1% wealth tax
– Gold ETF: Long term Capital tax of 20%, but after 1 year. No wealth tax

Note: Gold is taxed at 30% if held for less than 1 year in any format.

So on all these 4 scenarios, GOLD ETF’s score heavily over other means of investing in GOLD.

To read more on why gold is a must buy now and how silver is much better than gold, read https://silverstockreport.com/

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

The importance of Power of Compound interest and Early Investing

Posted on by Jagoinvestor

This post talks about the importance of Investing early in life and do not get late at all. Also it shows the power of compound interest and regular investing.

When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .

Power of compound interest

For Example:

Suppose you start in 2008 and want to save for retirement and If regularly invest 1 lacs every year at 15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if you do late for 2 years and start in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs. This 58 Lacks is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don’t get benefit of compounding.

Lets see two Case studies and there results of early investing:

CASE STUDY 1

Robert and Ajay start career same time at age 23

Case 1 (Ajay) :

  • Understand the importance of investing Early, enjoys some time and then …
  • Start investing early (at 25) and invests Rs 50,000 every year.
  • Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is annuity , don’t confuse with Compound interest 🙂 )
  • Stops after that and doesn’t invest extra money till he is 65 , he just leaves that 7.97 lacks in investment and that keeps growing.
  • when he is 65 , he has Rs 1 Crore 40 Lacs 🙂

Case 2 (Robert):

  • Spends a lot and doesn’t believe in investing early, and when he is 35 he starts investing for next 30 years he regularly invests 50,000 till he is 65.
  • Assuming the same return of 10% per year.
  • He has only 82.2 lacs 🙁
  • Even after saving for extra 20 years Robert has 43% less than Ajay .
    Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i

Ref : https://en.wikipedia.org/wiki/Annuity_(finance_theory)

Watch this video to learn the power of compounding:

CASE STUDY 2

After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert is extra smart and Ajay is a Software Engineer.

Both are 25 and want to retire at 60 , both earn good money … (both can invest 1 lac per/year) … assuming return at 12% per/Annam …

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good amount and he just keep that money invested till he retires …, he can invest for another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year …

Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years , he thinks lets enjoy some years .

  • Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year … He sees that Robert has stopped investing now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing …
  • Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he wants to have more money than Robert at the end.

Results at 12% return

  • Case 2.1 : Ajay get how much ??
    – 66 lacs
  • Case 2.2 Ajay gets ??
    – 1.64 crore

And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years

– 1.72 crores !!

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