Posted on

Are you making the best use of your bonus?

Ajay and Vijay are two IT professionals working for the same firm. Having completed one year in office, they are excited about the performance bonus that they are going to receive. Both of them worked really hard throughout the year and it is time they reap the benefits of their hard work.

On one such anxious day, they were hanging out in their break out zone and discussing the very obvious topic – their upcoming bonuses!

Ajay:  I just can’t wait for the year-end bonus. I have so many things planned once I receive it.

Vijay: Really? I have a couple of things in my list too. Seems like we share common interests. What is it that you have planned?

Ajay: I am going to buy a Macbook Air for myself. It has the most amazing features. I also planto  get my brother the new Play Station he has been craving for.

Vijay: Oh okay, so you intend to spend your entire bonus on these luxury items. Hmm. I was, however, planning on something different.

Ajay: (seemingly confused) what else can you possibly plan?

Vijay: I want to use my bonus to plan my finances better. My topmost priorities are:

1) Repay debts where interest is high

I have a personal loan on which I am paying 14% interest. It is leading to high interest expense and zero tax advantage. I cannot enjoy luxuries till I have such a high interest liability due. So, I would like to repay that first.

2) Build an Emergency Fund

Normally, an emergency fund is not something that should be made after receiving the bonus but since I have not built one so far, I will do it with a part of my bonus which will ideally be 4-5 times my monthly expenses. I will park this amount in a short term debt fund.

3) Invest for long term goals

I will park a portion of my bonus in a liquid fund and start a monthly investment into an equity fund from there. This will help me create wealth over the long run ad simultaneously earn modest returns in the liquid fund.

4) Spend on what’s needed, not on what’s wanted

I want to have a clear distinction between our needs and our wants. While everyone likes to spend money based on their interest, I want to be careful about not splurging it all away on unnecessary items.

Ajay: You seem to be very adept at money management my friend. I think I am having a change of mind now. How do I plan my bonus allocation better?

Vijay: Consult an expert financial advisor about how should you best allocate your bonus.  Everyone has different goals and preferences and a plan should be devised accordingly.

Ajay: Indeed. Thank you so much for delivering this mantra to me: spend wisely, save judiciously and invest smartly!!

How do we help?

At CAGRfunds, we help you devise a suitable investment plan for your bonus such that it contributes to your long term wealth creation.

If you have received your bonus and do not know how to make the best use of it, comment on this post or whatsapp us on +91 97693 56440. We shall be happy to help!

Posted on

Stand out from the crowd while following the herd

If you were standing at the crossroads, in a new city, unsure of which direction to take and you observe 9 out of 10 people moving towards the left, isn’t it likely you will follow the more numerous group? This is an illustration of the herd mentality that we are all prone to, especially in unfamiliar situations. “When in doubt, play safe”, is the philosophy that drives this behavior. Ever wondered why this happens?

1) Social Acceptance

It is natural for us to crave acceptance in a group and wish not to be perceived as someone who goes against the crowd. This social pressure often compels us to choose options we would otherwise not have considered.

2) The Ad Populum Fallacy

We are ensnared by this fallacy when we happen to be unclear about the choices to opt for. Believing that we lack some information that others have access to, we choose to endorse the choices of those others, even if the preference may appear irrational at first. We convince ourselves that it is unlikely that so many people can be wrong simultaneously.

If many believe in a particular outcome, the chances of them being correct are high, isn’t it?

This may or may not be true. ‘Argumentum ad Verecundiam’ or ‘Argument from Authority’ is also sometimes termed ‘Appeal to False Authority’ or ‘Appeal to Unqualified Authority’. Argument from authority illustrates a statement that is authenticated by expert opinion. The latter two terms refer to positions that are adopted on the basis of hearsay. We often encounter hearsay in stock markets. Millions of people trade in equity stocks based on “tips” they receive from friends or relatives and many end up burning their fingers.

The inclination of investors, to follow the herd instinct is rooted in the quest for the latest trends in the financial markets. Which mutual fund scheme is fetching the greatest returns or which scheme is a part of some top investor’s portfolio? Did equity outperform bonds in the financial year or not? Based on the answers to such questions, investors switch back and forth rapidly, without realizing that the cost involved in such a process is going to eat into their profits, if at all they make any.

How do we avoid such behavior?

Should investors stop looking at trends and suggestions? It will be wrong to eliminate networking altogether. Research and meticulously acquired expertise are the two pillars, which serve to neutralize the risk of following the crowd.

This adverse impact of herd behavior is most visibly apparent in the realm of financial markets. An investor needs to overcome the fear of isolation and drive innovative investment strategy. Towards this end, he must either gain the expertise to manage his investments with acumen or take the help of a reliable advisor, who can guide him.

Posted on

Everything that you wanted to know about an SIP

SIP or Systematic Investment Plan – A term which has off late been doing the rounds in the world of investing. Every financial advisor you meet will recommend a few SIPs to you. Do you often feel bogged down by the what(s), why(s) and how(s) of these SIPs? Read on to find out everything you need to know about SIPs before you move on to start one.

  1. Mode of investment and not a fund: SIPs are a mode of investment and not the fund or the instrument where you invest. Therefore SIPs don’t represent any asset class. They are a way of investing in any of the asset classes. In other words, they are more of an approach to investing.
  2. Defined periodic instalments: As the term indicates, SIPs are defined instalments which get invested on a pre decided date every month or quarter. For example, you can decide that Rs. 10,000 should get invested on the 10th of every month.
  3. ECS / Deducted directly from bank: Every SIP application is accompanied by a NACH mandate also known as an ECS mandate. By signing the mandate you authorize your bank to debit the pre decided amount on the specified date. This means that you do not need to put a separate transaction every month to make your investment. For example, when you sign the mandate, your bank automatically debits Rs. 10,000 on the 10th of every month and this gets invested without any action on your part. At CAGRfunds, we have introduced the concept of 1 mandate, which means you do not need to sign separate mandates for separate SIPs. One mandate for any number of SIPs across any number of mutual funds.
  1. Pre decided funds: When you make an application for registering a SIP, you also decide the funds where the investment shall happen every month or quarter. O every month, Rs. 10,000 gets automatically deducted from your bank account and gets invested in the fund you had selected.
  2. Start date and end date: You can choose the start date and end date of your SIP. Most funds have a criteria for minimum number of instalments (wither 6 or 12). However, having a perpetual SIP is beneficial for those who want to create wealth in the long run and want to follow a disciplined approach for the same.
  3. Any number of SIPs: You can have any number of SIPs. Each SIP is for a particular fund that you decide and hence you can have as many SIPs as the number of funds you decide to invest in.
  4. ELSS SIP: Taxation is a necessary evil and none of us should leave an opportunity to save our taxes. Section 80c of the IT Act gives us a benefit of Rs. 1,50,000 which we can deduct from our taxable income. Some of us who are more aware and believe in the potential of wealth creation through equity investment, choose to invest in ELSS funds (Tax saving mutual funds). However, very few of us choose the SIP route. ELSS investments if made through SIPs, helps reduce the risk arising out of market volatility to some extent. For example, you need to invest Rs. 60,000 to cover your 80C investments and you choose to invest in ELSS funds. You should invest Rs. 5,000 every month over a period of 12 months rather than invest Rs. 60,000 as a lump sum investment at one go.

How do we help?

At CAGRfunds, we help you with all your financial queries. Whether it is about a SIP or otherwise, we promise to give an answer to each one of them. For any query, post a comment to this article. Or whatsapp us on +91 9769356440

Posted on

As they hit the final IPL shot, let us take home a few key learnings!

India loves nothing more than its cricket. And cricket is best epitomized in the all exciting and our very own Indian Premier League. However, if we spare a thought, IPL is not just a game. The learnings that we can derive from IPL are applicable in multiple facets of life.

Let us see how you can takeaway 5 things that will help us manage your money better.

1. Balance your portfolio

T20 as a sport demonstrates how a team cannot harness dependency on a single player. A winning team is a combination of the right mix of bowlers, batsmen and all-rounders.

Likewise, a portfolio which is diversified across various asset classes is always preferable over one which focuses on a single asset class. Imagine you invest all your savings in that house you had always dreamt of. While you now own the place you stay in, you don’t know how to fund the medical emergency that has suddenly cropped up in the family. Hence, it is essential that you map your investments to various goals and create a balanced portfolio.

2. Start planning early

IPL teams start wracking their brains right from the day they have to pick their players: which players should be retained, what would be the best combination in the given budget, is the value of a player worth his cost?

Similarly, an early planning for investing is always worthwhile. Not only does it give us better control over our finances but also gives us substantial time to plan for our goals. It is therefore important to understand every step in financial planning before you actually start investing.

3. What’s hyped isn’t always the best

IPL-1 is a great reflection of the famous catchphrase ‘all that glitters is not gold’. With their multi-million dollar wallets, pundits betted on teams like Mumbai Indians and Delhi Daredevils. The season, however, ended with the shoestring-budgeted Rajasthan Royals taking the trophy home. People thought that a bigger budget meant winning the trophy. But if only it was that simple!

Hype can often be misleading. We often tend to fall prey to herd mentality. However, it is of utmost criticality that you decipher facts yourself and look at all the important statistics with the help of an expert.

4. Keep your calm: Don’t quit on a winning strategy

IPL-2015 – a case in point. Mumbai Indians lost the first four matches of the season and were at the bottom of the table. But they knew they had a winning mix. They chose to stick to their guns and treaded with caution and patience. Result – They brought the trophy back home.

So, if you know that you have a winning portfolio or a winning strategy, don’t quit! Don’t be bogged down by short term fluctuations and focus on the long term.

5. Some advice along the way always pays off

We have often seen the cricketing maestros contributing their bit in mentoring and guiding the players off the field.

Financial planning which is a highly knowledge driven domain, is better done when planned along with a financial advisor. While your current knowledge may seem to be sufficient and adequate, you might not be as aware of the latest developments or specific implications of different instruments and investment avenues. It therefore always pays off to consult an advisor before you take that big leap with your hard earned money.