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www.wealth.economictimes.com | Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune | November 4-10, 2013 | 32 pages | ` 7

11
MUTUAL FUNDS

13
FINANCIAL PLANNING

ALSO INSIDE
Financial planning PAGE 14 Be a Financial Wizard and win `5,000 PAGE 32

New high, cheap stocks

While the Sensex is scaling new peaks, some stocks are still quoting below their 2008 lows. Find out about the three stocks you can consider buying.

Did you miss these outperformers?

Despite churning out good returns, some small-sized funds have not attracted the attention of investors.

Will a nominee inherit your assets?

Find out about the investments that will automatically be passed on to a nominee and those that can only be claimed by legal heirs.

PLUS
The weeks best stocks, loans, deposits and insurance.

Making your first investment can be confusing, especially when uncertainty ranges across asset classes. Heres how to take the first step. PAGE 2

HOW DO FIRMS SCORE ON GOVERNANCE?

PAGE 16

The Economic Times Wealth is available at an invitation price of `7/issue. To book your copy*, contact your newspaper vendor or call 022-39898090; Email: crm.mumbai@timesgroup.com; SMS ETWS to 58888

02

The Economic Times Wealth, November 4-10, 2013

Cover Story

YOUR FIRST
First-time investors often find it difficult to choose the right option. Sanket Dhanorkar helps you navigate the unchartered waters.

INVESTMENT
I
t is not an easy time to be an investor. Even though you may be spoilt for choice, there is a high degree of volatility across asset classes. This means that one has to be extra cautious while choosing investments. Whether you are opting for equity, fixed income, property or gold, the current environment will punish you for rash or untimely decisions. For those who have just started saving, taking the initial steps into the world of investing is even more daunting. Its the same for anyone exploring a new asset class. Often enough, initial investments are done without proper planning, homework or understanding ones requirements. Prasenjit Paul from Kolkata recalls his maiden steps in the stock market. I started intra-day trading without adequate knowledge and suffered a huge loss by taking deliveries; the value of my portfolio reduced by 30-40%. I couldnt use the stop-loss arrangement and the losses kept increasing, says the 22-yearold. Paul learnt from his mistakes quickly and today runs a stock advisory firm. For first-time investors, identifying the right initial investment can be a challenge. Where should I begin? Should I play safe and invest in a fixed-income instrument that offers guaranteed returns? Should I go for high-growth investments like stocks or equity mutual funds? You have to be careful with your choice to ensure that you begin on a solid footing and build a stable foundation. It should provide a sense of confidence as you move ahead. As Lao Tzu, the Chinese philosopher, said, A journey of a thousand miles begins with a single step. In the following pages, we offer you a helping hand as you take your first step.

Cover Story

The Economic Times Wealth, November 4-10, 2013

03

EQUITY Q
M
any of us choose to stay away from the stock market because of the risky nature of such investments. For some, it is akin to gambling in a casino. However, we also hear of stories where people have made fortunes from stocks. Some of your friends, relatives or acquaintances will recount their experiences of doubling or trebling their money within a short span of time. Naturally, this gets you thinking. Should I try my hand at the stocks game? How can I make handsome gains from equities? More often than not, you take the plunge. You open a demat and trading account, and make your initial purchasepossibly a strong blue-chip company that you admire, or an emerging company you have heard a lot about. Either way, this may not be the ideal route for everyone.

Avoid investing large amounts at one go. Buy small quantities at regular intervals and try to get a feel of the market.

Invest only what you can afford to lose. Avoid trying to time your entry.

Even professional investors find it difficult to catch a stock at its lowest price. Buy a stock in which you have strong conviction.

TOP RULES TO FOLLOW

Ignore tips and hot trends.

Often, first investments are driven by friendly tips or prevailing hot trends. Traders love beginners as they chase the hot trends and drive prices higher. However, the traders bail out, leaving beginners in the lurch.

Have realistic expectations of returns. Dont succumb to emotions.

Stocks can create enormous wealth, but dont expect to hit the jackpot early on. You might not earn good returns initially and may, in fact, suffer losses.

Stocks are inherently volatile. Even a good stock can fall if the market turns bearish. Dont let fear and greed drive your investment decisions.

Prasenjit Paul, 22, Kolkata

WHY TO INVEST If you have made up your mind to invest in stocks, make sure you are doing so for the right reasons. If you are looking to make quick gains and exit, then you are setting yourself up for long-term pain. Unless you are able to time your entry impeccably, you cannot earn good returns consistently. Equity is an asset class that rewards you the most if you stay invested for a reasonably long period of time. It is probably the only asset class that has the potential to beat inflation over the years. It is crucial that investors come equipped with the right attitude and understand the risks involved. Hemant Rustagi, CEO, Wiseinvest Advisors, urges first-time stock investors not to treat it as a source of excitement. Stock investing is not a gamble. It is a serious investment opportunity, he says. WHERE TO BEGIN Experts believe that first-time equity investors need to test the waters before jumping into the deep end of the pool. Mutual funds are the ideal starting point to do so as these take away the problem of picking the stocks yourself. Neeraj Chauhan, CEO, Financial Mall, insists, For those just starting out, it is better to leave stock-picking to a professional fund manager rather than doing so on ones own. Within mutual funds, first-time equity investors can opt for hybrid funds to get a taste of equities. Debt-oriented hybrid funds typically invest a chunk of the money in safe debt instruments, with a dash of equity thrown in. If you do not know how much risk or volatility you can handle, an equity-oriented balanced fund will take you on a learning curve. Srikant Meenakshi, director, FundsIndia, says, Those who are easily discouraged by market

He started investing in stocks at the age of 19 and quickly realised the folly of trading without adequate knowledge. After the initial experience of making losses, he never indulged in trading and only focused on investing.

Research extensively and try to learn from your mistakes. Dont follow hot tips blindly from any source.

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The Economic Times Wealth, November 4-10, 2013

Cover Story
A `25 share is cheaper than a `2,500 share. A lower PE stock is better than a higher PE stock. A stock trading at a 52-week low is cheap.
The low-priced share may be costlier in terms of valuation if its profits are falling and there is poor revenue visibility.

volatility, but want a flavour of equity in their portfolio, should consider a balanced fund. While equity investments can yield spectacular returns, they can also lose money very fast. For a first-time investor, a dramatic fall in the stock market may be tough to handle. The debt portion of his investment will cushion the impact. Those who can take on some risk can even opt for a pure diversified equity fund or an ETF. After you get the hang of how the equity market is influencing the funds returns and are comfortable with it, you can try your hand at investing in stocks on your own. However, if you are keen to dabble in stocks right at the outset, be ready for some heartburn. The stock that you zero in on is not important. The

first few picks will give you an understanding of the market, as you track the share price movement and the news flow around the companies. Even if you make mistakes, you will learn from the experience. So, dont lose heart if you burn your fingers initially. However, make sure you put in only small sums that you are happy to experiment with. If your initial stock picks turn out to be winners, dont be tempted to throw in your entire money in search of more such gains. The market has a way of bringing you down just when you start to think that only the sky is the limit for your stock picking genius. If you are going to invest in stocks on your own, make sure you follow some basic investing rules.

MYTHS OF STOCK INVESTING

Dont look at the PE multiple in isolation. A company with a higher earnings growth and better operating performance would be justified a higher valuation.

What goes down must come up.

Even a growing company may see its stock price fall if the market turns bearish. On the other hand, a company whose shares have been beaten down may never rise again, especially if it is poorly managed.

Index stocks are the most reliable.

Stocks are in the indices merely because they are the largest by market capitalisation and are widely traded. Every stock is exposed to the same forces and sentiments that govern the broader markets.

Just because the price is low does not mean the stock is a bargain. The company might have problems, which led to its shares being battered. Invest only if the companys fundamentals are intact.

DEBT
AMRENDRA JHA

ost people prefer to play it safe while making their first investments. They usually put their first savings in a fixed deposit with their bank. Debt instruments offer assured returns, are easy to understand and do not require as much homework as equities or real estate. This asset class offers multiple options to the investor, each with its own unique features. This may lead to confusion for the newbie investor. WHY TO INVEST Fixed-income products are the cornerstone of an individuals investment portfolio. Whether it is the humble bank fixed deposit, the Public Provident Fund or a government bond, these provide stability to your portfolio. Experts concur that any asset allocation plan should include fixed income or debt. Pankaaj Maalde, financial planner, Apnapaisa.com, says, Every portfolio should have an allocation to debt to ensure a solid foundation. Even the most sophisticated, risk-savvy investors would do well to put aside a part of their money in debt, which would help protect their portfolios from a sudden, drastic fall in the riskier asset classes. WHERE TO BEGIN By investing in a safe fixed-income option, you build a foundation for your portfolio. However, you should be clear about what you want. Are you seeking income, safety or growth? If you are looking for a constant stream of money and the preservation of capital, then a simple fixed deposit that pays interest every month or quarter makes sense. If you do not need the regular inflow, choose the cumulative option of the fixed deposit or go for NSCs. The PPF is a longterm investment that locks up your money for 15 years. Simply leaving your money in safe, fixed-income instruments is not a

productive long-term solution. You will be lucky if you beat inflation with these investments. The tax incidence is another important point to consider. Chauhan argues, For those in the higher tax brackets, it makes more sense to invest in instruments that give higher post-tax returns. For those in the lowest tax bracket, investment in fixed deposits is a good idea. However, to get more out of fixed income, you will need to move a bit higher up the risk ladder. Bond funds and FMPs provide a good alternative to traditional instruments as these can offer decent capital appreciation, even though the returns are not guaranteed. Bond funds have been known to provide double-digit returns in good times. Be sceptical of high-yielding NCDs and corporate bonds, though. They offer higher returns than most debt products, but carry a higher default risk.

Be clear how you will deploy the money when the instrument matures and you get the money back along with the interest or capital gain.

Consider the reinvestment risk.

You cant lose money in debt products.

The interest from FDs and NCDs is taxed at the rate applicable to your income slab. The income from debt funds is treated as capital gain if the investment is for over a year.

Debt products are not risk-free. The company or bank in which you invest can go bust. Also, taxes and inflation can leave you with negative real returns.

Check the tax efficiency of investment.

TOP RULES TO FOLLOW

MYTHS OF DEBT INVESTING

When rates are rising, funds can invest in high-yield bonds and shift to more stable shortterm bonds.

Fixed income is only for retirees.

Even young investors should invest in debt products to provide a solid foundation for their financial portfolios.

Match investments with cash-flow requirements. If you need money in three years, invest in an FD or FMP. If you can wait, go for instruments with longer terms.

Match investments with cashflow needs.

Avoid bond funds when interest rates rise.

Cover Story

The Economic Times Wealth, November 4-10, 2013

05

GOLD
T
he shiny yellow metal holds a special place in the hearts of Indian investors. Much of this sentimental attachment is towards physical gold, mostly in the form of jewellery. As such, gold was not seen as an investment avenue until recently. With gold prices going through a multi-year rally, investors have started looking at the metal as another asset class in their portfolio. However, many people have given undue importance to gold as an investment. First-time investors are at risk of putting their savings in the asset for all the wrong reasons. WHY TO INVEST Gold is seen as one asset whose prices can never go down. If you have also been led to believe this, you need a reality check. True, gold provides a good hiding place when there is lack of faith in the global monetary system or when political turmoil is widespread. However, this doesnt make it immune to a sell-off. Only recently, we saw gold prices tank by more than 20% in a matter of weeks. The reason to invest in gold, therefore, should be because it has little correlation with other asset classes, such as equities and debt, which helps diversify the portfolio. Jayant Manglik, president, retail distribution, Religare Broking, agrees. Gold adds an element of diversification to the portfolio, he says. WHERE TO BEGIN Make a clear distinction about buying gold for consumption purposes or as an investment, insists Maalde. If you are considering your first investment in gold, it makes sense to invest in paper gold, which is a more convenient way of buying it. You do not have to hold it in the physical form, so you neednt worry about its storage and safety. Buying physical gold entails high making charges, with concerns about its purity. On the other hand, gold ETFs offer investors the triple benefits of security, convenience and liquidity. Investors also dont have to worry about the purity of gold as these funds are required to hold an equivalent quantity of standard gold bullion of 99.5% purity. Unlike physical gold, investors are assured transparency in pricing as there are no making charges or premium involved, and units are traded on the exchange. Investors can liquidate their holdings quickly at the prevailing market prices. You would need a trading account and a demat account to invest in gold ETFs. If you do not want the hassles of opening a de-

Invest in gold for diversification and stability of your portfolio. Dont be misled into believing that gold prices will only rise over time.

Invest purely for diversification.

Limit your exposure to 10-15%.

Do not try to get rich with gold. Contrary to belief, investing in gold carries a high degree of risk. Up to 15% of the portfolio is enough to gain a meaningful exposure to the asset.

TOP RULES TO FOLLOW

Kavita Jajoo,

36, Mumbai

MYTHS OF GOLD INVESTING

Gold is a perennial safe haven.

Gold is a hedge against inflation.

The return from gold has no clear relationship to inflation. The sensitivity of gold prices to inflation varies significantly.

Gold is considered an alternate currency that cant be manipulated. However, there have been instances where gold has lost value.

She started investing in gold ETFs three years ago and has found it a more convenient way of buying the precious metal.

Gold ETFs are the best way to invest in gold as I can encash them at short notice without having to deal with a jeweller.

mat account, you can consider gold funds, which are essentially funds of funds that invest in gold ETFs. This avenue offers the convenience of investing through the SIP route. Maalde insists that gold savings funds are a good proposition. One need not open a demat account and bear the cost of brokerage to invest in a gold savings fund. The facility of investing systematically is an added benefit, he says. However, keep in mind that you will pay the fund management fee to the gold fund and bear the expense ratio charged by the gold ETFs in its portfolio.

06

The Economic Times Wealth, November 4-10, 2013

Cover Story
real estate for investment and for self use. WHERE TO BEGIN Investing in real estate isnt a cakewalk. Finding a good property with decent amenities in a good neighbourhood, which is close to your place of work, school and markets is a huge challenge. However, a little homework can help you zero in on a good deal. You first need to work out a budget to finance the down payment for the house and subsequent EMI payments. Remember that you will have to meet the EMI obligation month after month. While preparing the budget, do not forget to factor in the expenses you are likely to incur after the purchase. These expenses are anything but ancillary. Painting, furnishing and maintenance expenses can amount to a huge sum. Shopping for a home loan is another aspect requiring homework for first-time home buyers or investors. Lenders will have marginal differences in interest rate, processing fees, margin money required, prepayment options, etc. Go through the fine print carefully before signing on the dotted line. First-time buyers should opt for a ready-for-possession property because there are too many hassles involved in one that is under construction, advises Sadagopan.

REAL ESTATE
H
aving your own house provides a sense of security and an elevated social status. However, home buyers have to tackle a long list of issues before committing to the investment. If you are not careful, even a small mistake can put you in misery for years or leave your finances in a mess. Real estate as an investment can be very tricky if you do not know what you are doing, says Suresh Sadagopan, founder, Ladder 7 Financial Services. WHY TO INVEST As an investment, real estate is like no other. It is simple to understand, tangible, and can greatly enhance the returns of your portfolio. The low volatility in real estate prices lends stability to the investment. The prices rise gradually over time, compared with other asset classes, which may see wide fluctuations. It also provides a steady stream of income through rentals, even during a lull in the economy. Even if you do not intend to live in the house, you can partly finance your mortgage payments and other expenses through the rental income. Besides, it provides several tax benefits by allowing you to claim tax deduction on repayment of principal and interest on the housing loan, as well as repairs and maintenance. Most importantly, it provides the much-needed diversification to your portfolio. But keep in mind that there are different considerations when you buy

Think before finalising the deal, but once you zero in on an option, move quickly. Good properties get snapped up fast and waiting may result in diasappointment.

Secure your finances before the deal. Avoid taking on an EMI obligation that takes up more than 40% of your monthly income.

Work out your budget.

Dont get carried away by tall claims and leave nothing to chance. Whether it is inspecting the property or arranging proper documentation, take the help of professionals.

Kiran Shetty,

37, Mumbai
Move fast. Take professional help.

TOP RULES TO FOLLOW

MYTHS OF REAL ESTATE INVESTING

BHARAT CHANDA

Buying is better than renting.

You need to time the purchase. You can never lose with real estate.
Not all real estate makes for a good investment. If you buy in an area that is in a decline or at a superinflated price, you may suffer a loss. Many people wait for a correction before buying. This can work against you because there is no telling when the prices will correct. Instead of focusing on timing your purchase, make sure you get a good deal.

He has two houses in Mumbai. The rent from one partially pays the EMI of the second house. He plans to buy another property, but finds the prices prohibitive.

If you are looking at real estate as an investment, try and use your own funds and do not rely too much on bank loans.

Buying real estate very early in life ties you down to a location. You can rent a house for a fraction of what you will have to shell out as an EMI. Buying makes sense if prices are low and capital is cheap.

Cover Story

The Economic Times Wealth, November 4-10, 2013

07

insurance

Your first

policy
I
ts important to buy insurance because it protects you against financial loss due to unforeseen events. Whats more important is that you buy the right cover. An unsuitable policy will not only be a drain on your finances but also give you inadequate protection. You must fully understand the features and limitations of the policy you are buying. Here are a few tips to help you choose the right cover. DO YOU NEED INSURANCE? Before you buy life insurance, ask yourself if you really need it. A life cover is meant to replace your income and provide financial assistance to your dependants if something untoward happens to you. If nobody is dependent on your income, you dont need to buy it. Some insurance policies are sold as retirement tools or tax-saving options. However, these objectives are better achieved by other saving options, such as bank deposits and the Public Provident Fund. You will need life insurance when you get married and start a family. At that stage, a pure protection term plan should be your first life insurance policy. You should buy a health cover, you may have to buy on your term insurance plan even before you open a own. You might be left without a cover if you bank account, says T R Ramachandran, change jobs. A basic indemnity-based medimanaging director and CEO of Aviva Life cal insurance plan is advisable. If you are Insurance. Term plans are especially useful married and have children, buy a floater if your income is not very high because it plan because it offers a larger cover for the provides a high cover at low cost. The costs entire family at a lower price compared to are even lower if you buy online. A 28-yearindividual plans for each member. old man can buy a `1 crore cover for Besides a term insurance and around `8,000 a year. medical cover, you should also According to experts, one consider buying a personal acciWill a should have a cover of at least dental policy to cover death or nominee inherit 5-6 times ones annual income. disability due to an accident. your assets Page 13 This does not include any outFor as little as `225 a year, you standing loans taken by the polican get a basic cover of `5 lakh, cyholder. Also, buy for the maxithough add-on covers may cost mum term available. Your insurmore. A personal accident policy is ance should not end when you are in unique because it offers three beneyour 50s because buying a new plan at that fits. If the policyholder dies in the accident, age may not be feasible, warns insurance it provides a lump-sum payment to the professional Deepak Bhuwania. nominee. If he survives, it pays for hospitalisation expenses. If he is disabled and loses CUSHION AGAINST MEDICAL EXPENSES livelihood, it provides financial support. Life The high cost of private health care means insurance plans cover only death, while you cannot afford to ignore medical insurmedical plans pay only for hospitalisation. ance. Even if your employer provides a However, you will have to do a lot of run-

The insurance market can be very confusing, especially for the first-time buyer. Heres how to cut through the clutter and purchase the right cover.

ning around to buy this plan. Agents rarely sell these low-cost personal accident covers because they earn barely `20-30 as commission. You can buy an accident cover as a rider along with a life insurance policy. COVERING YOUR HOUSE & CAR A house is perhaps the costliest asset, but very few homeowners insure it. The cost of insuring the structure against damage is as low as `50 per `1 lakh. Keep in mind that you dont need to insure the house for the value of the property, but only for the cost of reconstructing it. The cost can vary from `1,500 per sq ft for a basic structure to `2,500 per sq ft for a premium construction. If you expand the cover to include burglary and breakage, the total cost of the insurance will not be more than `2,500 a year. It is best to go for a comprehensive plan that covers a wide range of risks. A standard fire and other perils policy covers damage due to fire, lightning, storm, flood, landslide, earthquake, vehicle impact, rioting, arson and bursting of pipes and tanks. For your vehicle, dont be lured into buying the add-on covers that cost a bit but are not really necessary. A plain vanilla insurance cover will do just as well. Do remember to renew your third-party insurance cover in time. This protects you against compensation claims from third parties. Without it, you could be exposed to a risk running into several lakhs of rupees.

THE FIVE MUST-HAVE COVERS FOR YOU

*Life insurance for a 30-yearold man for 30 years.

INSURANCE

WHAT IT COVERS

WHAT IT COSTS PER YEAR

TERM PLAN* MEDICAL INSURANCE PERSONAL ACCIDENT HOME INSURANCE VEHICLE INSURANCE

Death, except by suicide Hospitalisation expenses Death or disability due to accident Damage to house Theft or accident

`9,000 for a cover of `1 crore `8,000 for a floater plan of `3 lakh `1,500 for a cover of `10 lakh `1,000 for a cover of `20 lakh `8,000 for a car valued at `4 lakh

Please send your feedback to etwealth@indiatimes.com