Wealth creation - Part 3 - Where to Invest?

Welcome to part 3 of the blog series ‘Want to create wealth. But how’

In part 2, Prakash shared with us powerful mantras of wealth creation.

They are:

(a)   Understanding our risk appetite

(b)   Asset allocation basis our risk appetite

(c)   Importance of having financial goals.

Here is a link to Part 2 of the blog:

https://www.blogger.com/blogger.g?blogID=2249881988584882575#editor/target=post;postID=7051872362494185605;onPublishedMenu=posts;onClosedMenu=posts;postNum=1;src=postname

Shraddha asked Prakash the following questions.

How do I know which asset class should I invest in?

How about returns?

How about guarantee?

All of us had these questions in our mind. Most of us were aware of the different asset classes (at least by name) but Prakash showed us the slide to give a comprehensive understanding of different asset classes.

The group could relate to some of the names like real estate, cash etc. Some in the group were partially aware of commodities; collector’s items; fixed income and equities.

Prakash told the group not to get confused with the blocks. The important point he said is to know that each asset class comes with its own risk and rewards.

Do you mean higher risk, higher returns and lower risk, lower returns? asked Deepak.

Yes. You are right Deepak. This becomes an important consideration while planning your financial objectives, said Prakash.

He continued looking at the group. 'FDs and RDs form a part of fixed income assets. They give you assured returns but the returns are fixed at a certain percentage. They cannot go beyond that. Currently they are anywhere between 7.5 to 8.5 percent. The average inflation from 2004 to 2014 stands at 8.14%. This clearly shows that this investment option cannot help you beat inflation'. 

'But these are guaranteed' said Shraddhha. Yes. That’s correct. And that gives lot of comfort to all of us, right? asked Prakash. All of us nodded our heads. After long time he was talking what we wanted to hear. He also highlighted the tax related benefits for some guaranteed returns products like PPF (Public Provident Fund) and NSC (National Savings Certificate)

'However what I am going to tell you now is equally important' asserted Prakash. 

‘How many of you have heard of Unit Scheme 64 (US 64)’?

90% hands went up. After all US 64 was a long standing scheme of UTI.  People perceived this scheme to be an assured return scheme. They had every reason to think that way. The scheme religiously declared dividends every year similar to any assured returns scheme. This scheme missed giving dividends in 2001 stating shortfall in assets.

Some from the group recalled this information which they had read in the newspaper during those days. For some of us this was a news.

The point I am making said Prakash is this.

Number of assured returns options/financial products are coming down. Assured return schemes always do not give assured returns and sometimes even your principal amount also may be at stake. Prakash gave example of few NBFC (Non-banking financial company) to substantiate his point. They promised handsome guaranteed returns but did not give even the principal amount of the investors.

By now Shraddha seemed to have moved from her fixation to assured returns products.

'So Prakash are you suggesting that in addition to assured return products we should start investing in other things mentioned on the slide' asked Shraddha.

Yes. Certainly. Investing your money in different asset classes’ basis your risk appetite is called Asset Allocation. This is the best way to create wealth. And this means that you need to invest your money in Equities as well.

‘But equity is a risky asset class’ said Ashok. Others echoed.

Prakash gave a smile as if he knew something on equities that we don’t.

However since we were already over 90 minutes in this discussion, someone said that we should break away and reconvene the next weekend to discuss things further.

Prakash and the group agreed. He highlighted the following three points before we dispersed.

1.     1. Assured returns schemes/financial products have their benefits however number of such schemes has come    down over last few years.

2.   2.  Assured return schemes always do not give assured returns and sometimes even your principal amount also   may be at stake.

3.    3.  One must invest in equities if he/she is serious about wealth creation.

_

Want to create Wealth. But how? – Part 2

In part 1 we saw why health insurance/hospital cover and term insurance form the foundation of the financial planning pyramid.

If you missed reading that blog, please visit :

http://bhushankulkarni2903.blogspot.in/2014/10/want-to-create-wealth-but-how-part-1.html

The topic was interesting but get-together was more of a social gathering than figuring out answers to our personal finances. So we decided to meet the subsequent week for some time exclusively to take the discussion forward.

‘How many of you have most of your savings in fixed deposits and recurring deposits’ asked Prakash. Almost all of us raised hands. To this he made a profound statement. ‘You guys are going to have tough time building wealth’ he said. We were taken aback. Some of our friends were in FDs and RDs for good 8-10 years.

‘While we know that whatever savings we are doing may not be adequate but how can you say we will not be able to create wealth’ asked Kailash.

‘The answer is very simple. Your money (savings in FD and RD) is not earning enough to beat inflation’ said Prakash.

‘But we also have our house. Isn’t that an investment too’ said Sandeep.

Self-occupied house is not, additional house is. Prakash proclaimed.

So according to you what is the right way to create wealth asked Dhananjay who seemed visibly confused hearing all this discussion.

‘Goal based financial planning and adherence to asset allocation based on your risk appetite’ said Prakash. The tone and expressions were such as if he found a Holy Grail and is wanting to share with us.

‘Oh you are talking like a business channel anchor Prakash’, said Swati. Goal based financial planning; asset allocation and risk appetite. These words seem familiar but are difficult to understand and implement.

‘They can be as difficult or as easy as you make it’ came the philosophical salvo from Prakash.

So tell us Prakash do these 3 things assure us of wealth creation? Someone asked from the group.

The probability is much higher told Prakash.

You need to know your risk appetite; invest in different asset classes and stick to it for long time came another big mantra from Prakash.

‘All that is looking good but how do I know my risk appetite’? asked Sharad.

While your previous savings and investment pattern is a good indicator to know your risk appetite, today there are scientific methods to know about them. You need to answer some questions and your financial planner will be in a position to tell you whether you have conservative; balanced or an aggressive risk aptitude.

Once you identify your risk appetite, you may choose to follow these two things.

a.       Decide your asset allocation basis your risk appetite.

b.      Decide your financial goal and start investing towards it in different asset classes.

But how do I know which asset class I can or need to invest? How about the returns? What about the guarantee? Someone had to stop Shraddha from asking more questions in one breathe.

‘Precisely these are the questions we will try and discuss during our subsequent meetings’ said Prakash.

After one hour discussion Prakash left for some work. The group was still discussing the Holy Grail suggestions by him.

Risk appetite; Asset allocation and financial goals

What should we do?

1.      Take help from your financial planner and understand your risk appetite

2.      List down the financial goals that are most important to you in your life and the number of years left to achieve them.

Want to create Wealth. But how? - Part 1

I and a group of my friends all in their late 30s and early 40s met up for a small get-together. The topics ranged from current affairs, to politics to elections to economy. One friend popped up a question that got everybody’s attention. The question got people to think, talk, discuss and debate. I could see lot of curiosity, understanding and mis-understanding around this question,

The question was, “What is the best way to create and increase our wealth that will help us take care of all our obligations and help us lead a comfortable life?

All of us want to create wealth. Want our money to grow. However I realised one thing out of that discussion. We are either partially aware or ignorant of how to do that. Our understanding is like those blind men who were asked to describe an elephant. Their description was limited to the area of an elephant they touched.

During that intense and involved discussion we wanted to see the entire elephant. I guess for two reasons.

1.      To know whether the route(s) that we have followed is the right one with regards to our savings and investments?

2.      Will it meet our present and future needs & wants?

Prakash, who has taken help of professionals for planning his finances, started asking questions to the group.

In this blog, I will share the first 2 questions that he asked and answered.

1.      How many of you have medical insurance or hospitalisation cover plan? Some hands went up. He said with sky rocketing medical costs, if you do not have this one in place it can eat up most of your savings. This is the first thing you should have.

2.      He asked us to think of one situation. While travelling from this get-together if something happens to you and you lose your life.

Have you made provisions for the family so that they continue to get the monthly income and are able to take care of their needs and wants?

While some of us thought of this question earlier, but not as deeply as he made us think. He highlighted the importance of having a term insurance plan. The thumb rule at our age (late 30s and early 40s) he said is to have at least 10 times cover of our annual income.

Deepak who became restless by now said, you are only scaring us and asking us to put money in something that is protection against risks. The money given in the above two is not going to give any returns. And hence the wealth creation question still remains unanswered.

‘I agree’ said Prakash. The above two are crucial or else they can be show stoppers. The first point (hospitalisation cover) may turn out to be leaking buckets and can give a serious blow in wealth creation journey. The second one (term insurance plan) can severely compromise your aspiration of quality life for your family in your absence.

So what should we do?

1.      If you do not have medical insurance, check out for health/medical/hospitalisation insurance plans.

2.      Check out your term insurance cover. If you do not have an adequate cover check for : (a) Term insurance plan at competitive premiums from a good life insurance company; (b) Check their claim settlement ratio.

3.      Importantly take action and cover yourself.

Note: These are the key points I presented out of the discussion over get-together. I advise you to take a professional help while planning for your insurance and financial needs.

We started with these two questions.

1.      To know whether the route(s) that we have followed is the right one with regards to our savings and investments?

2.      Will it meet our present and future needs and wants in future?

In the subsequent blog I will share with you some interesting insights Prakash gave us on our savings & investment patterns and whether that needs a relook.

Leadership lessons from Jaipur Pink Panthers - Part 2

In part 1 we looked at team composition; strategy and execution of Pink Panthers. We saw how we can juxtapose these tenets to business life.

If you missed reading part 1 of this blog, please visit :

https://www.blogger.com/blogger.g?blogID=2249881988584882575#editor/target=post;postID=9056661391186002435;onPublishedMenu=allposts;onClosedMenu=allposts;postNum=1;src=postname

Let’s now look at the other 3 important tenets in this final section.

4.      Resilience :

Its’ not that Pink Panthers had straight line victories. In fact they lost the first match of the tournament that they played against U Mumba. Jaipur played in all 14 matches. They won 10, lost 3 and 1 was draw. Of the 3 lost matches, 1 was lost to U Mumba. The draw again was with U Mumba. So the previous two experiences were not much in favour of Pink Panthers. “We couldn’t have won it if we hadn’t removed the fear factor from our minds. We had worked hard to reach the final and it was more of beating the team that we had failed to. The aggression and hunger clearly showed and there is no question that the better side won” said Jasvir Singh. Burning desire kept them consistent at winning and the bounce back ability helped them overcome their defeats.

5.      Clear communication lines :

Forthrightness and clear communication of players within them, with the coach and the captain is an important point to consider. They did not get into un-necessary egos. The team was encouraged to focus on strengthening their individual positions and skills. While doing this the captain and the coach ensured that the team member does not start strengthening skills in silos. They focussed on the collective performance and orchestrated efforts.

In the business context keeping the communication lines open for the manager or the leader is essential. Fear free expression of the team members will help address the issue(s) at nascent stage before it becomes a growing hot balloon. These are some of the methods some managers follow to keep the communication lines open.

a.       The open office design allows the team members easy accessibility to her manager.

b.      Follow a regular meeting schedules of skip level team members.

c.       Management by walking around (MBWA) if the team is in same location or through web chats.

d.      Informal get together

e.       Reviews and ideation sessions

6.      Branding and presenting :

Like other teams, Pink Panthers also had their team dress designed. This was sponsored by their apparel partner T K Sports. What was strikingly different is the way in which the team was launched by Abhishek Bachchan in a press conference. He made the media shy players extremely comfortable and presented them with their best side to us.

In the office context, we see the team logos, team names, team dress code etc. Anything that stands teams apart. Branding helps the team to identify themselves with the composite unit. The brand is easily noticeable. Showcasing the strength can give a good exposure to them in front of their stake holders. I have seen some managers follow it quite consistently.

This is what Abhishek Bachchan says about sports and kabaddi.

1.      Team work, loyalty and leadership is what you learn from Sports.

2.      Kabaddi requires players to be a gymnast, rugby player, wrestler and a chess player.

I guess businesses and teams need a lot of it to remain vibrant and successful.

Please share your views.