Should Gold be part of your Investment ?

Gold is often viewed by different people in different ways. The enthusiasts will always vouch for the purchase of gold saying that its value will never fall, promptly buying physical gold (read ‘Jewellery”). This is one investment that the lady of the house will invariably support! However, Gold prices have seen far too many fluctuations in the last few years prompting many investors to reject it as an investment class (compared to other Mutual Fund categories) with a lot of risks and no commensurate return.

Gold neither provides the excitement of Equity nor does it give “assured” returns of Debt Mutual Funds. Hence, we have more of a lukewarm response to a suggestion of investing a part of the funds into Gold. Does Gold merit a place in the portfolio, for reasons other than social and religious purposes? There are many reasons why Gold should form part of your portfolio

Hedge against Inflation

Gold is mainly seen as a “store of value”.  It should be looked at as an alternative to currency. While currency can be printed (and demonetized) at will, Gold is the warehouse where you stock the value of your money. In other words, as currency loses value (what economists and now common men and women understand as Inflation), one needs to protect its purchasing power by converting the “cash” into gold. Gold provides the hedge against inflation. As the purchasing power of currency falls, everything becomes expensive in money terms. You no longer get your favorite vegetable for Rs.2/ kg. The cup of tea that refreshes is now in double digits. The story is similar for almost everything. However, you cannot store value in a cup of tea or in vegetables. These items are perishable and hence, the value is lost if we stock up on them as protection against inflation.

However, with Gold, it works like a bank in which you deposit the value of your currency and when you withdraw, you get the same value back. To use a very simplistic example, if Rs.100 can buy 10 chocolates in year X but only 9 chocolates in year X+1, it means the currency has lost value. If you do not wish to buy chocolates in year X but store your money to buy it in year X+1, you actually lose out, as you get lesser chocolates. However, if you buy gold with your Rs.100 in year X, and you sell the gold in year X+1, you will get money with which you will be able to buy 10 chocolates. The price of gold would have increased by the same proportion as the fall in the value of the rupee. Thus, Gold is a hedge against inflation.

Thus, we see gold as a protection against the risk that prices of various items would go up (which means loss of purchasing power of the currency). If one invests in gold, one is protected against this risk as the value of gold would also go up proportionately.


Gold is arguably the most liquid of all non-cash instruments. Irrespective of where you are in the world, locating someone who will readily offer cash in exchange for gold is not difficult. Transparency on the price of gold in the global markets, clarity with respect to purity of gold (18 karat/22 karat/24 karat) along with certifications (BIS/Hallmark) has made it easy even for retail investors to trade in gold.

Source of Diversification

One of the important lessons learnt in school was “not to keep all eggs in one basket”. The jargon equivalent of this in financial markets is called “diversification”. Diversification essentially means spreading out the investments across different asset categories such that the loss is one asset category is offset by a gain in another. However, if we spread across different asset categories which behave in a similar fashion, (i.e. gain in one is accompanied by a gain in another and loss in one is accompanied by a loss in another), then there is no benefit of diversification. In order to achieve the goal of spreading risk, one needs to diversify across asset categories that are “negatively correlated” or has “low correlation”.

A negative correlation means that the rise or gain in one asset category is usually accompanied by a fall or loss in another asset category. Low correlation implies that the rise or fall is not in similar proportion. Gold tends to have negative or low correlations to most assets usually held by institutional and individual investors whether it is in good times or bad. Gold in a portfolio can reduce the volatility of the portfolio without necessarily sacrificing expected returns.

Protection in Financial Distress

Gold is the last bastion of value. Investors hold on to Gold knowing that, when everything else fails to work, gold can get them out of trouble. As uncertainty increases, investors prefer to “store” value until relative clarity emerges. Thus, when every other asset class is losing value, the price of Gold increases. Thus, Gold helps in protecting the value of the portfolio. Recent history such as Brexit, Trump becoming president, the rising trends of referendums and their results, combined with an increase in debt, liquidity driven asset inflation and currency wars do not point towards a stable global economy. There are risks that cannot be wished away. Markets in general and equity markets, in particular, are vulnerable to such macro disruptions. In this context, the yellow metal is likely to shine bright amongst all chaos.

Thus, Gold should be part of every risk averse investor’s portfolio. Nothing untoward may happen and Gold might just return the equivalent of inflation. However, if there is a crisis waiting to unfold, Gold will be the protection your portfolio will need.

How do I invest in Gold?

1. Physical Gold:

Gold can be bought in the form of coins and bars. The coins come in different sizes (1 gram, 2 gram, 5 gram,10 gram, 20 gram and 50 gram in India, 14mm, 22mm, jewelleryetc diameter in the US, commemorative 1 US$ gold, and various such other forms). Bars are normally available in 100 grams. However, to cater to the need of retail investors, dealers in physical gold are willing to cut a part of the gold equivalent to buyer’s requirement. The advantage is that the gold is in the hands of the investor. However, there are many disadvantages of holding gold in physical form. It does not have utility value, can be lost (or stolen) and requires the investor to make arrangements for appropriately storing it. There can also be trust issues with respect to the quality of gold.

 2. Jewellery:

 One way to create utility value for physical gold is to convert it into Jewellery. There is a huge demand for gold jewelry, which is actually a manifestation of a demand for holding gold as a store of value. More than  60% of demand for gold is towards jewellery. Apart from the other disadvantages of holding physical gold, the cost of holding increases on account of high making charges and wastage taken by jewellers. The resale price is also lower as the jeweller deducts a small commission on the prevailing gold price.

3. Gold Funds and Gold ETFs:

This is increasingly becoming the mode of holding Gold from an investment perspective. They allow investors by units of a gold fund on the stock exchange. The gold fund is a passive investment in gold. Let us understand this with the help of an example.

M/s Glitter Asset Management company comes up with a Gold Fund, wherein it offers units to investors at an initial price of Rs.10 per unit. A person willing to invest Rs.1000 in gold can buy 100 units of this fund while a person willing to invest say Rs.50,000 can buy 5000 units. Totally, the fund collects Rs.100 crores from all investors, issuing 10 crore units. Let us say, the price of gold on that particular day is Rs.2,50,000 per kilogram. The Gold fund buys 4,000 kgs of gold. In the next one month, gold prices shoot up to say, Rs.275,000 per kilogram. This means the value of gold held by our fund goes up to Rs.110 crores (4000 kg *Rs.275000 per kg). This translates into the value of 1 unit of the gold fund increasing to Rs.11 (Rs.110 crores of fund value / 10 crore units). Thus, a person who bought only 100 units of this fund sees an appreciation of 10% in his portfolio. If he wishes to sell his investment, he can redeem the units of this gold fund with the Asset Management Company at the prevailing NAV of Rs.11 per unit.

Thus, a gold fund facilitates small investors also to invest in gold. Since the fund is actually buying and selling the gold as well as holding the gold, there are no worries pertaining to quality of gold, storage and the risk of paying higher (making/ wastage, etc) or selling lower ( deductions). However, a small asset management fee has to be paid to the fund.

Gold ETFs are Gold Funds that are exchange traded funds. Investors can buy/ sell Gold on the stock exchange by buying/selling the Gold ETFs. Gold ETFs have all the advantages of a Gold Fund. However, investors need to open a Demat account for holding Gold ETFs.

4. E-Gold

E-gold can be bought on a commodity exchange through a member of the exchange. Each unit of e-gold is equivalent to one gram of physical gold and is held in the demat account. Like gold ETFs, e-gold units are fully backed by an equivalent quantity of gold kept with the custodian. The difference between a gold ETF and E-gold is that E-gold can be converted into physical gold at any time through a process of re-materialization.

5. Shares of Companies dealing in Gold

Shares of gold mining companies or companies that stock gold for trading purposes can be an alternative way of benefiting from the increase in the value of gold. Investors, in this case, are not only optimistic about the prospects of gold prices going up, they are also having full faith in the management of such companies.

6. Sovereign Gold Bonds

The government of India is offering Sovereign Gold Bonds at regular intervals. These bonds not only offer the investors returns equivalent to holding of gold but also offer a nominal interest (currently 2.5% p.a.) on the investment. Since money is lent to Government of India, it is absolutely safe. There is no need of opening a Demat account. Liquidity comes in the form of trading on the exchange. These bonds are exempt from Capital gains tax if held upto maturity. However, it is difficult to have a Systematic investment plan unless one is an active and alert investor.


Gold should be a part of every investor’s portfolio. However, its allocation should be around 10% to 15% of overall portfolio. One should not go overboard or overweight in this asset class. It should not be looked at as a trading opportunity. While Gold Funds and Sovereign Gold Bonds appear to be the best way of holding Gold, the choice really boils down to what one feels is convenient for oneself.

Are You a Trader or an Investor

“The markets have been falling for five sessions in a row. I think it is a good time to buy”.

“My stock is up by 25% in 2 months. I would rather book profits than regret later” .

“The stock price is near its support level. I am planning to buy”.

Nothing wrong with any of the above statements. End of the day, you want to make money. Any strategy that results in a profit is a great strategy. However, the question remains. Are you a trader or an investor?

What is a Trade?

A trade is a contract wherein buyer and seller (of a specific item) agree on its price. For example, if Mr. A buys 100 shares of Infosys Technologies Limited for Rs.1000 (per share) from Ms. B, then Mr. A is a buyer and Ms.B is a seller. Both Mr. A and Ms. B are traders as both entered into a trade.

Who is a Trader?

Based on our above understanding of the word “trade”, every person, who is either buying or selling, is a trader. However, the mindset of a trader is to BOTH buy as well as sell! He/ she buys with the intention of selling. Similarly, traders sell with the intention of buying back. If you look around on our roads, we find many shops which are named as traders. AK Traders, Janata Trading Co, etc are some typical names. These establishments are essentially organizations who are “trading” in a particular product. Their Business model is to buy from wholesale shops at lower prices and sell it to retail customers at a higher price, thereby making a reasonable profit.

Similarly, a trader in financial markets is looking to buy securities that he/she feels is priced lower and hopes to sell it as its price goes up. Smart traders also sell securities that they feel are priced high and hope to buy them back as the price comes down.

The intent of the trader is to clearly make profit. However, a seasoned trader knows that his/ her expectation about the change in price may go wrong. In such a case, the trader “books the loss”.For example, if Mr. Baazigar felt that the share price of AIL (All is Lost Ltd) would go up and buys a few shares, but finds that the price actually falls steeply, he would still sell the shares at the lower price and incur a loss. He would not wait in the hope that someday, the price of AIL would go up and then he will sell it at a profit.

What is an Investment?

So ,What are Investments? When we “invest” our money, we invest with the expectation that we will get a return on our investment. In other words, we expect to get more money. For example, if we “invest Rs.10,000 in a fixed Deposit, we expect to get, say, Rs.10,800 after 1 year. Obviously, we cannot get that money immediately. Thus, the “returns” are “promised” after some time in future. There is no guarantee or assurance that the promised money will come back. Even Banks may fail and the money invested in Fixed Deposits may never come back. It is just that we have faith in our banks and do not expect the banks to default. Thus, investments are about “expected future returns”.

So, when we invest, we need to have a “time-frame” in mind. Unlike a trade, which can give you instant returns in a few minutes, an investment takes time to provide returns. Also, there is no guarantee that we will definitely get the returns or for that matter, our investment. Just like a trade, we can lose money when we invest. Hence, we need to be careful with our investment.

Who is a Speculator?

Often, trading is dubbed as “speculation”. If you make money, you are an investor. If you lose money, you are a “speculator”. This convenient classification comes from a lack of understanding of how different people think and work. “Speculation” is not a vice or a “dirty habit” akin to, say, smoking. It is not that the markets would be a better place if all speculators exit the market. On the contrary, Speculators play an important role in the market. However, speculators participate in the market by trading.

Who makes money?

Both traders and investors make money. More importantly, both traders and investors lose money.

Trading vs Investing

Trading is exciting. Investing is boring. Trading keeps you glued to the screen. Investing does not need constant attention. Taking Cricket as an analogy, Trading is like T-20 where there is action every minute. Investing is like Test match cricket. Nothing seems to be moving, but a lot would have changed between sessions. Both Trading and investing require discipline and clarity of thought. After all, it is your hard earned money.

What does a trader do?

A trader actively follows the market. He/she looks at the price trends. A trader anticipates how the stock price would move in response to a particular news flow. In fact, the trader actively looks for various triggers that can have an impact on the price of a particular security. While traders can also have a long term view, most trading is done with a short time frame in mind. Traders are not too worried about asset allocation and portfolio diversification, though smart traders would factor in the same.

In many ways, trading is about outsmarting other players in the market. You get that right, you make tons of money. You go wrong, then you have nowhere to go.

What does an investor do?

When it comes to investing in stocks, an investor looks at the stock as a business opportunity. For example, if an investor is thinking of buying the shares of Kal Kya Hoga Ltd, he/she would first understand the business of the company. What is the business of the company? (what products does the company make or what services does it provide?) Does he/she believe that it is a good business? We will not get into the criteria for decision making at this stage, but the primary point is that when you invest in a stock, you actually invest in a business. You would think multiple times before you are convinced that it is a business with good future prospects.

Obviously, investment is about long term. You do not start a business only to get disillusioned in a few months and close it down. Nor would you simply close one business and start another because it looks like a more attractive proposition. When you are in business, you are in it for the long haul.

Having got the business right, one also needs to buy at the right price. A great business bought at an exorbitant price may not result in the desired “returns” from the investment.

Lastly, Investors need to build a diversified portfolio. For all the research you have done, the future can totally surprise you. Putting all eggs in one basket have never been a great strategy and investment management is no exception.

What style suits us?

Well, the world is full of traders, investors, traders thinking of themselves as investors and investors behaving like traders. It depends upon our personality, our skillsets, the amount of time we have at our disposal and more importantly, our risk profile.

My experience, which is obviously an inadequate sample, suggests that retail traders are better off as investors rather than investors. Most “investors” I have known have made money in the long run.

However, the challenge has been to remain an investor when your instinct tells you to be a trader. There is an itch to do something, every time the market throws some data or news at us.

This is not to suggest that Investors are not bothered about what is happening around them. An investor also needs to review his/ her portfolio periodically. Any development that fundamentally alters the base assumption with which the investment was made should trigger a review with respect to such investment.

How to Invest? How to Trade?

The best way to invest is through the direct mutual fund route. A professional is managing your portfolio. You are unlikely to beat him/her, atleast not consistently period after period. If you are a trader, mutual funds may not be the best route, unless you are trading in Exchange Traded Funds (ETFs). You can either directly invest or take the help of a professional fund manager.


To be a trader to be an investor is an individual’s choice. However, one needs to know if one is a trader or an investor. Understand the game that you are playing. Both Cricket and Baseball involve hitting the ball with the bat, but as they say, it is a “different ball game”.

Happy investing! And for a change, Happy Trading too. But not both!

Take a ULIP, or Invest in Tax Saver (ELSS) Mutual Funds?

It is that time of the year when one looks for the best way to invest money and save tax at the same time. Since the ‘Big Finance’ industry actively pushes products like ULIPs, there is a high level of awareness of ULIPs and products like them, which mix insurance and investment. On this blog we have already written about the dangers of mixing up insurance and investment, and also on how to gracefully exit out of a ULIP. But still this question keeps popping up.

Instead of simply retorting, ‘I told you so’, it is our duty to keep repeating the basic financial wisdom again and again. This is not ‘whiz-dom’, it is actually quite simple. Though some people make it sound like it requires ‘whiz’ to confuse hapless investors and make a killing via fat commissions.

How to Save Tax?

It is said that in life only two things are certain. One is death. The other is taxes!

We all know that death cannot be avoided (however there is a lot of research these days on how to delay ageing and live a long healthy life).

Taxes, is well, another story. There are many ways to legally reduce your tax burden. You need to be smart about tax planning and choose the right instrument. In India, we have the so called Small Savings investment schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC), Employee Provident Fund (EPF) etc.

What about ULIPs

Unit Linked Insurance Plan (ULIP) is also one such instrument and the entire amount invested can be exempted from tax, up to a maximum of Rs 1,50,000 under Section 80C. Agents pushing ULIPs will tell you that it is a smart way to get both benefits in one shot. But this comes at a significant cost of both upfront commissions, trail commission, high insurance mortality cost, premium allocation charges and fund management charges. There is also a lock-in period involved.

What about Tax Saver Mutual Funds (ELSS)

Equity Linked Savings Schemes (ELSS) are Mutual Funds that invest in equities and have a lock in period of 3 years. This is the least lock in period for a Tax Saving instrument. The charges involved are primarily the fund management charges.

If you are one of those investors going for ‘Regular Plans’ then you also pay a high commission of about 1.5% per year. Overall you lose about 6% in one shot by going for a ‘Regular Plan’ sold by a broker. At Jama, we clearly define what a broker is (see our FAQ).

Since this is an equity mutual fund, the long term capital gains are absolutely tax fee. The divdends you earn from the scheme are also tax free! For more details you can check the “Tax Savings Calculator” that is available for every ELSS fund in Jama’s App.

The Comparison: ULIP vs ELSS Mutual Fund

We will cover this in simple bullet points for easy understanding and score them along the way:

  • Lock in period: ELSS has 3 years whereas ULIPs have three to five years. Score: ELSS 1, ULIP – 0
  • Overhead charges – ELSS lean, ULIPs – massive (covered above) that reduce your returns. Score: ELSS 2, ULIP – 0
  • Surrender charges – ELSS has no such charges but ULIPs have high charges; fortunately they are capped but agents don’t tell you this. They want you to think that your money if fully locked for 5 years. Score: ELSS 3, ULIP – 0

Haven’t ULIPs Reformed and Become ‘Better’ Products?

So you can see that a ULIP is basically an insurance product that charges a part of the premium to cover benefits under death (aka “mortality” charges), and puts the rest into a mutual fund equivalent.

When they were launched in the early 2000s (coincidentally the ‘sunrise’ years of the private life insurance industry), they were touted as better than endowment products. However due to huge commissions and payouts made, agents rampantly mis-sold the product to customers. Many investors lost a considerable part of their wealth due to investing in ULIPs.

The regulator (IRDAI) did step in to regulate the ULIPs. So ULIPs have better disclosures and some caps on costs and commissions. However, when compared to ELSS Funds the above score still stands!


If you wish to buy insurance for protection, and you must – if you have a family that depends on your income for their living. Or if you have outstanding loans. In such a case just buy pure term life insurance. Invest the rest in a Tax Saver Mutual Fund.

7 Mistakes To Avoid While Investing

Investing well requires a mix of discipline and endurance. It may appear boring but in the long run you become wealthy and financially independent. Being Financially Independent in turn means that you control your time and as well like to say time is more valuable than money. So how do you succeed in this boring yet exciting journey (yes it is an oxymoron’ish statement)? Here are some common traps that you mus avoid.

Mistake #1: Short term focus.

Many people think that investment is till the going is good. And for equity investments this usually means a few months. There is enough data by AMFI that the average holding period for a mutual fund folio is six months only!

Why is this bad:

  • You lose out on putting the eight wonder of the world to your advantage. Yes, it is compound interest.
  • When you cash out, chances are that you make a loss. Thus you destroy wealth, if you carry a trader’s mindset as opposed to an investors mindset.
  • When cash is sitting idle in your pocket (or bank), you might spend it on impulsive buys. And if you don’t spend then, cash sitting idle in the bank is not working hard enough for you.


Mistake #2 – Not having a Defined Goal

When you fail to plan, then you plan to fail. This is true for investing too.A goal helps you clearly plan your cash flows and apportion how much goes into investment and the rest for expenses. This approach inherently limits your expenses and increases your saving ratio.

Why this is bad – Without a goal people are not motivated to stick on for the long term. And that means repeating Mistake #1 all over again.


Mistake #3 – Not Automating Your Investments

An automated approach such as Systematic Investment Plans ensure that your investments continue no matter what happens. They sock away your hard earned money into productive investments. You are not given the option of deciding whether to invest or not. When combined with Goal based Financial Planning this is a winner!

Why this is bad:

  • When your income hits the bank account and lies idle in your current account, it means that the bank is making more money from your hardwork, than you!
  • You tend to spend away the ‘idle cash’ on impulsive buys. In the long run you might be left high and dry when goals like daughter’s education or retirement approaches.


Mistake #4 – Not Diversifying Your Portfolio

There is no free lunch in investments, except Diversification. This is the shock-absorber in your portfolio that steadies returns over the long run. A portfolio with FDs or bank deposits only be eaten away by inflation. On the other extreme, a portfolio with only equity funds may perform well during bull market runs but fall heavily when markets correct. The key is to find out your right asset allocation based on your risk profile.

Why this is bad: Poor diversification gives low returns and increases the risk of your portfolio.


Mistake #5 – Not reviewing your portfolio

Once you establish a suitable portfolio you must ensure that it is periodically reviewed. This should happen at least once a year. You need to weed out poor performing funds and monitor exposure to various sectors.

Why this is bad:  A reduced return of just 2% can mean a loss of more than 50% over the long run (say 20 years).

Mistake #6 – Reviewing your portfolio too often

The converse is also true. Frequent review of portfolio may lead you to churn it too much thereby reducing the overall return. The best way to invest is to have a patient perspective and not worry too much every day.

Why this is bad:  You repeat mistake #1 as your emotions get the better of you.

Mistake #7 – Not Paying For Quality Advice

Too many people are not aware of the huge cost of commissions over long term. People risk losing 40% to 50% if their wealth. Good quality advice pays for itself many times over.

It is better to know the cost of investment upfront than get fooled over the long run by the “Wealth Management” industry. The traditional model of ‘free advice’ + transaction fees or portfolio % fees is making only the wealth managers and banks rich. A model of ‘reasonable fees for advice’ + zero transaction fees is much more investor friendly.



Being aware of the 7 mistakes of investments can greatly enhance your returns and make the investment journey highly rewarding. Investment has no silver bullet, there are no major secrets (except for hidden commissions) – so being disciplined and committed is what will get you to your destination!


Why Sectoral Funds are not the right choice for you

There are many type of Mutual Fund Schemes. Asset Management Companies come up with various themes of investment. This is not a concern. It is similar to an FMCG company coming up with different variants of their product(s), to meet specific requirements of their customers. For example, a toilet soap making company may produce different types of soaps, some of them appealing to the health conscious, some claiming to treat the skin softly, some providing the beneficial effects of a key ingredient, while some may simply talk about freshness.

Similarly, mutual funds have launched various schemes with different investment philosophies. There are Equity funds, Debt Funds, Gold Funds, Balanced Funds, etc. Within Equity, we have Large Cap funds, Mid Cap and Small Cap funds, Multi cap funds, etc. Each of these investment themes appeal to certain types of investors. Thus, Mutual funds provide a lot of flexibility to the investor to align his/her investment objectives with investment philosophy of the fund. One such type of funds are “Sectoral” funds.

What is a Sectoral Fund?

A sectoral fund is one which invests in a particular sector or industry. For example, we have “Pharma” fund, “FMCG” fund, “Banking Fund”, etc. A Pharma fund invests the entire money being managed in shares of Pharma companies. Similarly, a “Banking” fund buys only shares of banking companies. Thus, sectoral funds are an effective way of taking exposure to a particular industry, without having to bother about which company in the sector should be included in our portfolio.

Reasons for not investing in a Sectoral Fund

On the face of it, Sectoral funds look like a good investment option. However, I would not recommend them to you for the following reasons:

Lack of Diversification:

A Sectoral fund, by definition is a fund whose investments are concentrated in one industry. For example, a Pharma fund will invest only in shares of Pharma companies. Thus, the fortunes of the fund are tied to the fortunes of that industry. If there is any negative development that adversely affects the industry, then it is all downhill for the sectoral fund.

Lack of Flexibility

Any investor will understand that his or her investments can be adversely impacted if there is any newsflow that negatively impacts the investment. For example, a tyre manufacturer will be adversely impacted if there is a rise in price of rubber. The advantage of investing through the mutual fund route is that we get the benefit of a professional manager. Such a professional should be able to foresee likely problems and exit from investments that will get impacted. In our example, the fund manager will sell the stocks that can be negatively impacted due to a probable increase in price of rubber. The money obtained from sale of such shares would be used to buy shares of other companies.

However, the fund manager of a sectoral fund suffers from a certain disadvantage. Assuming that the fund manager is good and has been able to foresee the likely fall in share prices, he or she can surely sell what is currently held, but lacks the flexibility of buying something else. The investment mandate is to invest only in shares of companies belonging to that sector. The fund manager will have to either hold cash or continue to invest in shares of some stock of that industry. To that extent, the fund resembles a passive fund. Sectoral funds should be about active investment strategies and for that reason, the expense ratios are also higher.  Thus, sectoral funds score low in terms of flexibility.

To illustrate the above point, let us take a simple example of a hypothetical “Banking fund”, which currently holds SBI, ICICI Bank and HDFC Bank shares. The market expects the RBI to increase Repo rates, which is perceived as a negative development for banking industry. What would the fund manager of this Banking fund do? Even if the market correctly anticipates a rise in interest rates, would the fund manager sell all the 3 banking stocks? What would he or she do with the amount realized? Would the money be invested in other “Banking” stocks? Will such other Banking stocks not be impacted by the rise in interest rates? More critically, what if the anticipated rise in interest rates does not take place?

Which Sectoral fund?

Even if we assume that the fund manager will find a way to manage the above situation, the decision to invest in a particular fund has to be made by us. Do we have the competence to be able to understand how different sectors will perform over the next few years? Most of the times, our decision to invest in a sectoral fund is on account of friendly advise received by our broker or financial advisor. Again, most of the times, they are selling to you the flavour of the season. Most advisors and brokers do not have the necessary knowledge to analyse and forecast Industry performance.

Contrast this with a diversified equity fund. The diversified fund would also have exposure to the favourite sectors such as Pharma, IT, Infrastructure and Banking. However, when a fund manager anticipates that a particular sector, say Pharma, is unlikely to perform over the next few years, he or she would have the flexibility to move out of Pharma and reinest in other promising sectors.

High Total Expense Ratio (TER)

Sectoral funds have typically higher Total Expense Ratios. This is understandable as the returns from these funds are likely to be much higher. In other words, you end up paying higher asset management fees to the fund manager. Brokerage on these funds is also higher.  While TERs should not matter as investor looks for net return after TER is paid for, we must understand that higher TERs eat into our profit. Also, TERs need to be paid even if the fund incurs a loss!


Sectoral funds provide an opportunity to investors to invest in shares of a particular sector and have provided high higher returns. However, lack of flexibility, the concentration of investments in a few companies of a particular sector and higher TERs suffered by fund managers make Sectoral funds an unattractive investment option.

How to exit ULIP and switch to Direct Mutual Funds

Often many investors realize that they bought a Unit Linked Insurance Policy (ULIP) without knowing the various costs that go into the investment every year. They may have liked the insurance cover and the prospect of investment returns that the product promises to generate. An agent might have painted a rosy picture and shown tax savings that might accrue. As it happens with any product that is pushed aggressively by agents the end result and what is promised could be quite different. You might have thought its a beautiful tULIP but may have ended with a lemon!

Once the realization dawns, the decision to switch out is not easy. Most of us have a deep psychological aversion to a loss. Research by famous psychologies – Amos Twersky and Daniel Kahnemann also points out that the pain experienced in losing a thousand rupees is much higher than he joy one gets by gaining Rs 1000. Naturally the common reaction is to avoid making the decision or postponing it endlessly, or indulge in analysis paralysis.

Whatever the ‘process’ the end sate is not favourable to the hapless investor. Chances are that the investor might be scared away or intimidated by the ‘industry’ when he attempts to get out of the investment. There is a fear instilled that he cannot break the lock-in, he might lose the entire money invested – these are plan lies and something that the investor should not be intimidated with. We cover a few key points here on how to get out of a ULIP if it has not worked for you. I have already covered here in this blog before that Insurance & Investment should not be mixed together. Doing so would be at one’s own peril.


Why should I Exit a ULIP:

The answer is quite simple. A ULIP is heavily loaded with commissions and various charges (covered below). Such a big reduction in the initial amount of investment means that it is next to impossible to achieve returns that can beat even an average mutual fund. For example if various charges reduce your investment of Rs 100 to Rs 70, then getting to Rs 110 would be tough. Note that getting from Rs 100 to Rs 110 is a 10% return, which a decent Mutual Fund has been generating over the last decade). But getting from Rs 70 to Rs 110 means a 57% return which is extremely rare. As a result your investment languishes and even after 10 years you might notice that the returns could be poorer than even a Bank Fixed Deposit.


A Quick Guide to Exit a ULIP:

Let us demystify this and cover the thought process of getting out of a ULIP with 3 questions.

Should I wait till I recover my ULIP investment?

If you have held the ULIP for a few years, compare it with the returns an MF would have generated. If the gap is too big for your comfort then decide to get out of it.

What about the lock-in?

The lock in is only a psychological factor to force people to stay on. If your surrender charges are lesser than the other charges then why stay? If the return gap vs a good Mutual Fund is too big then

What are the various types of charges levied in a ULIP:

  • Mortality Charges : this is simply the life insurance premium you are paying.
  • Premium allocation charges: quite frankly these charges are often given back as rolling commission to the agent who sold you the policy; these are also cover the overheads incurred by the Insurance company.
  • Policy Administration charges: These are administrative charges.
  • Fund management charges: This is to manage the funds and invest in various stocks and bonds as the Fund Manager deems fit.

To Surrender or Not?

Check the schedule of charges year wise. It is possible that the Premium allocation charges and Premium allocation charges could be higher than surrender charges. If yes, then exit immediately.

What to do with the money redeemed?

Ensure adequate protection by buying term insurance

If your life insurance requirement was solely met by the ULIP, make sure that you purchase a Term Insurance Policy immediately.

Options for Section 80-C Income Tax Saving

There are several less leaky avenues (actually zero leak!) to invest your hard earned money and at the same time obtain Income Tax savings. These are Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and Equity Linked Saving Schemes (ELSS). ELSS funds are also available in direct mutual fund platforms like (look for “Tax Saver”)

Remainder of the funds

Invest remainder money in diversified and DIRECT mutual funds. Mutual Funds are a reliable way of investing in the growth of the economy at a reasonable cost. Make sure that you invest in the Direct Plans of mutual funds as they carry 0% annual commission. Unlike Regular Plans where 1% to 1.5% commission is compounded every year, you could end up making up to 30% – 40% more.


Getting out of ULIPs is not as tough as one can imagine. One has to overcome the fear loss aversion. It is always better to cut your losses and start afresh! Wake up and smell the fresh tULIPs!

Getting Value for Crores Collected by Banks?

A Bank is a great place to make or receive payments. But if you are using the bank as a channel for your investments, then think about this in the short post here.

Banks Mutual Fund Commissions are growing

Banks that have sponsored Mutual Fund companies (or AMCs) have collected Rs 800 crores as commission from their AMCs. This number has gone by by 83% over the last year. So if you are investing in Mutual Funds through your bank, pause and think – are you getting value?

If the bank is collecting more from its own sponsored funds then is there a conflict of interest? Are the employees of the bank incentivised to ‘sell more’ of their own Mutual Fund instead of offering the best of choice to their customers?

Here is some data:

Name of the fund house Commission paid to sponsor banks in FY 2016-2017 Commission paid to sponsor banks in FY 2015-2016 Change Change%
ICICI Prudential




103.39 89.14 86.22
SBI 175.46 60.64 114.82 189.34
HDFC 167.89 90.65 77.24 85.21
Axis 151.43 92.01 59.42 64.58
Kotak Mahindra 42.15 45.23 -3.08 -6.81
HSBC 18.46 16.82 1.64 9.78
Canara Robeco 16.54 10.52 6.03 57.34
IDBI 14.29 4.64 9.65 208.32
Union 8.07 5.56 2.52 45.36
Baroda Pioneer 6.73 3.48 3.25 93.51
BOI AXA 4.52 3.50 1.03 29.35
Total 798.09 436.43 361.67 82.9

How does a Bank make money?

Let us simplify the main sources of revenue for a bank.

  1. A bank makes money off the Current & Savings Account ( ‘CASA’) when you keep your money idle there (or earning a low 4%-5%). This ‘low cost’ deposit for the bank means that you are not getting your money’s worth. Instead the bank is able to lend this to various people at rates as high as 11%-12% and make money on the spread.
  2. Your ‘Debt Habit’ : You might be taking loans from a bank for a car, bike, personal vacation or something else. If you carefully notice, there is heavy advertising on loans to fuel consumption.
  3. Sell expensive and low returns products such as ULIPs: You could buy products that may not give you the best value. Various insurance + investment products are of this type.
  4. Distribute mutual funds with higher commissions: This is where you are losing 1% – 1.5% of your investment in commissions EVERY year. Over the long run (20 years) this means you could lose 40% of your wealth due to compounded commissions!

Summary – Why is this relevant for you?

This is important simply because you should be getting the best value for your money! You decide if of the four options above which one suits you the best. Quite clearly Direct Mutual Funds is the way to go and you must choose a platform that is easy to use, gives you good advice and provides great service.

Should One Invest in Equities or Equity Mutual Funds?

“I am a conservative investor”.

“I do not like to take risks”.

“Equity is not for everyone, definitely not for me”.

“Invest your money wisely. Don’t invest in equity”.

Do any of these sentences ring a bell? Do you also belong to the same school of thought that shuns equity in the name of avoiding risk? If yes, are we doing the right thing?

What is Risk?

In simple terms, risk is uncertainty. Uncertainty that can affect us adversely. In our daily lives, risk of losing a job, risk of falling sick, risk of injury, risk of accident, are some of the risks that we think of. Similarly, the risk of losing our hard earned money also worries us. To a large extent, our earlier experiences influence our behaviour with respect to risk.

Is losing money the only financial risk?

There are a number of stories of people who bought stocks at high levels and sold them when the markets crashed, incurring huge losses. This bitter experience makes us averse to equity. However, is this the only financial risk that we need to worry about?

Inflation is a hidden risk

When Mr. A invested Rs.1,000 in a Fixed Deposit, Rs.100 could buy 4 apples (Rs.25 per apple). After 5 years, let us say, the maturity amount he gets is Rs.1,500. However, during the 5 years, the price of apples has doubled to Rs.50 per apple and he can now buy only 2 apples with Rs.100. Earlier, he could buy 40 apples with his Rs.1,000. Now, with Rs.1,500, he can buy only 30 apples. Is this not a loss? Should we not worry about the risk of rising prices? In fact, rising prices is more of a certainty and the only thing uncertain about it is the rate at which the prices will rise.

Many people understand this phenomenon. When I tell this simplistic example to participants, the normal reaction is “Yes, we understand inflation, but you are over exaggerating it in your example. Inflation is in single digits”. I agree. I am exaggerating it a bit for simplicity. However, single digit inflation is a myth. Check the prices of your consumption basket – fruits, vegetables, foodgrains, electricity bill, water bill, taxi rides, and if possible, compare them with what used to be your spend a year ago?  The inflation you experience is much higher than what the Consumer Price Index reveals! Inflation steals money from us without we realizing it.

Interest Rate Reduction

Various business leaders have been advocating reduced interest rates. There is a whole lot of Economics that needs to be understood to arrive at the right conclusion. We will address that in a separate blog. However, we do not have any association or body representing the depositors’ viewpoint. A large number of people, particularly senior citizens, depend on “fixed income” instruments such as Post Office savings schemes, Fixed deposits and Bonds. Would a reduction in interest rates not be a risk to such investors?

How to protect ourselves from the risk of inflation and falling interest rates?

Gold, Land and Equities offer a hedge (protection) against Inflation. In a separate blog, I had advocated having Gold as a part of our portfolio. Land, or Real Estate, is not a financial asset, unless we have mutual funds investing in Real Estate. REITs do not serve the small investor’s purpose. As a real asset, investment in Real Estate requires huge amount of money. It also scores low on Liquidity. Thus, that leaves us with Equity as an option to protect our investments from the risks of inflation and falling interest rates. But, Equity is the MOST risky investment! Or is it, really?

What is the risk involved with Equity Investments?

It is true that equity investments are risky. However, we need to understand the risks associated with Equity. Investment in Equity is exactly like investing in a business.  Imagine yourself and a friend of yours starting a small grocery store or a service centre. We will think a hundred times about all the pros and cons before we put our hard earned money at stake. In other words, our investment will follow our conviction about the idea. Since we are convinced about the idea, we will give it our all and be in it for the long haul. In spite of all this, we could make tactical or strategic errors and the business may fail. Thus, the big risk with business is that it may fail.

When you buy 1 share of Reliance Industries Limited, you are effectively entering into a partnership with Mukesh Amabani ( and several others) to run an oil and Gas to Retail Vertically integrated business. On your behalf, Mukesh Ambani and some others have done enough homework about the business. They are there in it for the long haul and will give it their all. Yet, the business may fail.

Another risk associated with equity is that we may have bought a good business, but at a wrong price. In other words, we paid much more than the business is currently worth. Retail investors are often guilty of investing into equity at peak prices. The reason for the same is that we generally make our investments based on advice of an “expert”, who could be a knowledgeable friend, a broker, someone who knows someone who is an ace investor, and so on. While there is nothing wrong with such advise, we do not understand the basis of such recommendation. Also, our “expert friend” has no accountability for the advise and while he/ she would have sold the investment at an opportune time, there is no way he/ she can remember all the people to whom the advise to buy was passed on. We are left stranded with the stock while the rest of the world has already exited.

Lastly, the most disturbing reason for investing in equity is our desire to make quick profits. Equity investments are the best asset category for building wealth, but they are no “get rich quick” solutions. We buy a stock hoping that it would double or triple in a few days. When that is not happening, we run out of patience. One piece of bad news at such a time is enough trigger for us to sell the stock and book our loss!

The Silver Lining

It may sound cliched, and almost every body says this, but the good part of investing in equities is that they give you inflation beating returns (on a conservative basis) over the long term. The guy who is running the kirana tore may be making more money than the young software professional. That is because, the returns are much higher in business. In most cases, even if the investment is made at high valuations, but in good stocks, the investor earns a decent return over the long run.

Missing out on the most tax effective asset class?

Equities are the most effective instruments from the perspective of taxation. Dividends are exempt from tax. Dividend Distribution Tax is not applicable. There is no Capital gains tax if held for a period of 1 year. Even short-term Capital gain is subject to a flat rate of 15%. The rules are same irrespective of direct investment in equity or through mutual funds.

What does not work with Equities?

Hoping to make a quick buck on some hot news often results in investors like you and me incurring losses. Those who make money are probably plain lucky and should be buying lottery tickets for even more super-normal returns!

Taking a short term view is risky. If you have a financial commitment over the next 5 years, it is preferable to park the money in debt. Equity is strictly for long term investors. The technical definition of long term is more than 10 years, and not more than 1 year as our Income Tax rules suggest! If you are not in for the long haul, equity is not for you.

Investing in equity without understanding the business is like entering a blind alley. You do not know what is in store.

Who should invest in Equities?

Almost everybody can invest in equity. The only exception is a person who needs money in the short term. If your financial goal is falling due within the next 5 years, it is preferable to move your investments into debt.

How should I invest in Equity?

To tackle the various risks associated with equity, such as study of the business, valuation of such business, etc it is highly recommended that we take professional help. Instead of investing directly into equity, invest in direct mutual funds that are equity oriented. Just remember, whether it is direct equity or equity oriented funds, investment in equity should be for a time horizon in excess of 5 years. Of course, mutual funds allow you the flexibility to liquidate your investment any time, but realization of financial goals can happen only by allowing equity to work for you.

How much Should I invest in Equity?

There cannot be a generalized asset allocation for one and all. A professional investment advisor such as a CFP or a RIA will help you arrive at the right allocation.


Equity is an asset class that provides inflation beating returns. Do not ignore or avoid equity investments considering Equity as risky. Risk is involved in fixed income securities also. Choose equity as per a customized asset allocation. Invest in direct mutual funds that are equity oriented.

Happy Investing!

How many Mutual Funds should I invest in?

Through this blog, I have been answering some questions which are asked to me regularly by investors. One such question is the topic of today’s discussion. How many mutual funds (schemes) should I be owning?

Well, before we answer that question, we need to once again revisit a more elementary question. Why should we invest in Mutual Funds? Let us answer that first.

Why should we invest in Mutual Funds?

The simple answer to this question is that we need to diversify our investments. By investing in mutual funds, we get the services of a professional fund manager. He/ She is able to pick the right investments for us. Moreover, although the amount of money we invest is small, sometimes even as low as Rs.1,000, we get the benefit of investing in shares of different good quality companies.

For example, if I invest Rs.1,000 in ICICI Prudential Value Discovery Fund Direct plan, your Rs.1,000 enables you to own 40 stocks, including L&T and HDFC Bank, whose share price (of 1 share) is more than Rs.1,000. This is because the fund manager is managing a large amount of money( Rs.17,300 crore plus as on May 31, 2017) and can afford to spread the amount across different investments.

Secondly, Regulation forces the fund manager to invest in different securities. Thus, one clear benefit of investing in Mutual Funds is to get the benefit of diversification.

What can go wrong with Mutual fund investments?

We have repeatedly come across the statutory warning of “mutual fund investments are subject to market risks. Please read the offer document carefully before investing”. What does this statement really mean? It means that although a professional fund manager is managing your money, he or she does not provide any guarantee that you will get any assured returns on your investment. Your investment value may go down, resulting in a notional loss to you.

What it means is that the fund manager can go wrong with his choice of investments, just like you and I can. However, because of the regulatory requirement that the fund manager has to necessarily spread the investments, the impact of the fund manager’s wrong choice is likely to have a lesser impact than the impact of a mistake committed by us.

Thus, investments in mutual funds, particularly in equity mutual funds, can result in a loss. However, because of the benefit of diversification, the impact of such a loss on us gets cushioned.

So, should I invest in only one mutual fund scheme?

To answer this question, we again go back to a more basic question. Why am I investing? I have emphasized in my earlier blogs also that investments need to be made based on our financial goals and not for the sake of investments. Thus, a goal based investment plan will result in a portfolio of various financial assets such as gold, equity, debt and liquid assets. Obviously, one fund will not be able to meet this requirement. Based on your portfolio allocation, you should ideally hold multiple mutual fund schemes across various asset classes. So, your portfolio will contain equity mutual fund(s), debt mutual fund(s), liquid fund(s) and Gold fund(s). One mutual fund is unlikely to ideally replicate the requirement of our portfolio.

How many funds?

We are now back to our original question. How many funds should I own? Should one fund under each asset class suffice?

Although our portfolio allocation will have a mix of each of these asset classes, we need to recognize that there are various sub-asset classes within an asset class. For example, within equity, we have Large Caps, Mid and small Caps, Thematic funds, ETFs, Tax Saving Funds, etc. Thus, our portfolio allocation should not stop at the asset class level, but should drill down further up to the sub-asset class level. Your Risk profile can determine the composition of funds at the sub-asset class level that you should be holding. Holding one fund does not help. We need to invest in multiple funds, based on our portfolio allocation.

What if we end with an under-performing fund/ fund manager?

This can always happen. Sachin Tendulkar (or Virat Kohli for today’s generation) may be a great player but we cannot expect him to score a century in every match. We may not be personally impacted if a batsman fails to score runs, but we will be impacted if a fund manager fails to perform. Hence, it may not be a bad idea to go with 2 fund managers. In other words, choose two different funds under each sub asset class. Again, to illustrate, if the portfolio allocation recommends investing 20% of the funds in large Cap Equity, it may be a good idea to invest 10% in say, ICICI Focussed BlueChip equity Fund and another 10% in HDFC Top 200 Fund (this is not a recommendation. The names of the funds have been stated for illustrative purposes only). I do not see any point in choosing three, four or more funds within the same sub asset category, except in some very specific situations.

Same AMC?

I do not have a problem with 2 funds being selected from the basket of funds offered by the same AMC. However, the fund managers of the two schemes should be different and also work independently of each other. More often than not, this is not the case. Hence, it is advisable to choose 2 funds from 2 different AMCs.

Should I do this for all sub-asset classes?

This strategy of choosing 2 funds under each sub-asset class can be applied for all actively managed funds. However, in case of funds that are passively managed, there is no point in diversifying across 2 funds. This is because, in case of passive funds, there is no role of the fund manager. For example, to the extent your portfolio allocation recommends an investment in Gold, investing in one gold fund is good enough. All gold funds, being passive, will have an identical performance.


There is no magical number of funds to own. It depends on your goal based portfolio allocation at the sub asset class level. Within each sub asset class, for actively managed funds, choose two funds across different Asset Management companies and in case of passively managed funds, choose one fund. Of course, consulting a Registered Investment Advisor to specifically plan a portfolio for you would be the best thing to do. One thing that should not be forgotten is to invest only in Direct Mutual Funds.

Happy Investing!

How to make compounding work for you, Why invest early in mutual funds

Compounding growth is a fantastic thing when it comes to mutual funds and investments; but it can be found everywhere! You and I started as embryos but we are finally here because those embryonic cell grew at rapid pace! Behind all life forms there is a simple math. This math has compounding at its core.

Remember the story where a king generously offered a man anything he asked. The man said he just need two grains of rice for each of the 64 squares on a chessboard. The condition was that number of grains would be double of the previous square. In the end the king had to sell his entire kingdom!

Compounding has been called the Eight Wonder of the world! Why? Read on..


What is Compounding Interest & Growth?

It is simply interest earned on the interest generated by the original investment.

(Did you see a simpler definition?   🙂 )


How does Compounding Work in Mutual Funds?

Let’s take an example right away. Suppose Ram invests Rs 1,00,000 every year from age of 25 up to his retirement at age 58. He would have invested Rs 34,00,000. Simple interest on this would be Rs 3,40,000. A total of Rs 37,40,000. Cool isn’t it?

NO! compare this compounding. Had he earned interest on the interest every year, ie interest on Rs 1,10,000 in the second year (because his first year end balance would be Rs 10% on 100,000 + Rs 1,00,000 = Rs 1,10,000) and so on, then he will have a larger kitty.

How much? That is Rs 2.7 crores! SEVEN times more when compared to original + simple interest. If you don’t include the simple interest, then its EIGHT time more than the original investment.

Age Ram Starts at age 25
25 1,10,000
26 2,31,000
27.. 3,64,100
..35 20,38,428
36 … 23,52,271
.. 56 2,21,25,154
57 2,44,47,670
58 2,70,02,437


What is the impact of starting early in mutual fund investments?

Starting early is important simply because your base grows larger with time. Let’s take a second example.

Suppose Ram’s twin brother Shyam also starts investing Rs 1,00,000 every year until his retirement at age 58. The difference is that he starts at age 35, which is 10 years after Shyam.

Only 10 years later, what difference does it really make? The table bellows that while Ram ends up with Rs 2.7 crores, Shyam ends up with only Rs 97 lakhs!

compounding growth in mutual funds starting early

Here are the highlights:

  • Ram gets EIGHT times his original investment.
  • Shyam gets only FOUR times his original investment because he did not start early.
  • Just by starting earlier Ram makes THREE times more money than Shyam investing the same Rs 1,00,000 every year.

And the numbers below:

Age Ram Starts at age 25 Shyam Starts at age 35
25 1,10,000
26 2,31,000
27.. 3,64,100
..35 20,38,428 1,10,000
36 … 23,52,271 2,31,000
… 56 2,21,25,154 78,54,302
57 2,44,47,670 87,49,733
58 2,70,02,437 97,34,706


Why is this so important? Because of Inflation!

While compounding is your Brahmastra or divine weapon acting FOR you, inflation is the opposite, working against you.

An inflation of 8% makes an original amount of Rs 1 lakh reduces to HALF in eight years. The average inflation for the last eight years has actually been 8%.

Unless your money works for you day and night (yes it works at night also), inflation will eat half of it in 8 years.

 Amount after Inflation
Original 1,00,000
Year 1 92,000
Year 2 84,640
Year 3 77,869
Year 4 71,639
Year 5 65,908
Year 6 60,636
Year 7 55,785
Year 8 51,322


The Danger of Compounding Commissions in Mutual Funds

Just like those seemingly small things like starting early, or inflation there is another hurdle to your financial well-being. This is compounding commissions of Rs 1% to 1.5% on your investment every years.

Let’s take another example. Suppose Ram had invested through a commission-based advisor (93% of people do that). The advisor could be a person or a portal like ICICIDirect, ETMoney, Scripbox, FundsIndia etc. Commission taken is only 1% per year.

benefit of direct vs commision based mutual funds

Ram’s money instead of giving him Rs 2.7 crores will give him just Rs 2.1 crores. In other words, compared to 2.1 cores, he would have earned 33% more in 20 years by going 0% commission.


Age With 1% commission With 0% commission
25 1,09,000 1,10,000
26 2,27,810 2,31,000
27.. 3,57,313 3,64,100
.. 56 1,78,80,032 2,21,25,154
57 1,95,98,234 2,44,47,670
58 2,14,71,075 2,70,02,437

The actual commissions are more (depending on the fund). With a commission of 1.5% the corpus reduces to Rs 1.9 crores. Going direct he could have mode 40% more!


Bonus Tip 1: Should I opt for Growth or Dividend option in Mutual Funds (all this compounding!)

For mutual fund investors a common choice is to invest in Growth Option or Dividend Option. The difference is that in Dividend Option the gains are given back to the investor regularly; in Growth option they are reinvested in the same fund for more growth.

If you are smart investor focused on the long term, you know the answer! Go for the Growth option as that allows you to compound your money much more over the years!


Bonus Tip 2: Avoid Debt

With Debt, compounding is working AGAINST you! Imagine Ram climbing a mountain up, whereas Shyam is sliding backwards. That is debt for you.


Conclusion & Summary:

With the FOUR simple examples above, we all agree that:

  • Start really early, a small amount like Rs 1000 is absolutely fine!
  • Beat the evil of inflation with compounding
  • With mutual funds invest in Direct Plans only, even 1% lesser return means you can lose ONE-THIRD of potential gains. Or upto 40%
  • Opt for Growth options of mutual funds if you are looking for higher value creation in the long term.


Even Albert Einstein noted that “He who understands compounding, earns it but he who doesn’t pays it.”