SIP or Lumpsum? The question will stay forever.

SIP stands for Systematic Investment Plan where you invest in an equity fund at regular intervals of time. Lumpsum stands for investing the entire sum you planned to invest in one go. Let’s look at both the options.

If you are new in the market and do not know when to enter (remember that in the market, timings are what matters most), SIP is usually the course taken by most people. Why?M

1.Minimizes the risk

Let’s assume you invested Rs. 10,000 during the peaks of the market and the next day market goes down by 30%, you have already lost Rs. 3000.  Consider a SIP where you invested Rs 5000 during the beginning of the first month and another Rs. 5000 in another month.  The market went down by 30% in the first month and recovered by 10% during the second month.  This makes your investment amounting to Rs. 3500 at the end of the first month but Rs. 5500 during the second. Taken for two months, investing in lump sum amounted to the total balance of Rs. 7700 at the end of two months while through SIP, it was Rs. 9000.

2. Help you take advantage of the market

Sometimes when you buy, the market is weak and hence you can buy more stocks at low prices and in times when the market is strong, you might be able to buy less for more.  This is what SIP takes advantage of and however hard we try, the one thing that somebody cannot time accurately is market.  Certainly, some prediction can be made, but nobody can take care of all the endless things that can suddenly change the weather in the markets. SIP is a smart way of taking advantage of these golden times.  This is also called rupee-cost averaging much for the same reason explained above.

3. Makes you a saver

Taken a chunk of your hard earned money every month and putting it up for investment that could otherwise have bought you a delicious pizza is hard but yes, if you go for a SIP, it just gets done on fixed dates.  The fund manager takes the share it owes making you a habitual saver.

But the choice of SIP over lump sum is more of a psychological choice than the return for investments.   People who would have invested lump sum during the times when the market was falling and finally crashed, they would be wary of taking such a risk again.  But, eclipses are not an everyday event.

Consider an example.  Let’s say Mr A has Rs. 4, 00, 000 to invest.  Similarly, Mr B also wants to invest Rs. 4,00,000. Mr A put his money into the equity fund a lump sum with an average return of 15%.  His invested capital at the end of 4 years would be 7 Lakh. Mr B, however, puts his money into the equity fund as SIP, investing 1 lakh every year.  His return at the end of four years would be 5.74 lakh invested at the same average rate of interest.

In market essentially, it more about the time that the money stays invested which decide the returns.  In lump sum, 4 lakhs was invested for entire 4 years that generated 7 lakhs.  In SIP, 1 lakh was invested for 4 years, another 1 lakhs for 3 years, and other 1 lakh for 2 years and the remaining sum for 1 year pulling down the overall return on investment.

Though this is a never-ending discussion, choice of SIP over lumpsum is essentially about the financial choices of the individual.  If I am not sure of the total balance in my bank account every month, SIP is out of the question while if I am a not so rich with a large capital at hand, the lump sum is out of the question.

Return is obviously subject to the volatilities of the market but the longer you stay invested; the more returns you can expect.  SIP and lumpsum both are good means of investing your capital in markets, your choice depending on the amount of capital in your hand, the time for which that capital won’t be needed to meet your emergency needs and the degree of risk you can afford with your money.

Important note: As per the performance statistics of the leading long term equity mutual funds like Axis long term equity fund or Principal hybrid fund, for example, the return for lump sum over the period of 3 to 5 years are higher than those for SIP.

How do financial institutions help economies?

As promised in the past articles, I will first brief you about the need for financial intermediaries in the system and then a throw little light on how economies and financial institutions linked.

When savers have extra money to lend, it is hard for them to figure out the right borrower and the one meeting their needs, among the huge crowd available in the market.  It is also important for savers to check the background and financial health of the lenders in order to make sure they will be able to pay back the money.  Similarly, it is also crucial for savers to keep monitoring the condition of their invested value and regularly keep an eye on the borrowers.  Lenders do not usually have the time and resources to do it efficiency and that is when financial intermediaries come into the picture.

Consider for example banks. How do you think they pay you interest over investments?  You pay them certain among of money in return for a fixed rate of return. They then lend that money to somebody else, in the form of loans in return for some rate of return (usually higher than they owe you) and then pay you the part they owe, keeping the remaining themselves.  Insurance companies are other examples.  Insured person money goes to somebody who is willing to take up the future risks and they use this money to invest in financial markets expecting more returns than the probable risks from the insured person.

In the situation where finances are scarce, individuals are forced to make a choice. A certain sum of money that they hold could either for used for buying a house, or a car or a take an abroad trip for example. This competition for resources is important to ensure that the limited resources are used wisely.

Consider for example capitalist markets.  There some business holds all the power to decide what products will go the market and what prices would be paid by the customers.  On the other hand are democratic economies where multiple businesses compete with each other for similar products.  Let us take the example of soap.   There is Dove, Dettol, Cinthol,  Medimix and a number of others and all are priced very close.  Similar is the case for toothpaste and for that matter any other product.  Ever wondered why Lays and Uncle chips sell at the same price? Same products competing in the markets cannot afford to be priced higher from the other until they hold a significant advantage. This competition to be the choice of customers fosters creativity in the market and also drives down prices.  Now when businesses like these are expanding and need capital, they approach the markets for funds.  Here savers play a crucial role,

  1. They invest in businesses that have good financial history, good client base and excellent upper management. This benefits the economy as the growing big businesses could mean increasing employment, increasing variety of products to the customers, and improved quality at the best price.
  2. Some risk-takers invest in businesses that have the potential to become big through the potential in their ideas.  Some of these businesses might be trying to expand in the territory of existing businesses.  This fosters competition, which improves efficiency and drives down prices. 
  3. Savers have financial intermediaries in the system to choose the right borrower for them by using their comprehensive research database and in house skilled team of professional experts in these kinds of analytics. This ensures that resources used by individual savers in finding the right borrower are saved and they can be used for their best use.
  4. Investment industry packages the relevant information about borrowers together making it easier for lenders to give money. This hassle-free and transparent approach builds confidence in the savers and makes them more willing to participate in the markets.
  5. Investment industry also helps investors with liquidity.  It is difficult to sell land or a house immediately at your desired price in the time of need but if you have shares of actively traded companies, you can share fairly large of shares without compromising with your returns.  

Ultimately, the investment industry essentially exists as the point of connection for buyers and lenders, with regulations and systems in place. This confidence in system security and credibility helps lenders enter and actively participate in the market, crucial for the economy to grow.

Ten things that make an organization successful.

Apologies for going a little off track! I thought that business can’t grow without a strong value culture. Forget about investment and wealth creation and finances, nothing is possible without the backing of strong organizations which stand on the shoulders of excellent employees.

The ten things listed below are crucial for a company to be successful, survive long and create an image where people dream to be a part of it.

Team-working is promoted

There are companies where one project one person approach is followed with the perspective that more people mean more projects and faster work results. On the other hand is a company where each project has a team, however small or big is the project. Problems with the single person handling every aspect of a project are:

  • Competencies of a person vary and the only person handling a project might not be good at all.
  • There is nobody to correct and suggest improvements.
  • Limited learning, no knowledge transfer.
  • Unnecessary dependencies and therefore work delays.
  • Internal destructive competition in the team to prove themselves better.

When only one person looks after the project or a problem, the credit or discredit goes to one person and this internally divides the team. The progress of one project is ultimately the success or failure of the single person handling it and this creates a feeling of competition between the members of the same department. Working in groups or teams ensures that everybody is helped by everybody else to successfully conclude a project in the interest of the company to which they all belong. It also encourages productive discussion between the team members over lunch/dinners and helps to build a healthy relationship. Working in teams develop a culture of mutual responsibility and this eliminates people questioning each other in difficult times.

Have strong managers

In successful organizations, the people leading the team are problem solvers, approachable, friendly and dedicated to creating a healthy culture in the team. Managers are people employees look forward to when they are stuck in a problem and are expected to offer smart solutions. They trust their teams and open to accepting that their team members could be smarter than they are. They don’t gossip about their team at their back and take accountability for their actions. They share credits and help team trust each other and prevent internal dissension.

Employees are heard of

In a successful organization, employees are not scared to speak. Whoever might be the person in question, successful organizations ensure that anything in the good of the organization is heard of. Be it about managers, team leaders, directors’, flaws in the system or anything for that matter, employees aren’t insecure to speak. Good organizations understand that people at any level are working for the company and not for the people belonging to that company. Everybody in the company holds equal powers with varying responsibilities and this is developed in the culture of the company.

Employees feel secured and valued

In a successful organization, an employee works because they want to and not because they have in order to survive. Good organizations provide freedom to employees. Their experience and contribution to the company are valued and they are not disparaged when another person competent to take up their responsibilities is hired by the company. Employee work as the time demands and they need not appear to be busy to be valued. The good organization ensures trustworthiness and openness in culture. Even after an employee leaves, their transition is ensured to be smooth and they are waved goodbye respectfully and thanked for their contribution to the company.

An organization pays the employee for the time taken from him. No organization can pay an employee for the value added to the company and the benefits it reaps from it several decades after the employee is not there to serve the company. This notion is respected by successful companies.

Ideas win over politics or titles

In good organizations, ideas win over politics. Politics spoiling or masking the ideas from the introverts in the company are taken care of. Good organizations ensure transparency in the transfer of information and that bad politics do not spoil the culture of the company. Rising up the ladder in such an organization is based on the ideas and competencies.

Lower level workers are made to feel important

No organization can succeed if the people at the lower level stops working and therefore needs to be given the top priority. Whether they are people in the shop floor, sweepers, watchmen, pantry boys, production workers or laboratory workers, good organizations understand that they are the real assets of the company. It’s their sweat and blood that helps company meets its targets whether directly or directly and they deserve that respect.

Organizations where they are made to feel they are different and less important from people earning higher salaries rarely rise the ladder. No organization can earn a penny if these people stop working. Successful organizations understand their contribution and give them the respect and consideration they deserve.

Valuable employees are retained

Good organization ensure that the best brains of the company are retained. A good employee working for another organization is ultimately a competition to the company and they understand that. Strong managers ensure that the best brains are kept engaged. Every valuable employee leaving the company pushes it back by several years. Every new hire needs to be trained and will take around a year to fit and understand the culture and work-style of the company. By the time they fit, they leave the company and the cycle repeats making bad organization investing more time in hiring and training new hires than investing in retaining and development of their old employees considerably saving on time and money.

Micro-management is absent

Successful organization hire the best fit for the role and they understand that every person has their own work style. If an employee needs to be managed, you have probably made a wrong hire. An employee who can’t manage them self can’t be expected to manage anything else. Managers ensure that they hire people who are enthusiastic and take responsibility, keep them engaged and motivated, peep-in when they are asked to and give their teams freedom to decide, give a practical deadline and invest in employee growth and development. Micro-managing puts off the valuable employee, suggests a lack of trust and mars productivity and zeal. Successful organizations ensure that employees learn to manage their work with the help of their managers rather than managers controlling their time and work.

Right people are hired

Successful organization hire the right people. As famously said by Steve Jobs, “It doesn’t make sense to hire smart people and tell them what to do. It makes sense to hire a smart person and let them tell you what needs to be done”. An organization is nothing but its employees. An organization consisting of bad employees and weak brains is a higher cost to the company than hiring great employees, smarter brains and paying more. Ultimately, this sets the baseline for the company and the cycle goes on. The cost saved on hiring an incompetent employee, training and managing them periodically, investing time to get the work done is equivalent to hiring a smart person, paying more and saving on these auxiliary costs. Successful organizations are good at these cost-benefit analyses and know that a strong employee base ultimately turns into a strong company.

Knows that all the above are important

A successful organization know that to be competent means all the above are taken due care of.

These are things I learned from my own experience working in the industry for a year now. So, are you working for a strong organization? Let me know in comments. Do tell me if I missed something!

Mutual funds! Sahi hai?

This is, in fact, a significant question to ask and the article aims to throw light on the various factors that make people invest in mutual funds. Of course, nobody trusts anybody easily when it comes to money and this is about giving a large sum of money to somebody for investing on your behalf. My God! It needs careful thought.

With the growing number of mutual funds in the market due to the rising number of people finding it attractive, it is difficult for a beginner to make a choice.  Yes, you can consult magazines and check online investment websites, but as an entrant new to the investment world, it is not an easy game to understand it all. Let us discuss the various factors that influence the investor’s decision,

  • Returns and the associated risk

No doubts, investing in markets are one of the best ways of maximizing the return on investment.  But most people lack the expertise needed to choose their investment portfolio for themselves and do not always have enough capital to diversity it enough to minimize the risks possible. That is when mutual funds make the weather so convenient. Somebody smarter than you collect the money from all the interested investors and invests it in multiple companies, in multiple kinds of the sector and across a wide range of securities. People with limited income especially find mutual funds attractive rather than entering directly into the market.

  • Educational qualification

Research shows that people who are educated tend to favour investing in mutual funds.  It suggests that as the people become more aware, they tend to be more inclined towards mutual fund investment compared to people who aren’t educated enough. For the latter, the mutual fund is an especially risky avenue for savings appreciation.

  • Lack of time

Close to 95 million people are investing in mutual funds as per the latest data. Statistics show that people, even when they know about markets, prefer investing in mutual funds for the convenience it offers.  It takes away the hassle of regularly monitoring your investments. It is an easy route to higher than bank and fixed deposit returns, saves a lot of time and a lot of worries.

  • Tax benefits

A lot of mutual funds offer a tax benefit to people under section 80C. This makes it an attractive proposition for a lot of people.  Taken effectively, the return on a good mutual fund can exceed CAGR 25% if the income saved in taxes is accounted too.

  • Transparency

While mutual funds make you carefree since your funds are in the hands of an expert managing your investment portfolio, you get regular updates on its performance with details of all the sectors and companies that the funds have large holdings.  This makes thing transparent and anytime the fund doesn’t meet the expectations, the investor is free to withdraw its money (mutual funds usually have high liquidity) and put it into a different fund. It’s as easy as that!

  • Other factors

Research shows that males have a higher tendency to invest in mutual funds.  Married females have a higher tendency to invest in funds as compared to males.  Mutual funds also have less transactional costs as compared to when the individual stocks are traded.  All the factors combined to increase the tendency of people to invest in mutual funds and this is probably the reason that while it originally started in States, this has been so popularized in India and a growing number of Indians now have their money multiplying in the hands of various fund managers.

What you need to know about Network Marketing?

This is coming from my recent reading, “Business for the 21st century”.  This is aimed at giving a summary of what the book suggests. Interested readers,‘Go on’.  For the rest, ‘Sorry to disturb you man’.

Robert Kiyosaki is one of the few people I really admire. Be it his ‘Rich Dad’ series or other books on business, none fails in communicating his passion and perseverance for his job.

According to him, each person falls into one of the following four quadrants,

  1. Employed: It denotes somebody like me working at a respectable company earning a monthly income and saving some part of it.
  2. Self-employed: It could mean a freelancer who is not really working for another company but for himself. This means that now his boss is his own self.
  3. Businessman: These are people who do business.  The difference between businessman and self-employed is small. A businessman has power over his source of income and it keeps coming even when he is working or sleeping (of course after a certain stage). For a self-employed person, the income stops as he does.
  4. Investor: This is a person who invests his earnings in order to get maximum return on his investments.

Each person has a mindset which makes him do what he does. An employee is a person who aims for security, self-employed people aim for independence, businessman aim for wealth building and investor aim for financial freedom. Wealthy and being rich do not mean the same thing. Being rich means owing a lot of money but being wealthy means owning enough that you live to the standard you aim to, till the date you want to without worrying about going to work.  Not every wealthy person is rich and not all rich people are wealthy.

Robert then shares what it takes to be an entrepreneur.  As he says, “It takes courage to discover, develop and donate your genius to the world”.  As per the statistics he shared, “It takes approximately $5 million to build a business, 90% of which fail in the first few years and every new business takes at least 5-10 years before the founder receives his first paycheck”. Phew! That’s asking too much.

What if I say that you do not need to start from scratch? The groundwork is already done for you. This is what network marketing exactly does. What do you think of an advertisement where one person sipping tea asks her neighbour to take that tea daily for good health? What happens when somebody comes to you for recommending a good toothpaste brand and you say ‘Colgate’ and then that person recommends the same to his friend who then shares it with somebody else initiating a chain reaction (as per any chemistry guy)? In terms of Robert, it’s called ‘Metcalfe law’, the power of multiplication.  You share something with 2 people and if they do it exactly the same way and this process goes on say for 10 times. There are already 1024 people who know about now. Whoa! It is quite a good number.

This is called network marketing.  Every advertisement where one person is recommending something to another person is trying to do just that.  ‘Why pay commercials such huge money?’ thought some smart businesses.  Why not distribute the money among people and let them do on the floor what they are trying to communicate through televisions? This gave birth to network marketing.

Network marketing as everybody things is not selling things. It is developing a network of people who share your ideas and values and trust in something with as much passion as you do. In network marketing, you are the source of contact for somebody interested to know about that thing. You represent that thing and most important of all, you believe in it.

Network marketing as Robert says is not a salesman job.  It is not a job where greedy could survive and it is not a job where ‘I can do it alone’ people can win the game. It’s the business for people who love talking, who love sharing and telling stories and who like people to grow with them.  More than above, Robert shares the eight assets you earn in the process of involving yourself into this business.  They are,

Asset 1: A Real-World Business Education: Mukesh Ambani dropped out of business school because his father told him that it’s not science. If he has to learn the business, he has to be in the playground.  This is what network marketing do. It provides you with real-world business education right as you pitch into this business.  No kidding, this like any other business needs a lot of time and effort to be successful.

Asset 2: A Profitable Path of Personal Development: Do you shy about talking to people, failing or hearing people saying ‘No’? This business is then exactly for you.  To be successful in this business, you have to be outgoing, an excellent communicator, a storyteller and a person who rejoins in rejections and learns in failures.

Asset 3: A Circle of Friends Who Share Your Dreams and Values:  It is an excellent opportunity to circle yourself with people who share your vision.  As Robert says in his book, you are the sum of the people who surround yourself with. 

Asset 4: The Power of Your Own Network:  In terms of Robert, “The power is not in the product, the power is the network”. An excerpt from books puts it perfectly, ‘

From the shipping magnates and railroad barons to Sam Walton, Bill Gates, and Jeff Bezos, the great fortunes of the world have been made by those who figured out how to build networks. Sam Walton didn’t manufacture goods for people; he built the distribution network that delivers the goods. Bill Gates didn’t build computers; he built the operating system that ran on those computers. Jeff Bezos didn’t go into publishing books; he created the online network Amazon that delivers those books.’

Asset 5: A Duplicable, Fully Scalable Business:  Why can’t salesman be excellent network marketers? They do not know how to replicate themselves in the other person.  This is the beauty of network marketing.  You can replicate yourself innumerable times in terms of your network.  McDonald’s did not seek people with a high level of expertise.  Instead, it developed the expertise right into the operation and in this way replicated itself so much that it is now present in 120 countries with more than 30000 restaurants worldwide serving more than 60 million people every day. This is the power of duplicity and scalability.

Asset 6: Incomparable Leadership Skills: More than above, it is not a business where you are earning and growing yourself.  It’s a business where your job is to help others grow and learn every day, be a teacher to your network and therefore build leaders for the growing network.

Asset 7: A Mechanism for Genuine Wealth: As you grow your network, so you grow you’re earning and as you earn and reinvest, earn and reinvest, you are building wealth.  This wealth, after you have built your network, will not depend if you are on office or a vacation, sleeping or playing baseball, the money keeps coming.  This is the power of genuine wealth creation. 

Asset 8: Big Dreams and the Capacity to Live Them: And yes, if you have all the above, you will have time to live your dreams and be free of the scary mornings where you brush up, go to the office, come home, sleep and again do the same things.  You will then go office because you want to and not because you have to.

I am not a promoter of network marketing business nor do I own one myself.  The idea of sharing it is the revolutionary shift in the culture where people step on each other to rise up the success ladder.  In this business, you will fall right on your back with this attitude. You can only grow together which makes it so great.

An overview of Investments

Financial industry as you know exists because on the one side of dice are people who are in need of money and on the other are a set of people who have money to offer. The financial industry acts as a pipeline connecting the two sides.  People need money to grow their business, purchase house, car and provide education to their children. People offer money because they have a surplus.  There are savers and then there are spenders. The role of the financial industry is to match the perfect spender with a suitable kind of saver.

Let’s take an example.  Sanjay is a young entrepreneur who just started an organic juice corner.  He needs money to buy machinery and hire people.  There is another person named, Rajni who has a lot of capital but is looking for attracting investment options to spend.  Organic juice to Rajni sounds like an interesting idea as the growing number of people is going crazy over healthy diets.  Rajni thinks if successful, this business can offer her huge returns on her invested capital.  She, therefore, lends Sanjay a fraction of her savings.

People usually invest money (mind you I said invest and not spend), to accumulate assets. What are assets? Assets are things that have value. They could be real assets or financial assets.

Real assets: Something like land, machinery and gold is called a real asset which you can later sell for a price typically higher than what you purchased it for.

Financial assets: They vary in type but they are usually paper assets.  Let’s say you own a share of a company. That means you own a part of the company’s assets and earnings.   This kind of an asset is called a financial asset.

Why would somebody consider some business to be a financial asset? Most of the times people invest in companies they expect will thrive and therefore multiply their money in terms of a share in the increasing profits of the company over the period of time.  The above example answers that.

Some financial assets can be traded. These assets are called as Securities.  The place where these assets are traded is called financial markets.  Trading can be done directly or through means of an intermediary.

Securities are broadly categorized as:

Bonds:  This is where the saver lends the spender a loan. They are therefore also known as debt securities. In return, the saver wants the spender to pay some interest on the lend money which earns a consistent profit to the saver.  Since the interest is fixed, the return for such kind of securities is fixed. They are therefore called fixed income securities

Equity: They are the share that you own in a company.  Let’s say I am confident that Nestle will do wonders in the coming years and therefore I invested a fraction of my money in Nestle.  High side,  there is no bar to the profits I can make as long as the company continue to excel and make huge profits, Downside, nobody is responsible for my money and if the company closes the next day of my investment, all my hard earned money is gone.

Interesting? Isn’t it!

So the next question is, are you accumulating assets with your hobby every day? Each coin or banknote that I own is worth a good sum of money today and as the time pass, this asset value is only going to shoot up. So yes, my hobby is accumulating my assets.

A question to all my numismatic friends here; is your asset a real or a financial asset? Looking forward to the answer in your comments below!

Next time we will see why we have financial intermediaries in the system.