Money management (an Amateur’s perspective)!
It’s been a while since I have written an essay. I was thinking about my next topic and money management came up during a conversation at home (or some Whatsapp group conversation); Why not this topic?
True, I am an amateur when it comes to managing money. I have a few tricks up my sleeve that I have learned the hard way (thanks to my association with the AMC industry and insights that I gathered from various financial advisors). So, how do I go about doing it?
Strategy 0: Let me start with what I don’t do, I don’t invest in stock directly as I have borrowed an investment principle from a famous market investor, invest as long as you understand the company, their leadership, their business, and their future plans. Unfortunately, it’s a full-time job and takes a lot of time hence i don’t invest directly in the market. I have to admit, I don’t understand most businesses anyway. I take the moral high ground, I don’t invest in the stock market. I have tried in the past, let’s leave it there.
Strategy 1 (Long term, > 10 years): Some may say, 10 years is too long a time. With so many unknowns around us (e.g. the COVID19 pandemic), do 10 years really make sense? Be that as it may, for my long term is at least 10 years and I shall stick to the same. What do I do here?
- I don’t go after all indices, I typically follow NIFTY 50 and S&P BSE 50.
- Why only the aforementioned indices? Please check the composition of NIFTY 50 or BSE 50, they are the top 50 companies in this country (let’s say, these companies have a great impact on the organized GDP of this country).
- The indices ensure that the companies coming in and out of the same are based on serious empirical performance numbers (not one time but over a period of time). I invest in the index directly via index funds.
- Why index funds? Index funds are not managed funds hence the cost of management is minimal (much lower than mutual funds that have fund management and distribution expenses).
- I look for index funds managed by large companies like SBI or HDFC. Very low management costs and works directly on the performance of the index. The COVID19 scare has caused sufficient tremors in the market hence this is not the best time to look at the performance, generally speaking, these funds do well. Remember, it’s a long haul and not for short term returns.
Strategy 2 (Midterm, 5–10 years): I go for mutual funds and I have logic for selecting funds:
- I look for Mint’s report on fund performance on a regular basis and use them to curate funds of my choice.
- I typically don’t go for funds that have accrued a lot of AUM e.g. HDFC funds are very large funds. My logic is that large funds have higher exposure and high management cost, why should we bear that cost?
- I go for funds that have done well in the past; the Mirae Asset India Equity funds are a great example. A small Asset management company with an enviable product.
- I am pretty aggressive with mutual funds investment. It’s simple, the market is volatile now but mutual funds have the much needed cushioning effect during these turbulent times. In fact, this might be the time to invest in aggressive mutual funds like equity funds or sectoral funds or thematic funds (where the money is put into related sectors e.g. transportation and logistics).
- SEBI has put tight controls on the composition of the funds, so I select a reasonably sized fund with decent management cost (3 parameters are of paramount importance -> AUM: the size of the fund, Expense ratio: the cost of running the fund and Exit load: the cost you bear when you exit the fund).
- Sometimes, I also go for funds that have invested in alternative assets e.g. gold.
Strategy 3 (Short term, < 5 years, sometimes instant gratification):
- I go for traditional investment instruments like FD, RD, etc. for near time gratification requirements e.g. am a sucker for motorcycle parts (it’s like horse racing, I need to buy something or the other every 3–6 months), local holidays, school fee or any other unforeseen expenses, etc.
- I go for debt mutual funds for “longish short” term requirements e.g. international holidays, etc. and I use the same selection policy as specified in strategy (2).
- I go for liquid funds for any other immediate gratification requirements. Instead of keeping money in a savings account, I use liquid funds. With the interest rates falling dramatically these days, liquid funds will mostly give you more value for the money rather than keeping your money (dead) in a savings account.
Summing it up; my strategy may be wrong, maybe right; I have diligently followed it. It is working well. I am certainly not a millionaire to write about “how to become a millionaire with smart investments?”. For mortals, this write-up might be useful:)
Originally published at https://www.raghsforte.com on April 2, 2020.