Desicritics

The Fundamentals of Exchange Traded Funds

Ranjan Varma — Sun, 15 Apr 2007 01:01:25 EDT

Despite giving the highest returns last year and also being the least costly, Exchange Traded Funds or ETFs are hardly known to the general public. The irony is that ETF managers don't incentivize their products, which other regular mutual funds do very aggressively, hence there is no one pushing it.

But internationally what has happened that over a period of time people have found out that ETFs are ideal instruments and it has become very popular.

Basically, Exchange Traded Funds (ETFs) are open-ended index funds that can also be traded on the stock market.

Compared to Mutual funds, there are many advantages of ETFs; one is real time pricing, secondly long term investors are protected from short term traders. Hence it proves to be an ideal instrument for both long term as well as short term investors and also it is easy to buy and sell from the exchange.

One major disadvantage of ETF is that the investor should have a demat account and a broking account.

There are two types of advantages over index funds - one is the expense ratio which is currently lower in ETFs as compared to normal index funds. The second advantage is the distribution costs- the other index funds have to pay commission to the broker, while ETFs do not pay the same. So the ETF costs will be lower.

In addition to the above-mentioned expenses, there also exist some 'hidden' costs like transaction costs. Such costs do not form a part of the expense ratio like brokerage and STT. The transaction costs however, are incurred by index funds but not by ETFs. This is another area where ETFs score over regular index funds.

Did I tell you that in India the ETFs have outperformed the actively managed funds over the last year (2006-07)?

Even though the actively managed funds have done better on a 3/5 year scale, the net difference would be lower or non existent because of the higher cost. The active funds charge you 2-2.5% while the ETFs charge around 0.5% only. The extra Fund management charges will even out the difference, I guess.

I wonder why a good product like index funds do not sell like hot cakes. Comparatively an expensive product like ULIP is selling like hot cakes even though it is much more expensive than the MFs.

I guess it boils down to lack of adequate knowledge and information and unwillingness on the part of the agents have no interest in selling them.

The Fundamentals of Stocks

Ranjan Varma — Sat, 14 Apr 2007 11:36:02 EDT

I must claim my place as a successful stock investor since I have made huge profits. How? By not investing a single penny, and investing with my instincts!

Well, this (technical) analysis stems from the fact that my elder brother who is an IIT(D)/IIM(A) product has invested a lot and has lost a lot. Since I didn't have any money to invest, naturally I profited with the absence of loss. This part of the story happened when the markets were down in the dumps.

Now cut to a later date when I had some money and I invested them into the first stocks that came to my mind without troubling anybody with any analysis. Luckily the stocks happened to be HDFC, Satyam and LICHFL. And the rest they say is history.

Hey, I'm not asking you to follow my style. You may not be that lucky after all.

Let's take a look at the fundamentals of stocks.

When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term.

This may be illustrated with the help of following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%.

b) Mr. Raj invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%

What precautions must one take before investing in the stock markets? Here are some useful pointers to bear in mind before you invest in the markets:

All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, luring advertisement or 'hot tips' of the day.
Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc.
Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

Though direct stocks have the ability to give the best returns, it takes time and effort to be able to get the best out of it. The trouble is that we consider investment to be rocket science. Which, it is not. The irony is that even when the investing rules look so simple, it's hard to follow them.

The Fundamentals of Asset Allocation

Ranjan Varma — Wed, 11 Apr 2007 13:54:38 EDT

Doesn't Asset Allocation (AA) sounds sophisticated? It assumes you have an asset to allocate and gives a boost to your ego. It's a smart and sexy word for something as drab and dreary as planning your personal finances. Asset allocation also gives you a feeling that you are holding some aces up in your sleeves. It specially applies to the Financial Planners or Advisors.

But seriously, asset allocation is a useful concept to know. And it's very simple too. Once you get your fundamentals clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.

Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.

Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100 - your age).

But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.

And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:

What is your risk appetite? I mean if you are jittery with the slightest tremor in the stock market, you better be away from the stock market. Even though, stocks give the best returns on a longer run.

What are your financial goals? For example, if you believe in frugal approach to life and give a thumbs up to "Simple living, High thinking", you don't need to set very high goals with your money. In the other case, you may have to align the allocation to your goals.

When do you need the money? Is it for the car you want to buy in another 2-3 years? Or is it for the dream house 10 years from now? Ask yourself and then decide your asset allocation.

And if you love ready made formulas, here's some allocation strategies from John Bogle:

Older investor in distribution phase: 50% equity; 50% debt

Young investor in distribution phase: 60% equity; 40% debt

Older investor in accumulation phase: 70% equity; 30% debt

Young investor in accumulation phase: 80% equity; 20% debt

The accumulation phase means the period when you have no use for the money and are focussed on building it on. In the distribution phase, you are also using your assets for your goals.

All said and done, AA can contribute to your financial prosperity in a big way. Studies have pointed out that the asset allocation decision is more important than the process of choosing the actual stocks, funds and even market timing.

In other words, if you just replace active picks with simple asset allocation decisions, it will work just as well as, if not even better than, professional fund managers. Do your allocations now.

Picking Stocks in Real Estate

Ranjan Varma — Fri, 23 Mar 2007 12:40:17 EDT

One of the questions asked of my earlier post was how to choose a stock to invest in.

It is alright to say, " You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them." I guess, it's good in theory.

How about we do an analysis of a sector and then take a look at some of its stocks. Let's take a look at the Real Estate/Infrastructure sector which is so much in the news.

When we do an industry analysis, what are the things we look at? Companies producing similar products are subsets of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd., etc. belong to the Power Sector/Industry of India.

It is very important to see how the industry to which the company belongs is faring. Specifics like the effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this Industry Analysis.

To start with, let's look at some macro facts and observations about the industry.

The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.

The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($1 billion = Rs 4,400 crore).

There is a steady growth in Housing Finance sector of approx. 30% over last four years. The rate of interest for housing finance has become reasonable and affordable which has resulted in more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.

Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.

Income of the urban buyer has grown substantially. There is tremendous scope and growth in the Infrastructure Development.

Foreign investment by way of FDI has been approved. Emergence of professional builders in the market with proper accounting standards. There has been an emergence of rating systems for building projects.

The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.

The award of ultra mega power projects and privatization of airports demonstrates a commitment at the highest level. So the momentum to build up roads, ports and urban infrastructure is building up for sure.

The JawaharLal Nehru Mational Urban Renewal Mission (JNNURM) initiative in 63 cities and urban transport projects will also drive up Investments in Infrastructure. Water Supply projects and sewerage projects would be part of the JNNURM.

So what do you think about the future of Infrastructure stocks in India? Ready to take a call?

There are three major stocks in the Infrastructure sector which are worth talking about: 1. Nagarjuna Construction (NJCC) 2. IVRCL and 3. HCC

Remember, do not go by the order book size alone, which is what many people do without understanding the intricacies. We need to understand the execution period of the order book, and the kind of margins that the company would make, given the kind of raw material prices at which it has booked these orders.

Even though it may look daunting, a little bit of research helps you in understanding the stocks as well as improving your general knowledge.

Investment Options In India: Grow your Money

Ranjan Varma — Tue, 13 Mar 2007 06:34:36 EDT

Some readers are asking me where to invest. I have been guarded with my answers and start with the observation that since everyone has different financial goals and risk appetite, my recommendation may not work for him or her.

But when my elder brother asked me this question, I did not have an escape route anymore. And I had a responsibility too. After all I can't vanish from him after a year or so!

By the way, it's also important to note that this elder brother is an IIT(D)/IIM(A) guy and can't be taken for a ride. And that IIT/IIM guys also need proper financial advice!

Let's take a look at some of the popular options available which are Bonds, Stocks, Real Estate, Mutual Funds (MFs), Unit Linked Insurance Policies (ULIP) and Exchange Traded Funds (ETF). Now I'll try to rate them on four parameters of investing. i.e. 1) Growth, 2) Liquidity, 3) Security and 4) Expenses

Growth: Stocks, MFs and ETFs top the rankings here. Over a period of over 5 years, the Compounded Annual Growth Rate (CAGR) is above 15% in comparison to 8% in Bonds. ULIPs begin to give a good growth only after 5 years or so because initially they are very expensive. Real estate is on a fairytale run these days too.

Liquidity: Again, Stocks, MFs and ETFs score heavily while Bonds and ULIPs have a lock-in period or have substantial surrender charges. Real estate scores low here (You have to be lucky to get good buyers at the right time).

Security: I would rate all of them at par over a long-term of over 5 years. But you may get into a bad stock or real estate which are unsecured. Otherwise also, stocks and real estate are very volatile and can affect your blood pressure too!

Expenses: ETF is the least expensive with charges of around 0.5% compared to 2% from MFs and much more in ULIPs (especially in the initial years). Stocks too, are the least expensive, provided you get into the right stocks at the right time.

Based on the short analysis, I would recommend ETFs. Read more about ETFs here. But as I said earlier, one man's meat could be another man's poison. Moreover, the diversification rule says that one should not keep all our eggs/ apples (for the vegetarians) in one basket. So let us take a look at the various options, one at a time.

Shares: Investing in the equity market directly is exciting and sexy. You are in the thick of things and learn a lot in the process. Though the volatility and the information overload makes it a daunting task, investing in stocks is not rocket science. One should start with identifying a list of 10-15 companies out of 3-5 sectors which you know about and interests you. You can then keep a tab on their management team, financials, and future outlook and over a period of time, and will be able to take a call on them.

Real Estate: I feel that one has to be plain lucky to get into a good deal and be able to get the right buyer at the right price and time. I can't think of any other factor other than luck. So if you feel you are blessed and have the right tip, go for it. Otherwise, it's a no-no.

Mutual Funds: One should allocate their time to investment decisions in proportion to their income generation goals. Also, convenience and hassle free investing should be a major factor. Mutual Funds fit the bill where Fund Managers are into it full time. If you van identify fund managers who have consistently performed over last 3-5 years, nothing like it. The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially. MFs continuously churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you would do when you churn. With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month. But MFs have its own loading and administrative charges and the fund managers make merry on your hard earned money.

Exchange Traded Funds: While the index fund has given a one-year return of 42% last year, diversified equity schemes (MF) could only come up with 34% returns. Diversified equity funds usually have large expense ratios compared to index funds. For example, the expense ratio of Banking BeES, an index fund, is only 0.45, while it is anywhere between 2-2.50% for diversified equity schemes. That's why I recommend ETFs.

ULIPs: Unit linked insurance policies combine two products, i.e. Insurance and Mutual Funds. In the initial few years, ULIPs are very expensive. But in case you don't want any hassles of investing, and you have a tried and tested Insurance agent who is almost part of your family, then ULIPs are for you.

Bonds: For those of you who are risk averse.

Handy Tips for Financial Planning

Ranjan Varma — Tue, 9 Jan 2007 09:26:48 EST

Getting rich is in your hands, nobody else's . So get started with working hard or smart (depends on you again), adding to your finance knowledge and generally taking responsibility for yourself. Get Rich Or Die Trying.

If Financial decisions look like rocket science to you and Investing is even more daunting, here are some baby steps for you.

This one is from Deborah Fowles, Guide to Financial Planning in About.com Seems very elementary but I doubt how many people are scoring more than 5/10. Here it goes, the top ten:

1. Get Paid What You're Worth and Spend Less Than You Earn : Hey, I get less than what I deserve and so do you!! And I've not done any budgeting so that I may be sure of the second part.

2. Stick to a Budget : I'm ashamed, no budgeting exercise for myself, not to speak of sticking to one.

3. Pay Off Credit Card Debt: Thank God, I finally get a score on this one. I've managed to stay clear though I've had to suffer with the agonising interest calculations earlier.

4. Contribute to a Retirement Plan: I do have a pension plan but I've never cared to figure out whether it is sufficient! Will give 1/2 for that one to me.

5. Have a Savings Plan: Yeah ,I'll be partial to myself and give some score here too! I do save about 15% of my income though it's a recent phenomena. Better late than never!

6. Invest! : Pretty straight forward. But few people manage to find an hour for that in a week. They'll rather watch TV(Big Boss is on these days!)

7. Maximize Your Employment Benefits : A meeting with your HR guy!! Brace yourself. I have no hope with my guys.

8. Review Your Insurance Coverages: Putting a finger on that is important from the family point of view. Those of you without that responsibility can breathe easy on that count. But I get full marks here!

9. Update Your Will: Never thought about that up till now. Bless Ms Fowles.

10. Keep Good Records: I will, as part of my New Year resolutions. But I've yet to get started on that. Next Monday, I promise.

Phew!, I score about 4/10!! So much potential to improve!!

But before I sign off, for guys who suddenly want to get started with their budgeting exercise, here are percentages of major spending categories from the US Bureau of Labor Statistics (2003) Consumer Expenditure Survey. May not apply to you and me but it's an interesting statistic anyway. Gives you an idea where you stand and where you can increase/decrease your expenses.

Food at home 7.7%
Food away from home 5.4%
Alcoholic beverages 1.0%
Total food and drink 14.1%
Housing 32.9%
Apparel and services 4.0%
Vehicles 9.1%
Gasoline and motor oil 3.3%
Other transportation 6.7%
Healthcare 5.9%
Entertainment 5.0%
Personal care products and services 1.3%
Reading .3%
Education 1.9%
Tobacco products and smoking supplies .7%
Miscellaneous 1.5%
Cash contributions 3.4%
Personal insurance and pensions 9.9%

Work on your Budget sheet for two hours and it'll tell you a lot about yourself. Look at it as a personality test!!

Investing Gyaan: In School

Ranjan Varma — Mon, 13 Nov 2006 12:16:32 EST

This news can make you feel that it should have been started in your time. The Government is thinking of starting a course on Investing in the schools in Std. XI/XII.

For me the first principle of investing is "better late than never". But actually it is to "start early". And when it comes to making money by investing, time is on the side of the youngsters.

Investing and the stock market will play a vital role in the future, irrespective of what the youngsters choose to do with their life.Whether they want to build a career in business, be a freelance artist, or whatever, knowing about managing their own money will give them freedom and choices in life that they wouldn't otherwise have.

Actually investing is no rocket science that it is made out to be. Agreed that it is a bit complex, but the important aptitude too have is to "spot trends" and to "break away from patterns and convention". And our youngsters excel in that.

Moreover, you don't need to be a car mechanic to learn driving. Operating a car and servicing them may need an effort to understand the mechanics of the car. But you need to understand the functions of the steering, gear, clutch and accelerator only to learn driving. Like investing, it may appear daunting for the newbie. But leave him on the steering for a week and there he goes.

The ideas behind investing are really very basic. And you don't need to know everything before you start putting some money. For the teenager, the biggest enemy is `inertia ; the tendency to do nothing', says Bamford. To combat this, take a few steps to learn about investing, and then take a few steps to actually do it! "These can be the most profitable steps you've ever taken." Janet Bamford in Street Wise from Bloomberg Press (www.bloomberg.com). "The great thing about investing is that you can start slowly, bit by bit, and get more deeply involved as you learn more."

Critics might argue that teaching teenagers the nuances of financial markets is putting too much pressure too soon. But being protective of our children may hinder their growth. Throwing the baby into the swimming pool and letting him learn swimming might seem heartless. But it actually helps the child.

Ultimately it is important for all of us to take responsibility for one self. Managing your money is critical in the game of life. And instead of learning theory of history, civics, etc, investing will be one practical aspect of our education. And maybe it will help the youngsters to face the "fear" of stock market and the "greed" that it brings along, and make them better investors than us.

Bring on the course fast, GOI.

Investing Gyaan: Stocks

Ranjan Varma — Wed, 8 Nov 2006 13:43:55 EST

I must claim my place as a successful stock investor since I have made huge profits. How? By not investing a single penny initially, and investing with my instincts!

Well, this (technical) analysis stems from the fact that my elder brother who is an IIT(D)/IIM(A) product has invested a lot and has lost a lot. Since I didn't have any money to invest, naturally, I profited with the absence of loss. This part of the story happened when the markets were down in the dumps.

Hey, I'm not asking you to follow my style. You may not be that lucky after all. But here's what I think on the issue:

Empirical studies have shown time and time again how market timing and analysts’ forecasting abilities have failed countless times. You cannot improve your forecasting ability simply because there are countless variables to account for.
For people who do not want to do research, index investing is a good solution.
Go for Mutual Funds which have consistently performed over a period of say, 3-5 years. Take the SIP route.

Though direct stocks have the ability to give the best returns, please see the time and effort needed to be able to get the best out of it. It's fine if you have a portfolio worth more than 10 lacs, I guess. But if it's less than that, the returns may not be justified for the efforts required

Before I try to write about the basics of equity investing, here's a scam about financial experts which I must share:

Get a list of email addresses of people interested in sports betting. Say you have 32,000. Email 16,000 of them to say that the home team will win this week's big game, and 16,000 to say that the home team will lose. Now, half of the people will have gotten the correct prediction, and the next week, you do the same thing with them. After 5 weeks, you'll have 1,000 email addresses of people who have seen you pick the winner five times in a row! Now you pitch your 1-900 number or paid email list subscription to this amazed group.

The amount of faith we put in financial "experts" who actually may not be very good at predicting the future is frightening. And so it's a good idea to do some study on your own and take responsibility for yourself.

But don't get too scared. Here's some basics to learn about equity investing and you'll become more confident. When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long-term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term

This may be illustrated with the help of following examples:

Over a 15 year period between 1990 to 2005, Nifty has given an annualized return of 17%.
Mr. Raj invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%

Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study them carefully before investing.

Broadly there are two factors: (1) Stock specific and (2) Market specific. The stock-specific factor is related to people's expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills. The market specific factor is influenced by the investor's sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company.

In the investment world we come across terms such as Growth stocks, Value stocks etc. Companies, whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions. While looking for ‘Value Stocks’ the task is to look for stocks that have been overlooked by other investors which may have a 'hidden value'.

I'll continue with more information and inputs about stocks in the next review.

Investing Gyaan: Financial Planning Steps

Ranjan Varma — Tue, 7 Nov 2006 14:12:35 EST

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings - investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It's easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al....... At times I feel the importance of the proverb: " Ignorance is bliss"

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It's critical to be responsible for your wealth and as I said in the beginning, it's pretty interesting too! Here's a indicative list of what you should know for a start and I promise I'll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc....

Let's start with the first financial planning steps:

Failing to plan is planning to fail. It is very true for personal finance. Personal finance looks at how your money and future is managed. Personal Finance is financial planning for individuals. Generally, it involves analyzing their current financial position, predicting short-term and long-term needs, and recommending a financial strategy. This may involve advice on retirement planning or pensions, wealth creation through stocks and mutual funds, children's education, home loans, life insurance, and other investments.

Financial planning is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, home loan). A personal cash flow statement lists personal income and expenses.

2. Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of Rs 5000000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term.

3. Creating a plan: The financial plan details how to accomplish your goals. It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in the stock market.

4. Execution: Execution of one's personal financial plan often requires discipline and perseverance, and many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.

5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.

It may appear a daunting exercise for many and many more may feel that it is too late for them. It is said that you are young at any age if you are planning for tomorrow. And there are so many tools that are easily available and still easier to use which you can search here.

For example, a simple MS Excel sheet can help find out your monthly withdrawal between the planned retirement and a particular age, say 80, when you plan to invest a particular amount every month. Fill in with the variables like your monthly investment, preferred age of retirement, expected rate of return and you get your withdrawal amount. Toggle around with the figures and you can arrive at setting goals for yourself. Write to me at ranjanvarma@gmail.com for the Excel sheet.

Read an article on how to become a crorepati in Mutual Fund Insight (Value research publication, July-Aug, 06). It says that if you invest Rs 20000 per month in a systematic investment plan of one of the top ten mutual fund for ten years, the value of your investment will range from 1.05 crore to 2.06 crore. A simple strategy, but a lot of discipline, mental strength, and self control is required

Introduction to stocks, derivatives, options.will follow next.