Putting together….

Doing this course is beginning of your journey in managing personal finance.

Summary of the important takeaways:

Prof. Ananth Narayanan asks a pertinent question that has a strong theoretical backing of Efficient
Market Hypothesis. Can we beat the market? The equity, currency, bitcoin, gold, commodities are
some of the markets where the investors look for investment opportunities.

The Efficient Markets Hypothesis (EMH) is an investment theory primarily derived from concepts
attributed to Eugene Fama’s research as detailed in his 1970 book, “Efficient Capital Markets: A
Review of Theory and Empirical Work.” Fama put forth the basic idea that it is virtually impossible to
consistently “beat the market” – to make investment returns that outperform the overall market
average as reflected by major stock indexes such as the S&P 500 Index.

Investors are looking for market returns or higher than market returns. It is possible to get higher
than market returns as there exists asymmetry in information and markets are not always efficient.

Asset Allocation plays an important role. The investor has to allocate his savings to various
investment opportunities on the basis of his profile.

Investor has to balance in terms of risk and returns; by keeping track of Volatility and Return.

Volatility depends upon day to day change in the price. Standard deviation of the daily price gives us
daily volatility. Annualising it by multiplying by sqrt(256)=16, assuming there are 256 working days.

Return depends upon CAGR.

Data reveals following Feb 2020-over Feb 2021 (YoY).

 Nifty return is 23.4% with volatility of 33%

 Gold return is 17.6% with volatility of 20.8%
 Bond return of 8% with volatility of 4.3%
 Nasdaq return of 48% with volatility of 34%

The investor has to be aware of his risk profile. Volatility may be painful, during emergency it may
not be possible to liquidate fund. Asset allocation needs to incorporate need for money at various
stages of life (children’s education).

For efficient asset allocation Life sheet has to be maintained, updated, revamped.

Some general tips

1. Consumption-Savings-Investment: Keep track of your expenses. Not daily but monthly. Now
that you would be paying through cards, tracking is easier. Keep hisaab. I am not saying not
to spend but keep a track of where money is going.
 Age 25-35, income and expenditure rises, this is the period where savings do not rise
faster.
 Age 35-50, income rises faster than expenditure, savings rise during this period.
 Count Insurance as an expenditure.
 A set of thumb rules for insurance. Insurance cover should be 10 times your annual
income. Insurance premium should be 6-8% of the income.
  The insurance cover could be raised in (Age 25-35) and later it can stay flat. Your
increase in other assets (Age 35-50) would take care of your risk.
 Ideal Plans: Term Life and Medical Insurance
2. Investing in property at this point of time in India is not financially justifiable. However long
term trends all over the world say a different story.
 Keep a watch on government rules that change the attractiveness of investment in
property.
 It is a good idea to invest at least in one property. For emotional reasons as well as
retirement planning (reverse mortgage).
 As a thumb rule: your EMI should not exceed 40% to 60% of your monthly income.
3. Gold could be considered as about 10% of value of your portfolio.
4. Financial investment is the key to long term gains.
 In the age group of 25-35, you may not be left with sizable savings once you fulfil
your insurance and EMI commitments.
 Determine your asset allocation. At your age, 30:70 mix. 30% in debt and 70% in
equity and MF.
5. Understand and estimate your risk. Understand volatility of investment and the additional
risk arising out of it.
6. Investment in direct equity and MF could be 50:50
7. For equity, start with simple businesses. The businesses you understand and can relate.
 The products and services you consume. The companies in which you work or aspire
to work
 Once you invest after doing your fundamental research; keeping track of quarterly
results, EPS, P/E and other news is very important. Invest only in 2-3 companies to
begin with. Read all the news that are available. Be long term. Develop a conviction.
 Invest in companies where expansion is taken care of by internal accruals and not by
increasing debt or equity. Value investing is a process where you can get rich slowly.
 Keep your direct equity holding to maximum of 10 companies even if your portfolio
becomes large so that you can keep track of your companies.
 Never invest because someone said or you heard on news channels. You will not be
able to forgive anyone if the investment goes sour except yourself.
 When the market rises, usually all stocks rise. It is time to clean your portfolio. Weed
out the non-performers.
 When the market falls, usually all stocks fall. It is time to value pick stocks.
 When should one take an exit from equity stocks? Deven Choksey
o Personal requirement
o Get out of commodity companies at peak
o When cash flow < Capex, be cautious
o P/E is higher than long term average
 MF is a good vehicle to diversify and the fund is managed by an expert. Expense
ratio should be taken into consideration. Invest after research of MFs; expense ratio,
NAV, fund manager, track record. Look at their portfolio of investments. Keep your
MF investment to maximum of 5 MFs.
 You may consider following types of MF
o Index fund, expense ratio is minimum. Return is exactly equal to index
performance. It is a good long term tool as non-performing companies get
dropped out of index.
 o Top 100 Hybrid
o Sector funds
o Small and midcap.
8. Tax planning. Under all options understand the tax implications.
9. We are not sure whether we can outperform market but it is important to get return above
the fixed income investments.
10. Who makes better investor? Make investment a joint decision so you have advantage of
gender diversity.