Take Charge of your investing journey!

If you are beginning your investment journey (or if you want to rethink with a structured approach), there’s no better place to start! This document outlines a structured approach to investing that we wish we had when we started to invest.

Here’s how to make the best use of this document:

Read this 📖
Create a draft plan 📝 (we have an example at the end)
Share it on Multipie with #takecharge and get feedback from us, experts and the vibrant Multipie Community 💡
Act on the plan ✔

If you aren’t on Multipie already, you are missing out! Join here: www.multipie.co/get-app

Outline

Why is investing important?

Mere savings will not be able to tackle rising costs of lifestyle. You need to earn more than inflation. Your hard earned money needs to be invested well so that it can start earning for you.

When should one start investing?

As good a time as any to start investing. The right time is always now! 🕝

How should one start investing?

You need a plan💡

Acting on tips, buying a lot of stocks, hunting for the next “multibagger”, investing in risky bonds and FDs – sounds familiar right?

This is how fragile your portfolio would be with an unstructured approach like that.

Don’t play Jenga with your portfolio!

Before we look at a structured approach to investing, let us understand asset classes i.e. avenues where one can invest.

A good investment plan allocates money across all asset classes.

Why is asset allocation important?

One often hears “Do not put all your eggs in one basket”! Returns from asset classes are volatile in nature. Your goal should not be to put all your money in an asset class that ”experts” expect to outperform in the near future.

Your goal should be to stay invested across all asset classes over a period of time.

Asset allocation creates a balance between the return and risk ⚖️

But why do I need a balance between return and risk?

Markets are volatile. Different asset classes provide cushion to the overall portfolio. This helps in ensuring reducing the overall volatility of investment and gradually generating returns over a long period of time. Most importantly, it reduces your stress and helps you stay happy. 😁

During the beginning of COVID 19 the equity markets crashed and returns went negative, debt as an asset class provided an overall cushion to the overall portfolio as it ensured capital protection and consistency of returns.

Show me a structured approach towards investing

1. Know your current position

1.1 Have a summary of your income and expenses to get more idea around surplus to invest

1.2 Make an approximate of assets and liabilities that you have today

1.3 Understand your current asset allocation (Upload your portfolio on Multipie to get a birds eye view)

2. Estimate your risk profile

2.1 Have an idea of the time horizon of your goals – short term (less than 3 years) means a tilt towards debt or long term (more than 3 years) means a tilt towards equity. Remember that your time horizon is as long as you will live!

2.2 Emotional Quotient – how do you react to a news, do you get a good sleep without worrying about the portfolio? If yes, tilt a little more towards equity. Happiness is a super important factor in investing!

2.3 Past Behaviour – your past behaviour is an indicator, see what you had done in the turbulent times for the portfolio. If you bought more equity in March 2020, you are an aggressive investor.

3. Arrive at a target asset allocation

Combine your ability and appetite to take risk, investment goals and current level of markets to arrive at your target asset allocation. This is the basket you want to target for maintaining your return and risk profile. The idea is to get better, aware and consistent with your style.

How much to be invested in each asset class is a combination of 2 factors:

Internal factors – your risk profile, your time horizon, your emotional quotient
External factors – how expensive/cheap the markets are currently

Considering current market levels, the Debt:Equity:Gold for a moderate risk profile investor stands at 60:35:5 as per Multipie’s proprietary algorithm.

There is no right answer here! Any allocation will work well as long as it is not skewed to one particular asset class and is applied consistently.

4. Optimise each asset class

4.1 Make a gradual switch from current asset allocation to targeted allocation

4.2 Build buckets around investments (long term – Equity + Real Estate, Short term – Savings Account + Debt Instruments)

4.3 Research yourself/follow someone who has seen market cycles – Don’t blindly buy what they have bought. Ask them why they bought it and you’ll get insights.

Want to buy that potential “multibagger”? See how it fits in your asset allocation. Don’t just buy it.

If you are a beginner or have no time/inclination to research: It’s absolutely fine to just buy Mutual Funds, Index Funds, ETFs rather than single stocks

5. Re-balance

Suppose you started out with a Debt:Equity:Gold allocation of 35:60:5. The market moves up and with it your value of Equity will move up. Your allocation moves up to say 10:85:5, you can rebalance i.e. sell Equity and buy Debt to go back to 35:60:5 (or a newly calculated asset allocation if your risk profile or underlying market views have changed).

It’s a simple way to buy high and sell low.

Remember –

5.1 Focus more on asset class level rebalancing rather than changing your funds within an asset class very often

5.2 Re-balance should be done over a period of time and not in one go

5.3 Re-balance only in case of large movements (20%+) in your target allocation

This 5 step process should not only help you stay disciplined in your approach but will help in moving towards wealth creation for goals in a more structured way !

By now you are thinking 2 things:

1. Why haven’t we spoken about crypto? NFTs? I want to invest in those! 🪙

2. I want to engage in some fun by taking punts on stock tips. 21 din mai paisa double! 🤑

Of course, go ahead and invest, act on stock tips but restrict this “thrill allocation” to a tiny part of your total portfolio! Say between 1-5%.

A cheat day always helps while following a diet. But don’t let that become multiple cheat days. Similarly a thrill allocation helps while following a structured investment approach. But don’t let that exceed 5% (or any other small number).

Insurance

Why should I invest separately, my insurance offers me returns?

Insurance is not a good tool for investments. Always remember to keep your insurance and investments separate. The idea of investments should be to create wealth while insurance should be taken only to protect in situations of uncertainty.

Protection against uncertainty is extremely crucial, must have insurances are

1. Term Insurance

Term Insurance provides a lump-sum amount to your family, in the unfortunate instance that they lose you, during the term of the policy. It is the easiest way to ensure that ‘financial burden’ does not come to the family and they are able to maintain a similar lifestyle and meet the goals. And, all you need to do is take a simple policy.

How do I know the amount of cover required ?

20X of your current expenses + Value of Any Major Liabilities – Existing Assets

should help you with a comfortable cover

Did you know premiums paid for term insurance get tax benefits under Section 80C!

2. Health Insurance

Health Insurance, also called Mediclaim, provides a lifetime cover on hospitalization expenses. Given the increasing costs of healthcare, surge in life-style diseases and protection of savings helps provide for any contingency situation.

Always remember to disclose your critical illness to the provider. You do not want your claims to get rejected later just to save on a small premium today.

How do I know the amount of cover required?

There isn’t actually a universally acceptable number to come to a right amount of cover however an ideal way to go about it is to create a balance between situations of medical distress and ability to comfortably pay an ongoing premium!

Think long term here when planning for health insurance, what are the approx. future costs of healthcare when you turn 50-60 years

Average Claims Amount in India per claim is approx. 1,50,000 /- (IRDAI)Observed rising costs in healthcare are 8%-10% per year.

E.g., Current Age: 25 Years then Comfortable cover to be taken should be 10-15 Lacs!

Did you know premiums paid for health insurance get tax benefits under Section 80D!

Some quick wins 💪

General

1. Use Stocks and Mutual Fund statements to know your current asset allocation on Multipie

2. Write down your goals and bucket them into Short and Long term

3. Avoid investing in ULIP and Endowment funds, they mix your investments & insurances. Keep a check on the ones you are already holding and try to move out of them ASAP considering costs!

Equity

1. Avoid heavy equity investments in Bull Markets specially on M&A and Land Bank stories

2. Avoid investing basis STOCK TIPS to make quick gains.

3. Ask questions to your advisor like promoter’s stake in the company, ROCE, ROE. Generally, ROCE and ROE >15% is considered good.

4. If you have any existing SIPs and current investments in Mutual Funds, Be aware of the commissions currently paid on the investments. Direct Mutual Funds have no commissions.

Debt

Get rid of any high risk Debt like low quality FD or Bonds.

Liabilities and Loans

Check on the interests paid on your current liabilities. Check if you can pay off a part of the high cost loan (>10%) immediately. Money saved is money earned.

Insurance

Premiums to start mediclaims before the age of 35 are significantly lower than after. The earlier you start your health insurance the better!

Example

Here is how Aastik “took charge” of his financial life, share yours on Multipie and make it better with feedback

Step 1- Know my current position

Age 24
Monthly Income 100 (common sizing everything to scale of 100, ain’t revealing my income 🤪)
Edu loan outstanding of 1500
Monthly Expenses 40 including EMI, So surplus is 60
Savings of 500, all sitting in savings account and FDs

My goals:

Emergency Fund
Build a house (in 10 years)
Create a retirement fund (in 40 years)

Step 2 – Estimate my risk profile

Given my age, majority long term goals and no other liabilities beyond an ongoing education loan I consider myself to be an aggressive investor. I will not lose sleep over some volatility in my portfolio.

Step 3 – Arrive at a target asset allocation

Emergency Fund – I will just set aside 6 months of my expenses (40 x 6 = 240) out of my current savings of 500. I will use the balance 360 to invest.

Both my goals – house as well as retirement are long term. I am an aggressive investor. Hence I will allocate a larger portion of my money to equity. I will not go all in equity as markets are very high as of now.

This Rs 360 can be invested in a Debt:Equity:Gold allocation of 15:70:5. I will take some exposure through REITs to Real Estate. I will count that within the equity bucket because REITs can be somewhat volatile.

However, I will not do so in one go as I have never invested in equity and do not want to run the risk of timing the market. I will do this over a period of 6 months.

Furthermore, I will also invest my monthly surplus of Rs 60 every month through an SIP in the same allocation 15:70:5.

Step 4 – Optimise each asset class

For Equity (70%)

1. XYZ Equity Mutual Fund for domestic exposure
2. ABC International Mutual Fund for international exposure
3. 4-5 Stocks – blue chip stocks and not small or micro caps as I do not have the time to monitor

4. 1-2 REITs

Which fund I invest in does not matter as much as what allocation I have towards equity. If in doubt, I will choose an index fund.

The proportion between elements 1, 2, 3 and 4 above is a personal choice. I will keep it simple and have equal allocation towards all.

I can also get a lot of insights on stocks on the Multipie Community. There are many expert investors whose portfolios I can see as a starting point for selection. I will do some reading on those stocks before buying.

For Debt (15%)
1. Corporate FD – Fixed Return with highest possible credit quality
2. EPF / PPF investment – deduction from my salary for retirement which also earns tax benefits

For Gold (5%)
Sovereign Gold Bonds – long term gains are tax free

Step 5 – Re-balance

I will rebalance only when my equity allocation moves 20% from the current level of 70% i.e. when it hits 50% (if market goes down) or 90% (if market goes up).