How to build and maintain a Equity to Debt Allocation Ratio

Q.       Can u please suggest how One's portfolio should be allocated when investing both in equity and debt funds in mutual funds. Right now i am all in equity.

In theory everyone would suggest different figure to you but if we only talk about mutual funds and leave alone the FDs and various other schemes that you may be holding then for a youngster, equity to debt ratio of 80 :20 is sufficient.

But the question that arose was that how to arrive at this allocation ratio.

A better question  would be how to start building your portfolio.

The answer to this ;for those who work on shore and have a regular flow of income even if a little less would be to start a SIP in a few funds and keep building it.

Such people naturally have FDs and also invest in NPS,  PPF,  EPF and other avenues which makes up for the debt portion of the portfolio.

But for unfortunate people like us who just get a few lacs every month and 6 months of leave to do what we like there is a different strategy.

This strategy like most of my colleagues are aware is the header tank on expansion tank strategy.

And this is no different then a normal STP.

Select 5 to 7 good equity funds in different AMC s and start with putting 1 lakh each in liquid or Ultra short term funds with those AMCs.

Then simply set up a weekly STP from this liquid or Ultra short term fund in to those equity funds in such a way and with such a amount that the liquid fund or the Ultra short term fund ( which can be called the source fund) does not deplete during your leave and before going back to the ship.

This part... of the source fund not getting over is more important than choosing a higher value of STP. Because under all circumstances your STP must go uninterrupted for as many years as possible.

Once you have started moving your money from the liquid or Ultra short term funds to the equity funds your exposure to equity will keep on increasing and the debt portion will keep on reducing and in roughly 4-5 years the allocation ratio of 75 equity and 25 debt will be achieved automatically.

During these 5 years if you are lucky the share market will go down and your further investment will be able to buy more units in equity funds than in a bull run. Furthermore after this downturn in the stock market when the market will start looking up your allocation ratio will automatically start leaning towards equity.

At this stage you will be able to evaluate your risk appetite and will be able to decide exactly how much percent you want to have in equity.

This process will be a continuous one ... and whenever you find that your portfolio has skewed more than 5% on either side of Equity or Debt- you can make a corrective action of shifting it to the opposite  asset- Equity or Debt.

QED

What to do after I have set up my investment process.

 What to do after I have set up my investment process

A common question that I am often asked after one starts doing his customary as it is in STP into equity Mutual Funds is what do I do now?

Well !!! To start with, first accept my congratulations because you have done something which most of the country and even the world does not do.

As one moved from different type of political systems and economy  to the one of liberalization and privatization of high salaries and longer working hours, collecting millions - before one reached his 30s and getting that coveted house in the hills much much before the retirement. As We moved through all the above we forgot one thing that violent fires do not last long and heavy torrential rains come to abrupt stop and in the same way the highest salaries that we see in the beginning of a careers or towards the mid career and not forever.

The situation does not last long not because of many other reasons. But simply put, while running in that fast track race a person gets tired faster gets a lot of problems which add up to one’s adverse physical and mental condition much earlier. Hence  the very organisation which actually pushed you for all those mind-blowing achievements at a such a young age is further on the lookout of even younger blood all the time.

Hence right from day one when you enter the fast track career with higher compensations, it becomes imperative that you do not forget that's saving is important and putting that saving to work harder in form of investment is even more imperative.

It would not be an over statement if I say that you should have made your billion rupees much before your 40s.

…and now by the virtue of you having started on the road of investment in whatever small measure it may be… you need to understand a few things.

Firstly it should be remembered that what you have started investing in all probability is a small percentage of your salary and you need to step it up as soon as you have faith in the system and methodology of your investment.

Secondly you should remember to keep on the track without deviating much as different schemes which are both attractive and unbelievable comes along.

Just because you started 25000 SIP into equity mutual fund does not give you the right to start going for IPOs or NFOs or closed ended funds all get quick rich forest schemes, ulips, endowment plans money back plans of various insurance companies or some chit funds. Don't look at any of them just stick by your standard 7 golden rules and keep on your investment track.

Thirdly you have to remember that every year as your salary goes up by way of increment all the forex fluctuation you must try to divert the increased funds towards your Investments.

Fourth point, That I would like to stress is that somewhere in the middle do not start believing that real estate will give you a better return.this will not only take away and important portion of your savings but take it into an uncertain BLACKHOLE, out of which you will find it very difficult to come out as long as you invest and stay in India.

Fifth point that Comes along is most important of all and that is stop tracking the market everyday. Do not start subscribing to that pink newspaper start watching the CNBC channel everyday.

Just by investing a few lacs in mutual funds or direct stocks does not make you an expert on the Indian economy or give you the right to start discussing it at dinner parties. In fact it is definitely a good idea to start learning about your country in some small measure. Read newspapers to see how different projects are taking place across the countryand which companies are involved in it and what is the quantum of money being spent. You should try to read how different discoveries and inventions are coming up in the world and how they are expected to change your life.

The last. To be kept in mind is simply a extension of Fifth one and that is do not listen to the noise and cacophony that happens around you which tells that how the US economy is going down and further on the Indian economy will go down. Believe me at a lot of people … the leaders of the country, the governors of the central banks have lot more at stake than just a few lacs rupees and they will do something right to keep their own position intact even if not the economy at large.

What should be the ideal ratio for home loan EMI to yearly earnings as Seafarer

What should be the ideal ratio for home loan EMI to yearly earnings as Seafarer

Taking a home loan for a seafarer maybe a little different than that for a land based worker because he has a ability to pay it off earlier. We shall try to analyse and determine this on the basis of the following:

1. First determining factor I would say would be the rank of a person. For example the cash flow from salary would be quite different for the 4th engineer and a master. In case of the latter even if he takes the entire sum on loan he can easily pay off in a few years time. Whereas a junior officer might require many years which may extend to 10 or more than that.

2. Second determining factor would be the the cash available with the buyer.

If the amount in savings is substantial but parked in NRI or fcnr accounts then naturally a large portion of it can be used. However if the sum is properly invested over long periods of time then it would naturally be getting returns in the range of 12 to 15% over 5 to 10 years period in that case there should be no need to disturb that investment and go in for a loan of the amount desired.

3. Third determining factor would be the price of the property. If the price is prohibitively high then it would be prudent to go for at least 50 to 70% of the loan amount .

4. Next most important point is to maintain liquidity with oneself under all circumstances considering the unpredictability of life that we seafarers face. And with this I mean that take the loan, on as low rate of interest as possible with prepayment facility but secure it properly by taking good term plan and the insurance on the property as well.

So as you can see that the loan amount will depend upon some qualitative factors rather than the quantitative ones and a person should be careful enough to structure his finances properly after taking the loan.

In the view of the above. Up to a loan of 1.25 crore I can say that you can easily take UPTO 90 lacs or 1 crore secure it with very good insurances and try to pay off of repay the loan if the rate of interest is high by paying about 8 to 10% of the principal every year.

Having done this the next step become more important by which you should start investing your salary in a very disciplined way. Though the facility of the loan account of SBI and erstwhile HSBC seems very attractive but I am not a very big fan of it as it prevents you from investing your money as soon as it earned.

You must remember that loan is a liability and higher the amount means higher the liability and should be paid off as soon as possible unless the rate of interest is ridiculously low.

From the loan issuers point of view a home loan is the most secured loan which he can recover by taking control of the property at any given time.

a point that I would like to bring out in the circumstances is based upon two cases that came to my notice in last few years. It happens that somewhere in the mid career a person takes a exorbitant loan to buy home and very soon after he gets an opportunity to take up a shore job. Now these two offices workout between the devil and the deep sea because the house for which they had taken a huge loan prevented them from taking up the shore job abroad.

Now you can imagine why something as simple as a home loan can become tricky under circumstances.

A fleeting moment in a journey called Life

                              A fleeting moment in a journey called Life

Joginder uncle lost his life partner Toshi Auntie yesterday. I got 4 missed calls from him which I couldn't take as I was in a group Meditation. When I called him back he was talking in a matter of fact and balanced voice- बाकी सब ठीक है बेटा, तोशी कल चली गयी, आज उसे 11 बजे पहुंचाने जाएंगे।

When I met him a bit later, he must be the only person whom I met as always- hugging and laughing. Onlookers were horrified.

Why was that? Read on to find out...

We met first time exactly 25 years to the date when I bought my first house and he had also shifted to his new house just opposite mine after his retirement.

I wasn't even 30 and he was an experienced wise man, full of humility and life's philosophy, which I didn't understand at that stage.

In due course, he became a family member rather a family head and may be even more than that. 

During my absence from Dehradun and while I was on board the ship, he would stand like the rock of Gibraltar for my wife and daughter. I have never seen him complaining about his personal problems which were aplenty.

I came back once on leave, it was after Diwali only to discover that he had lost his younger son who was a full grown adult during the gallbladder operation at the hands of a local doctor.

His elder son was suffering from childhood hematological problem which he wasn't properly aware of. When I took both of them to a specialist, while taking out some papers from his pocket the receipt of the firewood which were purchased for cremating his younger son fell out.

Even the doctor was shaken and looked at me with questioning gaze.

Soon enough his elder son also passed away.

After both the losses he had very casually said that he looked after his sons as long as they were with him and now let almighty take care of them.

He never complaint about any God and nor did he become an atheist.

Then I bought another house and moved to a different locality but would meet uncle once in awhile. We would always hug each other like long-lost friends and chat away refusing to listen to each other and more interested in talking about ourselves.

5 years ago ,I had lost my mother and was quite in grief. A few days later Uncle came to see me and before he could utter a word , I jumped and hugged him laughingly. I did not need his sympathies and was instantly rejuvenated.

And since we both understood each other so perfectly, when I met him today I did not see any reason to put on artificially sad face and sympathize with him.

Uncle doesn't need it.

While leaving the cremation ground he told me that now he is free to come for Vipassana.

I told him , sorry we don't need a teacher right now.

Do not Procrastinate- SAVE what you have less and need more- TIME.

Do not Procrastinate- SAVE what you have less and need more- TIME.

Last week I was in quite a spot late at night. 

By quite a coincidence  three young officers were all about to join their vessels within a week and were already out of their home town.
All three of them had their financial matters quite muddled up.
To quantify the problem all three of them had collectively over 1 crore rupees to invest in various avenues but no time.
All of them had been on leave and at home from  3 to 5 months.
Why they could not take such an important decision earlier, warrants an informal enquiry.
We cannot trust the matters simply on psychological uncertainty and write it away.
The reason for such dalliance comes because of the nature of the employment of marine professionals.
When they're at Sea , they are earning money but they do not see it accumulating. More importantly they do not see the money being consumed because they are not aware of actual expenses at home.
Hence any financial decision in terms of investment does not get taken when they are at Sea because they feel that the money will be needed for various things when they come home on vacation.
Similarly when they are on leave the Marine professional is not aware when he would actually be in employment and when he would start earning as a result he likes to keep a mental buffer amount ready for any contingency.
Above are other two reasons why the Marine professional starts accumulating his money in the bank and more importantly in the basic savings account where the money does not grow but rather depletes due to inflation.
This may have been a situation earlier but in the last two decades world over few trustworthy avenues have come up in form of mutual funds where one can keep his accumulated wealth from a few days to a few years.
As I have pointed out earlier to all the seafarers across the world irrespective of their nationality that they must investigate the possibility of keeping their funds in a category of mutual funds called liquid or ready to use funds.
I have investigated that in other countries too ( like India) there is a possibility of keeping their money  in these liquid funds. These type of funds give a better return than in the bank and a possibility to withdraw at a very short notice and utilize them for their needs. Beyond creating this buffer for their mental uncertainty and mental peace they must start a system by way of which a very small amount start getting invested every month into various equity or stock based mutual funds.
In the beginning this amount needs to be small in just a few dollars a week and then as they educate themselves in the field they can let this investment amount grow.
However it is imperative that the first saving or the first investment of a person is done as early as when he is a cadet , and not wait till he becomes a full fledged officer.
Investing in efficient avenues like Mutual Funds is exactly like planting a seed of a fruit tree.

 It does not matter how many seeds you plant but it is the time which will make sure that the tree grows.
This growth of a tree in financial terms is called compounding.
In order to benefit from this concept of compounding about which you may have already heard a lot on the net, in books and magazines please stop procrastinating stop postponing for tomorrow and act today.

As a slightly older and experienced person, I would suggest to younger colleagues that they start planning their leave before they actually leave the ship. Whether it is about going on a holiday, or completing documentations or going for professional courses, they must plan it with their spouses or parents (if not married) in advance . Taking all the important Financial and Non-financial decisions in the first few weeks of coming on leave will help them spend rest of the time in peace and also see that any of the jobs that they have done has actually been completed from the service Provider’s end.

Please do not Procrastinate, it is a serious lacunae that I find with the Seafarers. Most of our counterparts on land are very used to paying bills on last date, or filing  returns a day before- but since we have sufficient funds but lack of time- we must save what we have less and need more – TIME.

ON EXCHANGE TRADED FUNDS

                                              ON EXCHANGE TRADED FUNDS

With all the good things that we hear and say about ETFs , main is the liquidity. The extremely low availability and asset size of the ETFs prevents sizeable exposure to the asset class. If you would try to buy MoST Nasdaq 100, you maybe surprised that though you are ready to pay the price , there are no sellers. Similar situation may also occur when you wish to sell. So consider this aspect while deciding to invest at this point of time.