Rules to make stock market investment safer

Introduction

The thought of investing in equity and safety sounds contradictory. Conventional wisdom says investing in equity is the riskiest. How does one make such investment safer? 

Although it is impossible to eliminate the market risk in equity investing, you can make your investment process sound by following some simple techniques.

Keep in mind that the purpose is to generate wealth over a period of time and not overnight or in a fortnight. Let's now look at some methods to make your investment safer:

Go for higher dividend yield stocks: Stocks with high dividend yield are preferable. Dividend yield is calculated as a percentage by dividing the dividend by price e.g, the dividend paid by Indian Overseas Bank for 2008-09 was Rs. 4.5 per share and its current share price is Rs 92.

The dividend yield is about five per cent. Since the dividend you get is a tax-free amount, it compares better than the return from a bank fixed deposit. At times, when not able to sell your stocks due to the market condition, there can be cash flow in the form of final dividend and, at times, interim dividend.

Look for shares with lower Price to Book Value (PBV) ratio: Book value is computed by dividing the equity share capital and reserves & surplus by the number of equity shares outstanding. PBV is market price divided by the book value. Generally, high-growth companies have a higher PBV.

However, at times there are some fundamentally good companies with a low PBV. If PBV for a company is less than one, it means the market capitalisation is lower than the net worth. Meaning, in normal circumstances there is intrinsic value in the stock.

Investors should generally avoid stocks with a very high PBV ratio, as it means their market capitalisation is far more than the net worth.

Don't put money in stock at a 52-week high or all-time low: A time-tested rule is not to buy stocks at a 52-week high or low. A stock at a high price may start dropping after reaching the peak. Also, there may be limited upside from these levels. Similarly, when the stock price is bottoming out, you don't know how much more it will fall.

Buy companies with good management: At times, out of greed, investors invest in companies with shady management. It is advisable to buy in stocks of companies with good management, even at the cost of lower returns.

Monitor your investment: A common tendency is to forget the investment after it is made. You have to periodically evaluate the performance and take corrective steps. Investing does not mean buying and forgetting. It requires constant evaluation and corrective action.

Have a profit-booking and stop-loss policy: If the stock you invest in gives you the anticipated capital appreciation in a specified time period, it is advisable to book profits either partially or fully. Similarly, if the price of the stock that you invested starts drifting down, it is advisable to have a stop-loss limit. By doing so, you will be able to preserve your capital to a considerable extent.

Diversify your pie: Always diversify your investment in different sectors, asset classes and time horizons, as it will enable you to lower your risk. By investing in only one asset class or sector, you may lose out on the opportunities in others.

Investing is like driving a vehicle. It is similarly important to avoid potholes, follow traffic discipline and keep your vehicle in proper condition. Investing requires avoiding unnecessary risk, having proper strategy and evaluating your investment decisions.

If you follow some basic rules properly and have a disciplined approach, you can drive your equity investments safely!

5 rules on how much insurance you need

Introduction

If you are an earning member of your family, and there are members of your family who are financially dependent on you, you need life insurance. But how much life insurance do you need?

There are many factors that are relevant in determining the amount of life cover you should buy.

Need for minimum protection

It is essential that a particular level of income should be maintained for the family even when its breadwinner is not around. Suppose a family's present needs are Rs 25,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family's monthly expenses of Rs 25,000.

If one also wants to provide for the future fall in the purchasing power of rupee due to inflation, one must necessarily take policies for higher amounts. No widow, they say, has ever complained that her husband bought too much insurance.

Current income level

Payment of insurance premium results in an outflow of disposable income. You may, therefore, not like to buy too much insurance. One might have to limit the quantum of insurance keeping in mind the cash flow problems that will be created as a result of the obligation of regular payment of insurance premia.

Tax benefits

You should also take into account the tax benefit under Section 80C.

Accumulating for specific needs

If you expect to spend a particular sum of money for the education and / or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a lump sum commitment.

Present age

Your present age is a critical factor in deciding the quantum of insurance that you can afford. The rates of premium go up with the advancing age of the life assured. Hence, one can buy more insurance for the same premium at a younger age than at an older age.

The final decision rests upon a careful consideration and balance of all the above factors. The need for minimum protection may be quite high, but the current need for disposable income may not immediately permit buying adequate insurance.

You then have to make a compromise and buy extra insurance as and when you can afford it.

The 5 simple rules

In the event of any misfortune, well-planned life insurance can protect your loved ones from financial difficulties. However, in most cases, people find it difficult to estimate the correct value of insurance they need.

Partly this is because life insurance needs change through different stages of life. Young people with no dependents may not have much need for life insurance.

As one's family responsibility grows, life insurance needs too increase. Thus, a periodical review based on your family circumstances is required in order to ensure that the coverage is adequate.

There are several simple methods available to broadly estimate your life insurance needs. Five simple rules are:

1. Income rule

The most basic rule of thumb is provided by the income rule which holds that individual insurance cover should be at least around eight to ten times one's gross annual income. For example, a person earning a gross annual income of Rs 1 lakh should have about Rs 8 to10 lakh in life insurance cover.

2. Income plus expenses rule

This rule suggests that an individual needs insurance equal to five times your gross annual income, plus the total of basic expenses like housing or car loans, personal debt, child's education, etc.

3. Premiums as percentage of income

By this rule, payment of insurance premium depends on disposable income. In other words, one should decide the quantum of insurance after meeting the regular outgo from salary.

From the first two rules, you can make a broad estimate of the minimum insurance you should have. The premium as percentage of income rule can help you fine-tune your cash flow by committing an appropriate percentage of your income for paying life insurance premium.

4. Capital fund rule

This rule suggests that if you need Rs 1 lakh p.a. for your family needs, and assuming you do not have any other income-generating assets, you may like to create a capital fund of Rs 12.5 lakh (Rs 1.25 million) which can yield Rs 1 lakh (Rs 100,000) annual income @ 8% p.a. You may therefore buy a life insurance policy of Rs 12.5 lakh.

5. Family needs approach

This rule holds that you purchase enough life insurance to enable your family to meet various expenses in the event of key earning person's death. Under the family needs approach, one has to divide his family's needs into two main categories: immediate needs at death (cash needs), and ongoing needs (net income needs). 

Stage of Life	Needs	Assets
Initial stage. No family responsibilities.	Premature death leads to minimal needs like funeral expenses	No worthwhile assets. Just a beginning. May be some cash balance.
Married, with children.	Premature death causes serious financial problems, as most of the needs continue	Some assets available. Growing assets
Empty nest	The needs decline once children grow up and get settled. No major financial problems	Strong assets base, surpassing the financial needs

You may also like to keep in mind that if your family is reasonably wealthy and its protection needs relatively low, you can buy a smaller amount of insurance. Similarly, if your family members have independent earning capacity you may reduce your insurance.

There is a broad relationship between needs and assets over a period of time. Thus, not much life insurance is needed in the initial stage. The same is true in the empty nest stage.

The maximum need for life insurance arises during the mid-phase, when one is married and has children. In other words, one may go for life insurance so long as the asset-level is lower than the need-level. As highlighted above, once the asset-level surpasses the need-level, the importance of life insurance declines.

Caution: Insurance is not investment You should always remember that life insurance is a protection and not really an investment because financial returns are rather meagre. (This is equally true of the life insurance portion of even a ULIP scheme.)

 

If you take inflation into account, there could even be a negative rate of real return at the time of maturity of your insurance policies. So, while it's important to secure your family's well being through adequate insurance of the lives of the earning members, over-investing is a mistake.

48 Ways to Save Money

Transportation

Airline Fares

1. Compare low-cost carriers with major carriers that fly to your destination. Remember, the best fares may not be out of the airport closest to you.

2. You may save by including a Saturday evening stay-over or by purchasing the ticket at least 14 days in advance. Ask which days of the week and times of the day have the lowest fare.

3. Even if you are using a travel agent, check airline and Internet travel sites, and look for special deals. If you call, always ask for the lowest fare to your destination.

New Cars

4. You can save lots of money over the lifetime of a car by selecting a model that combines a low purchase price with low depreciation, financing, insurance, gasoline, maintenance, and repair costs. Look out for internet for new car guides that contain this information.

Transportation

5. Having selected a model and options you are interested in, you can save money by comparison shopping. Get price quotes from several dealers and let each know you are contacting the others.

6. Remember there is no “cooling off” period on new car sales. Once you have signed a contract, you are obligated to buy the car.

Used Cars

7. Before buying any used car:

• Compare the seller’s asking price with the average retail price in a “bluebook” or other guide to car prices which can be found at many banks, and credit unions.

• Have a mechanic you trust check the car, especially if the car is sold “as is.”

8. Consider purchasing a used car from an individual you know and trust. They are more likely than other sellers to charge a lower price and point out any problems with the car.

Auto Leasing

9. Don’t decide to lease a car just because the payments are lower than on a traditional auto loan. The leasing payments are lower because you don’t actually own the car.

10. Leasing a car is very complicated. When shopping, consider the price of the car (known as the capitalized cost), your trade-in allowance, any down payment, monthly payments, various fees (excess mileage, excess “wear and tear,” end-oflease), and the cost of buying the car at the end of the lease.

Auto Fuel

11. You can save lots of money a year by comparing fuel prices at different stations.

12. You can save on fuel by keeping your engine tuned and your tires inflated to their proper pressure.

Car Repairs

13. Consumers lose hell loads of money each year on poorly done car repairs. The most important step that you can take to save money on these repairs is to find a skilled, honest mechanic. Before you need repairs, look for a mechanic who:

• is certified and well established;

• has done good work for someone you know; and

• communicates well about repair options and costs.

Insurance

Auto Insurance

14. You can save several hundred dollars a year by purchasing auto insurance from a licensed, lowprice

insurer. Check out internet and other resources to find quotes offered by different companies. Then call at least four of the lowest-priced, licensed insurers to learn what they would charge you for the same coverage.

15. Make certain that your new policy is in effect before dropping your old one.

Life Insurance

16. If you want insurance protection only, and not a savings and investment product, buy a term life insurance policy.

17. If you want to buy a whole life, universal life, or other cash value policy, plan to hold it for at least 15 years. Canceling these policies after only a few years can more than double your life insurance costs.

18. Check the internet and other available resources for information on the financial soundness of insurance companies.

Banking/Credit

Checking Accounts and Debit Cards

19. You can save some money in a year in fees by selecting a free checking account or one with no minimum balance requirement. Request a complete list of fees that are charged on these accounts, including ATM and debit card fees.

20. See if you can get free or lower cost checking through direct deposit or agreeing to ATM only use. Be aware of charges for using an ATM not associated with your financial institution.

Savings Products

21. Once you select a type of savings account, use the telephone, newspaper, and Internet to compare rates and fees offered by different financial institutions, including those outside your city. These rates can vary a lot and, over time, can significantly affect interest earnings.

22. To earn the highest return on savings (annual percentage yield) with little or no risk, consider certificates of deposit (CDs) or Savings Bonds.

Credit Cards

23. To avoid late payment fees and possible interest rate increases on your credit cards, make sure you send in your payment a week to ten days before the statement due date. Late payments on one card can increase fees and interest rates on other cards.

24. You can avoid interest charges, which may be considerable, by paying off your entire bill each month. If you are unable to pay off a large balance, pay as much as you can. Try to shift the remaining balance to a credit card with a lower annual percentage rate (APR). You can find listings of credit card plans, rates, and terms on the Internet, in personal finance magazines, and in newspapers.

25. Be aware that credit cards with rebates, cash back, travel awards, or other perks may carry higher rates or fees.

Auto Loans

26. To save as much as money in finance charges, pay for the car in cash or make a large down payment. Always get the shortest term loan possible as this will lower your interest rate.

27. Make certain to get a rate quote (or preapproved loan) from your bank or credit union before seeking dealer financing. You can save money in finance charges by shopping for the cheapest loan.

First Mortgage Loans

28. Although your monthly payment may be higher, you can save tens of thousands of money in interest charges by shopping for the shortestterm mortgage you can afford. For each Rs 100,000 you borrow at a 7% annual percentage rate (APR), for example, you will pay over Rs 75,000 less in interest on a 15-year fixed rate mortgage than you would on a 30-year fixed rate mortgage.

29. You can save lots of money in interest charges by shopping for the lowest-rate mortgage. On a 15-year Rs 100,000 fixed-rate mortgage, just lowering the APR from 7% to 6.5% can save you more than Rs 5,000 in interest charges over the life of the loan.

30. Check the Internet or your local newspaper for mortgage rate surveys, then call several lenders for information about their rates (APRs), points, and fees.

31. Be aware that the interest rate on most floating rate mortgages (ARMs) can vary a great deal over the lifetime of the loan. An increase of several percentage points might raise payments by hundreds of rupees a month, so ask the lender what the highest possible monthly payment might be.

Mortgage Refinancing

32. Consider refinancing your mortgage if you can get a rate that is lower than your existing mortgage rate and plan to keep the new mortgage for at least several years. Calculate precisely how much your new mortgage (including fees and closing costs) will cost and whether, in the long run, it will cost less than your current mortgage.

Housing

Home Purchase

33. You can often negotiate a lower sale price by employing a buyer broker who works for you, not the seller. If the buyer broker or the broker’s firm also lists properties, there may be a conflict of interest, so ask them to tell you if they are showing you a property that they have listed.

Renting a Place to Live

34. Do not limit your rental housing search to classified ads or referrals from friends and acquaintances. Select buildings where you would like to live and contact their building manager or owner to see if anything is available.

35. Remember that signing a lease probably obligates you to make all monthly payments for the term of the agreement.

Home Improvement

36. Home repairs often cost lots of money and are the subject of frequent complaints. Select from among several well established, licensed contractors who have submitted written, fixed-price bids for the work.

37. Do not sign any contract that requires full payment before satisfactory completion of the work.

Housing

Major Appliances

38. Do your own research for information about specific appliance brands and models and how to evaluate them, including energy use. There are often great price and quality differences. Look for the yellow Energy Guide label on products, and especially for products that have earned the government’s ENERGY STAR, which can save up to 50% in energy use.

39. Once you’ve selected a specific brand and model, check the Internet or yellow pages to learn what stores carry the brand. Call at least four of these stores to compare prices and ask if that’s the lowest price they can offer you. This comparison shopping can save you money.

Utilities

Heating and Cooling

40. A home energy audit can identify ways to save money on home heating (and air conditioning). Ask your electric or gas utility if they audit homes for free or for a reasonable charge. If they do not, ask them to refer you to a qualified professional.

Telephone Service

41. Once a year, review your phone bills for the previous three months to see what local, local toll, long distance, and international calls you normally make. Call several phone companies which provide service in your area (including wireless and cable), to find the cheapest calling plan that meets your needs. Consider a bundled package that offers local, local toll and long distance, and possibly other services, if you heavily use all the services in the bundle.

Utilities

42. Check your phone bill to see if you have optional calling features or additional services, such as inside wire maintenance, that you don’t need.

43. If you make very few toll or long distance calls, avoid calling plans with monthly fees or minimums. Or consider disconnecting the service altogether and use prepaid plan.

44. Before making calls when away from home, compare per minute rates and surcharges for cell phones, prepaid phone cards, and calling card plans to find how to save the most money.

Other

Food Purchased at Markets

45. You can save hundreds of dollars a year by shopping at lower-priced food stores or local market. Convenience stores often charge the highest price.

Other

46. You will spend less on food if you shop with a list, take advantage of sales, and purchase basic ingredients, rather than pre-packaged components or ready-made items.

47. You can save money by comparing price-per-ounce or other unit prices on shelf labels. Stock up on those items with low per-unit costs.

Prescription Drugs

48. Since brand name drugs are usually much more expensive than their generic equivalents, ask your physician and pharmacist if a less expensive generic or an over the counter alternative is available.