Original source	Physical Book (Amazon)
Status	Completed

I have summarised & highlighted the important points covered/that I liked in the book for speed reading.

Preface to the Revised Edition

We worry about investment the way we worry about weight. Instead of dieting or investing being a habit, we only think of them as remedial measures when our weight or our bank balance goes too high or too low.

Happiness is a choice - we can choose to be or not to be.

Pandemic Money Lessons

Lesson 1: We can up our saving target sharply the day we decide to go to back into lockdown mode.
Lesson 2: Emergency fund amount needs to be recalibrated based on age, stage, and nature of work.

Emergency fund rule of thumb

If <40 yrs old + stable job, then 6 months of living expenses.

Else, up to 2 yrs depending on age and job riskiness.

Lesson 3: There is no safe haven for our money. Each investment comes with a risk and we have to decided which one we are able to take.
- Investments such as liquid cash, FD, debt funds, equity, gold, real estate, etc.
Lesson 4: Asset allocation is not an option. Understand the difference between risk capacity and risk appetite, and align them. - Risk capacity: Ability to take risk. Capacity is about our age, stage, number of dependents, confidence of our ability to keep generating income for long time, etc. - Risk appetite: Willingness or desire to take risk. This depends on how well we understand money, finance, our own skills, our ability to manage portfolio, etc.
Lesson 5: Our total fixed obligation-to-income ratio (FOIR) should be 30% or less.
- i.e., Our equated monthly instalments (EMIs) should not be more than 30% of our take home money. Preferably, 15% to 20% ratio..

Pandemic Life Lessons

Make peace with death, as it’s also empowering and liberating.

Pandemic Work Lessons

We all need Plan B and Plan C.
Everyone need two things
- 1. Always strive for deeper understanding of what you do, and then try and stretch beyond what the ask is.
- 1. Plan for a career 10 years ahead of today.

What you want to be doing 10 years from today, and what you are going to do about to do about it today.

TL;DR: We are doing OK if ...

we have 6 months to 2 years of emergency fund;

our loans are <30% of our take-home salary;

we are increasing safe assets as we age;

we have our own medical cover;

we have our wills in place;

we are building second & third career even as we work our current job.

1. The money order

“What to invest in” is not the first money decision we should take.

2. Don’t stash that cash

The key to finding the money to save and invest is to have a good cash flow system.

Easy cash flow system

3 accounts for 3 functions of money

Salary (Income Account)

Spending (Spend-it Acconut)

Saving (Invest-it Account)

Moving money from Invest-it to Spend-it is not allowed.

Mental accounting - We like to separate our money into separate accounts according to intent, and dislike using it for anything else.

TL;DR: We are doing OK if ...

we have 3-account system that separates our income, spendings, and savings;

our spending on living costs is no more than 45-50% of our take-home income;

our EMI payouts are no more than 25-30% of our take-home income;

our savings are at least 15-20% of our take-home income.

3. Emergencies need a fund

“Why are we usually afraid of long-term money commitments? Why don’t we want to invest for long-term?”
- The answer almost always is “What if there’s an emergency? Then, we won’t be able to use our own money if it’s tied up in a long-term investment?”

The unwillingness to take risks also comes from the fear of not having the money when it's needed.

We need money ‘midway’ under two circumstances
1. Planned events
2. Unplanned events
  - Hospital bill, getting fired, Chennai floods, COVID pandemic, etc.

It's for the unplanned events we create an emergency fund, and buy insurances.

We can't use our emergency funds even for the downpayment of the house.

What's an emergency fund?

Go-to fund when disaster strikes in the form of a job loss, large hospital bill, death, or natural calamities. It’s the difference between slipping into disaster and staying afloat.

TL;DR: We are doing OK if ...

we have 6 months’ to 2 years’ living costs in emergency fund;

we are a double-income family with no dependents, and have 3 months’ living expenses;

we are a single-income home with dependent parents and have a year’s living costs;

we are in our 50s and have 2 years of living expenses in the fund;

our emergency funds sits fixed deposits or very safe debt funds.

4. Building our protection

Getting a good medical cover is probably more important than buying life insurance - we're more likely to go to hospital with an illness or accident than die.

Do we need medical cover? What if my office already covers me
- Yes, we still do need a personal medical cover.
- Especially if we are in our forties or when there is a change in our circumstances (e.g., retrenchment, quitting work during/post pregnancy, etc.) or post retirement (lifestyle diseases might have already set in).
- Companies are reluctant to cover older people, and with ‘pre-existing’ disease, the reluctance is even stronger.

What policy do we buy?

Cheapest policy is not necessarily a good plan.

3 factors to decide on a policy

Price

Benefits

Claims

1. Price

How does the price compare with policies from other companies right now?

How does the price compares over the years?

2. Benefits

Ensure that we have a policy that does not have something called a ‘co-pay’ clause.

Check for a ‘pre-existing’ disease clause.

Check if the policy has ‘disease waiting period’.

Check if the policy has ‘sub-limits’.

Check for exclusions,

How much of the costs before and after hospitalization the policy will cover?

List of ‘day-care’ procedures that don’t need us to stay for 24 hours in a hopital anymore.

Check the ‘no-claims’ bonus feature.

3. Claims

Check how many claims does the company settle? Only choose the firm that settles more than 95% of claims.

Look at claim-complaints data and look for policy that has <30 complaints on every 10,000 claims made.

What to do if we are not getting cover because of a pre-existing disease?
- The worst case, at least buy a policy with sub-limits, co-pay, and an exclusion period for our existing ailment.
  - Though they are restrictive, it’s better than not having a policy.
- If we are unable to get a policy
  - Start a regular systematic investment in long-term product like mutual fund, and label it as ‘medical-cost’ fund.
Critical illness and personal accident
- Critical illness policies pay a lump sum if we get any of the illness that are part of the contract.
- Personal accident policy adds another layer of security to our by-now robust medical insurance portfolio.
Key-terminologies in Benefits, Claims & Policies

Sub-limits

Limits on what will the policy will pay for certain diseases and for the room rent and related costs.

Co-pay

What we agree to share with the insurance company in terms of cost.

Exclusion period

Waiting period before the policy will start paying a claim.

Critical illness

Is a disease where we may not spend too much time in hospital, but have very large out-of-pocket expenses.

The disease may also affect our ability to work for some-time.

Covers in personal accident plan

Death

Permanent disability

Permanent partial disability

Temporary total disability

Check if the financial planner knows more than us or not by asking about

Pre-exiting

Sub-limits

Claims

Waiting periods

TL;DR: We are doing OK if ...

along with our work covers, we have our own family floater;

we live in a small-town India, and have a family floater between Rs 3 to 7 lakhs;

we live in large metros, and want the 5-star hospitals, and have minimum of Rs 15 lakhs’ family floater;

we are over 60 yrs old, and have a top-up plan to bump up our basic cover.

5. What if we die?

I personally found this chapter to be quite a heavy and intense 🤯.

Why do we need a life insurance cover?

We buy life insurance for all the wrong reasons - fear, greed, pity, frustration, taxes, pressure, investment, etc..

The real & only reason for a life cover is to protect our family’s financial health (lifestyle & future goals) if we die.

My personal analogy

Medical cover is to cover us when we live.

Life insurance is to protect our family when we die.

Is the life insurance cover a 'waste'?

When we buy this policy, if we live beyond the policy term, we get nothing back.
It’s not a waste. Rather, it’s price we pay for buying a life cover (an income replacement - an income replacement - a lump sum that we need today so that our income will not be missed by the family if we are not around).

Rule of 72

Versatile rule to know the rate of return of every year of a double-your-money proposition. Over what time, my money doubles? Then, divide the 72 by the time window in years.

e.g., If Rs 1 lakh will grow to Rs 2 lakh in 15 yrs, our return per year is ~72/15 = 4.8%.

Separate/unbundle investment and insurance products.

How much cover do we need?

We need 8-10 times our take-home annual income. Or 15-20 times our annualized monthly expenditure.

Also, we need to buy insurance for all the debt (e.g., home loan, personal loan) we have.

Examples

If our annual take-home income is Rs. 12 lakhs, and life insurance cover if we die was for Rs. 1.2 crore (10x of our annual income).
- If we die, and even if our family put this in a naive 6% 10 yrs FD, it will generate Rs 60K per month.
Say, we take a home loan of Rs. 80 lakhs, and we have a term of Rs. 80 lakhs.
- If we die, the insurance will pay the unpaid home loan.

When's a good time to buy?

Buy as soon as we have dependants or the possibility of getting dependants arises.

Buy the policy the moment we realise that other people in the family will suffer if we die suddenly.
Touching 30 is usually the good time to buy the cover.

What cover/term policy to buy & how to buy it?

Rule 1: Get a cheap plan.

Rule 2: When buying a term cover, check the claims experience of the insurance firm.

A policy sold by an agent costs 2x the policy we buy online.
A claims experience of over 95% is fine.

When do we not need a life cover?

If we have no dependents on our income.

When we are financially free.

The job of life insurance cover is to serve us till we are debt-free or financially independent.

The moment that happens, we can terminate the term insurance plan, and we loose nothing as they are usually annual contracts.

TL;DR: We are doing OK if ...

we have a pure term insurance plan;

we bought this online to remove agent commission costs;

we don’t have a single ULIP or ‘traditional’ plan in our money box;

we have a sum assured that is 8-10x of our annual take-home income or 15-20x of our annual expenditure.

6. Finally, we’re investing

Why we resist investing for the long term?

Not having money to invest.

Desire to keep money in liquid form for future emergency.

Fear of making a mistake.

Lack of knowledge.

Not having money to invest

Waiting to invest because we don't have a large corpus is like waiting to get fit before we join a diet and fitness routine.

We are not stock market traders or speculators. We are investors. Understand the difference.

Start rather than wait for the golden moment when we have a big amount to hit the market with.

Desire to keep money in liquid form for future emergency

Emergency fund + insurance covers act like a seat belt.

It also reduces the need to keep most of our money ready at hand.

Fear of making mistakes

We hate mistakes

Big reason why we stay in FDs, gold, insurance, and real estate is the fear of making errors.

Lack of knowledge

Understanding investing is a one-time fixed cost in terms of our time.

How much to invest?

Depends on many factors, such as

Why we want to invest?

How long we want to invest?

How comfortable are we with high risk high rewards?

How many people we have in our family?

How secure is our job?

What products we already have in our money box?

Who are we? An entrepreneur, a salaried employee or a consultant

Each financial product we buy must solve a problem we have.

Compartmentalise the money box

Cash flows

Emergency fund

Medical cover

Life cover

Investment

Almost There (2-3 yrs) or short-term needs

Some Time (3 -7 yrs)

Far Away (7+ yrs)

Examples of Almost there
- Getting married
- Sending kid to school
- Buying a house
- Buying a car
- Going for a holiday
- Financing mum’s surgery
- Buying dad a car
Examples of Some Time
- Down payment of our house
- Kids’ higher education fees
- Kids’ marriage
- Our retirement

Not everything suites everybody

We need to match our financial needs to financial products.

Each financial product has certain time period over which it works best.
- A product that’s safe in long run becomes risky in short term, and vice versa.

Learn to ask the question

Over what holding time period does this financial product work the best?

Even if we were the unluckiest investor in the world, and bought into the market on the worst day possible, there is a way in which we can still win .

It's never the 'right' time to being investing. We feel we are too poor or too young or too dumb to begin. The right time is now. No matter what our age, stage or circumstance is, we need to being investing right away according to a solid plan.

TL;DR: We are doing OK if ...

we are committed to drawing up an investment plan;

we have written down our near-, mid-, and long-term goals;

we have put a monetary value on these goals;

we understand what amount we need to invest today;

7. Let’s de-jargon investing

We are too fond of gold, real estate, and FDs.

There's a purpose for each financial product we buy, and each product needs to fight with others to grab that place in our money box.

3 asset classes we need to understand

Debt: Umbrella term for all financial products that are based on borrowing.

Equity: Ownership of a business and the risk it brings, either directly (through stocks) or indirectly (through mutual funds).

Real assets: Can be physically seen.

Financial assets

Debt & equity.

Real assets

Real estate & gold.

Debt

Products that usually give us an assured return. Example include
- FD
- Corporate deposits
- Bond
- Provident Fund
- Public Provident Fund (PPF)
The core of the product is loan.
- Higher the return it promises, the higher is the risk of non-payment of both of our investment and the interest.

Two things are fixed in debt financial products

How much we will get back, and

When we will get back

Debt mutual funds

Another category of ‘debt’ products that carries more risk than the guaranteed-return products mentioned above, which will be covered in Mutual funds.

The goal of debt products in our money box is to provide money at short notice, and to provide stability in our long-term investments.

Debt products are good for stability, but not for growth.

Gold

Gold is a good as a hedge against inflation.

The only way we can make profit from gold is when it’s value goes up.

How good is gold for getting capital gains or profits?

It depends on

When we bough it, and

How long we held it

Not more than 5-10% of our total portfolio goes into gold. We do not buy jewellery as investment.

Real estate

We forget how many of our money decisions are related to emotions, power equations within the family and suppressed issues that tend to erupt at some random trigger.

Real-estate story

It’s a horribly, clunky, chunky investment that has lots of costs, which people forget to add to profit maths.

Costs include

Interest cost of the loan

Monthly maintenance bill

Doing-up costs

Purchase stamp duty and registration fee

Agent fee/commission

Yearly property tax

Challenges include

Title disputes

Land/flat can be grabbed

Tenant may refuse to get out

…

Why do we like real estate so much?

Habit

Black money

Fear of unknown

Dealing with black-money is like a treadmill

Once we get on it, we have to keep running with the money.

Irony of our investment fears!

We are happy to invest in dodgy property deals, to risk builders running with our money, and to turn our white into black so that we can invest for the long term in something we are familiar with and can ‘trust’.

Rule of thumb to see the true face of our investment returns

Count the costs

Count the years of investing

Look at the post tax returns

TL;DR: We are doing OK if ...

We have no more than 5-10% of our portfolio in gold, and they are in the form of government gold bonds;

we own one house as the roof over our head and no more;

we have our FDs; PF and PPF, debt funds, and no other debt products, no corporate deposits, no chit funds, no ATI bonds;

our debt allocation is equal to our age; rest is equity.

at age 30, no more than 30% of our portfolio is in debt products;

at age 70, no more than 70% of our portfolio is in debt products.

8. Equity

The most misunderstood of all asset classes.

Stocks are not a lottery or gambling where some people get lucky, and most get unlucky.

There’s a math & science, and a way to take risk safely.

Equity is slow cook, and not instant noodles.

There are two ways entrepreneurs can fund their business
- Debt
- Equity

What’s Sensex and other indices?

A stock market index, that’s made up of 30 most representative companies that are listed in BSE.
The Sensex and Nifty50 are broad market indices and are also called large market-cap indices.

As long-term investors, can we ignore Sensex?

We can ignore it. However, before we do that, we need to understand

What is Sensex?

Why is it irrelevant to our life in the short term, but very important in the long term?

What's market cap?

No. of shares of company × Price per share.

Based on market cap, company may fall under

Large-cap

Mid-cap

Small-cap

If we could just buy Sensex or Nifty50, we could hold automatically the large, bestselling companies in India that represent the sectors of the economy that are doing well.

Just as a food index will be more volatile (prices will go up and down with greater intensity) than a broader consumer index, so also the Sensex will be more stable than changes in a mid-cap index or sector-index.

In a growing economy, stock prices go up over long run.
Good profits and potential growth are the basis for the stock price rise.

Why does the author likes giving her money an equity exposure rather than direct stocks so much?

We will gasp on ROI on Rs 1 lakh invested 40 yrs back in
1. Fixed deposit
2. Gold
3. Public provident fund
4. Sensex

$1.1 3^{40} = 133$ ⇒ The power of compounding over long term!

Assuming Sensex gains 13% p.a. steadily every year, after 40 years, an investment of Rs. 1 lakh would be worth Rs. 1.33 crores.

Depending on a number of factors, the year at which the minimum return is positive in equity is between 7 and 10 yrs.

It's not timing the market, rather the time in the market that matters.

We should not put money into the equity market if we need it next year.

Rules of equity investing

When investing in stock market, give it the same patience & respect we give real estate - a good equity portfolio needs 5 years of patients, ten years to see consistent returns, but actually will slow-cook over 15-20 years.

Our risk is choosing poor products, and finding out after 15 years that our fund (manager) has malfunctioned.

If we find ourselves frozen while choosing equity products in the market - and don’t want to take risk of choosing a fund manager, go with ETF or an index fund linked to a broad market index or mid-cap index.

This is the safest way to get average market returns.

Do not invest into any product that locks you into a particular company or asset manager.

We want a product which is portable, where exit is possible, cheap, and easy.

If we want to invest in managed funds, start learning.

Read through Mint50 coverage, Value Research data, and Morningstar ratings.

Our money box can handle the risk that equity brings in short term now, because

We have created an Emergency Fund.

We bought Medical & Life Covers.

What's best way to buy equity?

Mutual funds

TL;DR: We are doing OK if ...

we understand that equity cooks over time, and we need atleast 7-10 yrs of patience to see returns;

we understand that we will not double our money overnight, but will get a return that is between 12-15% a year;

we understand that mutual funds are best way to give our money an equity exposure;

we understand that if we don’t have the ability to choose funds, we invest through index funds or ETFs.

9. Mutual funds

I personally found this chapter to be the most heaviest and intense 🤯. Next to that would be Equity topic.

Mutual funds

A way to pool the money of large number of small investors and hand it over to experts to manage it.

Market linked products ⇒ Current value of the products the fund buys reflects in the price, as these products are “marked to the market”.

Are the mutual funds safe to invest?

Our money is safe from being stolen

But, our money is not safe from the ups and downs of the market - aka volatility.

How many kind of mutual funds are there?

Gold mutual funds

Equity mutual funds

Debt mutual funds

Real estate mutual funds or Real estate investment trusts (REITs)

Debt mutual funds

Debt funds

Buy bonds and debt papers issues by the government or firms, or both.

What's a debt paper or a bond?

It will pay regular interest to the lender, and then at maturity, it will repay the principal - not very different from the FD.

Different kind of bonds according to the maturity duration

Short-term bonds

Issued by both government and companies.

e.g., Bonds that mature in a day.

Long-term bonds

Mostly issued by the government.

e.g., Bonds that mature in 30 years.

Why not buy bonds directly from the company? Why buy from debt mutual funds?

As an individual, it’s very difficult to keep track of the health of the business.

e.g., If one of our 3 bonds does badly, we lose 1/3rd of our portfolio.

A debt mutual fund will hold bonds of at least 25 - 30 firms.

Diversification - we reduce our risk by increasing the number of products we hold.

Buy debt funds to match the investment horizon of the mutual fund scheme with ours.

e.g., If we need our money in the near term, we will buy debt mutual funds that invest in short-term bonds.

Ways to differentiate debt funds

According to tenor or holding period of the bond.

If we want money next week, we should not invest in fund that has average maturity of of 3 years.

According to the quality of the debt paper bought by the fund.

Better the quality, lower will be the potential return.

Two categories of debt funds we should have (according to the author)

Liquid funds

Ultra-short-term funds

Liquid funds
- Purpose is to keep money liquid or ready to use.
- Liquid fund buys short-maturity or short-term bonds (i.e., bonds that will mature within ~3 months)

Money we put in a liquid fund must be the money we need in the short term.

What's average maturity of 3 months mean?

The average holding period of all bonds is about 3 months in a liquid fund.

What are overnight funds?

These schemes buy paper with a maturity of 1 day.

These are the safest but returns are too low.

For an average household, a good credit quality liquid fund is better option than overnight funds which are great for treasury managers and entrepreneurs..

Ultra-short-term funds
- Invest in these funds if we need the money anytime in the next 3-6 months, as they have the average maturity that matches this holding period.

Constantly watch out for mutual funds buying lower-quality bonds to spike returns.

Government bonds are safest. and therefore carry the lowest interest rates.

Other types of debt funds

Low duration funds: Have an average maturity of between 6 months and a year.

Corporate bond funds

Medium-term bond funds

Credit risk funds

Long-term bond funds

G-Sec funds

Floater funds

Look for bond rating to understand the "credit risk" of the debt funds.

AAA - safest

BB - fairly high levels of risk

If an ultra-short-term fund is showing very high return rates compared to the overall category of ultra-short-term funds, look deeper into why!

Usually safe to stay with large funds from large well-known fund houses.

What to do if our investment horizon is 2 years?

We should stay with the low duration of ultra-short-term funds.

However, the author uses a conservative balance fund (debt funds with small flavour of equity).

Once we understand the mutual funds better, we can switch out of debt funds for cash needs beyond 1 or 1.5 years and buy a balanced funds too.

We must match our investment horizon to that of the fund we buy.

We need short-term product for our short-term needs.

We need medium-term product for our medium-term needs.

We need long-term product for our long-term needs.

Author says "I use debt funds to keep my emergency money" to keep money that I need in next 18 months. For horizons more than that, I use balanced fund"

Gold mutual funds

Gold mutual funds

Funds that invest in gold.

They buy actual gold and track the price in real time.

The product is called ETF.

What is Gold ETF?

Instead of buying physical gold, we can buy fold that is held by the mutual fund through Gold ETF.

1 unit of gold ETG = 1 gram of gold.

Benefits of Gold ETF

Lower cost than buying physical gold.

Close to 100% purity.

No “making” charges

Safer - no need to rent a locker to store our gold.

Remember, the role of gold in our money box is to provide diversification and a hedge against inflation.

Equity mutual funds

Author says "I love equity funds".

Equity funds

Buy stocks of companies listed in the stock market.

Why not buy stocks directly? Why should we buy a equity mutual fund?

Similar answer to “Why not buy bonds directly from the company? Why buy from debt mutual funds?” How will we know which stock to buy? When we buy a mutual fund, we outsource the decision to pick stocks to a team of experts (AMCs) that track companies, markets, international events, politices, interest rates, etc.

Why not buy one or three blue-chip stocks and sit on it?

We will have to track the stock to see when it stops being a blue chip.

Growth that the blue chip sees may be slower than smaller and more aggressive firms, which also carries higher risk.

Sometimes, blue chips can tank.

Diversification

Reduces the -ve imapct of an imploding stock

Reduces the +ve impact of an exploding stock.

Active vs. Passive funds

Active fund	Passive fund
Like a taxi	Like a Metro
We are choosing a mutual fund where the fund manager has a view on the market, chooses his stock to fit the investment mandate, and then manages the money by trading every day.	We know the cost, we know the distance, and we known when we will reach. Just buys the index and stay with it.
Performance of an active fund depends a lot on the active manager, which may both be a pros and cons.	Don’t invest in large research desks, or brokers and dealers.
	Costs less than active funds

Index returns

Why buy active funds when passive is cheaper and less risky?

The Indian market still has alpha left in it.

What's an alpha?

The extra return that the fund manager can generate over the index.

What's NAV?

Price of 1 unit of a scheme (e.g., mutual fund).

It’s not “gross” as costs have been removed.

Value of mutual fund holding per scheme = NAV $\times$ Number of units we hold.

NAV example

There are 100 investors
Each investor puts Rs 1,000 in equity mutual fund
So, in total Rs 1 lakh is invested in mutual fund by these 100 investors collectivey.
Each unit costs Rs 10. (i.e., NAV = Rs. 10)
So, each investor holds 100 units.
The mutual fund (AMC) invested the Rs 1 lakh in different stocks
Year later, the value of portfolio increased from Rs. 1 lakh to Rs 1.5 lakhs
⇒ Profit of Rs. 50,000
Before sharing this profit equally among all investors, the cost (e.g., Rs 10,000 ) needs to be removed.
⇒ Net profit of Rs. 40,000
This profit gets reflect in the NAV that goes from Rs. 10 to Rs. 14
⇒ Our 100 units which we purchased for Rs 1,000 now worth Rs 1,400

Index passive fund vs. ETF passive fund

The difference between index passive fund and ETF passive fund is not relevant to retail investors like us.

Index fund	ETF fund
e.g., Will buy 30 stocks in the same proportion as they have in Sensex and just stay with the investment. If the Sensex falls by 1%, the index fund’s NAV will also fall by 1%.	ETF also tracks an index like the Sensex, but lists its units on a stock exchange, unlike a mutual fund

There can be any number of Indices in the market

Broad market index

Mid-cap index

Small-cap index

Technology index

PSU index

…

Since there can be any number of indices, there can be any number of inde

Large cap vs. small- and mid-cap funds

Large-cap funds	Small- and mid-cap funds
More mature and stable.	Higher returns than those from large-cap ones, but comes with higher risk.
	A.k.a. Aggressive high growth firms.
	Engines of growth in a portfolio.

When the stock markets fall, it's the small and mid-cap stocks that fall harder than the large-cap stocks.

Sector funds

Allows to invest in stocks of particular sector

Technology funds

Banking funds

Pharma

FMCG

Retail

Thematic funds

Track a bunch of sectors.

Infrastructure thematic fund will include sectors such as

Construction funds

Telecom funds

Power funds

What is diversified equity funds?

Fund that is diversified mainly across large-cap stocks.

Aims to give returns that are bit higher than index.

Open-ended vs. close ended funds

Open-ended funds	Close-ended funds
Like a very long unending escalator.	Like a lift.
Open for investors buying and selling it forever.	Comes to the market with fixed time (investing) frame.

Growth vs. dividend mutual fund scheme

Growth scheme	Dividend scheme
Allows us to stay invested and get the benefit of long-term growth of the portfolio. In other words, our profits reflect in the rising price, much like the stock prices that goes up. Till we sell, the profit is “unrealised” or notional. The number of units we buy remains the same, but the price. or the NAV, keeps going up.	Allows us to book profits periodically. The number of units remain the same, but the NAV keeps reflecting the booking profits.
Good option if we don’t need an income from the investment today, but are targeting a corpus for the future.	Good for those who need periodic income from the investments.
NAV of the growth option will be higher than the dividend option.

Balanced funds

Balanced fund

Balanced fund is a hybrid.

Debt funds with a crust of equity to give higher return than a pure debt fund.

3 kinds of balanced funds

Conservative funds: 10% - 25% in equity.

Balanced funds: 40% - 60% in equity

Aggressive funds: 65% - 80% in equity

Balanced funds are a great first investment to make in order to taste equity funds.

How do mutual funds make money?

Front load

Ongoing cost or Annual fees

Exit cost

1. Front Load

Cost to entire the product
e.g., If we invest Rs 100, and Rs 2 from that is cut out so that Rs 98 is invested, the Rs 2 is called a front load.

2. Ongoing cost or Annual fees

The fee we pay to have experts manage our money.
This cost is captured in “expense ratio”

What's an "expense ratio"?

The fees that a mutual fund charges investors for its costs and the profit it makes.

In the context of India

Fund type	Expense ratio per Rs 100 invested
Liquid fund	Rs 0.05 to 1
Debt funds > Ultra-short-term funds	Rs 0.06 to 1.5
Equity funds > Large cap non-index funds	Rs 0.90 to 3
Equity funds > Small cap non-index funds	Rs. 2 to 3
Index funds, ETFs and direct plans	Cost much less

Example: Investing 1 lakh over a 20 year period with two different expense ratio

Expense ratio	0.5% pa	1.5% pa
Pre-cost return	15%	15% pa
Net return	14.5% pa	13.5% pa
Total after 20 years	$100000 \times 1.14 5^{20}$ $15$ lakhs	$100000 \times 1.13 5^{20}$ $12.5$ lakhs

3. Exist cost

Cost of selling the product
- Funds levy exit charges to deter frequent churning of money.
- This is a % of our corpus, and usually falls off to 0 after about 1 - 2 years.

What's a direct plan?

Remove the sales commission embedded in the “expense ratio” and make the product cheaper for us to buy.

e.g., large cap direct fund will cost an expense ratio of 1.03%, and the same fund as a regular fund will cost 1.89%.

SIP

Similar to RD, we make periodic investments into mutual fund.

SIP is good for two reasons

Matches the earning rhythm of most people.

Allow us to average out our price over as invest over the year, either weekly, monthly, or quarterly.

Use SIP to make investments in a mutual fund.

STP

Allows us to space out a big investment over time.

e.g., If we suddenly get a big bonus, instead of investing it all in one go, we can put the money in a liquid fund, and set up a monthly/weekly/… transfer into an equity scheme.

SWP

To periodically redeem our units to generate an income.

Works like a dividend, but we control how much money we want to take from our fund periodically.

TL;DR: We are doing OK if ...

we understand we can invest in debt, equity, and gold through mutual funds;

we understand that managed funds cost more.

we understand that lowest cost and safest way to get an equity exposure is to use index funds or ETFs that track Sensex or Nifty50;

we understand that churning our mutual fund portfolio benefits the seller and not us, and so, choose carefully and stay invested for years.

Thangavel PrasanthTP

Explorer

Let's Talk Money

Preface to the Revised Edition

1. The money order

2. Don’t stash that cash

3. Emergencies need a fund

4. Building our protection

5. What if we die?

6. Finally, we’re investing

7. Let’s de-jargon investing

8. Equity

9. Mutual funds

Debt mutual funds

Gold mutual funds

Equity mutual funds

Active vs. Passive funds

Index passive fund vs. ETF passive fund

Large cap vs. small- and mid-cap funds

Open-ended vs. close ended funds

Growth vs. dividend mutual fund scheme

Balanced funds

10. Putting it all together

11. My retirement

12. Redo the box

13. Will it

14. What kills a money box?

…

Action items

Miscellaneous

Graph View

Table of Contents

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