Personal Finance - How to approach your investments now ?

With financial markets and global economies undergoing very uncertain and unprecedented difficulties, it is very important you don't make any more mistakes and come out safer thru. these challenging times. I personally feel tough times will last for few more quarters.

The following are some of actions suggested which can act as a general guide:

1. Don't lose sight of your medium to long term goals (e.g. Higher education, House, marriage expenses, Retirement kitty and such large and important commitments which I also refer to as important mile- stones). Plan and invest for it on regular basis, earlier you start, easier it becomes.
2. After setting aside funds for liquidity and emergency needs (Thumb rule is to keep 4 to 6 months household expense in the form of cash or in savings a/c.), clear out your liabilities (if any), specially all the high cost ones first , viz. Credit card dues, Personal loans, Vehicle loans and other personal loans taken at high rates.
3. Pre-pay housing loan, in part or full, if you have surplus liquidity. You may also consider switching to linked bank accounts offered by many housing loan financier. Under this a/c. facility, you can deposit the surplus funds that may be available with you from time to time and you can withdraw the same at any time by issue of cheque, cash withdrawal,etc, just like the way you use your normal bank a/c. The advantage here being you are charged interest only on the loan portion outstanding (net of these temporary advance payments) and no pre-payment penalty is charged. At the same time you don't lose the liquidity advantage.
4. Earmark portion of the funds that should be invested in the stock market and use SIP's (Systematic Investment plans) route. Investing in Index Fund or Large-cap fund would be a safer option. Small allocation (based in risk appetite) may be kept for investing in Mid-cap and small-cap funds.
5. Take personal insurance. Start with pure term plan first - here the premium is the lowest and coverage higher. Avoid combination of insurance & investment from a insurance product.
6. Invest for your tax savings, if not already done, as year ending is just round the corner. Options like PPF & 5 yrs. bank deposits, provide attractive returns.
7. Invest regularly in Gold. ETF's are better options then Physical gold and jewellery. Treat this as part of your currency holding and don't expect returns on the same. Here the thumb rule is to invest 7% to 10% of your total investments.
8. Balance available should be preferably invested in Debt/fixed Income products of high quality (AAA rated) and having good liquidity (for early exit).
9. Avoid taking fresh loan and postpone availing it wherever possible.
10. I personally avoid taking loans for consumption items (e.g. Holidaying) or investing in a depreciating asset(e.g. Car, fancy mobiles,etc.).

All the above suggestion are general in nature and may not be applicable to all of you. It is always better to consult a financial advisor for each specific case. If you need my help pls. send me an email with your query.

Happy Investing.

My thoughts on the Market......

World Markets
So far not much is perceived to have come out of Obama's promised financial and Economy boosting miracles. Stock Markets continues to trade in a range and are still awaiting the major trigger (Positive or Negative) to take further direction.

Meanwhile some bit of optimism was generated from China introducing some more measures for boosting its economy, by reducing import tariffs on raw material and components imports.

Bank of England in meeting scheduled for today is expected to cut its key rate to 1% (eventually heading towards zero percent).

However I still feel that we are yet to see the worse and while it comes it may stay and last for longer period, then most of us are expecting.

India :

As expected Inflation rate headed down and for the week ended Jan 24 it dips to 5.07%, down from its previous week level of 5.64%. The effect of the second recent cut in the fuel prices (following the weak global oil prices over last few months) will soon be reflected in the WPI. Headline inflation rate is expected to touch sub 3% level by Mar'09 end.

Bond yield spread between the bench mark 10 yr Gilt and AAA rated (PSU & Private) is also expected to contract from current 3.5% - 4% range to 2.5% - 3% range over next 6 to 9 months. This gives opportunities to ride the expected rally in AAA bonds, mainly for two reasons - one expectation of fall in overall interest rates over short and medium term and second due to expected reduction in spread levels between Gilts and High quality traded bonds. For most of the investors, using the Income fund route will be the better option to invest (advantage of holding a diversified bond portfolio) and selecting those fund schemes which have bias towards holding PSU bonds (to minimise credit as well market risk). (Word of caution: Borrowing program of Govt. over next few weeks / months, can distort the yield curve and it may also results in crowding-out of Non-Govt. borrowers, mainly PSU & Pvt. sector borrowers and thereby lead to increase in overall interest rates).

With Qrtly results seasons been over, corporates as well as investors are bracing up for tougher time ahead, as next few qtrs. will continue to be challenging for India Inc.

Next week's Vote-on-Account Budget is expected to be populist, with the ruling party keeping a eye on forth coming General election (Apr09-May09). It not being a full fledged union budget, no changes in the taxes rates will be announced.

Market has also build-in the political risk, as no single party is expected to gain majority and projection of likely composition of the future multi- party Govt. ,is still blur.

All in all, it is time to sit on the side line as far as stock market is concerned and try to cash in on the expected rally (even though marginal) in Gilts and Fixed Income products.