“Ethics is knowing the difference between what you have a right to do and what is right to do.”

– Potter Stewart Former Associate Justice of the US Supreme Court

INTRODUCTORY PAPERS ON PERSONAL INVESTMENT


Paper I           A GUIDE TO PERSONAL FINANCIAL PLANNING

Paper II         A GUIDE TO MUTUAL FUND INVESTMENT

Paper III        A GUIDE TO EQUITY INVESTMENT

I – A GUIDE TO PERSONAL FINANCIAL PLANNING

The domestic and work related responsibilities of most investors do not permit them to go deep into the intricacies of investment, insurance, finance, real estate and taxation.   Common investors   require investment advice that is simple, effective, easily understood and easily remembered.   Few sectors are witnessing such explosive growth as the financial services sector.   There is a crying need for properly trained financial advisors in India today.

Unfortunately,   there is a tremendous dearth of such advisors.   Most so called advisors are nothing but agents who in collusion with the corporations they represent or work for, generate and use a lot of hype to aggressively sell financial products and services to gullible investors and customers, whether or not such products and services are advisable for them.   As a result, experiences of the common investors in investment, insurance, real estate etc., have been far from pleasant.   The disaster stories of how investors have lost tons of money in imprudent financial adventures are too numerous and well known to be recounted here.

With a view to have better informed and better equipped investors, we have established infrastructure to assist investors to adopt proper Investment and Financial Planning.

PERSONAL FINANCIAL PLANNING is the conceptualisation and implementation of a comprehensive financial plan for the achievement of a person’s total financial objectives.

The areas covered by a normal personal financial plan are:

  1. INSURANCE:
    • Health/Medical Insurance should be compulsorily taken. The entire family must be covered by health insurance. We advise choosing family floater policies which cover a maximum of four members of a family, with any one person entitled to make use of the entire cover, should the need arise.
    • Personal Accident Policy should be taken only by earning members of the family to cover the risk of partial and permanent disability.
  • Critical Illness Insurance should be taken for all the family members to cover the risk against costly treatment of terminal deceases.
  • Life Insurance: If an individual has no financial dependents, life insurance is not necessary and will be a waste of money. If there are financial dependents, the quantum of life cover required must be calculated. Thereafter, it is advisable to take only a pure term life insurance cover, to the extent life insurance is required.
  • Property Insurance: Protection against losses caused by earthquake, fire, damage from other causes, breakdown, burglary, etc., may be taken if required, and to the extent required.
  • House Hold Insurance to cover the risk of fire and burglary of electronic goods, furniture, interiors, etc., may be taken if required, and to the extent required.
  1. EMERGENCY FUNDING:

Ensure that an amount equal to at least 12 months’ normal living expenses is deployed in highly liquid avenues like money market accounts (called ‘liquid funds’ in India), short-term mutual funds, short-term floating rate mutual funds, ‘flexi’ bank deposits, etc. This builds an excellent buffer in case of unexpected shocks like job/earnings loss, change of residential status, migration to a different country, unforeseen but necessary expenditure, etc.

Investment in any short-term debt fund with monthly or quarterly capital appreciation transfers to an equity index fund or diversified equity fund would be an excellent strategy for an emergency fund. An emergency fund is your private insurance policy and your first line of defence when tackling an unexpected, adverse financial situation. It is important that an emergency fund be utilised only in an emergency.

  1. RETIREMENT PLANNING:

Never expect either the government or your employer to provide for your retirement. You are responsible for your financially comfortable retirement. No one else is. There is a wrong notion that planning for retirement should start when a person approaches retirement. Nothing can be farther from the truth. Retirement planning must start as soon as a person starts earning. The best “private” retirement plan would be a sustained systematic investment into a well diversified portfolio of blue chip stocks, diversified equity mutual funds, equity index funds, and, resources permitting, real estate. So long as interest on the Public Provident Fund (PPF) remains tax-free, this would also be an excellent retirement avenue for the conservative investor. Employees who are eligible for the Employees’ Provident Fund (EPF) benefit, should make contributions to the EPF at least to the extent of matching contributions by the employer.

From the financial year 2014-2015 onwards, Section 80C of the Income-Tax Act, 1961, provides an excellent opportunity to build a tax-advantaged retirement fund of up to Rs 1.5 lakh per annum, using among other avenues, PPF and ‘equity linked savings schemes (ELSS)’ of mutual funds. While the exemption under Section 80C may be a sweetener, it should be borne in mind that a retirement fund is of vital importance in its own right, whether or not there is a tax benefit attached to it.

Just as an emergency fund must be used only in an emergency, withdrawals from a retirement fund must be contemplated only upon retirement. The solitary exception to this rule is if the family or any of its members is threatened with a life-and-death situation, and emergency funds and insurance have already been exhausted.

  1. HOUSING:

Everyone must aspire to owning a dwelling. This is the only area where we will not object to a loan being taken for acquiring an apartment or house. Today, housing loans are freely available and there are substantial tax advantages attached to the repayment of principal and the payment of interest on these loans. However, it should be remembered that the acquisition of a residential house is important in its own right, regardless of any tax advantage attached to it. If the individual has need for commercial premises for his own use such as an office, shop or showroom, steps may be taken over time to acquire the ownership of such premises. Additional real estate investments may be undertaken only if the individual has specialized knowledge and a keen interest in real estate investments.

  1. EXTINGUISHING DEBT:

It would be very prudent to have no debts at all, except perhaps a housing loan, if needed. Get rid of dangerous, high cost, open-ended debt like credit card debt, personal loans, cash credits and overdrafts. Use only term loans, that too sparingly, and only for the acquisition of vitally important productive assets such as a residential house or truly useful higher education.

  1. INVESTMENT:

Investment can be for parking funds, to earn regular returns and for growth. Use savings accounts, ‘flexi’ accounts, liquid, short-term floating rate mutual funds for short duration parking of funds. Use Post Office Monthly Income Scheme, Taxable Government of India Savings Bonds, Senior Citizens’ Savings Scheme (for persons of 60 years and above only), bank fixed deposits, short and long-term floating rate mutual funds, fixed maturity plans of mutual funds, and structured withdrawals from PPF accounts, to earn regular returns.

Invest in a very well diversified equity portfolio of blue chip stocks and/or use systematic investment and systematic transfer plans into mainline diversified equity mutual funds, for wealth enhancing (growth) investments. Real estate is also a good, long-term, wealth-enhancing avenue of investment. However, real estate suffers from some drawbacks such as poor liquidity, difficulties in verification of title, requirement of large amounts of capital for a single purchase, high registration costs, menace of black money in real estate transactions, problems arising out of absentee landlordism, etc. Real estate mutual funds should be available in India before long, at which time systematic investment and systematic transfer plans into these funds can certainly be considered.

  1. OTHER OBJECTIVES:
  • Vehicle purchases, children’s education, marriages and family functions, family vacations, down payment on real estate purchase, renovation of real estate assets, etc., can be provided for by setting up a general investment fund, following a simple asset allocation plan. When in doubt, maintain a 50:50 balance between debt and equity in this account, and rebalance it at annual intervals.
  • Do not neglect succession and estate planning. Prepare a will.
  • Ensure that all bank accounts and investments are either in joint names or with nominations registered.
  • Ensure that the spouse and / or family are kept aware of investments, insurance policies, retirement benefits, tax matters, etc.
  • Regularly review investments. Make changes only when required. Do not constantly tinker with investments.
  • Ensure that all adult family members apply for and obtain an income-tax PAN card, an election identity card, a passport, a driving licence and (if necessary) an Aadhaar card.
  • Know your client (KYC) registration formalities for mutual fund investments may be undertaken and completed. The opening of client and demat accounts with a member of a recognised stock exchange and depository participant respectively may also be completed, if direct equity investment is contemplated.

PERSONAL FINANCIAL PLANNING – PLAN OF ACTIONS

Very few common people have a clue about what their investment objectives should be. Others have fancy, unrealistic and often unworkable objectives, completely out of touch with the reality of their income, assets and economic prospects. Our task is to enlighten investors about what their objectives should be, prioritise these objectives and implement them through a viable and workable financial plan, after taking into consideration their situation, income and assets.

Where investment objectives of a normal client are concerned, we go beyond simple investment objectives and try to implement financial planning objectives. We advise drawing up, implementing and then adhering to a financial planning plan of action, the highlights of which are:

  • Take health insurance cover for the entire family, preferably on a family floater cover basis.
  • Take personal accident cover to the extent required only for bread winners of the family.
  • Take critical ill insurance cover to the extent required for the entire family.
  • Take pure term life insurance cover only if required, to the extent required only for bread winners of the family.
  • Take property insurance cover and house hold insurance cover only if required, to the extent required.
  • Establish a family emergency fund, equal to at least one year’s normal living expenses.
  • Plan for retirement, NOW. Make maximum possible contributions to your EPF, if you are employed and eligible for EPF. Your EPF contribution must at least equal the maximum matching contribution of the employer. Open PPF accounts for all members of the family and ensure that at least the minimum annual contribution is made to them. Start systematic investments into equity or equity mutual funds. In equity mutual funds, ensure that at least half of your investments go into low-cost index funds. Reserve at least 10% of your take home income for retirement funding.
  • Acquire a house especially if you have not done so already and are not likely to inherit one. Attempt this only after five years of uninterrupted earnings from employment, profession or business.
  • Get rid of debt, especially unproductive and open-ended debt. Ensure that monthly repayment of all loans put together does not exceed 25% of net family income.
  • Build a general investment fund across different types of asset classes. Always diversify. When in doubt go for a 50:50 rebalancing strategy between equity and debt for your general investment fund. Allocate at least 15% of net income to a general investment fund. Have a good idea of your financial objectives which must be met by your general investment fund.
  • Learn to differentiate between short-term and long-term monetary needs and invest accordingly. Its short-term debt for short-term needs, and equity and/or real estate for long term needs.
  • Guard against hype, excitement and costs in investment and insurance.
  • Keep your documents in order and review your finances and financial papers at least once a quarter. Ensure that all investments are in joint names or with nominations registered. Don’t neglect tax work. Be tax-efficient wherever possible.
  • Don’t neglect estate and succession planning. Make a Will.
  • Ensure that every adult family member has a passport, an income-tax PAN card, a voters’ identity card, a driving license and (if necessary) an Aadhar card. Examine whether family members need to complete KYC formalities for mutual fund investment, and / or open client accounts with a member of the BSE / NSE and open demat accounts with a depository participant.

Performance of an Investment of Rs. 500/- per month

No. of Years Total Investment (Rs.) Rate of Return  
8% per annum (Rs.) 12% per annum (Rs.) 15% per annum (Rs.) 20% per annum (Rs.)
5 30,000/- 36,707/- 40,551/- 43,671/- 49,351/-
10 60,000/- 90,642/- 1,12,018/- 1,31,509/- 1,72,156/-
15 90,000/- 1,69,889/- 2,37,966/- 3,08,183/- 4,77,730/-
20 1,20,000/- 2,86,330/- 4,59,929/- 6,63,537/- 12,38,097/-
25 1,50,000/- 4,57,420/- 8,51,103/- 13,78,280/- 31,30,133/-
30 1,80,000/- 7,08,807/- 15,40,481/- 28,15,885/- 78,38,126/-
35 2,10,000/- 10,78,176/- 27,55,416/- 57,07,422/- 1,95,53,117/-
40 2,40,000/- 16,20,902/- 48,96,536/- 1,15,23,335/-  4,87,03,764/-

 

The Power of Compounding & Long Term Investment

Chose your Investment Outlay…
 

How much you need to invest every month if you want to retire a Crorepati at the age of 60 years

 Returns 8% pa (Rs.) 12% pa (Rs.) 15% pa (Rs.) 20% pa (Rs.)  
Age 30 Years 7,054/- 3,246/- 1,776/- 638/-
35 Years 10,931/- 5,875/- 3,628/- 1,597/-
40 Years 17,462/- 10,871/- 7,535/- 4,038/-
45 Years 29,430/- 21,011/- 16,224/- 10,466/-
50 Years 55,162/- 44,636/- 38,020/- 29,044/-
55 Years 1,36,214/- 1,23,299/- 1,14,492/- 1,01,313/-

 

II – A GUIDE TO MUTUAL FUND INVESTMENT

Some of the investment options that we recommend in mutual funds are briefly described below. Depending upon your risk appetite, you can choose the option/s you are comfortable with. We are unapologetically conservative in our investment advice. Our focus is on safety, diversification, asset allocation and optimum returns. In the long term (10 years and above), we seek to achieve results well described by an old investment saying: “The ultimate objective of good investment is to obtain above average returns at below average risk.”

Option 1: Debt Mutual Funds:

For investments of uncertain duration and investments of up to 3 months’ duration, money market accounts and liquid plans of mutual funds are excellent investments. In our opinion, they would be attractive alternatives to savings accounts of banks, without compromising too much on safety. For investment horizons of more than 3 months and less than a year, ‘liquid plus’ plans and short-term floating rate mutual funds (also called ‘floaters’) offer liquid investment avenues with a high degree of safety.

If the period of investment exceeds a year, the best options would be short-term funds and fixed maturity plans (FMPs) of more than 12 months’ duration. Fixed Maturity Plans (FMPs) of over a year are more tax-efficient than comparable cumulative bank fixed deposits, especially for investors in the higher tax brackets. Let us explain. If any of the categories of debt funds mentioned above is liquidated after one year, the resulting appreciation will be taxed at the long-term capital gains tax rate of (presently) 10.3% without indexation or 20.6% with indexation, whichever is beneficial to the investor. To that extent, these funds are tax-efficient, especially for investors in the higher income-tax brackets of 20.6% and 30.9%.

An important feature of floating rate funds is that in the event of a rise in the general interest rates, the returns on these funds will also rise automatically, because they basically invest in floating rate securities. A fall in general interest rates will result in lower yields from floaters. Short-term floaters are very liquid. On the other hand, short-term funds will do better when interest rates fall and worse when interest rates rise. A mix of liquid funds and floaters on the one hand, and short-term funds on the other, could be a good way of parking funds or investing for short and intermediate time horizons.

Dividends on all mutual funds are tax-free. However, for investments of more than one year, the growth option is better, because non-equity mutual fund plans, including debt fund plans have to deduct a dividend distribution tax in case of dividends paid out or reinvested, which is presently higher than the long-term capital gains tax payable on growth options. NRIs can invest in debt funds both on a repatriable and non-repatriable basis. Investment in these funds carries low risk, provided an investor sticks to the leading mutual funds.

Option 2: Debt Mutual Fund to Diversified Equity Mutual Fund Systematic Transfer Plan:

This strategy requires a minimum investment of Rs 50,000/-, even though starting with Rs 1,00,000/- is better. The strategy can best be understood by the example of how a basic investment of Rs 1,00,000/- would be made. This initial corpus is placed in a liquid or short-term or short-term floating rate fund. From here, 2% of the principal (Rs 2,000/- for a Rs 1,00,000/- lump sum) is systematically transferred to a diversified equity fund. Our experience with this type of investment for investors in India shows that attractive and tax-efficient returns can be earned in a period of five years or more, with relatively low risk to principal. Invest in this strategy only if you are reasonably confident of not needing the funds for at least five years.

Option 3: Highly Conservative Systematic Transfer Plans:

Here the objective is to preserve the principal invested even in a bad stock market. The simplest way to do this is to invest the lump sum in a liquid or liquid plus or short-term floating rate or short-term fund and then register a monthly or quarterly transfer of only the capital appreciation to an index fund or diversified equity fund. This is the closest you can come to fashioning a zero-risk mutual fund strategy on your own, allocating assets between debt and equity.

You could also try a variation of Option 2. One percent of the principal is transferred every month from the debt fund to the equity fund in this strategy. The minimum investment advised here is Rs 1,00,000/-. We have not seen a risk to capital in this strategy even during the global financial crisis that started in the latter half of 2007. That does not mean risk cannot occur. There is no such thing as a risk-free strategy. But the probability of a risk to principal here is remote.

There can be value additions to the above strategies. After you have begun any of the two investment strategies mentioned in the two paragraphs appearing immediately above this one, if the stock market index falls by at least 25% from its last peak and remains at this lower level for at least a month, you would do well to double the monthly systematic transfer of Rs 1,000/- to Rs 2,000/-. Similarly, in case the index falls by 50% from its last peak, we would recommend transferring the entire balance in the debt fund to the equity fund/s.

These strategies are recommended for investors who want to invest in the stock market, but want to avoid the risks associated with equity investment. These strategies are also ideal for investors with no previous experience in stock market investment. Investors who opt for this would be following Warren Buffett’s famous dictum: “The first rule of investing is, do not lose. And the second rule is, do not forget the first rule. And that’s all the rules there are.”

Option 4: For regular fund flows – Systematic Investment Plans (SIPs):

SIPs into a mix of debt, balanced, asset allocation, diversified equity, equity index and (when they are available) real estate mutual funds are probably the best way of building wealth in the long term. SIPs into any mutual funds that have an element of equity must be continued without interruption for a period of at least five years, and preferably for much longer.

Wealth can also be built by direct investment in a diversified portfolio of blue chip stocks. Our advice on direct equity investment is contained in a separate paper entitled ‘A GUIDE TO EQUITY INVESTMENT.’

III – A GUIDE TO EQUITY INVESTMENT

Common investors in the stock market routinely rely on tipsters and manipulators, little realizing that most ‘experts’ are sadly innocent of sound investment knowledge. Most stockbrokerages flaunt ‘research’ departments that are of dubious value, whose main purpose appears to be to make investors trade more and more, so that brokerages increase.

Our view of stock market investments is that in a boom, you do not need the advice of experts to make money. Any trash you buy will appreciate. In a recession, the advice of the best experts cannot prevent you from losing money.

Should then, a self-respecting investor keep away from the stock market? The answer is an emphatic NO! The stock market is a legitimate avenue of investment. Equity and real estate are the only two avenues of investments that have consistently beaten inflation and genuinely enhanced wealth in the long run. It would be difficult to find another avenue of investment that offers better returns, to a sensible, patient and disciplined investor, than the stock market.

The problem is, stock markets also provide facilities for speculation. Often, we pervert this genuine investment avenue into a purely speculative avenue. Most investors fall prey to the temptation of quick riches via speculation. In the process, they almost always encounter quick poverty. Today, day traders, margin traders and punters in the derivatives markets embody the essence of what a genuine stock market investor should not be!

No one can predict the stock market in the short term. In the long run, predicting the market is relatively easy. Long-term stock market returns are a total of the current dividend yield and rate of growth of corporate earnings. In the long run, the market always goes up, and the rate of growth beats inflation by a comfortable margin. Therefore, for long-term investors, the stock market is a genuine avenue of wealth enhancement. So how do you invest in the stock market? The following model may be worth a try:

SIX RULES AND A RECOMMENDATION

  1. Diversify across 10 to 20 major economic/industry sectors.
  1. Select only the top blue chips from each sector, aiming for an ultimate portfolio of approximately 60 stocks and 20 sectors. The BSE-200 index provides a wide enough basket for stock and sector selection.
  2. Allocate equal amounts to each sector.
  1. Reinvest dividends don’t spend them.
  1. Review the portfolio at least once in three months, making additional purchases upon a substantial drop in the market from the date of your investment. A substantial drop can be when the market, as measured by any popular index, falls 25% from its last peak, or from the date of your investment. 
  1. The time horizon for equity investments is at least five years.


Recommendation: Systematic investment and systematic transfer plans are highly recommended, both for equity as well as equity mutual funds.

RATIONALE BEHIND THE RULES

The first rule employs the risk management tool of diversification. It does not mean that an investor must start equity investment with 10 to 20 major sectors straightaway. However, an equity investor must build a portfolio across 10 to 20 major economic or industry sectors over a reasonable period of time. Why 10 to 20 sectors? Up to 2,800 stocks are traded on the Indian stock markets, daily. These companies can be divided into 100 to 120 sectors.

Our equity model argues that a sample of between 10 and 20 per cent of these sectors is more than enough to build a good equity portfolio. The model also stipulates that the sectors chosen should be major sectors, e.g., steel, cement, power, engineering, pharmaceuticals, software, banking and finance, fast moving consumer goods, automobiles, etc., rather than minor sectors like aquaculture, cigarettes, dyes and pigments, glass products, leather products, moulded luggage and so on.

The second rule is equally important, because most investors have a problem of stock selection. They always ask a broker which share to buy. Instead of this, it is better to choose only blue chips from the BSE-200 index. Why only blue chips? Because blue chips are liquid. They are generally around for the medium to long-term. They attract the best management talent. More often than not, they have the highest standards of corporate governance. They focus on enhancing shareholder value. They are adept at managing rapidly changing business, economic, fiscal, tax and political environments. They generally contribute heavily to the state exchequer through both direct and indirect taxes. They provide considerable employment.

These qualities give blue chips significant economic impact. Economic impact simply means the strength to lobby effectively with the powers that be, for legislative and policy changes required to meet challenges during recessions and other difficult times. Economic impact also means that the company is so important that its failure will have an adverse effect on the entire economy.

Having said this, it must be remembered that blue chips are in no way insured against failure. Hence the need for adequate diversification, which protects an investor from the failure of individual companies.

The third rule is also very important. Investment should be made uniformly across sectors. Why this uniform allocation? Because, at any given time in the stock market, the spotlight is on just one or two sectors which are fancied at that time. Most stock market players dabble only in these fancied sectors. However, the spotlight can shift to other sectors, without warning. It is very difficult for an individual investor to predict these changes in market fancy. It is also difficult for ordinary investors to predict how changes in business, economic and tax policy will affect the collective psyche of the stock market.

The common investor is generally unable to gauge the impact of such changes on the various sectors of the economy. The first two rules of this model stipulate that only major sectors and top blue chips be chosen. Once this is accomplished, it is better to allocate equally between these major sectors, because in a time horizon of five years or more, all major sectors and blue chips have an even chance of performing well and therefore hogging the limelight. So, a prudent investor would do well to spread his investment uniformly across a minimum basket of 10 to 20 major sectors.

The fourth rule encourages investors to reinvest dividends. Equity is a growth avenue, not an avenue that is designed to provide regular returns. Dividends received, even though they may be relatively small sums, should be collected and reinvested in the stock market, whenever they accumulate to meaningful amounts.

According to research by Crandall, Pierce & Company, an investment of one US dollar in the S&P 500 stocks on 31st May 1946 would have been worth $ 47.53 on 31st July 2002, had dividends not been reinvested. Had dividends been reinvested, the $ 1 would have grown to $ 405.92 in the same period! That is why Benjamin Graham has enlightened us that, “Far from being an afterthought, dividends are the greatest force in stock investing.”

The fifth rule is about reviewing equity investments. Regular reviews keep an investor constantly aware of the state of his portfolio and the risk and return thereof. Reviews also alert the investor to opportunities for further investments which can enhance the value of a portfolio. Finally, ‘reviewing’ is not ‘tinkering.’ Long-term equity investment with regular reviews makes investors wealthy.

Tinkering makes brokers wealthy, often at the cost of investors! ‘Reviewing’ is being aware of one’s portfolio and its performance on a regular basis. From our experience, additional investment needs to be made only upon a drop of at least 25 per cent in the index, from the date of original purchase, or upon a drop of 25% from the last index peak, depending upon when the investor has made her original investment.

The sixth rule cautions the investor that equity is a long-term investment avenue, with a minimum time horizon of at least 5 years. Why at least 5 years? History shows that generally, a boom and recession cycle in the stock market takes an average of 5 years to complete. That is why a period of at least 5 years has been estimated to be a reasonable minimum time horizon for equity investment.

Of course, if an investor makes substantial profits before the time horizon runs out, he can always liquidate his investments, if need be. A time horizon of at least five years only means that the money reserved for equity investment, should be money that the investor does not ordinarily need for at least 5 years. In our opinion, too much importance is given to booking profits and market timing. Investors are constantly exercised about when to sell.

Legendary stock market investor Warren Buffet remarked that his “favourite holding period is for ever.” The most successful investors we have seen are those who have followed Buffett’s dictum, accumulated equity investments over thirty or forty years or more, and never sold! These investors now earn dividend income and have long-term capital appreciation that is more than enough to see them through retirement very comfortably!

The recommendation is for systematic, regular or recurring investment. Such a regular investing program helps the investor to average the market, by making purchases when the market is low, high, as well as somewhere in between. This is an important risk management tool, because we have observed that virtually all common investors invest only when the market is at its peak, and withdraw from the market, often in panic, when it crashes.

Actually, investors should enter the market when it is low and exit from the market when it is high, which is not done. Systematic investment helps the investor to obtain better market pricing, automatically, by buying more stocks when the market is down and less when the market is up. Systematic investment also makes investment a habit, through regular, disciplined investing. There is great value in cultivating such a habit.

USING OUR EQUITY INVESTMENT MODEL

The total risk in the stock market can be of two types: Systematic Risk and Unsystematic Risk. Systematic Risk affects the stock market system as a whole. For example, if war breaks out or corporate income-taxes are increased sharply, the entire market will be affected adversely. These are examples of systematic risk.

Unsystematic Risk affects a particular company or sector or industrial group only, and not the entire market. Accounting frauds, family squabbles in family-owned businesses, mismanagement, poor prospects, intense competition or gluts, government policies unfavourable to a particular sector or company are factors that could result in unsystematic risk.

Unsystematic Risk can be very effectively managed by deploying the risk management tool of diversification. If a portfolio is diversified across 30 blue chip stocks spread over at least ten major economic or industry sectors, unsystematic risk gets substantially reduced. But if the portfolio is diversified across at least 60 stocks spread over twenty or so major economic or industry sectors, unsystematic risk can be virtually eliminated.

Systematic Risk is much more difficult to manage, but can be tackled with reasonable success, by systematic investment, which is nothing but diversification across time.

Therefore, you can easily implement our investment model by simply investing equal amounts (a minimum of Rs 20,000/- per stock would be viable in today’s conditions) in each of our recommended stocks. In order to build a satisfactory portfolio therefore, you would need a minimum of Rs 6 lakhs, for 30 companies. The ideal portfolio will be Rs 12 lakhs for 60 companies. You can start with smaller amounts, provided your ultimate objective is to build a portfolio of approximately 60 stocks.

For systematic investment, buy one stock a month from our recommended list of stocks, investing at least Rs 20,000/- each time. It does not matter if it takes five years to build your portfolio.

Investors, whose investment surpluses are less than the sums indicated above, would do well to choose mutual fund investment strategies instead of direct equity investment.