We live in a dynamic, evolving, uncertain world. The investment landscape is too constantly changing with uncertainty being omnipresent. The wisdom to know what to do and how to act in the face of this uncertainty will decide who and what will succeed or fail. This is the reason we must time and again go back to the fundamentals of investing, especially equity investing.

Presented here as commandments, these are the ground rules and behaviour which suggest specific actions to pursue or avoid. The 10 commandments distil the collective wisdom of investment gurus and are timeless in their relevance and importance, and we need to remember it from time to time. In an uncertain investing world, the below ten commandments can help you navigate and find success as investors.

1. Thou Shall Avoid Emotional Investing

   “If you can’t control your emotions, you can’t control your money.” - Warren Buffett. This is the most important commandment and hence the first on the list. Without separating emotions from investing, none of the below commandments will be of much use. Equity markets, as many now would agree, often experience stages of fear and greed, as recently witnessed in the past few months, again. Anyone falling prey to the herd mentality is bound to make mistakes. We should refrain from the FOMO (fear of missing out) emotion and take a step back, think independently and rationally, always.

2. Thou Shall Not Forget Asset Allocation

   Smart investors always have an eye on their Asset Allocation. The next commandment requires one to have an asset allocation strategy to manage one’s overall investment portfolio. Within asset allocation, one has the option to choose fixed or a dynamic asset allocation approach, depending on your risk appetite. This can be revisited every few years or after any major life event. A regular rebalancing to restore your asset allocation, either on a fixed frequency and/or driven by sharp market movements, is all one needs to do on an ongoing basis.

3. Thou Shall Always Diversify

   Beyond asset allocation, diversification ensures that you do not concentrate your holdings and risk into limited funds or securities. Equity diversification can be across different market capitalisations (large/mid/small/mixed), fund styles (growth/value), even countries (domestic/international), etc. As compared to direct equity investing, mutual funds offer much better diversification as a single fund will invest in many stocks at any point in time.

4. Thou Shall Not Ignore your Risk Profile

   A risk profile is an assessment of an individual's willingness and ability to take risks. It is important for determining a proper investment asset allocation for a portfolio. We can think of risk as the trade-off between risk and return, which in other words is the trade-off between earning higher returns at higher probability /risk of losing capital or earning lower returns at a lower probability /risk of losing capital. We should see the risk profile as the weighing machine to avoid financial and emotional damage beyond what you can handle.

5. Thou Shall Always Have A Plan

   By failing to plan, one is planning to fail. To accomplish anything worthy in life, preparation /planning is required, even for financial well-being. Irrespective of how big or small your savings or your goals are, planning is critical to reaching your destination. A good plan identifies where you are today, where you want to go and more importantly, how to reach there. If one put it in a sequence, there are first dreams, then goals, plans, execution, course correction and finally achievement.

6. Thou Shall Follow Discipline

   Being disciplined at handling and saving money is a lifelong behavioural change. Small things, repeated many times over, over many years, can result in wonders. Being disciplined for an equity investor would mean being steady, sticking to and following your plan and not reacting to the market craziness. Often disciplined savings in equity is also promoted rather than putting all your money at the same time in the markets. Disciplined savings with Systematic Investment Plans or SIPs in equity mutual funds is a very popular approach to disciplined savings in equities, which is hard to replicate in direct equities.

7. Thou Shall Not Predict Markets

   If there is one ability which all equity investors and managers dream of, it is the ability to predict markets. Unfortunately, no one is gifted with this foresight. What is amusing is, it is easier to predict over many years rather than to predict the next day! Successful investors are not better market predictors but are more researched, they hold on to their convictions, use common sense and invest for long-term, where the probability to succeed is high.

8. Thou Shall Not Leverage

   Leveraging is the easiest and the fastest way to bankruptcy. Period. The only people who may leverage are the ‘traders’ running the business of short-term trading in stocks /indices. Derivatives, comprising  futures and options, again are called as the weapons of mass destruction and is a territory of only those who wish to take it up as a full-time business, willing to sacrifice mental peace to take up daily risks. Retail investors should clearly stay out of this world which can take away a lifetime’s savings without a day’s notice.

9. Thou Shall Not Run After Tips

   What happens when you mix equity investments with excitement? It becomes gambling. Surely, you can hunt stock market tips, buy penny stocks, bet on horse races, buy lottery tickets, all at the same affordable prices. But please do not paint all this as part of your equity investments. Buying established companies or good funds is far more predictable than buying into the unknown, fly by night, companies available at prices cheaper than chocolates or public bus tickets.

10. Thou Shall Not Make Big Mistakes

    Sometimes, all it takes is one mistake to ruin the good work done over many years. Such mistakes need not be limited to equity investing but can be in any sphere of life which can destroy your wealth. Investing in unsolicited, get-rich-quick schemes, bad property deals, business failure, unemployment, legal disputes, marital break-down, etc are many of life’s realities which not only take our mental peace but can also cost us dearly. Lack of adequate insurance for death, disease, disability and damages to property, business establishment /goods etc by far are the most common reasons behind ruining a family’s financial well-being. Ensuring safeguard against risks, being careful in decision making, creating multiple earning sources and smartly compartmentalising your investments is needed.

Our relationship with money starts at an early age when we notice or parents exchanging coins or notes for all sorts of stuff we like. The understanding of money grows as we start getting our pocket money. Slowly, we get more exposed to money and we start forming our financial behaviour and habits as we progress through these years. Once we start earning, we perhaps either continue or form new behaviour and habits, depending on our knowledge, understanding and our live-style needs. These experiences and beliefs may last throughout your life. The challenges however only multiply as we continue in our lives, have families, dependents and life goals.

Some concepts are very important when we talk of any investment journey. Having a good understanding of these concepts and ideas will go a long way in developing a strong foundation for our future financial well-being, irrespective of our age.

In this article, we will talk about 5 important concepts and ideas for wealth management. These can also be viewed as long-term strategies which, when practiced diligently, can help us strengthen our finances and reach the goal of financial well-being earlier.

1. Have an Evolving Appetite for Risk

William Faulkner said: “You cannot swim for new horizons until you have the courage to lose sight of the shore.” Investing is an art that is backed by logic. To master this, one needs to have an appetite to take calculated risks. Perhaps the biggest risk to your financial well-being is not taking any risk. Your willingness to take thoughtful and calculated risks is in disguise an opportunity to build wealth as you grow.

You must remember that to create wealth, you have to earn ‘real returns’ - returns above post-tax, rate of inflation on your investments. Anything below that is in fact losing wealth. For eg., even if you are earning say 8% on your bank FDs and fall in the highest tax bracket, the post-tax net returns would be just 5.6%, meaning with inflation at say 6%, you are reducing your wealth by 0.4% every year! Always calculate your real returns as a test.

2. Patience and Discipline

To yield good returns on long-term assets such as mutual funds, one needs to have patience. This will come from understanding the asset classes and their behaviour. There is no shortcut to success, similarly, any appreciation in assets takes time. Being impulsive and investing without adequate knowledge can lead to financial losses. Discipline when investing in equities can lead to superior returns, as ups and downs in equities is a normal phenomenon, staying invested in quality assets is key to value creation. One very good way of having discipline in investments is to invest through SIP in equity mutual funds for long term wealth creation.

3. Diversify Your Funds

The best English proverb when it comes to investing is ‘don’t put all your eggs in one basket. This is an old yet effective way to explain the importance of diversification when it comes to investments. Diversification, whilst not fully guaranteeing losses, helps spread the risk of investments to help reach long-term financial goals. Diversification can come across different asset classes and with different funds/products within a chosen asset class. Broadly the asset allocation is always between equity and debt. Some may even add gold and real estate to this equation. Diversification is dictated primarily by your risk profile, investment horizon and returns expectations. It helps provide contingency to adverse effects in one asset class. Your MF distributor or investment expert shall in a position to guide you on the level of diversification required by you.

4. Have Equity Exposure

Investment should be made keeping in mind your risk appetite. This is influenced by many factors including; life stage, income, age and experience of investment. However, for wealth creation, the equity asset class emerges as the undisputed winner amongst all asset classes. For young individuals with income, taking higher risk is recommended as compared to a retired individual with limited or no income. As said, the choice of an asset class is dictated by risk appetite and investment horizon. However, when it comes to returns expectations or required returns for achieving financial goals, the most likely outcome will be equities. There is also a lot of ease, convenience, flexibility and tax advantage while investing in equities as compared to physical assets like real estate and gold or debt investments. However, it is a more volatile /risky investment and hence prior understanding, risk assessment and guidance from experts may be required.

5. Focus on Financial Plans

Lastly, we strongly recommend having a working financial plan, always. You won’t reach anywhere, achieve your life goals, financial independence, unless you have planned it first and are regularly tracking the same. It is critical to start investing in opportunities that are aligned with your larger financial goals. One should be focused on staying on track to reaching these goals through remembering that long-term value creation takes time. Get in touch with your financial guide /expert /distributor to know more about this.

It's about to start a new Financial year and we usually start the new year with new goals and resolutions, then why not to plan for TAX saving. Although, tax planning should ideally be done at the beginning of the financial year, in the month of April, you have one more month in hand to plan and break your investments over the year, yet many of us have still not kicked off the tax planning process. So, without wasting any more time, you must immediately get on to your Taxes.

Calculate your Tax Liability: Since there is already a time crunch, the plan must be a sure-fire to avoid making mistakes later. Hence, begin with estimating your annual income, you already have nine months' numbers with you, so you are left with just three months' to judge. Remember to include:

• Any Annual Bonus that you are expecting,

• Any Capital Gains or Losses through redemption of earlier investments or any imminent sale of assets

• Interest incomes from fixed deposits or for that matter, from saving accounts also

• Dividend Incomes, etc.

Expenses: Once you are through with the Income, try to cut it down by deducting the expenses eligible for deduction. Most people start investing in PPF's and NSC's randomly on the basis of their annual income. But you don't need to always invest to save taxes. There are certain expenses which you have already paid for, and which can help you bring down your tax liability. The money you save by not investing can be directed to products which are more suitable for you, since then you won't be limited by Section 80C. So, if you have spent on or are about to spend on any of the following from April 2020 until March 2021, then they should be deducted from your gross taxable income:

• Tuition Fee of your Children : The tuition fee paid by you for your children to any registered school, college, university or any other educational institution based in India, for full time studies, is eligible for deduction under Section 80C of the IT Act. Remember, this deduction is eligible for fee paid for upto 2 children.

• Rent Paid : If you are living in a rented accommodation, the rent paid by you to the landlord, is eligible for deduction. Salaried individuals can claim HRA exemption provided by their employers, while business owners or salaried people who do not get HRA exemption, shall claim the rent paid under Section 80GG of the Income Tax Act.

• Medical Insurance : Your health insurance premiums can also be claimed as a deduction u/s 80D of the Income Tax Act.

• Home Loan Principal and Interest : If you are paying your Home Loan EMI's, then both the principal repayment as well as the interest paid, are separately eligible for deduction. The principal repayment can be claimed under Section 80C for upto Rs 150,000 and the interest component can be claimed under Section 24, for upto Rs 2 Lakhs.

• Payments made for purchase of a Residential property : In addition to Home Loan installments, if you have acquired a house or a land in FY 2020-21, then the payments made at the time of acquisition like the stamp duty, registration fee, etc., are also eligible for deduction.

Apart from these, there are a number of expenses that you can claim as a deduction from your income, like Interest paid on education loans, donations paid, deductions available to disabled people, etc.

Assess the investment amount : Once you are through with the expenses part, and are at the income post deductions, the next step is to assess the amount you need to invest. If your Sec 80C limit isn't yet exhausted after providing for the tuition fee or home loan principal, Life insurance policy premiums, etc., if any, now you need to fill in the gap with investments.

Asset Allocation : Your tax investments are not just a tool to save tax. They are a part of your overall financial plan of achieving long term goals. Therefore, these investments must follow your ideal asset allocation, they must be linked to a goal, and shouldn't be treated as a random mandatory investment created just to save tax.

ELSS Schemes for Saving Taxes and Wealth Creation : While most of us have been investing in PPF's, Tax Saver FD's, Traditional life insurance policies, etc., since ages. But these products have a number of shortcomings, like the interest rates are gradually becoming exceptionally low, there are high lock in periods and the returns are taxable, except in PPF. So in this scenario, investors must consider ELSS schemes of Mutual Funds, these are eligible for deduction under section 80C, with the minimum lock in of 3 years, the returns generated are way higher than all other conventional products, and that too tax free.

You must at once, sit with your advisor, who can guide you with the various investment options and the ones which are most suitable for you. So, once you are through with the plan, it's time for action. Start investing and also accumulating the receipts for all of the above expenses paid and the investments that you are going to do to avoid the last minute hassles.

Albert Einstein had once called power of compounding as the eighth wonder of the world.This is one investment principle which makes money making simple. There are two facets of power of compounding which if you follow as an investor, creating wealth becomes easy. First is to start investing early and giving time to your investment and second stay invested, do not withdraw money in between and let it grow.

In simple terms compounding is nothing but reinvestment of interest/income earned at the same rate so that interest/income earned also generates additional return at the same rate in future. Let me explain this with simple example :
If you invested Rs. 1,000/- in an instrument giving 10% return in a year. At the end of year 1, value will go to Rs. 1,100 and in year 2 you will earn return on Rs. 1,100 and not on original investment of Rs. 1,000/-.

But why is it so important in world of investment and how can it create wealth for investors ?
Let’s try to understand this with simple story of chess & grain. Chess was invented by Grand Vizier Sissa and then he gave it to a king in India. The king offered anything in return; Vizier said that he would be happy merely to have some wheat: one grain for the first square of the chessboard, two grains for the second square, four for the third, eight for fourth and so on. The king was amused by the ‘small thinking’ of Vizier but the king could not fulfill the desire of the inventor of chess. Why? The number of grains for the whole board = 18,446,744,073,709,551,615. This is more wheat than in the entire world; in fact, it would fill a building 40 km long, 40 km wide, and 300 meters tall. So, the moral is if one uses the ‘Power of compounding’ smartly, then becoming rich is not a dream.

Let me explain the same concept in investment parlance. Let us understand a story of a tortoise and hare. The hare saves Rs. 10,000 every year for the first 10 years. After that he saves nothing. However, he compounds his money at the rate of 15% for 30 years. The tortoise starts at the year 11 and keeps saving Rs. 20,000 every year (double of what hare saved) for the next 20 years. Like the hare, he too compounds his savings at 15% every year. So hare invests only Rs. 1 lakh and tortoise invests Rs. 4 lakhs. Let's tally the score at the end of 30 years. Tortoise makes a respectable Rs. 23,56,202 whereas the hare makes Rs. 38,21,468! This is nothing but power of compounding for hare and cost of s15.5 lakh for starting late for tortoise.

So there are two simple logic of generating compounding impact on your portfolio:

1. Start investing early in life. No matter how small that investment is but start investing whatever small amount you can save. Ideally starting point should be 1st month of pay cheque of your life. So as soon as one starts earning, he/she should start investing.

2. Let your investment grow consistently without doing unnecessary withdrawals in between.

The same logic of compounding applies to retail investors approach. No matter how small you start with, important is to start investing early so that your money gets time to compound over a period of time. As investor starts early and has time on his side, he can look at higher return potential asset class like equity to generate positive real return and create wealth over a period of time. Important is not how much you invest, more important is for how long you stay invested.

Rule of 72 might help you in understanding this concept. Rule of 72 gives you doubling period. In short it explains how long your investment will take to double. This rule says that to know doubling period you divide compound rate of return into 72 and you get doubling period in number of years. e.g. if your investment generates 12% return then 72/12 = 6 is the number of years require to double your money.

So if you park your money in fixed deposit giving 9% return you will require 72/9 = 8 years to double your money whereas if you park your money in mutual funds generating 15% return you can double your money in 4.8 years.

(Initial investment of Rs. 1 lakh)

Year End Value @ 9% Value @ 15% 1 Rs. 109,000 Rs. 115,000 2 Rs. 118,810 Rs. 132,250 3 Rs. 129,205 Rs. 152,088 4 Rs. 141,158 Rs. 174,901 5 Rs. 153,862 Rs. 201,136 6 Rs. 167,710 Rs. 231,306 7 Rs. 182,804 Rs. 266,002 8 Rs. 199,256 Rs. 305902 9 Rs. 217,189 Rs. 351,788 10 Rs. 236,736 Rs. 404,556

As you can see from the above graph, investment of Rs. 1 lakh will grow above Rs. 2 lakh by 5th year at 15% compounding while it takes 8 years in compounding at 9%.

As Albert Einstein said, 'compounding is something one who understands earns it and one who doesn't understand pays it'. Remember compounding works best with equity asset. That may be the reason why world's richest men list include people who have created wealth by taking advantage of compounding with their equity investment.

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