We asked you to send in your experiences about the financial mistakes you made in 2007 and how you plan to make 2008 a financial success.
Here we present a strategy by Pune reader Anand K telling us how he makes money from the stock market by taking personal loans.
I want to share my experience of investing and savings using debt. Sounds alien? But true. Here it is how I am doing it since the last 6 months:
I am a software professional aged 30, married for last 2.5 years and my wife is also in the software profession.
Since the last two years I am into investment and share trading along with my job. I started from nowhere and I am a person who likes to take risks, manage risks and bring innovative ideas into reality by implementing them myself. So from the last two years I am into share trading and investing. But I never found a way which would give me sure money in the market.
The existence of my industry (IT) is not sure in future. What will happen to the IT industry in the next 5 years is not very clear right now. How long the India growth story will go on, is uncertain. Everything is dependent on monthly pay cheques. I have taken a 3 bedroom flat, for Rs 17 lakhs in Pune and there are other liabilities also. So, how do I manage all this?
I wanted to earn money from the stock market, sure money! After brain storming a lot, I prepared a framework, suitable for my risk appetite, financial position and investment period. Here is what I assumed before preparing my plan.
I fixed my investment horizon for the next 4 years starting from 1 Jan 2008. That is, I was prepared to lock in my investments in the stock markets till 2012.
Assumptions:
~ Software industry & my job will remain for the next 4 years
~ India's growth story will be intact for the next 4 years.
The base for these assumptions is pretty clear as the Indian government is planning projects in every sector like infrastructure, power, education, R&D with a horizon of 4-5 years.
I manage to save Rs 20k monthly (excluding my wife's income of Rs 10K) after paying all expenses from my monthly salary.
If I save the entire amount for 4 years, ie, 48 months, I will end up with Rs 9.6 lakhs with some interest on that @ 4 per cent per annum if I deposit this money in a savings account. (Inflation will eat some part of that also).
When I started I had a small corpus of Rs 1.5 lakhs as cash; I applied for a personal loan of Rs 2 lakhs @ 17 per cent per annum on a monthly reducing balance. This cost me 9.63 per cent flat rate annually.
For that loan I paid Rs 5,774 as installment every month (EMI). On the very first day I had an amount of Rs 3.5 lakhs in hand ready for investment in the stock market. My only aim was to beat the bank rate and inflation as many times and by as much as I could.
So I started booking profits after making a 3 per cent gain on each of my investment. Thus I set a goal of making Rs 300 for every Rs 10k invested per month. That is, Rs 3,000 for every Rs one lakh invested every month. That comes to around Rs 3,600 ie 36 per cent yearly. I did not bother about the stocks that I bought, be it a Reliance or L&T, I sold it after making a profit of 3 per cent. And that profit went into my savings account. I strictly avoided day trading and F&O. So in the recent falls like the ones in September and October, I managed to recover my targets.
Please keep in mind here that I am not competing with the Sensex in terms of returns. That is not my goal. Sensex can return 200 per cent in a year... but my goal is to get 3 per cent monthly.
Now you will want to know how much brokerage I paid for Rs 300 profit. But I never bother about brokerages. At the end of every month I should earn Rs 300 net on my Rs 10k investment. That's all. We put money in bank FDs at 10 per cent; do we bother about their loan rates? They lend our FD money at the rate of anywhere from 12 per cent to 24 per cent. So why to bother about brokerages? That is their business, let them earn too.
And to conclude since the last 3 months I have recovered all my loan amount of Rs 2 lakhs and capitalised it (added to previous total of Rs 3.5 lakhs). Now my capital is Rs 5.5 lakhs today. I am getting another Rs 2 lakhs loan, taking the EMI to Rs 11,548 now. So out of my monthly savings of Rs 20k, Rs 11,548 goes to paying the EMI and the rest in a savings bank account. Now I have Rs 4 lakhs of loan and Rs 3.5 lakhs of my own, taking my capital to Rs 7.5 lakhs to play with in the next 48 months.
Calculate yourself the returns at 36 per cent annualised for 4 years on an investment of Rs 7.5 lakhs. (It takes Anand's annual returns to Rs 2.7 lakhs and after paying for the EMI of Rs 1,38,576 (Rs 11,548*12), the net that he would earn is Rs 1,31,424).
As far as trading for a gain of 3 per cent per month is concerned, my favourite stocks are Neyvelli Lignite, GSPL, JP Hydro, the entire Reliance pack, Kotak Mahindra Bank & Jai Corp. (higher the risk = higher the rewards).
Once again I would like to stress that my goal is to book profit at a minimum of 3 per cent in a month.
Whoever says leveraging (borrowing money from banks and investing it somewhere else, in this case, in stock market) is dangerous in stock market? As per my individual experience, not always! Sometimes it's smart way to earn money. Buy and hold is a time proven strategy, I know. But who has seen the future?
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Did you make any financial mistakes in 2007? What caused you to make these mistakes? How could you have avoided them? Would you like to inform people about such investment bloopers so that they make wiser investment decisions in 2008?
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