If I had to rate people who brilliantly manage their finances, my friend Hina would top the list.
Talk about being money savvy! She's a rare combination of a discerning spender and an astute investor.
You won't find her splurging Rs 2,000 on a pair of shoes or Rs 500 on a haircut. Nah! She believes money must be well-spent.
That does not mean she has a frugal lifestyle. She eats out, parties a fair bit and is quite a movie buff.
But it is her adeptness at investing that I admire most.
No money lies idle in her savings account. No investments are made by chance or on the spur of the moment. They are all well thought of and balanced between insurance, fixed returns and equity.
Let's look at how she manages her investments.
1. Have a few long-term relationships
The investments that fall under this category are all done with a long-term perspective in mind. A broad estimate would reveal that the holding period would be around 10 to 15 years at the least.
A classic example is her investment in the Public Provident Fund and her core stocks, which she calls her buy-and-hold stocks.
The stocks invested here are fundamentally sound and from companies that are well known for dishing out regular dividends.
That does not mean she will blindly hold on to them. She constantly checks the annual results and balance sheet and keeps an eye open for any significant changes that have taken place in the company that could cause her to review her decision.
Deciding what stocks to buy is part of the process. The more crucial aspect is at what price one must pick them up.
You may pick up a very good stock that is currently overvalued and then may lose money on it when its price falls to more reasonable levels. Or, if you make a profit, it may never be a substantial one.
What Hina does is list out stocks she would like to invest in. Then, taking into account their current earnings, RoE, EPS and PE, she sets a price band. Buying within this range would make for a sound investment.
Let's say she has HLL on her list and she gives it a range of Rs 115 and Rs 150. As the price of HLL inches closer towards Rs 115, she will buy more and restrict buying as it inches towards Rs 150. If it crosses Rs 150, she will stop buying.*
2. Keep a few short-term commitments
The above investments call for a very patient investor. It also takes a fair amount of restraint to hold on to your shares and not sell when you are getting a great return.
But she also invests for the medium to short term. This is where she classifies her Kisan Vikas Patra, which is for a tenure of eight and a half years. Over this time, the amount invested in it doubles.
Some stocks too fall under this category. They are not the buy-and-hold types mentioned above. She buys these stocks with the intention of holding on to them for just a few weeks, few months or even a year or maybe more. She chooses them based on suggestions made by her colleagues or friends. They will essentially be growth stocks.
She sets a price and the moment it touches that, she sells. Unlike the stocks that she picks on for her core portfolio, these need not be rich dividend paying stocks.
3. Be disciplined
We all know what a Systematic Investment Plan is with reference to a mutual fund. This is a scheme whereby a fixed sum of money is invested every single month in a mutual fund. Depending on the Net Asset Value, fund units are allocated to you. If the NAV is high, you get fewer units. If it drops, you get more units. Over time, it averages out.
So let's say you pick up the fifth day of the month as the day on which money is debited from your account to your mutual fund. This will take place every single month. However, the fund manager is not obliged to invest the money at that date. He will use his discretion as to when he has to invest it.
Hina does it with her investments in stocks. She allocates a fixed amount every single month that will be invested in stocks.
But, she does not have a fixed day to invest it. She keeps an eye on the market and, on the days that she is getting a good deal, she buys.
This helps her in a number of ways. Over time, the price you pay evens out. For instance, picking up stocks in a bull run will entail you paying more and buying in a bear market will allow you to get them really cheap.
The same principle as in a mutual fund works here too.
She does not believe in investing in each and every instrument available. She picks a few and puts her money there.
Investing in PPF and KVP represent the totally risk-free investments.
At the other end of the spectrum you have equity, which is the riskiest of all investments.
Within stocks, she distributes her risks. She has a fixed list of around 10 stocks which represent different sectors. If she finds she is investing too heavily in one sector, she will look at buying stocks in another sector. She tries to see that no single sector has a bulk of her investments.
For example, when pharma stocks* were being quoted at low prices some time back, she picked up quite a few. Now that she has a substantial part of her total investments in pharma, she looks at other sectors and avoids investing here.
5. Don't wait for tomorrow
Besides stocks, NSC and PPF, she also pays annual premiums towards a life insurance scheme and a medical insurance scheme.
She says the key to her success was not just being organised and disciplined but actually getting started. A number of people function under the mistaken assumption that you need a substantial amount of money to start investing.
This is not true. Even if you don't have money to invest, you can start by putting a small amount in a PPF account and then gradually start adding other investments to your list.
They key is to get started, stay disciplined and be patient.
* This is just an example and not a recommendation.
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