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Rediff.com  » Business » The crorepati's secret toolkit to get RICH

The crorepati's secret toolkit to get RICH

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September 19, 2006 09:25 IST

Part I: 6 qualities that can make you a crorepati!

Crorepatis, we saw, have six attributes that make them financially successful. But along with their personal habits, they also use some simple financial tools to manage, keep and grow the wealth they make through their work.

They use these tools to help them evaluate every financial decision. Outlook Money brings their secret toolkit to you.

1. Return

What return will my investment give? Sure, you ask this question, but when told that a mutual fund has given a return of 40 per cent in the last two years, do you find out what the market average has been?

If the average market return was 50 per cent and you are sold a product that gave 40 per cent, you've not made the crorepati choice. The smart ones know the right benchmarks or points of reference for different products. They use these benchmarks to evaluate the product on offer.

Find out the average rate of return on every product you are offered and then compare across products. Some benchmarks are listed here, but remember these are for a few generic products and rates change with time. 

The Return Reference

Benchmark rate

1 year bank FD

6.25%

15 year PPF

8%

1 year Sensex return

41%

15 year Sensex return

13% p.a.

2. Risk

How risky is the product I am going for? Smart investors look carefully at all the risks in the various products they consider and not just the risk of losing money. The layman approach is to look at risk only in the context of the principal (or the amount invested) losing value (as in a stockmarket product) but crorepati investors look at risk in terms of inflation, liquidity, ease of entry and exit and costs as well.

Go through the checklist above to see the risk attributes of some products. 

The Risk Rating

 

Risk of illiquidity

Risk of principal loss

Risk of Inflation

FDs

Low

Zero

High

PPF

High

Zero

High

Bond funds

Low

Low

High

Equity funds

Low

High

Low

Equity ULIPs (in first 5 years)

High

High

Low

3. Cost

What will the product I am planning to buy cost me, upfront, ongoing and at the time of exit? Every financial product has a cost, which may or may not be disclosed clearly. Crorepati investors make an effort to find out what it costs to buy, hold and sell a product, even if they have to spend time and effort in doing this. Most financial products' cost structures are difficult to decode, so it is smart to ask the agents to provide detailed structures of all products.

The Cost Count

 

Entry cost as % of amount invested

Per annum cost as % of portfolio

Exit cost

FDs

0%

0

0

PPF

0%

0

0 after 15 years

Bond funds

0

1.2-2.26%

0

Equity funds

2.25%

2-2.5%

0

Equity ULIPs

5-70%

1 to 4%

0 after 5 years

4. Inflation

Will my investment return match the price rise? Ever thought why smart investors leave so little money in their savings deposits?

At 3.5 per cent return a year and inflation at 5 per cent, you lose money in a savings deposit. Smart investors try and look at return rates after taking into account the expected rates of inflation. Use this simple formula to calculate the post-inflation return on any investment and then look at what some nominal returns look like after inflation has taken a bite out of them.

Real return =  [1 + nominal return rate/1 + inflation rate] - 1

The Price Push

Assume inflation at 6% a year Nominal return per year

Returns afte rinflation in %

6.25% FD

.24

8% PPF

1.89

10% balanced fund

3.77

15% equity fund/ULIP

8.49

5. Tax impact

How much will the taxman take away? That's a question the cool crorepatis ask. They count taxes before they count their money. Some investments are tax friendly and some are not.

A simple way to find out the post-tax return is to use the following formula:

Post-tax return = Rate of return x (1- tax rate)

Take a look at the post-tax return before you buy.

The Tax Take

Nominal return per year

Post-tax return

Tax rate

6.25% FD

4.34%

At 30.6%

8% PPF

8.00%

None

10% balanced fund

8.60%

Div. distribution tax of 14.03%

15% equity fund/ULIP

15.00%

No long term capital gains tax

6. Future Value

What do I finally get? Smart investors cut out the noise and find out the return that they will get after cost, taxes and inflation have been accounted for. No surprises here, the only asset class that wins over all these costs is equity.

No wonder that crorepatis either invest in equity by setting up their own businesses or have at least 60 per cent of their portfolios in stocks or market-linked products like mutual funds. If you can't pick stocks, then tread on the mutual fund route to grow your wealth.

The Return Relic

Nominal return per year

Post-tax, post- inflation return

6.25% FD

0.17%

8% PPF

1.89%

10% balanced fund

3.39%

15% equity fund/ULIP

8.49%

Monika Halan, Outlook Money
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