What is the surest path to financial independence?

 There are only 3 aspects you need to focus on.

1. Income
2. Dependents
3. Investing

Let's tackle all these three one by one.

Income:

Your income can be from a job, or your own business, or from your assets that are generating income, this income should be able to take care of the shelter, food, and clothing.

Obviously, you should spend less than your income, and the rest need to be invested into assets.

Dependents:

At least In India, We end up taking on the financial responsibility of family finance and sibling financial needs, and even housewife.

Some people are lucky, some parents don't depend on their kids, some people marry a working partner (I think it's a smart move). You will need to find ways to solve this dependent problem (If you have dependents).

It will be hard, but If I can do it, then you can also do it.

Investing:

Obviously, your income can stop due to multiple reasons, you could lose your job, your business can fail or your investments can underperform for a couple of years.

You need back up and that is nothing but more investments.

Until your income is flowing, your investments need to happen side by side, the more you invest, the more you are financially independent you become.

My investment generates almost 2K per day (Somedays even more), But my spending might be at 500 per day, rest 1,500 is always re-invested. Eventually, it will grow into a huge pile of cash and ensuring more financial freedom.

One More: Your Attitude

Your attitude towards money, towards your financial freedom is a very critical part, You can let money and society control you or you can take control of your money and your lifestyle - It's your choice.

As for me…

I live in a small home (Not Villa),

I don't have a SuperBike 

I don't have a luxury car (I do have a nice car)

I eat and drink well at home (Maybe once or twice a month I eat out)

I keep my expense in check and invest most of the money.

I work where I want and I don't really care about getting big offices.

So basically, I am Financially Independent for Many Years to come :)

I hope this helps!

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Why ELSS is a better tax-saving option than traditional instruments?

Equity-linked saving schemes (ELSS) qualify for a deduction under Section 80C. You can claim a deduction of up to ₹1.5 lakh against investments made in ELSS during the financial year. Some experts also believe ELSS is a better option than traditional instruments such as public provident fund and National Savings Certificate as they have a potential to deliver better returns.

However, returns are not guaranteed and are market-linked but they have the ability to deliver inflation beating returns if one stays put for a long term. “Since we already have EPF deductions, it adds a good balance. And more importantly it teaches us how to be good equity investors, stay for long term," said Shweta Jain, chief executive officer and founder, Investment.

ELSS returns are, however, not guaranteed and are market-linked but they have the ability to deliver inflation beating returns if one stays put for a long term.

Apart from these, there are other reasons which make ELSS a better choice for tax savings.

Shortest lock-in: ELSS has the shortest lock-in of 3 years when compared to other tax saving instruments. This gives comfort to people that they may have the option to withdraw the money in case of an emergency. However, it is advisable that one satys invested in ELSS for long-term. “ELSS can deliver better returns but one should stay invested for more than just 3 years, need to stay invested for longer and definitely see better returns, also these are good habit forming decisions, so definitely one should opt," said Jain.

SIP option available: ELSS helps in building the discipline of investing in equities as one can invest systematically through SIP plus the lock-in ensures that the person stays put for long-term and doesn’t withdraw due to market movements.

As the financial year is coming to an end, many of you may be looking for investing in tax-saving options. However, it is always advisable to invest in equities in a staggered manner to get the benefit of rupee-cost averaging. So, may be you can start with your investments in ELSS now and continue it for next year in a staggered manner.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

IS IT A GOOD TIME TO INVEST IN EQUITY?

The question is a loaded one, and legitimate too. But given the stock market’s erratic behavior, there is no right answer. And if you wait for one, you will end up sitting out the market.

• Is there ever a good time to invest in the market?

Of course. When it hits rock bottom. Invest huge amounts and then wait for the market to rise. This is timing the market in its purest form, something that is extremely difficult to do. Let me tell you why.

You need to be convinced that the market has touched rock bottom. No one can successfully call out the bottom or peak in advance.

You need immense conviction and confidence to invest when scene is dismal.

You must have tremendous patience to ride it out. The wait could sometimes be years. Then again, those who invested in March 2020 found that the wait could be a few months. Unpredictable.

• Stocks: Is there a right time to invest?

In 2020, infotech and pharma stocks had a massive bull market, while banking and finance stocks had a bear market. So, was it the right time to buy? The answer is, depends on what you want to buy.

You wouldn’t buy a car without knowing its value. You would not buy a house without knowing what it is worth in terms of location and area and other factors. Why would you buy shares in a company without knowing its Fair Value Estimate (FVE)?

The FVE helps you determine whether the market price of a stock is high or low compared with its fundamental value. Calculating the FVE involves looking at a company’s financial statements and annual reports, its business and competitive advantage, predicting future cash flows, assessing the management structure and corporate governance. Based on that research, a value is calculated that estimates the value of the company and what one share of stock should sell for if no emotions or headlines or hype from talking heads were involved.

So you need to look at the stocks you want to buy and see where they stand with respect to the current stock market price. That will help you determine whether or not you should buy. Don’t just blindly look at the Nifty or Sensex and wonder if it is time to buy.

• Equity Funds: Is there a right time to invest?

The best way to invest in a diversified equity fund over the long term is via an SIP.

1. The need for convenience. It is very practical. You may not have huge amounts to invest, but you can invest at least Rs 5,000 every month. And once you select the fund and the amount, it is a hands-off approach. You could do an SIP every fortnight or every month or every quarter. The money from your bank account will automatically be debited to buy units of the fund. You decide the amount, the fund, and the periodicity of the investment.

2. The need for consistency. To be a consistent investor, you must do away with constant human intervention. Or else, during market downturns, you may be tempted not to invest at all. Or, when the market scales new highs, you could get carried away by the euphoria. The hands-off approach is convenient and prevents you from over thinking.

3. The need to exploit market upheavals. It capitalizes the erratic movements of the market. The stock market never moves in a linear fashion. This capitalizes on the market’s erratic movements; you get to buy more units when the market falls. And you are always invested, not sitting on the sidelines.

However, this is only in the case of diversified equity funds. When it comes to sector funds, you need to time your entry and exit.

 

Disclaimer:

The views are for personal use and for educational propose only. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer and is not responsible for any errors or omissions or for results obtained from the use of such information.

This BLOG is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this blog. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Accounting Procedure for Valuation of Goodwill (4 Methods)

The valuation of goodwill depends upon assumptions made by the valuer. Methods to be adopted in valuation of goodwill would depend on circumstances of each case and is often based on the customs of the trade.

The various methods that can be adopted for valuation of goodwill are follows:

1. Average Profit Method

2. Super Profit Method

3. Capitalization Method

4. Annuity Method.

Average Profit Method: 

Goodwill = Future maintainable profit after tax x No. of years purchase

The first step under this method is the calculation of average profit based on past few years’ profit. Past profit are adjusted in respect of any abnormal items of profit or loss which may affect future profit. Average profit may be based on simple average or weighted average.

If profits are constant, equal weight-age may be given in calculating the average profits i.e., simple average may be calculated. However, if the trend shows increasing or decreasing profit, it is necessary to give more weight-age to the profits of recent years.

Number of year’s purchase:

After calculating future maintainable average profits, the next step is to determine the number of years’ purchase. The number of years of purchase is determined with reference to the probability of new business to catch up with an existing business. It will differ from industry to industry and from firm to firm. Normally the number of years ranges between 3 to 5.

Steps Involved under Average Profits Method: 

(i) Calculate past profits before tax.

(ii) Calculate future-maintainable profit before tax after making past adjustments.

(iii) Calculate Average Past adjusted Profits (taking simple average or weighted average as applicable).

(iv) Multiply Future Maintainable Profits by number of years’ purchase.   Value of Goodwill = Future Maintainable Profits x No. of years’ purchase.

Illustration 1:

X Ltd. agreed to purchase business of a sole trader. For that purpose, goodwill is to be valued at 3 years’ purchase of average profits of last 5 years.

Illustration 2:

Y Ltd. proposed to purchase business carried on by Mr. A. Goodwill for this purpose is agreed to be valued at 3 year’s purchase of the weighted average profits of the past four years.

The profit for these years and respective weights to be assigned are as follows:

On a scrutiny of the accounts, the following matters are revealed:

(a) On 1st September, 2012 a major repair was made in respect of plant incurring Rs. 6,000 which was charged to revenue, the said sum is agreed to be capitalized for goodwill calculation subject to adjustment of depreciation of 10% p.a. on reducing balance method.

(b) The closing stock for the year 2011 was over valued by Rs. 2,400; and

(c) To cover management cost an annual charge of Rs. 4,000 should be made for the purpose of goodwill valuation.

Required:

Compute the value of goodwill of the firm.

Solution:

Before calculating goodwill, it is necessary to compute adjusted profit on the basis of information given.

2. Super Profit Method:

Super profit is the excess of estimated future maintainable profits over normal profits. An enterprise may possess some advantages which enable it to earn extra profits over and above the normal profit that would be earned if the capital of the business was invested in some other business with similar risks. The goodwill under this method is ascertained by multiplying the super profits by certain number of year’s purchase.

Steps Involved in Calculating Goodwill under Super Profit Method:

Step 1: Calculate capital employed (it is the aggregate of Shareholders’ equity and long term debt or fixed assets and net current assets).

Step 2: Calculate Normal Profits by multiplying capital employed with normal rate of return.

Step 3: Calculate average maintainable profit.

Step 4: Calculate Super Profit as follows:

Super Profit = Average maintainable profits – Normal Profits.

Step 5: Calculate goodwill by multiplying super profit by number of year’s purchase.

Illustration 3:

From the following information calculate the value of goodwill on the basis of 3 years purchase of super profits of the business calculated on the average profit of the last four years (simple average and weighted average):

(i) Capital employed – Rs. 50,000

(ii) Trading profit (after tax):

2010 Rs. 12,200;

2011 Rs. 15,000;

2012 Rs. 2,000 (loss); and

2013 Rs. 21,000

(iii) Rate of interest expected from capital having regard to the risk involved is 10%.

(iv) Remuneration from alternative employment of the proprietor (if not engaged in business) Rs. 3,600 p.a.

3. Capitalization Method:

Goodwill under this method can be calculated by capitalizing average normal profit or capitalizing super profits.

(i) Capitalisation of Average Profit Method:

Under this method goodwill is ascertained by deducting Actual Capital Employed (i.e., Net Assets as on the valuation date) from the capitalised value of the average profits on the basis of normal rate of Return (also known as value of the firm or capitalised value of business)

Goodwill = Capitalised Value – Net Assets of Business

Steps involved in calculating goodwill as per capitalisation of Average Profits Method:

Step 1: Calculate Average future maintainable profits

Step 2: Calculate Capitalised value of business on the basis of Average Profits

Step 3: Calculate the value of Net Assets on the valuation date

Net Assets = All Assets (other than goodwill, fictitious assets and non-trade investments) at their current values – Outsider’s Liabilities

Step 4: Calculate Goodwill

Goodwill = Capitalised Value – Net assets of business.

Illustration 5:

From the following calculate the value of goodwill according to capitalisation of Average Profits Method:

(ii) Capitalisation of Super Profit Method:

The goodwill under this method is ascertained by capitalizing the super profits on the basis of normal rate of return. This method assesses the capital needed for earning the super profit.

The value of goodwill is computed as follows:

Illustration 6:

Balance Sheet of X Ltd. on 31st March, 2013 was as under:

4. Annuity Method:

Under this method, goodwill is calculated by taking average super profit as the value of an annuity over a certain number of years. The present value of this annuity is computed by discounting at the given rate of interest (normal rate of return). This discounted present value of the annuity is the value of goodwill. The value of annuity for Rupee 1 can be known by reference to the annuity tables.

If the value of annuity is not given, it can be calculated with the help of following formula:

Illustration 7:

The net profit of a company after providing for taxation for the past five years is:

The net tangible assets in the business are Rs. 4, 00,000 on which the normal rate of return is expected to be 10%. It is also expected that the company will be able to maintain its super profits for next five years. Calculate the value of goodwill of the business on the basis of an annuity of super profits, taking present value of an annuity of Rs. 1 for five years at 10% interest is Rs. 3.78.

Lump sum vs. SIP is a meaningless comparison

              Lump sum vs. SIP

‘Which is better? Another school of thought believes in creating a lump sum and waiting for market dips instead of a SIP. The trouble with this approach is that, one may have to wait for months and months for an investment opportunity to show up. The bigger problem is how the opportunity is defined.

 A lump sum investment or a SIP investment?’, is a question I am asked  often (comments, meetings, emails, questions during investors workshops etc.).

Here is why I think such a comparison is meaningless because it originates in a lack of understanding of how a SIP works.

This argument can and should be dismissed in seconds:

• If I have a lump sum now, which I can afford to invest for 10+ years, then the prudent thing to do is to get rid of it as soon as possible (if not instantly, over a duration much lesser than 10Y – a few weeks, or a couple of months at best)
• If I don’t have a lump sum now, why am I even asking this question!

To understand why it makes sense to invest the lump sum as quickly as possible, we will need to understand how a SIP works.

Suppose we start a monthly SIP of Rs. 10000 for 10 years. That is 120 installments.

A SIP as we all know averages the point of investment. Sometimes we invest when the NAV is high and sometimes low.  ‘Experts’ will tell you that this is better than timing the market.

What those experts fail to point out (for obvious reasons) is that a SIP does not minimize the risk of your entire investment. It only minimizes the risk associated with the next installment.

After one year,  the total amount invested is 12 times the next installment in a monthly SIP. The market value associated with 12 x 10000 = 120,000 is exposed to the full volatility of the stock market. There is no averaging here.

Therefore, After one year, your investment will constitute of a lump sum investment of 120000 + the next sip installment of 10000 After  5 years,

your investment will constitute of a lump sum investment of 600,000 + the next sip installment of 10000

Get the idea?

Suppose you have 600,000 to invest now, after 5 years, it will have the same level of risk as a Rs. 10000 monthly SIP started at the same time.

There is no benefit in splitting the 600,000 into say, six 100,000 monthly investments via SIP/STP. A couple of years later, the entire lump sum will be subject to market risks.

What is a STP? A STP or a systematic transfer plan is an instrument by which the  AMC locks your lump sum in their funds.  Like the SIP.

If your duration is long enough, there is no point in a STP. If your duration is short, why are you thinking of investing lump sums in equity funds?

If you wish to invest in debt funds, there is no need for a STP again, you can invest in one-shot.

If you are scared of investing in one-shot, let the money lie in your bank SB account for a weeks. No big deal. Invest once each week, and get rid of it within a few weeks. Beyond that, it is a waste of time.

Findings for Lump sum vs. STP

• Both lump sum and STP modes have similar probability of loss irrespective of duration
• The chance of STP doing better than lump sum mode is only 25-35% for all duration's.

STP is more a psychological tool.

Another school of thought believes in creating a lump sum and waiting for market dips instead of a SIP. The trouble with this approach is that, one may have to wait for months and months for an investment opportunity to show up. The bigger problem is how the opportunity is defined.

Call me for detailed discussion and information about schemes for achieving such future values.

Ritesh Sheth

Chartered Wealth manager CWM®

Disclaimer:

This emailer/blog is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only and is not spam. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this emailer/blog.The views are personal. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this emailer/blog and is not responsible for any errors or omissions or for results obtained from the use of such information. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information as it is use for educational purposes. provided herein and the said information is provided on a best effort basis. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

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What is Alpha, Beta And Correlation (ABC) of a mutual fund Schemes

Whether you’ve managed your investments well into traditional PPF,NSC,Fixed Deposits or just got a Few Mutual Fund's a couple of years ago, it’s always wise to get back to the basics and refresh yourself on some of the most critical components of successful investing. In particular for Mutual Funds, As per my understanding  there are three metrics you must be mindful of to win at investing in Mutual Funds. Unfortunately even many of the pros forget what I call the ABCs of Mutual Fund investing (at their own peril), so refocus your Mutual Fund investment strategy in this volatile market with these simple yet profound reminders:

(A) Alpha - Investopedia defines Alpha as: “A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.”

My plain English definition: Alpha tells you if the investment manager is worth what you pay him. Alpha tells you how well a mutual fund or similar investment performs compared to the stated benchmark it’s trying to beat. 

If a funds benchmark is the Nifty index and the index returned 20% while the fund returned 22%, then the fund will have a positive Alpha (obviously positive Alpha is good, negative Alpha is bad). Compare the Alpha over longer time periods in order to understand what value the manager brings to the table versus the index he is trying to beat.

(B) Beta - Investopedia defines Beta as: “A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market.

My plain English definition: Beta is an expression of how volatile an investment is compared to the overall market. A beta of 1 indicates that the investment will move with the market. A beta of less than 1 means that the investment will be less volatile than the market. For example, if a Fund’s beta is 1.3, then theoretically it’s 30% more volatile than the broad market.

(C) Correlation - Investopedia defines correlation as: “…what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.”

My plain English definition: Correlation simply describes how two things are similar or dissimilar to each other. Specifically, how two investments move in relation to each other, how tightly they are linked or opposed. Correlation between historically dissimilar investments (think stocks and bonds) is never static, it’s not uncommon for the correlation of investments to change, especially during volatile or crashing markets. 

In fact, seemingly the only thing that goes up in a down market is in fact correlation. I use correlation measurements in advanced portfolio management to better manage risk. 

To me, higher correlation theoretically means higher risk to the bottom line. The higher the correlation of your investments the higher of the “doubling-down” effect you get, in other word's you have a greater opportunity for gains or financial ruin. One particular ripe investment class for high correlation are mutual funds because both bond funds AND Equity funds trade on the market, thu's your bond funds become more correlated with Equity funds during volatile markets.

Many investors tend to focus exclusively on investment return, with little concern for investment risk. Risk measures we have just discussed can provide some balance to the risk-return equation. 

As useful as these measurements are, keep in mind that when considering a stock, bond or mutual fund investment, volatility risk is just one of the factors you should be considering that can affect the quality of an investment.

Ritesh.Sheth CWM^®

CHARTERED WEALTH MANAGER

        Helping you invest better...  

Allaudin Bldg Shop No 1,Manchubhai Road,Malad East,Mumbai - 400097.
Shop No.9,Param Ratan Bldg,Jakaria Road,Malad West,Mumbai - 400064.
Tel:28891775/28816101/28828756/28823279. CELL:9930444099  www.tejasconsultancy.co.in | E-mail Us: ritesh@tejasconsultancy.in

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Disclaimer:This blog is addressed to and intended for the investors of Ritesh Sheth & Tejas Consultancy only. You are advised to contact Ritesh Sheth & Tejas Consultancy to clarify any issue that you may have with regards to any information contained in this emailer. The views are personal. Ritesh Sheth & Family or Tejas Consultancy does not guarantee the accuracy, adequacy or completeness of any information in this blog and is not responsible for any errors or omissions or for results obtained from the use of such information. Investopedia definitions are used for educational purpose. Ritesh Sheth & Family or Tejas Consultancy does not have any liability to any person on account of the use of information provided herein and the said information is provided on a best effort basis only for educating investor. In case of investments in any of our schemes, please read the offer documents carefully before investing. 

Over Rs 1 crore! This mutual fund SIP trick will help you double your maturity amount - here is calculation

While making any investment, an investor's major goal is to become rich as soon as possible. Some of them do achieve their investment goal with the available limited investment tools.

"Successful investors don't do different things, but they do things differently."

Let's take mutual fund investments. A person who is in the nascent phase of career generally chooses a systematic investment plan (SIP), which is one of the most popular parts of mutual fund investment. According to my experience over last 30 years, a mutual fund investment will give at least 10 to 12 per cent return if the investment is for long-term. 

However, I am with opinion that after one begins an SIP, one should think of increasing the SIP amount annually in sync with one's salary hike. It will help him or her maximise returns.

Speaking on the mutual fund SIP investments, "Mutual Fund is subject to market risk and one should have the appetite to take risk."

In the long-term Equity market linked mutual fund sip will give at least 12 per cent return but when I say long-term, then it should be an investment for not less then 15 years."

let's assume that we starts a mutual fund SIP of Rs 6,000 for 25 years and return for the same period is 12 per cent. Then as per the mutual fund calculator,  future estimated amount will be Rs 1,13,85,811.

However, we should increase SIP amount annually as salary or income grows. In that case it will be able to maximise money's worth.

Let's see how mutual funds SIP step-up plan will impact future estimated amount after 25 years if the same Rs 6,000 SIP is increased 10 per cent per annum. As per the mutual fund calculator, future estimated amount after 25 years at 12 per cent returns will be Rs 2,36,92,246.

Out of these Rs Rs 2,36,92,246 future estimated amount, net investment will be Rs 70,80,988 and rest Rs 1,66,11,258 is gain earned throughout the investment period of 25 years.

So, this 10 per cent step up in the Mutual Funds SIP will jump from Rs 1,13,85,811 to Rs 2,36,92,246, which is more than double from the normal mutual funds SIP investment.

Call me for detailed discussion and information about schemes for achieving such future values.

Ritesh Sheth

Chartered Wealth manager CWM®

9930444099

E-mail: riteshdsheth@gmail.com