Personal Finance
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July 22, 2022
How Much Should I Invest and When?
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Our team is demystifying personal finance for working professionals and students across the country
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As a part of our mission to simplify personal finance and wealth management, we've been hosting a series of financial workshops for corporate teams, startups, and some of the best universities across the country. In August, we had the pleasure to host these workshops (both in person and via zoom) for Systems Plus, Savage & Palmer, and IIT Madras.
Over 250 wonderful people joined us over these 3 sessions to build their personal finance foundations. We covered everything from eliminating high-interest debts to setting up an emergency fund to navigating the markets in the right way by using the safe and sound passive investing approach. All the workshops were followed by healthy and informative Q&A sessions.
If you're an HR executive, a people person, an entrepreneur or someone who would like us to host a similar session for your team, feel free to reach out by clicking here ⬅️
Just like Rome, your credit history isn't built in a day (but it can be seriously dented overnight if you don't understand how it works)
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This month we have Kanan Arora - Equity Structuring at Nomura, for our special community wisdom lesson. Over to Kanan now:
Hello Mintd fam, let's get started with how to look after your credit score. Before that, here's a quick look at what this magic internet number means - A credit score is a number that depicts a consumer’s creditworthiness. It is the most important measure of a person’s financial health and is, therefore, a widely used indicator worldwide.
Essentially, the better a person’s credit score is, the easier it is for them to get credit from various financial institutions. It also determines the interest rate available at the time of borrowing. Therefore, maintaining a healthy credit score really eases the path to financial freedom for an individual.
It is generally assumed that there is just one standard credit score applicable, but this is usually not the case. Even though the fundamentals governing these credit scores are the same, the relative proportion of these fundamentals and the scale used differentiate one credit score from the other. The four credit bureaus in India are - CIBIL, Equifax, Experian, and CRIF Highmark.
Regardless of the credit bureau and the credit rating systems used by these bureaus, there are certain intrinsic factors that determine the credit score of an individual. These factors must be understood in order to understand the various methods that can be employed to improve one’s credit score.
In order to improve one’s credit rating, one can systematically follow a few pointers to improve upon the factors affecting the credit score listed above and thus, providing them with a better credit experience over a longer period of time.
In order to lay down a good track record as a borrower in the future, it is essential for a consumer to open new accounts accepting credit from various credit lines right from an early age in order to build a reliable credit profile over time. Once an account is opened with a lending institution, they report the same to all the major credit bureaus.
Being disciplined and punctual with repayment of outstanding debt is one of the most important methods of steadily improving credit rating and maintaining a good credit rating score. Due to the inconveniences caused to the lending institution due to delays in payments, the borrower delaying payment suffers monetary penalties along with a downgrade of credit rating with time. Usually, payments that are at least 30 days late can be reported to the credit bureaus and can end up hurting a consumer’s credit scores. Having a notification or automatic payment system in place can help you avoid late payment issues.
A consumer’s credit utilization rate or credit utilization ratio is the amount of revolving credit being currently used to the total amount of revolving credit available to the consumer. In general, the lower the credit utilization ratio, the better the credit score. Utilizing the credit to the fullest has a negative impact on the credit score since it fails to provide the lending institution a buffer and increases the amount of loss if the borrower defaults in his/ her payments. A good practice is to customize credit limits based on expenses after discussing them with the lender.
The number of accounts opened in a particular period of time and the number of loans taken in a fixed period of time should be kept to a minimum to improve the credit score. An individual should repay one loan and then take another if keeping a good credit score is a priority for that individual. This is primarily because if a person takes multiple loans at once, it becomes evident that the person is in an unforgiving cycle of insufficient funds, hinting at the continual of such behavior in the future as well. As a result, their credit score may fall. Also, each loan application leads to an inquiry, and the coupling of several inquiries can have a negative compounding effect on credit scores. The inquiry aspect is often overlooked when one is constantly applying for loans.
Almost all of the methods discussed are intuitive in nature and do not need any sort of deep financial understanding to understand. The journey of improving the credit scores involves more of a consistent approach rather than a smart one and therefore, can easily be adopted by anyone.
It needs to be understood that lending institutions need creditworthy borrowers as much as borrowers need trustworthy lending institutions for their financial requirements. The process is therefore both ways and sometimes takes longer than expected but success is guaranteed with small steps and consistent efforts.
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Along with interest
A government bond is a debt instrument issued by the country's central and state governments to fund their needs while also regulating the money supply. Bonds are frequently used by governments to raise revenue for infrastructure development and to finance government spending. As a result, the government will issue bonds to the general public, attracting investment. It is a fixed-income investment and does not carry any credit risk, as the government may never default. But they do carry interest rate risk. That means that the Net Asset Value (NAV) may change as the interest rate changes. Therefore, it is best to invest in gilt funds (gilt funds are debt funds that invest in government securities) when interest rates are rising.
The Indian government is as consistent as the Lannisters when it comes to paying their debts. So yes, bonds are one of the safest forms of local debt you can invest in. They are a great alternative to FDs and if an investor has an investment horizon of at least 3 years, they can provide moderate returns with low risk. They have historically provided stable returns that have been uncorrelated with the Indian equity market, with low volatility. Usually, When the markets go down, bond prices tend to go up as investors look to move their money into safer assets. So bonds tend to be excellent when it comes to diversifying your portfolios.
Bonds offer higher returns and liquidity when compared to other forms of "safe" investments, here are some stats over the last 10 years:
Point to note: The best maximum CAGR from an active fund was 9.87%, the average CAGR from an active fund was 8.79%, and the minimum CAGR from an active fund was 7.08%. So here again, tracking the index beats out active investing.
To tie it all up, let's do a recap. So basically government bonds are a lot like loans. When you buy them, you are loaning money to the government with the promise of getting it back later, plus interest. Due to their nature of low risk, government bonds are suitable for investors who have a low-risk tolerance. Investment in government bonds also helps in ensuring portfolio performance when markets are down due to their zero correlation with the markets, hence giving a way to dilute the overall market risk in the investment portfolio.
Take a quick look at how asset classes across India and the globe fared.
Indian markets continued July’s positive momentum through August, with the Nifty 50, India’s large-cap benchmark index, up 3.5% for the month. Interestingly, Indian markets diverged from those in the US and Europe this month, as constructive domestic data overpowered the secondary effects of negative global data.
Domestic returns were driven by corporate earnings reports that were largely in line with analyst expectations, and indications that local inflation was peaking. The latter half of the month saw volatility, driven by hawkish policy stances from both the US Federal Reserve and the ECB in Europe. A hawkish policy stance essentially means they are likely to be aggressive in hiking interest rates to tame inflation. Investors are worried this will dampen economic growth and consequently, equity returns in the future.
US markets fared worse than those in India, however. The S&P 500 ended the month down more than 4%, to take its YTD returns to -17%. Comparatively, the Nifty 50 is about flat YTD, materially outperforming the US so far.
Markets globally and domestically will continue to be driven by the narrative around inflation expectations and resulting policy stances from the US Fed, the ECB, and the RBI in September.
