Personal Finance Archives

What are ETFs? Are ETFs good for beginner investors?

Recently, Exchange Traded Funds abbreviated as ETFs have gained popularity among investors. For the various benefits they offer. ETFs are a good investment option for beginner investors as they offer a collection of stocks with similar characteristics in one place. Investing in ETFs enables investors to have a diversified portfolio without doing research for individual stocks. ETF helps to minimise the risk of the investor & maximise his return on his portfolio.
By the time you finish reading this article. You will have a clear idea of whether you should invest in ETFs or not.

What are ETFs or Exchange- Traded Funds?

In simpler words understand like, that it is a box filled with many pebbles,& these pebbles are individual stocks or bonds with similar characteristics. An interesting fact is that specific ETFs track the movement of indices like NIFTY50, SENSEX, etc. So, you expect the same returns on your investment as the index’s annual CAGR.

Looking into the history of ETFs in India, we see that. The first ETF in India was launched in 2002 by Nippon India Mutual Fund (erstwhile Benchmark Asset Management Company Ltd). Listed on January 8th 2002, it witnessed a trading of 1.30 crores on the first day. The journey to listing of the 100th ETF on NSE took more than 19 years. The last one-year period has seen a lot of activity in the ETF space, with 21 ETFs getting listed on the NSE. The assets under management of ETFs in India are now at Rs. 3.16 lakh crores (end of May 2021), witnessing more than 13.8 times increase in five years,  compared to Rs. 23,000 crores (end of April 2016).

ETFs offer the best of both worlds, like Mutual Funds, ETFs represent professionally managed collections or baskets of stocks or bonds. And just like individual stocks, they trade on the stock exchanges, which means you can buy and sell them like individual stocks.

Types of ETFs in India

There are different types of exchange-traded funds (ETFs) available in India, offering investors a variety of options to choose from according to their financial goals and risk tolerance.

Equity ETFs : Equity ETFs track stock market indices such as Nifty 50, Sensex, or Nifty Next 50. They provide investors with broad market exposure and are suitable for the long term.
Debt ETFs : Debt ETFs invest in government or corporate bonds, such as Bharat Bond ETFs. These are known for stable income and low risk and are suitable for retirement or capital preservation. Investments in them can generate regular interest income.
Gold ETFs : Gold ETFs track gold prices and give investors an opportunity to invest in gold without buying physical gold. They are suitable for inflation protection and portfolio diversification.
International ETFs : International ETFs track stocks or indexes from foreign markets such as the US, China, etc. They offer global diversification and the opportunity to invest in foreign markets but also carry certain risks.
Smart Beta ETFs : Smart Beta ETFs move away from traditional index tracking and focus on tracking smart beta indices focused on value, growth, etc. They provide investors with an opportunity to earn better risk-adjusted returns.

Investors should consider their investment goals, risk tolerance, and time horizon when choosing among these different types of ETFs. Choosing the right ETF can improve portfolio performance and help achieve financial goals.

What are the pros of investing in ETF?

Investing in ETF has several benefits, some of which are listed below.

1. Diversification:

ETFs enable the investor to diversify their portfolio without the hassle of individually picking out each stock. Investors seeking to invest in a specific type of sector or industry. ETFs are a go-to option for people who do not want to spend their time researching each company individually. They cover most of the asset classes and sectors for the most part.

2. Low expense ratio:

The expense ratio is the operating expense of the Security, divided by the value of that security. In other words, it is the expense that the investor has to bear for the Security. An expense ratio below 1 is good. And ETFs offer an expense ratio below 1.

3. Easily tradeable:

Investors can trade ETFs just like individual stocks, which makes them highly liquid, meaning you can sell and buy them anytime during market hours.

4. Tax-efficiency:

Due to its low turnover, ETF offers tax relief to investors. The investors are charged 15% on short-term equity gains. And 10% on long-term equity hains after the exemption of the first 1 lakh rupees.

5. Transparency:

ETFs typically have the same securities as the index or the benchmark they track. Some ETFs disclose their holdings regularly, while others disclose them on a monthly, or quarterly basis.

What are the cons of investing in ETFs?

Investing in ETF has several disadvantages, some of which are listed below.

1. Low trading volumes:

Even though ETFs have become popular lately, their trading volume is considerably low compared to the other securities listed. Volume is the total buying and selling of a specific security over the trading exchange.

2. Lack of liquidity:

Due to low trading volume, sometimes it becomes hard to sell the ETFs because there is no one willing in the market to buy them at the price you are offering at that time. Therefore, ETFs are not the most liquid asset to hold.

3. Composition risk:

Since ETFs are already tailored-made investment options. Sometimes, they may have some securities in the group that you do not want to hold. Therefore, you do not have a choice for customisation.

4. Issue of control:

ETFs offer less control as the investor does not choose the securities in the ETF by his own will. Also, the portfolio manager swaps or churns the portfolio depending on his expertise.

ETFs vs. Stocks vs. Mutual Funds: Which is Better?

Before starting to invest, it’s important to understand the difference between ETFs, stocks, and mutual funds and which option is suitable for whom.

Feature	ETF (Exchange Traded Fund)	Stocks	Mutual Funds
Risk	Moderate (Diversified portfolio)	High (Investment in a single company)	Low to High (Depends on type of fund)
Returns	Index-based, relatively stable	Can be very high or very low	Depends on fund manager’s performance
Cost	Low (Lower expense ratio)	Brokerage charges	Slightly higher (Includes fund management fee)
Liquidity	High (Traded throughout the day)	High	Lower (Redeemed at NAV, once daily)
Diversification	Yes (Index-based spread across many stocks)	No (Single stock exposure)	Yes (Diversified portfolio by fund manager)
Management	Passive (Tracks an index, no active manager)	Self-managed (Investor makes decisions)	Actively managed (By professional managers)
Ownership	Indirect (Holds a basket of underlying assets)	Direct (Ownership of shares in a company)	Indirect (Units of pooled fund investments)

ETFs are a better choice for those who want low costs and good diversification and are comfortable trading on their own.
Stocks are suitable for active traders and high risk takers.
Mutual funds are for investors who like the convenience of professional management and prefer regular SIPs.

Points to keep in mind before investing in ETFs

First, determine the assets, in which you want to invest. Choose the best possible ETF according to your risk appetite and availability of funds.
Go for those ETFs that offer a low expense ratio. So, you can save on your operating costs.
Invest in ETFs with high liquidity so you can sell them without any hassle whenever you want. Otherwise, it would be a hectic task.
Check the ETF disclosure reports to ensure that your financial goals align with the objectives of that particular ETF.
Lastly, regularly check the performance of the ETFs and take the required measures according.

Conclusion

From the above article, we can conclude that, as a beginner investor, ETFs could be an adequate option to start your investing journey. Keep in mind that everything has pros and cons & the same applies to ETFs. Keeping a check on a few things and investing with patience and discipline can yield lofty returns for investors.

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3	ETF vs Stock – Which One is the Better Investment Option?
4	Gold ETF vs Gold Mutual Fund: Differences and Similarities
5	ETF vs Index Fund: Key Differences You Must Know

FAQs (Frequently Asked Questions)

What are ETFs in the stock market?
ETFs or exchange-traded funds are financial securities that resemble the characteristics of both Mutual Funds and Stocks. In simpler words, a collection of different stocks to track the performance of a specified index.
How do ETFs work?
ETFs are like common stocks on the stock exchanges. They track the movement of the underlying asset and perform accordingly.
What are the types of ETFs?
Different types of ETFs are present in the market like index ETFs, sector ETFs, and commodity ETFs.
Which are the best-performing ETFs in India?
Kotak PSU Bank ETF, CPSE Exchange Traded Fund, UTI S&P BSE Sensex ETFETF are the top-performing ETF funds for the past year.
What are CPSE ETFs?
CPSE ETF (Central Public Sector Enterprises Exchange-Traded Fund). An investment instrument that allows you to invest in Central Government public sector enterprise.

5 points to be considered before buying or selling any stocks

Choosing the right stock to invest in is a very grinding task and selecting the right Stock at the time is even more gruelling. So many Investors find it hard to decide when to Buy and Sell a stock. Even after doing a thorough analysis of a company or an industry if you fail to enter the investment at the right time, all the research goes in vain. Similarly, not exiting from the Stock at the right time can also result in losses. So, what to do in that case?

5 Points to Consider Before Buying and Selling

Below We have mentioned five such points that could help you to make Buying and Selling decisions timely. So that you could invest in the stock market with ease.

1. Invest in the industry of your interest:

The first step for anybody, when they start investing in the stock market, is choosing the right industry. Choosing the right industry, sector or business is the core foundation for building a strong portfolio.
Legends like Warren Buffet always suggest investing in companies in which you have an interest or you are familiar with their business. It encourages you to regularly update yourself on the company’s performance.

To make an appropriate Buy or Sell decision it is very important to be updated with the company’s performance. When you are familiar with a company, or industry and know how the price reacts to market dynamics, it becomes simple to ignore unnecessary news and stick to your target.
Therefore, it is always suggested to invest in companies that you know well. Who’s business model excites you and you are willing to hold the stock for a longer period?

2. Understanding the Market sentiment:

For example,

We have seen that during COVID-19 the markets were affected badly because of fear among the people. At that time the market had a bearish sentiment, the stocks of so many companies were at a price lower than their actual value. Which was a very good buying opportunity in certain specific sectors like FMCG, Healthcare, etc.

3. Evaluating the financial reports:

Understanding and interpreting the company’s financial reports helps you to have a clear viewpoint on Buying and Selling decisions. The financial reports of the company consist of the balance sheet, profit and loss statement and the cash flow statement.

A Balance Sheet is a concise summary of the company’s current market standing. Showing what all the company’s assets and liabilities are and how are they financing their operations.
The Profit and Loss Statement depicts the performance of the company during a financial year. It shows how effectively the company is using their resources to generate revenue and how much expense they are incurring.

Cash is considered to be the lifeline of any business. Having a positive cash flow is a big green flag for any company. The Cash Flow Statement shows the net flow of cash in the business during a financial year, from the operating, financing and investing activities of the business.
Being able to read and understand the financial reports of the company helps the individual to make optimum buying and selling decisions.

Financial reports provide you with insight into the sales growth, gross and net margins, and profitability of the company which helps you to determine whether the company is making any progress or not.

4. Determining the fair value of the stock:

Evaluating the fair price of the share is very important before buying or selling it. Many financial ratios help you assess that if the share is fairly valued or not, on the stock exchange.

Three Important ratios that you can look at

P/E Ratio
Debt to Equity Ratio
Intrinsic value

Let’s briefly understand each one of them-

P/E Ratio:
The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

Debt to Equity Ratio:
The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets.
Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly.

Intrinsic value:
Intrinsic value is the anticipated value of any stock. Based on specific parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors.

Intrinsic value = Future cash flows(1+ discount rate)#of periods

5. Investment goal

While investing in the stock market or building your portfolio it is very important to set your financial investment goals. Some Goals are short-term, and some are long-term. It is very important for an individual to correctly pre-define them to make the buy and sell decision at the right time.
Various factors determine one’s investment goals like the need for money in the coming years. A person who might not need his money for a decade can invest in more riskier assets. On the other hand, a person who might need his money in the coming years will invest in more liquid assets.

Conclusion

Summarising the above article We can conclude that while making a Buying and Selling decision we should always consider the market dynamics at the given point. Always try to invest in the industry or sector you are familiar with or are interested in. We have also seen that even at Rs.1000 a stock could be undervalued. Whereas, a stock trading at Rs.50 could be overpriced for what the company is offering.

And remember at the end of the day, investing in the stock market is a very whelming experience and you should always have control over your emotions. Often people get carried away with their emotions and end up making rash decisions and having to bear the consequences over the years.

FAQs (Frequently Asked Questions)

How to start buying and selling stocks?
To start buying and selling stocks, you first need to have a Demat account. There are several brokers present online, so it becomes complicated to choose the right one. Now. you can open a Demat account using Pocketful’s app within a few seconds.
Which are the best apps for buying and selling stocks?
There are many applications present online which facilitate the buying and selling of stocks. It depends on the use case and preference of the customer. Pocketful offers a trading platform for both your investing and trading needs. Simple interface combined with modern technology to make your finance journey smooth.
What are the buying and selling of stocks?
When you buy a stock you are not buying it with the company but the shareholder. Similarly, when you sell a stock the company is not buying it but some other investor.
What points should one consider before buying and selling stocks?
In the above article, five key points are mentioned that you should consider before buying and selling stocks. Never buy a stock in a company or industry, you do not know about. Analyze what the market dynamics are and how other investors are reacting.

Selection Methodology and Important Disclaimer

The stocks included in this list are selected primarily on the basis of their market capitalisation, which represents the total market value of a company’s outstanding shares. The companies are arranged in descending order of market capitalisation, with larger companies appearing first, followed by relatively smaller companies. This methodology is intended to provide a structured approach for identifying companies based on their market size and overall presence within a sector.

However, market capitalisation should not be considered the sole factor while evaluating investment opportunities, as it does not guarantee future performance, profitability, or returns. Investors should also assess other important factors such as financial health, business fundamentals, management quality, valuation metrics, industry outlook, and market conditions before making investment decisions.

The information provided is for educational and informational purposes only and should not be construed as investment advice, recommendation, solicitation, or an offer to buy or sell any securities by Pocketful Fintech Capital Private Limited.

September 6, 2023

Top 10 personal finance lessons for self-learning

In a world where money navigates the flow of your life, it is very important to learn about Personal Finance. This article is not only for young individuals who have just started earning but for every person who wants to take charge of their financial decisions and future. We all know that our traditional education system does not teach us about the real financial world. For example, how to file your taxes, how to do retirement planning, what is a credit score, how credit cards work, and more. Once you enter the real world you have to decide on the things that you were never taught about.

Here are 10 personal finance lessons for self-learning –

1. Setting up financial goals

Having clarity about your financial aspiration Lays a strong foundation for your financial future setting up short-term and long-term goals helps to form a road map to achieve them. The financial goal varies from person to person depending on their situation. Setting up financial goals that are realistic, attainable, and measurable is very important.

Some financial goals could be:

Buying a house in the next 10 years
Buying a car in the next two years

2. Have a budget

Pen down all your income and expenses on a piece of paper, and see where your money is going. Analyze how could you allocate your income in a better way, so that the utility derived from your income could be maximized. Try to eliminate necessary expenses, fix the budget for every expense and try to stick with it.

3. Pay yourself first

The first thing you should do when you get your paycheck is to pay yourself first. It means that you should keep a fixed amount aside every month for your future depending upon your financial aspirations. It is important to save for your future because we live in a world full of uncertainties, and believe it or not money may not be the most important thing in life but it affects everything that is.

4. Start investing early

Investing work on the principle of compounding. Interesting fact that Albert Einstein famously referred to compound interest as the 8th wonder of the world. Compounding is accumulating wealth by allowing returns to generate more returns amplifying the benefits of saving and investing.

Let’s try to understand the benefit of early investing through an example:

Suppose Mr Sam is 30 years old and starts investing 25000 rupees Every month at the rate of 12% p.a. for the next 25 years.
At the age of 55 years, the value of his investment would be 4,70,000 rupees.
But, if Mr Sam had started investing just 5 years ago, i.e. when he was 25 years old then.
At the same age of 55 years, the value of his investment would be roughly around 8,80,000 rupees.

5. Automate your saving

Saving your money is very important, if you save money in your good time your money will save you in your bad times. Set up automatic Transfer from your paycheck account to a separate savings account. Then slowly and gradually increase the amount you will be stunned to see how rapidly your savings will compound. Automating your savings gives you peace of mind because you know that you are building and saving your funds.

6. Learn about credit cards

Credit cards can be both a boon and a bane. It just depends on the person and how they use them. If you are someone who can pay their bills on time then believe it, credit cards are a blessing for you.

There are various advantages of using a credit card such as

Helps in building credit history.
Helps you in tracking your expenses.
Used as an emergency fund.
Comes with a lot of rewards.
Convenient pay method.

7. Retirement planning

It is never too early to plan for your retirement since who doesn’t want a comfortable and hassle-free life in their Golden years? so it’s better to start planning for your retirement as soon as possible. First, create a retirement budget and figure out an amount that you think will be enough for you to have your desired lifestyle in your retirement age. Then look for retirement accounts like IRAs or retirement pension plans to start your savings, Apart from this you can also figure out different sources of generating passive sources of income.
For example, invest in real estate by taking a loan from a Bank in your working year and then enjoy the rental income and capital appreciation in the following years.

8. How taxes work

Learn and have a fair understanding of how taxes work. Learn about Income Tax, wealth tax, rebates, deductions, and credit scores. Identify your tax slabs and understand how to file taxes. ITR is very important if you are looking forward to taking a loan. When you approach the bank for the same they ask you for your tax return filing. Apart from this the government also give various types of relief if you fulfil certain financial obligations. These reliefs can sometimes help you to save a lot of money while making big purchases.

9. Lifestyle inflation

Lifestyle inflation is a situation when a person starts spending more on their lifestyle than average because their income has increased. As your income grows it is normal to upgrade your lifestyle. But you should be mindful of where your money is going. It is important to distinguish between your needs and wants. However, being mindful of lifestyle inflation and saving a significant portion of increased income can accelerate your progress towards your financial goals.

10. Kept learning

Understand that learning is a continuous and never-ending process. Everyone at some point in their lives has taken wrong financial decisions. But it is okay because everybody makes mistakes. What matters is how much you have learned from those mistakes. Financial missteps are a part of the learning journey. Cherish your mistakes as learning opportunities. Analyze what went wrong and accordingly adjust your strategy.

Conclusion

Remember that learning about financial independence is a lifelong endeavour. Which takes time. Being disciplined and having patience over the longer term makes achieving your financial goals more easy.
So educate yourself, set your goals, and take productive steps to make your future financially secure. By doing so, you are not just saving your money but investing in a more fulfilling and secure future.

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FAQs (Frequently Asked Questions)

What is personal finance?
Personal finance is the management of monetary resources in such a way that you can maximize its utility. And planning to spend your money in such a way that you can fulfil your present needs and also save for your future.
How to save money wisely?
To save your money wisely first identify where your money is going or where you are spending your money. Then distinguish between your needs and wants and accordingly cut your unnecessary expenses.
What is the PYF rule?
According to the PYF pay yourself first rule you first pay yourself out of your paycheck i.e. you keep an amount aside to invest or save for your future. By following this rule you are creating a safety cushion on which you can rely in your hard times.

August 29, 2023

Undervalued stocks are stocks that are trading at a lower price than their actual fair price. At times the stock price does not fairly represent the true worth of the company. Sometimes small companies get ignored by analysts who are experiencing increased sales and better profit margins and have undervalued share prices. Investors look forward to investing in undervalued stocks because the possibilities are very high that the price of these stocks will increase in future. But, the question that arises here is how to identify these undervalued stocks.

10 parameters that one should consider to decide whether the stock is fairly priced or not –

Read Also: Semiconductor Industry in India

1. P/E ratio

The P/E ratio shows the relation between the stock price and the company’s earnings. It is calculated by dividing the current market price of the stock by the earnings per share.

The ratio can be used to determine whether the stock is undervalued, overvalued or fairly valued.

If the stock P/E is more than the industry P/E we can say that the stock is overvalued.
If the stock P/E is less than the industry P/E we can say that the stock is undervalued.

And lastly, if the stock P/E is nearly equal to the industry P/E then the stock is fairly priced. The P/E ratio is important when determining the true worth of the company.

2. P/B ratio

The P/B ratio shows the relationship between the current stock price and its book value.

There are 3 main steps for computing the P/B ratio of any company.

Step 1- Calculate the book value(company assets minus liabilities ) = assets – liability = book value.
Step 2- Calculate the book value per share = book value. of outstanding shares.
Step 3- Calculate the P/B ratio = current market of the share book value per share.

Any value below 1 is considered desirable by value investors indicating that the stock is undervalued. And a value above 3 is considered that the share is overvalued.

3. P/S Ratio

The P/S ratio or price-to-sales ratio is a financial ratio that shows the relationship between the price of the share and the sales of the company.

P/S ratio = market capitalisationnet annual sales

An ideal P/S ratio can vary from industry to industry or sector to sector. But still, a P/S ratio between 1-2 is considered a good ratio for value investors.
A high P/S ratio may indicate the inefficiency of the management in using the shareholder’s funds to drive more revenue.

Whereas a lower P/S ratio as compared to the industry standards may indicate that the stock is undervalued.

4. Debt-to-equity ratio

The debt-to-equity ratio is a financial ratio that is used to assess how much proportion of debt to equity a company is using to finance its assets. Debt is the creditor or debt holders’ money that is invested in the company against which they receive a payment in the form of interest regularly. Whereas equity funds are the money of the shareholders that is invested in the business.

Having a high debt-to-equity ratio can be a big red flag for any company if the free cash flow of the company is not good. Because then the company will not be able to meet its short debt financing obligations which is not good. This does not mean that having a high debt-to-equity ratio is a bad thing. It generally depends from sector to sector. A sector that requires heavy fixed assets (like automobile or construction) might have a high debt-to-equity ratio as compared to a company that does not require so many fixed assets (like the IT sector).

5. The PEG ratio

The PEG ratio is a financial ratio that shows the relationship between the price and the earnings to the growth of the company. It can be defined as an advanced version of the P/E ratio. Since the P/E ratio does not tell about the price of the stock being fairly valued taking into account only the current earnings of the company and not the forecasted future earnings.

That’s where the PEG ratio comes to the rescue it tells whether the share is being fairly valued or not at the stock exchange taking into consideration the growth rate of the company.

PEG ratio = price/EPS growth

A PEG ratio of more than 1 is considered that the stock may be overvalued and not considered for investing by value investors.
A PEG ratio of less than 1 indicates that the stock is undervalued than its true worth and might be a good option to invest in by value investors.

6. Free cash flow

Free cash flow is the cash left with the company after paying for its operating expenses and capital expenditures. The formula for finding the free cash flow for any company is given below.

Free cash flow cash flow from operations – (operating expenses + capital expenditure).

Having a positive FCF is a major green flag for the company because a positive FCF indicates that earnings are expected to increase in future. Which is a good sign for any value investor. Showing that either the company is experiencing sales growth or better net profit margins and that the company is effectively using their resources.

7. Dividend yield

The dividend yield is a financial ratio that shows what percentage of the share price the company is giving out as dividends to its shareholders.

Dividend yield =annual dividend paid/market price

If a company is giving out high dividends it is a green flag for any value investor and might indicate that the company is undervalued. Because generally in a company with a high dividend payout the shareholders are not only benefited from the capital appreciation but also the dividend payments give them a good annual return on their investment.

8. ROE

Return on equity is a financial ratio expressed in percentage terms indicating a relationship between the company’s net earnings and the shareholder’s equity.

ROE=(Net earnings/ shareholders equity)*100

A 15-20% ROE is considered very good for any company as it shows how effectively the company is using the shareholder’s funds to make more money.
An ROE higher than 20% might indicate that the management is taking a high risk on shareholders’ money to get more business.

9. Intrinsic value

Intrinsic value is the anticipated value of any stock. Based on certain parameters the IV of any stock is calculated. Taking into consideration both tangible and intangible factors.

Intrinsic value = Future cash flows(1+ discount rate)^no. of periods

It is very complicated to calculate the intrinsic value of any stock manually, and individuals can use the stock screeners available online to get the correct IV for any stock.

If IV>current market price then the share is considered to be undervalued.
If IV<current market price then the share is considered to be overvalued.
If IV is almost equal to the market price then we can say that the stock is fairly valued.

10. Pitroski score

Pitroski f- score is a no. between 0-9 which is used to assess the strength of the company’s financials. It is taken into account to decide whether the stock is suitable for investing or not with 9 being the best and 0 being the worst.

The calculation of the Pitroski score is quite complicated if done by hand, there are many stock screeners available online that automatically calculate the Pitroski score for you.

A Pitroski score below 3 is not considered good.
A score between 3-6 is considered good.
And a score above 6 is excellent for investing.

Conclusion

Thus we can conclude that identifying undervalued stocks is not even that hard. You just need to keep a few points in mind before starting your research.

Investing in stocks that you can hold for the long term is a good way to build a strong portfolio. Also, it is important to regularly churn your portfolio on a regular basis so that you can maximize the returns and minimise the risk in your overall portfolio.

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FAQs (Frequently Asked Questions)

What are undervalued stocks?
Stocks are trading at a lower price in the stock exchanges as compared to their actual fair price. There are various accounting financial ratios that you can use to assess the true value of the stock.
How to find undervalued stocks?
There are different financial ratios you can consider to decide whether the stock is undervalued, overvalued or fairly valued.
Fundamentally strong stocks that are undervalued in 2022 India.
You can check out any stock screener to find the top fundamentally strong stocks that are undervalued in 2022 India.

How to achieve financial freedom before retirement

As financial guru Warren Buffett once said, “Do not save what is left after spending, but spend what is left after saving”.Have you ever wondered how some people retire early at a young age? Because they have achieved financial freedom before retirement.
So let us understand what is financial freedom. Financial freedom can be defined as a state where your monthly income from passive sources exceeds your monthly expenditure. Also, you do have an emergency fund for any type of contingent liability that may arise in future. Okay, let’s try to understand the few technical terms that were used above in the definition of financial freedom.

Passive income- Passive income is the source of income where you are not actively working but your money is working for you. E.g. rental income, dividend income, interest from debt fund investments, etc.

Emergency fund– A fixed amount of money set aside in liquid form for unforeseen future circumstances.

Contingent liability– A contingent liability is a potential obligation that may arise from an event that has not yet occurred.

Now that we have understood what financial freedom is, the question arises how to achieve it?

Here are 10 easy rules that you could opt for to achieve financial freedom before retirement :

1. Understand where you are at present-

The first and foremost step in the journey of financial freedom is understanding your present financial situation. Your expenses, income, assets, liabilities, debt and savings.
Sat down take a pen and paper and write down your expenses, income, assets, liabilities, debt and savings. So that you have your financial statement.

2. Frame your future goals-

Clearly define your future goals. It could be buying your dream car, clearing up your education loan, saving up children’s marriage and anything else. Write down your 1, 5, 10, and 20-year financial goals or whatever you want you want to achieve in your life in the following years. But make sure, that your goals are specific, measurable, realistic and time-bound.

3. Budget like a boss-

Make a budget and have a record so that you know where your money is going. Try to cut unnecessary expenses from your budget. Distinguish between your needs and wants. A need is something necessary to live and function. A want is something that can improve your quality of life. Using these criteria, a need includes food, clothing, shelter and medical care, while wants include everything else.
It’s not like you have completely ignored your needs but the motive is to spend your money in such a way that you can maximize the satisfaction derived from it so that your future is also not compromised.

4. Pay yourself first-

The financial rule of paying yourself first simply means that you put a certain amount aside for your savings or investment before paying for any of your bills.
This helps you to build a cushion, for your future on which you can rely in uncertain times.
This rule enables you to prioritize your savings and investments, even if that means compromising on your wants today. PYF rule helps you to achieve financial freedom early and also to accumulate wealth.

5. Invest early-

‘The earlier you start the more you earn’ is a saying that goes by. Starting your investing journey early gives you a competitive edge over others to achieve financial freedom. The earlier you start the more benefit you could get from compounding because it takes time to grow your money.
The compounding effect is the gathering of big rewards from a series of small and intelligent choices. Small, seemingly insignificant steps completed with discipline over a longer period can show exceptional results. An interesting fact is that Warren Buffet’s net worth graph closely resembles the graph of a compounding series.
To experience the power of the compounding effect yourself is to start investing early. Today with so much technological advancement anyone can start their investing journey with as little as 500 rupees per month.

6. Never put all your eggs in one basket-

When we say never put all your eggs in one basket it means nerve depends on one or two sources of income. Or never put all your savings in one type of investment rather diversify your portfolio.
During covid-19 we have seen how blue collar job people had to give up their jobs because of the situation at that time. Similarly recent mass layoffs by big companies forced us to realise the need of having multiple sources of income in such uncertain times to provide for the safety of our loved ones.
It is very important to diversify your risk and accordingly allocate your resources and efforts over different assets so that you can create multiple passive sources of income.

7. Understand how taxes work

It is very important to understand how the tax system works if you want to save your money. Rich don’t pay taxes or the CEO of XYZ company takes 0 salaries. We are sure you must have heard all those things.

There are so many legal ways in which rich people avoid paying taxes few are mentioned below:

Income shifting-
Shifting your income from one person or entity to another to reduce taxes.
Charitable giving-
Donating large sums of money to charitable organisations to reduce your gross taxable income.
Capital gain taxes-
The tax rate on capital gains is less than the tax rate on personal income, so many times rich people invest their money in different asset classes.
Tax heavens-
Tax heavens are those countries where taxes are low or not at all. So many rich people just transfer their wealth to such countries.

8. Crush your debt-

It means that first arrange your debt in descending order i.e. first try to pay off the debt with the highest interest rate following the ones with lower interest rates. This way you will pay less for the interest and more for the principal amount itself.
Try to make extra payments when possible. Instead of paying 12 EMIs the whole month, you can simply start paying 13 EMIs a year. This year you will, be able to close your loan on time without taking extra financial burden.

9. Automate your savings-

There are so many ways in which you can automate your savings. One is setting up a direct deposit, wherein you simply give instructions to your bank to transfer a certain amount every month to another account or SIP account.
Apart from this, you could you budgeting apps that track all your daily expenditures and automatically invest the change amount to your desired asset classes.

10. Educate yourself-

This is by far the most important point that you should swear by in your financial journey. The journey to achieve financial freedom is full of ups and downs. And the only way to tackle them is by educating yourself and being updated on your surroundings.
Understanding money, finance and investing is a long-term journey that takes time, patience and discipline to complete.

Conclusion

Hope that now you will have a clear understanding of how you can achieve financial freedom before retirement by just following these simple steps. Having financial freedom is not only about having enough money in your bank account to sustain you for your golden years. But also having peace of mind and understanding that having enough money for the future is not the ultimate goal.
But diversifying, allocating and churning your investments in such a way that it can sail you through the thick and thin market trends.

FAQs (Frequently Asked Questions)

What is financial freedom?
Financial freedom can be defined as the state where you have enough monthly income from passive sources to cover your monthly expenditures without working. Financial freedom is not about being rich or wealthy but about having enough resources to pay your bills.
How to achieve financial freedom?
It takes discipline and patience to achieve financial freedom. Achieving financial freedom is a long-term thing that takes time. First, you have to know about your monthly income and expenditure and then accordingly create passive sources of income.
How to plan early retirement in India?
In the above article, 10 simple yet very important steps are mentioned that if you follow you can achieve early retirement as compared to others.

August 23, 2023

Category: Personal Finance

What are ETFs? Are ETFs good for beginner investors?

What are ETFs or Exchange- Traded Funds?

Types of ETFs in India

What are the pros of investing in ETF?

1. Diversification:

2. Low expense ratio:

3. Easily tradeable:

4. Tax-efficiency:

5. Transparency:

What are the cons of investing in ETFs?

1. Low trading volumes:

2. Lack of liquidity:

3. Composition risk:

4. Issue of control:

ETFs vs. Stocks vs. Mutual Funds: Which is Better?

Points to keep in mind before investing in ETFs

Conclusion

FAQs (Frequently Asked Questions)

What are ETFs in the stock market?

How do ETFs work?

What are the types of ETFs?

Which are the best-performing ETFs in India?

What are CPSE ETFs?

5 points to be considered before buying or selling any stocks

5 Points to Consider Before Buying and Selling

1. Invest in the industry of your interest:

2. Understanding the Market sentiment:

3. Evaluating the financial reports:

4. Determining the fair value of the stock:

5. Investment goal

Conclusion

FAQs (Frequently Asked Questions)

How to start buying and selling stocks?

Which are the best apps for buying and selling stocks?

What are the buying and selling of stocks?

What points should one consider before buying and selling stocks?

Top 10 personal finance lessons for self-learning

Here are 10 personal finance lessons for self-learning –

1. Setting up financial goals

2. Have a budget

3. Pay yourself first

4. Start investing early

5. Automate your saving

6. Learn about credit cards

7. Retirement planning

8. How taxes work

9. Lifestyle inflation

10. Kept learning

Conclusion

FAQs (Frequently Asked Questions)

What is personal finance?

How to save money wisely?

What is the PYF rule?

How to find and identify undervalued stocks

10 parameters that one should consider to decide whether the stock is fairly priced or not –

1. P/E ratio

2. P/B ratio

3. P/S Ratio

4. Debt-to-equity ratio

5. The PEG ratio

6. Free cash flow

7. Dividend yield

8. ROE

9. Intrinsic value

10. Pitroski score

Conclusion

FAQs (Frequently Asked Questions)

What are undervalued stocks?

How to find undervalued stocks?

Fundamentally strong stocks that are undervalued in 2022 India.

How to achieve financial freedom before retirement

Here are 10 easy rules that you could opt for to achieve financial freedom before retirement :

1. Understand where you are at present-

2. Frame your future goals-

3. Budget like a boss-

4. Pay yourself first-

5. Invest early-

6. Never put all your eggs in one basket-

7. Understand how taxes work