Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

Most articles on investing advise having a diversified investment portfolio. Diversifying investments is touted as reducing both risk and volatility. 

... One of the advantages of a more concentrated portfolio is that while it does increase risk, it also increases potential reward.

Read more at:

https://www.investopedia.com/articles/investing/030916/concentrated-vs-diversified-portfolios-comparing-pros-and-cons.asp

7 Simple Strategies for Growing Your Portfolio

"Growth is usually defined more specifically in the investment arena as capital appreciation, where the price or value of the investment increases over time.

Growth can take place over both the short and long term, but substantial growth in the short term generally carries a much higher degree of risk. 

There are several ways to make a portfolio grow in value. Some take more time or have more risk than others, but the following is a list of tried-and-true methods that investors of all stripes have used to grow their money."

Read more at:
https://www.investopedia.com/articles/basics/13/portfolio-growth-strategies.asp

Why Understanding Asset Allocation Is Key

Most investors are extremely diligent in determining what investments should be a part of their portfolios. Certainly, you want to make sure that any specific security or fund is serving a purpose and is chosen because it has the potential to meet your needs and goals.

However, what investors often overlook or neglect is their specific asset allocation. The truth is that the combination of investments in your portfolio can actually be more important to achieving your goals than the specific investments selected.

Read more at:
https://www.investopedia.com/advisor-network/articles/why-understanding-asset-allocation-key/

How to Find Tomorrow's Winning Stocks

The holy grail of investing is to find the biggest winning stocks in the market. The outliers. The stocks that break all of the records, i.e. the leaders that go up the most. 

Studies have been published showing that all of the gains in the market over the decades are from only a handful of stocks. This means that, if your portfolio didn't have some of these leading stocks, it didn't outperform the market. 

Read more at:
https://www.investopedia.com/trading/how-find-tomorrows-winning-stocks/

The Raging Bull Market Is Over: So, What's Next?

The stock market is in the midst of several major shifts, and investors should begin to reposition their portfolios appropriately, according to a recent report from the U.S. equity and quantitative strategy team at Bank of America Merrill Lynch (BofAML). 

"The 20-year long risky stock premium has finally been wiped out," is how their report leads off, continuing, "investors should pay for safety and be compensated for risk, but the opposite has been the case for 20 [years]." 

Given their observation that "the gap has finally closed," this has major ramifications for investors going forward. The table below summarizes five big market trends that BofAML sees as being underway right now.

Read more at:
https://www.investopedia.com/news/raging-bull-market-over-so-whats-next/

Portfolio Management Tips For Young Investors

Too many young people rarely, or never, invest for their retirement years. Some distant date, 40 or so years in the future, is hard to imagine. However, without investments to supplement retirement income, if any, retirees will have a difficult time paying for life's necessities.

Smart, disciplined, regular investment in a portfolio of diverse holdings, can yield good long-term returns for retirement and provide additional income throughout an investor's working life.

Read more at: 

https://www.investopedia.com/articles/younginvestors/12/portfolio-management-tips-young-investors.asp

When is the Right Time to Sell a Stock?

The following comments appeared in a post titled "When should you 'hold' and When should you 'fold' a stock?":

"Buying a stock doesn't make any one any money. Holding it for a reasonable length of time, and then selling it at a profit completes the cycle." 

It may seem like a no-brainer, but in reality many small investors find it difficult to decide when is a good time to sell a stock.

If you are a long-term investor with a 'core' portfolio of good large-cap stocks, then there should be only three reasons (explained in the post referred above) for selling a stock.

However, if you also have a 'satellite' portfolio of mid-cap and small-cap stocks then Warren Buffett's strategy of 'holding forever' may not be a good idea.

Setting a price target and a stop-loss - and selling when the target or stop-loss is reached is often a better idea.

In a recent article in investopedia.com, Steve Economopoulos explains how you can fine-tune your selling strategies and provides a technical analysis example of setting a price target after buying, and selling when the target is reached.

Read the article here.

Why you should Invest in Stocks of Companies that pay regular Dividends

Most people who prefer investing in debt instruments or real estate do so because such investments are 'safer' compared to stocks. Stock prices tend to fluctuate wildly and are considered to be more 'risky'.

That logic reminds me of a departed uncle who refused to stir out of his home. He thought his home was 'safer' because it had less pollution and germs. Plus city roads were too 'risky' because of unruly traffic.

Debt instruments like bonds and bank fixed deposits may appear 'safer' but they carry risks too - from fluctuating inflation and interest rates. Real estate prices fluctuate also, putting your investment at risk.

One of the best reasons given by financial experts for investing in stocks is that they provide capital appreciation that can beat inflation. Younger people often flock towards growth stocks in the hope of quick 'multibagger' returns.

More experienced investors - who are in the game for the long haul - include stocks of dividend paying companies in their portfolios. But aren't such companies stodgy, slow-growth ones?

They often are. But not only do they pay regular dividends, such dividends tend to grow over time. Why? Because with lower growth opportunities, there is less need for capital expenditure.

So, the cash these companies keep generating through well-known branded products or services are distributed to shareholders. 

Those investors who are working regularly or earning from their business or profession may not really need the dividend income. But they can very well reinvest the dividend amounts in buying more stocks.

Over the years, 'dividend compounding' can lead to a substantial addition to your stock portfolio - leading to even more dividends that will become useful when you retire and are no longer earning a regular income.

3 Things All Self-Directed Investors Should Know

There are two ways you can invest your monthly/quarterly/annual savings - the easy way and the hard way.

The easy way is to get hold of an experienced financial adviser and follow his investment advice. The hard way is to take charge of your own financial future and do the investing on your own.

Many small investors skip the easy way because they think that investing for the long term is a trivial activity, and not worth the fees a good financial adviser will charge. No wonder they end up with poor returns or losses.

Common sense suggests that you follow the easy way first. Learn the ropes and gain experience about which investment instruments carry what types of risks and give what kind of returns over different time frames.

Once you have followed the advice of a financial adviser you can trust and built up a decent investment portfolio, then you may start thinking about managing your portfolio on your own.

Before you decide to march to the steps of Tagore's well-known song "Ekla Chalo Rey" ("tread your own path"), there are three things you need to remember:

1. You can't be an expert at everything - invest in what you know, and gradually broaden your 'Circle of Competence'

2. Be patient and disciplined - Rome wasn't built in a day. A good investment portfolio requires canny selection, disciplined approach to regular investing and monitoring, and patience to hold for the long term

3. Control your emotions -  be dispassionate about the periodic ups and downs in the economy. Not investing when there is doom and gloom all around is just as bad as investing when there is euphoria and everyone is jumping into the stock market to buy.

Read more

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The Ultimate List of Painful Financial Mistakes

Warren Buffett is arguably the greatest stock investor that ever lived. He didn't become so by chance but by learning the ropes from his guru, Benjamin Graham, and by following a few basic investment rules.

Two of his most famous rules are:-

Rule No. 1: Never lose money
Rule No. 2: Never forget Rule No. 1

Does Buffett practice what he preaches? Of course he does. That is why he is the greatest. But the two rules should not be interpreted literally. If you invest in stocks, you are going to make a few wrong selections that will lead to loss of money.

In fact, 'losing money' can be a great learning experience - as long as you don't turn it into a habit. What Buffett really means by the two rules is that you need to follow a well-planned strategy that reduces the possibility of losses and increases the chances of making money in the long-term in spite of occasional losses.

Even if you make a lot of money from stocks, it can be difficult to manage and grow your portfolio unless you know how to avoid the following financial mistakes listed by Patrick Bourbon in a recent article in investopedia.com:

1. Not diversifying your wealth.

2. Not understanding the risk in your portfolio.
3. Investing in tax-inefficient portfolios.
4. Doing nothing/failing to build a customised financial plan.
5. Not saving enough or saving too late.
6. Overlooking your advisor/broker fees.
7. Failing to rebalance your portfolio.
8. Not having a sufficient emergency cash reserve.
9. Being overconfident in your own abilities.
10. Chasing past performance.
11. Investing based on news or reacting to short-term returns.
12. Emotionally buying and/or selling.
13. Trying to time the market.
14. Selecting the wrong stock/mutual fund.
15. Not taking into account the effect of inflation.
16. Buying what you don’t understand. 

Read more.

3 Secrets of Successful Companies

When small investors enter the stock market for the first time, they often make the mistake of buying individual stocks based on a friend's tip or a relative's recommendation. 

Such initial steps usually end up with a loss of the invested capital - either because the entry is at an inopportune time, or the stocks selected are of the cheaper/riskier variety, or both.

For the novice investor, the better way to start investing in the stock market is to select a couple of good equity and balanced funds and invest regularly - leaving stock selection to experienced fund managers.

At some point of time however - may be two or three years down the road - it may be a good idea to start selecting your own stocks. 

Why? Because fund managers tend to have a herd-like mentality - selecting from the same group of well-researched stocks for different funds. That leads to steady but average returns.

For above-average returns, one needs to select a few mid-cap and small-cap stocks for a 'satellite portfolio' - along with a 'core portfolio' of large-cap stocks.

Selecting under-researched mid-cap and small-cap stocks is not a trivial task. It requires knowledge and experience to choose from thousands of listed companies.

So, where should one start? Look for three essential characteristics that make a company successful. These are:

1) Barriers to entry
2) Management quality
3) Market leadership

What about other important metrics like Profit Margin, P/E, P/BV, RoE, Debt/Equity ratio, Interest Coverage ratio, Cash Flow, Growth rate and so forth? Those need to be looked at also for a more detailed study and analysis.

Learn more about the '3 Secrets of Successful Companies'. 

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Are the movements of a stock market index predictable?

That may sound like a strange question coming from some one who regularly writes about the movements of Sensex, Nifty, S&P 500, FTSE 100. Nevertheless, it is a pertinent question.

Many small investors spend an inordinate amount of time and energy in trying to figure out in which direction a stock market index is going to move next. Some do it out of curiosity. Others, because they have taken a position in the F&O market. Some are trying to 'time the market' by fine tuning their entry or exit.

Those who have spent a long enough time in stock investing - whether using fundamental analysis, or technical analysis, or both - already know that predicting index (or stock price) movements is like tossing a coin. You only have a 50% chance of success at best.

(That may be good enough to make money. However, the 50% success rate comes from averaging multiple tosses/predictions. You may get 7 'heads' in a row and feel that you have mastered the art of coin tossing/predicting. But then you may get 12 'tails' in a row that will wipe out all your investments!)

What should a small investor do? Whether you are an inexperienced or an experienced investor, you need to accept the fact that index movements can not be predicted or controlled.

So, concentrate your time and energy on stuff that can be predicted and controlled. Like, how much you are likely to earn over the next 5-10-15 years. How much you need to save each year to achieve your financial goals. What kind of assets you should invest your savings in to get the required rate of return.

In other words, make an investment plan and then stick to that plan regardless of index movements. The plan may need to be tweaked to optimise returns - but such tweaking should not be done more than once or twice in a year.

It takes a lot of mental strength, faith and discipline to stick to a plan when an index goes through its periodic turmoil. Specially when a 15 months long bear phase decimates your stock portfolio.

But over the long term, a planned investment strategy will generate better returns than an unplanned strategy based on predicting index movements.

That was the long answer. The short answer is: Not really.  

Does your Investment Style fit your Personality?

To be a successful investor, you must have your own investment style. That means evolving a system that works for you - by figuring out your own strengths and weaknesses and keeping a record of your successes and failures.

Every person has personality traits, cognitive biases, eccentricities, habits that affect their decision making. If you are impulsive, you may buy 5000 shares of Opto Circuits at Rs 9 and hope to double your investment in 3 months.

If you are risk averse, you may be happy with the long-term returns you get from a monthly SIP in an index fund or a balanced fund. 

An investor below the age of 30 may invest all her monthly savings into an equity fund. An investor who has already celebrated his 50th birthday may prefer the safety of bank fixed deposits or a debt fund.

According to an article published by the CFA Institute, there are four types of Investor Personalities:

1. Preservers - loss averse and deliberate in decision making, they are more keen to preserve their existing wealth than indulge in risky investments in search of rapid growth. They often end up not taking any decision at all and miss money-making opportunities.

2. Followers - not much interested or skilled in the investment process, they end up following the advice of friends or colleagues and have a portfolio full of yesterday's winners.

3. Accumulators - may have tasted success in a business enterprise or career, giving them the confidence to actively manage their own investment portfolio. They like to win big, and often make large risky bets that can lead to big losses.

4. Independents - like to think 'out of the box' and play contrarian based on their own research. They usually follow a plan and are not as over-confident as Accumulators. But relying too much on their own research can be time consuming and counter-productive.

So, which of these four Investor Personalities fit you the best? Give it some thought (if you haven't done so before) and then decide what kind of investment style you should follow. Your investment success will depend on it.

Read more from this investopedia.com article.  

How many Mutual Funds should you hold to adequately diversify your portfolio?

If you ask that question to your friendly fund agent, he may say: "The more the merrier. The more funds you have the more diversified will be your portfolio." From his point of view, the answer may seem logical. 

If you listen to his suggestion, you may end up with 15 or 20 funds. There are so many funds to choose from - large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, FMCG funds, banking funds, infrastructure funds, arbitrage funds, funds of funds, balanced funds, ELSS funds, gilt funds, short-term debt funds, long-term debt funds, income funds, liquid funds, gold funds, and so on.

After a year, you will find that your portfolio has under-performed the fixed deposit rates of banks because the good performance of some of the funds have been neutralised by the poor performance of the others.

So, what should a small investor do? The answer is: It depends. On what? On where you are in your investing/wealth-building stage.

If you are a young person who has just joined employment, investing your meagre monthly salary savings in one good balanced fund may serve your purpose and provide adequate diversification. 

The equity component of a balanced fund can comprise a mix of large-cap and mid-cap stocks. The debt component can comprise a mix of government securities, company fixed deposits, NCDs. 

The equity component takes care of growth. The debt component minimises downside risk. A balanced fund with 60-65% equity component is treated as an equity fund. That means they are not subject to long-term capital gains tax and dividends paid are tax free. 

Someone who has been working for a while, or is running a successful small business, more substantial monthly savings may be available for investment. In which case, a large-cap equity fund, a mid-cap/small-cap fund, an ELSS tax saving fund, a gold fund and a debt fund should provide adequate diversification.

What about all the other types of funds mentioned earlier? Aren't there money-making opportunities in them? 

Yes, if you have nothing better to do than monitor the performance of your funds regularly. Then you will be in a position to move in and out of your funds to increase returns - most of which may be eaten away by fees and taxes.

No, if you want your funds portfolio to run on auto-pilot while you spend your time and energy in furthering your career or growing your business.

Many investment advisors - particularly the ones who work in wealth management divisions of private banks - are clueless about what constitutes an adequately diversified funds portfolio.

Typically, they give you a suggested list of funds that are 5-star or 4-star rated by valueresearchonline.com or moneycontrol.com and expect you to choose from them. 

You may end up with 8 or 10 funds all of which hold Infosys, Reliance, L&T, HDFC Bank, Tata Motors among their top holdings. In which case, the performance of all your funds may depend on the performance of just these 5 stocks - giving you hardly any diversification.

You will be better off just buying these 5 stocks and not buying any of the suggested funds.

Remember that the more funds you have, the more time you will need to spend in monitoring their performances. Also, proper fund selection to avoid duplication of holdings will give you better portfolio diversification.

Last, but not the least, avoid the newer funds. Choose established funds that have a long-term returns track records.

Day Trading Strategies for Beginners

The post title is a bit of an oxymoron - because beginners should stay as far away from day trading as possible. Why? Because to make money on a consistent basis from day trading, one requires two important skills:

• more than a working knowledge of technical analysis
• a trading strategy that has been honed over several years

But isn't technical analysis what this blog is all about? Yes. However, learning about technical analysis may be necessary, but it is not sufficient. 

A trading strategy for picking entry points, exit points, setting stop-losses, identifying chart patterns while they are still forming and having the discipline to stick to the strategy takes many years of experience.

Lack of appreciation of the skills and discipline required for trading success is why majority of day traders lose money. 

That is like warning someone that smoking and drinking are injurious to health. People do it anyway because their peers are doing it, and they don't want to miss out on all the fun.

It is the fun and excitement of making money with very little capital outlay and even less effort that draws beginners to day trading like moths to a flame.

There are two choices in front of beginners:

• tread the path of slow and steady - gradually build up your capital by investing your monthly savings in one or two mutual funds; once you have around Rs 5 Lakhs in your funds, think about building a portfolio of individual stocks; then keep adding to your portfolio from your monthly savings, and retire rich
• jump into the stock market after opening a demat account and a trading account; pay some margin money and start day trading

The first choice is the one I endorse. It is the saner and safer choice that almost guarantees investing success. But it is also boring - like watching a fruit tree growing from a sapling till it starts bearing fruit several years down the line.

If the adrenaline rush of making quick money with very little effort or cash excites you - then you will try your hand at day trading anyway. Regardless of all the warnings that it may be injurious to your wealth.

In that case, you might as well go through Justin Kuepper's article 'Day Trading Strategies for Beginners' in investopedia.com.

A 7-Step Guide to Value Investing

If you enjoy the thrill of making some quick profit from the stock market by booking trading profits of Rs 2 or Rs 3 per stock then you will save time and effort by reading no further.

But if you are interested in building wealth over the long-term - which requires a well-planned but patient and boring strategy - then going through the 7-Step guide to Value Investing may be beneficial.

So without further ado, here are the 7 steps (according to Andrew Beattie): 

1. Buy Businesses

When you buy a stock, you are not buying a piece of paper or an entry in a demat account. You are actually buying a 'share' in a company. That means, you should spend some time in researching the company's business and assess whether the 'share' you are buying is at a fair price.

2. Love the Businesses you Buy

If you really want to build wealth, you need to hold 'shares' of good businesses over a long period of time. To be able to do that, you have to build a fundamental 'relationship' with the company by regularly analysing its performance. If performance is improving, buy more. If performance is not up to the mark, book part profits. 

3. Simple is Best

You need to understand how a business generates profits and maintains market share. The simpler the business (like Colgate's toothpaste or Marico's edible oil) the easier it is to understand. The more complex the business (like Biocon's medicines or Persistent System's software) the harder it is to fathom how the business is faring.

4. Look for Owners, not Managers

A good manager can successfully run a not-so-good business. A not-so-good manager can run a good business to the ground. Manager integrity and transparency is paramount. Look for managers who act like owners by having a long-term growth focus and delivering on promises. 

5. When you find a good thing, Buy a Lot

A value investor does not need to buy or sell regularly. He waits patiently for the stock of a good business to be available at a fair price. When an opportunity arrives, he buys the stock by the truckload. While this means 'timing the market' - not recommended for novice investors - concentrated portfolios of fewer stocks in large quantities tend to generate better returns.

6. Measure against your Best Investment

Jumping in at every opportunity is not the trait of a value investor. Quality of business is more important than quantity. That means buying a stock only if the company is better - or at least as good - as the ones you already own. It is your money. Why not buy the best companies?

7. Ignore the Market 99% of the time

Markets fluctuate. They neither go up or down in a straight line. Ignore the daily gyrations. When a market is rising, you don't need to buy. Neither should you sell if the market is falling. Rely on your asset allocation plan instead.

Read Beattie's full article here.

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Top-down Analysis: Finding the Right Sectors and Stocks

The stock market seems to be recovering from a year-long correction. Experts and analysts are suggesting that the next leg of a long-term bull market is about to unfold.

This is a good time for new investors to start building an investment portfolio. Note that I haven't mentioned anything about buying stocks just yet. 

Building an investment portfolio that will generate inflation-beating returns for many years requires careful planning and analysis. So, how should you begin the process?

Ideally, you should get in touch with a financial planner who will hand-hold you through the process of preparing a financial plan based on your current and future earnings and financial commitments.

Another option is to spend some time on research about how to prepare a financial plan, and do it yourself. It is not rocket science. Basic math skills and accounting knowledge is good enough.

Next, properly assess your risk tolerance. There are tools available to do such an assessment.

Based on your financial plan and risk tolerance, an asset allocation plan should be prepared. What is the necessity of an asset allocation plan? 

It diversifies your investments among different asset classes - like equity, mutual funds, fixed income instruments, gold - to enable better returns under different market conditions.

Now you are ready to build your investment portfolio according to your financial plan, risk tolerance and asset allocation plan.

To beat inflation, you have to invest in equity shares. It is not just about opening trading and demat accounts. You need to know which stocks to buy. 

For that, you need to go through another process, called Top-down Analysis - where you figure out how the economy is doing and which sectors are likely to perform better during the next leg of the bull market.

It helps to have some knowledge of the business processes in the identified sectors. 

If you have identified FMCG sector as a potential money-spinner due to the thrust on rural income by the government, you need to know that companies in the sector typically have huge advertisement costs, strong cash flows, low capex, well-known brands, high P/E, low growth, good dividend payouts.

You can choose the top two or three companies based on their rural distribution reach. Repeat the exercise for three or four more sectors to get adequate diversification. 

Now you have 10-12 stocks from three-four sectors for the equity part of your portfolio.

Read more about Top-down Analysis here.

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4 Steps for Profitably Investing your Savings

Here are the 4 easy steps:

• Open a 3-in-1 account - a combination of a demat account, a savings bank account and a trading account
• Transfer your life's savings into the savings bank account
• Visit some popular online investment boards for cheap small-cap stock ideas
• Buy stocks by the truck-load and get rich in double quick time

Do I hear a murmur of disbelief from blog readers? Are you thinking: He's kidding, right? 

Right. I'm kidding. Those are the 4 easiest steps to kiss your savings goodbye.

So, are there any easy steps that one can follow for profitably investing one's savings? 

First, the bad news. The answer is: No.

Now, the good news. 

There are 4 simple steps that you can follow - but these steps are not easy. They require a certain amount of planning, discipline, patience and commitment.

If you already have a successful career or business, you will know what I am talking about.

If you are still a student, think of the way you have progressed in your studies towards a career.

There are no guarantees - in life, or in investing. Most successful investors will readily admit that a large dose of luck is required to get rich.

But the 4 simple steps will definitely help you to turn a tidy profit from your investment portfolio.

So, without further ado, here are the 4 Steps to Building a Profitable Portfolio.

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Aggressive Investment Strategy

Of late, I have received several requests from investors seeking help with their investment portfolios. Earlier, such requests used to come when the stock market was nearing a bull market top.

This time it has been different. The market is at the tail-end of a 10 months long bear phase. The timing is much more appropriate for building or modifying an existing portfolio.

It clearly shows that small investors are becoming more savvy about when to buy. One of the reasons for starting this blog was to highlight the fact that 'when to buy' is just as important as 'what to buy'.

Without analysing the fundamentals of a company, buying its stock is like shooting in the dark. Chances of missing are far greater. But choosing the right stock is not enough if you buy it just before, or just after, it enters a correction. That is where technical analysis can help.

Even before you start fundamental analysis of a company, or technical analysis of its stock price, there are important decisions to be made. Like, what do you wish to achieve by investing in stocks? Make some quick money to buy the latest iPhone or put a deposit on a new car? 

Or, would you prefer to build wealth for the long-term - using stocks as an asset class that can generate risky but inflation-beating returns?

In other words, you need to make a plan. First, a financial plan to fund your long-term goals and commitments. Then an Asset Allocation plan based on your risk tolerance to achieve those goals.

If you are in your 20s or 30s and earning good money with decent savings, you can afford to be aggressive about your investment strategy. 

Being aggressive doesn't mean buying 10000 shares of a penny stock and selling it for a Rs 2 gain after a month. That is being foolish - because the penny stock can just as well go down by Rs 2.

To learn more about aggressive investment strategies, read this article.

Add some stability to your portfolio with bank fixed deposits – a guest post

The younger you are, the more should be your allocation to equities. Why? Because the longer you stay invested in equities, the greater is going to be your likely returns. Also, your financial commitments are lower when you are younger. So, you can afford to take more risks.

As you grow older, start a family and care for elderly parents, you will need more stability in your investment portfolio and additional cash flow to support your primary earnings from business or profession.

In this month’s guest post, Nishit argues in favour of bank fixed deposits. The downside to bank FDs is low returns which are taxable. The upside is safety of principal amount and facility of regular cash flows through quarterly interest payments. Using some simple investment strategies, the unexciting bank FD can add stability to your portfolio.

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Interest rates are falling. That is being touted as good news for the economy and for borrowers. Lower interest rates mean higher growth and more jobs. More jobs mean more income and more purchasing power. This whole cycle of spending, consumption and growth is likely to be triggered off by the cutting of interest rates by RBI.

RBI has already reduced rates by 75 basis points (i.e. 0.75%), and is further expected to reduce rates by about 1-2% before this cycle is over.

One of the casualties of this rate-cut cycle who goes unlamented is the senior citizen, who depends on fixed deposit (FD) interest for his livelihood. Banks are very quick to cut deposit rates and those FDs which were giving interest of 9.7% have already been reduced to 9%. In fact a study across PSU and Private Banks shows that maximum interest on FD which can be obtained now is 9%.

How does one work around this? To explain the impact, if a senior citizen has Rs 10 lakhs in FD, 9.7% interest gives him Rs 97000 and 9% gives him Rs 90000 per year. How does he make up for this Rs 7000 shortfall?

One way of doing it is locking in FDs for a period of 5 years when the rates are high. 5 years is a sufficient long period for one cycle of rate cuts to play out.

Also, once the rates start being cut, the 2-3 year FDs offer the highest rate of interest. At such times, one can go for such shorter-duration FDs.

The Senior citizen scheme from the Government, which has a 1 year lock in period, still offers 9.3% rate of interest. This rate changes only in April every year. So, one can lock in up to Rs 15 lakhs in this scheme till April ’16.

Next common question is: what about liquidity? What if one needs money urgently then how does one break the Fixed Deposit? A simple option is to break the one giving the least amount of interest. Even this can be circumvented by ensuring and planning the FDs in such a way that one FD matures every 3 months.

To do this, it requires certain amount of planning and the staggering of the FDs. Also, one can plan the FDs in such a way that every month some or the other FD gives interest. Quarterly credit of interest gives the highest returns and by staggering the FDs one can ensure a monthly flow of income while enjoying the higher returns of quarterly Interest.

The protection of capital is a must and only nationalized or top private banks FDs can be considered. This can be spread across 2-3 banks so that the risk of default is minimised.

These are some simple strategies, if followed scrupulously, can give maximum bang for the buck.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

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