Understanding Emergency Funds

An emergency fund is a safety net that you should be able to access quickly, without hassle. By definition, you shouldn’t spend more than an hour to get this money. Two key features define an effective emergency fund:

1. Ease of Access – The money should be available almost instantly.
2. Reasonable Returns – While safety is the priority, the funds should still earn some interest.

In terms of speed, Debit Cards are the fastest, followed by Fixed Deposits (FDs). Debt-based mutual funds can also be efficient, but some are still in the T+1 category, meaning you may need to wait a day or two for withdrawals.

This “time gap” can be easily solved when combined with a Credit Card—you can spend instantly and settle the dues once your redemption is credited. Therefore, it makes sense to classify emergency funds into two buckets:

• Fast Access – FDs, Debit-linked accounts, Wallets.
• Relatively Slower (T+1) – Debt Mutual Funds, Arbitrage Funds.

Once this classification is clear, parking emergency reserves in debt mutual funds becomes an easy and rational choice.

The Problem with Debt-Based Instruments

Debt funds and FDs have one drawback – Taxation. No matter how long you hold them, the gains are taxed at your income tax slab rate.

• If you are in the 30% slab, your post-tax returns shrink considerably.
• For those in the 10% or 20% slab, this may not hurt much.

This is where Arbitrage Funds enter the picture as a smarter substitute.

Arbitrage Funds – Equity Tax, Debt-like Safety

Arbitrage Funds are classified as equity funds for taxation purposes because they invest primarily in equity instruments.

• If redeemed within 1 year → Short-Term Capital Gains (STCG) tax of 20% applies.
• If held for more than 1 year → Long-Term Capital Gains (LTCG) tax of 12.5% applies.

This makes Arbitrage Fund particularly attractive for investors in the 30%+ tax bracket, as their tax outgo reduces drastically compared to debt funds.

How Do Arbitrage Funds Work?

The core idea comes from the age-old practice of arbitrage—profiting from price differences in two markets.

Example: Buy diesel in Goa where it is cheaper and sell it in Maharashtra at a higher price to pocket the tax difference.

In financial markets, the concept is applied to equities and futures:

1. Spot Market → Buy the stock at today’s price.
2. Futures Market → Sell the same stock in the futures contract at a slightly higher price.

Since futures usually trade at a premium to spot price (due to interest rates, dividends, and market expectations), the fund locks in a risk-free spread.

This strategy:

• Eliminates market risk (since the buy and sell are simultaneous).
• Provides stable returns (usually between 5%–6.5% annually).
• Enjoys equity taxation benefits.

Why Arbitrage Fund Is Safe

Arbitrage Funds are often misunderstood as risky because they deal in equities. However, unlike typical equity funds, they do not speculate on market movements.

They buy and sell simultaneously, capturing the price difference without exposure to volatility. This makes them:

• Low-risk like debt funds
• Tax-efficient like equity funds

When Should You Use Arbitrage Fund for Emergency Money?

Arbitrage funds are ideal if:

• You are in the 30%+ tax bracket
• You don’t need instant liquidity (T+1 settlement works for you)
• You want better post-tax returns than short-term debt funds or FDs

For investors in lower tax brackets, short-term debt funds or FDs may still make more sense.

Final Thoughts on Arbitrage Fund

For investors in higher tax brackets, Arbitrage Funds are an excellent substitute for debt funds—combining safety, stability, and tax efficiency. When used smartly as part of your emergency fund strategy, they can significantly improve your post-tax returns without compromising on safety.

The post Arbitrage Fund vs Debt Fund: Smart Emergency Planning appeared first on Fleek Finance.

When people talk about diversification, normally it is from returns perspective. But, at the core of it is managing risk. We diversify because we want to make sure that price fluctuation in individual asset should not impact the overall portfolio. A perfectly diversified portfolio is one where we have inversely correlated assets, i.e. price of one asset grows if other falls and vice versa and on an average level in long term, we manage to generate good return at portfolio level, while managing the risk.

Portfolio Basics and the Need for Diversification

The concept of diversification applies even at single asset class category level too, like Equity. So, if you want to buy some stocks like a Fund Manager, there is a portfolio of stocks which needs to be constructed to ensure that the Equity portfolio is well diversified and we are able to get benefit of different businesses while also mitigating business risk. We will discuss Equity portfolio sometime else. For now, we focus on a wider portfolio consisting of different asset classes.

As you know, there are various asset classes. Typically, investors classify an asset based on its risk category. Risk is directly proportional to returns and hence the returns generated from the asset also depends on amount of risk.

There are different views on definition of risk. For the sake of simplicity, we will define volatility as risk. For example, if an asset price changes by 5-10% every day, it may be called risky because potentially one may make losses in such an asset. If another asset grows at a consistent pace and never falls, it is the least risk or zero risk because potentially there is never a loss. The risk of volatility can also be associated with liquidity or mismatch of demand/supply. When there is huge demand and not enough supply, you would see an asset price rise exponentially. Like, we see in bitcoin for example. Due to volatility, one may call it risky.

To summarize, we want to diversify to have risk adjusted returns which makes the entire portfolio grow consistently while managing risk at individual asset level.

Asset classes and the Risks associated

Lets look at different assets classified broadly based on risk for a diversified portfolio. The risk itself may be caused due to liquidity, credit default, market, business, macros and many other factors.

1. Fixed Rate Assets:

These are fixed income assets where the price appreciation is pre-decided. For example, Bank FDs, Government Bonds, Liquid funds etc. The important thing to understand here is Interest rate. You can understand Interest rate as the fixed price you get for sacrificing your present cash in hand. Money used today is always costlier than used tomorrow. If one wants to borrow it from me, I would demand an interest because I am sacrificing my present. Investors rent money today to gain interest for tomorrow.

Banks give away money as a loan to business as debt and in return, earn interest. As an investor, we deposit money in bank to earn interest. This is normally at a fixed rate based on the dynamics of a country and the central bank. Broadly, the rate is determined by inflation. That explains, why interest rates differ from one country to another.

This is an asset class with almost zero risk. I use the word ‘almost’ because there is always a risk of default in this class. We take sovereign guarantee as a word from God and believe, it will never default. But, we have seen banks default in the past and it can always happen. So, there is a minor risk which you take and that gets added to your return. Banks borrow money from RBI at certain rate and make profit on it. They also borrow from investors and pay them 1-2% higher return. This takes into account inflation and default risk. In Indian context, this returns range from 7-11% depending on the default risk involved.

If you lend it to some unsecured category individual, as some apps like Cred allow, you may get a little higher return. Some Corporate Funds may give you 11-12% return because of the extra risk taken.
Always remember, returns never come without risk. So, if you are getting 1-2% higher, remember the risk you are taking. Never buy the story of risk free return in a fixed income product unless it is a Bank FD or Government bonds. As the famous quote goes, ”In God we trust. All others must bring data.”

2. Gold

This is India’s favorite asset class. Everyone loves the yellow metal and tell stories of high returns it has given. Gold is an asset equivalent to Dollar and you can call it a global currency. Of course, there is a price change due to demand/supply. Normally, this is used by all central Governments to increase foreign reserve and there is always demand/supply mismatch for fixed amount of gold available on earth. Whenever there is a mismatch in demand/supply and there is depreciation of buying power of some currency, the gold price will appreciate. In Indian context, whenever you will see depreciation in value of rupee v/s dollar, gold prices will appreciate. Globally Gold price will appreciate depending on global demand and supply.

Based on the data available by Forbes India for past 25 years, Gold has grown at 11-12% per annum in rupee terms and has been a consistent compounder, helping individuals beat inflation largely and achieve returns better than Fixed income category. There is no liquidity risk in Gold as such since there is enough buying and selling options available. An investor can buy Gold in Physical or digital form via Mutual Funds. Government of India has discontinued fresh selling of Sovereign Gold bond. SGB was a good wealth creator for many in recent years because of it being a combination of asset price appreciation and also regular income. Some amount of Gold in your portfolio is good to keep it shining.

3. Real Estate

Land is another asset available to the world in limited quantity. The price appreciation here depends on demand supply and it is always a local phenomenon. For example, price appreciation in Pune may not be same as Indore, purely in percentage terms. Broadly, this also fits into 10-12% returns to an investor in very long term after taking different expenses into account. The real estate returns are tied to liquidity risk. The biggest risk for an investor is not being able to sell when you want. So, many would classify this as a ‘Use Asset’ for people and not really an investment because you simply buy a house and live there, effectively saving on the growing rental cost.

An individual should consider this as an asset in the diversified portfolio, purely from housing point of view. Getting return etc. will need solid knowledge of property and hence risky. Normal investors should stay away from investing in Real estate as commodity unless there is sufficient knowledge and liquid cash available.

4. Stocks or Equity for a Diversified Portfolio

A misunderstood Asset Class

Equity is a popular asset class with investors. The fact that you can check prices real time makes it an emotionally taxing asset. It requires some amount of financial literacy to make sense of value and price of underlying Assets. Financial world has always kept this as an enigma and the knowledge isn’t much democratized in this space.

Mostly investors just view it from the lens of prices. Business value is always volatile and hence considered risky. An individual should never consider owning stocks directly if they do not understand or do not have the bandwidth to understand.

Fundamentally, one must understand that the underlying asset in a stock price is a Corporate body. So, if you do not know the details of the business, you are taking a risk just based on price and it is not much different from betting in a casino. There are good fund Managers running Mutual Funds to help you own the stocks. An investor with limited bandwidth to understand business must go via Mutual funds and participate in wealth creation journey. This asset class fundamentally can generate much higher return than any other asset because of disproportionate risk involved in the assets.

Business risk and the risk Premium

The biggest risk in Equity is of business. Businesses do go bust, you know. So, the stock prices may come down to zero in such a case. As an investor, if I am taking that kind of risk, the returns expectation also should be higher. So, there is no reason for us to settle at low 10-12% range of returns in long term.

Most of the wealth creation around us is via business only. Either you create a business or own a business created by someone else. The success or failure of the business will depend on macro factors like state of economy, interest rates etc. But, the rewards are always going to be high. Several good Fund Managers have generated 15-20% and higher returns in long term. The key to success here is to think like a business owner and stay invested for a very long time.

Balancing Stocks, Bonds, and Other Assets – How to get a Diversified Portfolio

Now, that we understand the need for diversified portfolio, various asset classes available, lets understand how to diversify.

Debt Funds for Emergency Funds

A smart investor would keep fixed rate investment for emergency funds. Rest of the asset classes if you notice have liquidity risk, i.e. you may not find a buyer when you are in need of money immediately. This is where fixed rate investments are useful if they come with liquidity. PPF/EPF are not liquid assets due to long term lock-in. For emergency funds, one can consider Liquid Funds/FDs/Savings account. Typically, one should have at least 6 months of expense set aside as emergency fund. You may look for Debt-based Mutual Funds/Bank/Post Office or any other mechanism to park your money safely to withdraw on demand.

Liquid funds are not investment. They are just your risk mitigation plan. Do not look at generating high returns there at the cost of locking them up. Anything in the range of 6-8% is good enough. The main purpose here is not to grow money, but to mitigate risk of emergency.

PPF and Government Bonds

Once we have sufficient Emergency Funds, should you own PPF/Government bonds etc.? Once we have sufficient Emergency Funds, we can park money to generate higher risk-adjusted returns. Depending on your risk profile and understanding of asset, one should take risk. Remember, returns are proportionate to risk. So, no risk would also mean no return and hence inability to beat the inflation.

Debt Funds to Manage Risk

Asset allocation is never a straight approach and has diverse views. Broadly for <35 Age category, any money not needed in next 2 years can be exposed to higher risk to generate better returns. For older individuals, nature of job, dependents, short or mid-term goals will decide the risk profile. Allocate funds for near and mid-term goals. But, broadly an investor should look at generating highest possible risk-adjusted returns out of the funds available after we have taken care of Emergency needs and short to mid-term goals.

There is no rule of thumb here and one must get a risk profiling done to understand the level of diversification needed. Sometimes, there are short or medium term goals which need a different asset class. There are many who would suggest Balanced fund or 30:70 ratio for debt to equity ratio. But, it all depends on your risk profile and goal. A Financial Adviser can analyze your financial position in order to create a balanced portfolio of assets.

Adjusting Portfolio Based on Goals

A portfolio needs periodic review depending on market conditions. You will need to adjust the portfolio based on change in immediate goals or change in market conditions. For example, there are years when Equity may not give the expected level of return and optimizing the portfolio by switching some funds to debt or Gold may generate better returns. Multi-Asset Mutual Funds take care of this balancing and is good for peaceful investing technique. Alternatively, an individual can do this exercise. It is not easy to time the markets though and it needs expertise. So, it is advisable to go via Mutual Funds.

Final Thoughts on Diversified Portfolio

A diversified portfolio is key to peaceful investing. An ideal portfolio is where you don’t lose a night’s sleep. Money management should come with peace. Diversification is also a way to achieve peace because it ensures stability irrespective of market conditions. Look at different asset classes and based on your risk profile, allocate sufficient funds in each category. The portfolio needs adjustment based on goals. A Financial Adviser can guide you through the process. It is perfectly fine to manage it on your own if you are equipped with right knowledge. In this internet age, overflow of knowledge can make you confused and you end up making wrong decisions. Hence, consulting an financial expert is always good to ensure you are making a right choice.

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Compounding is a concept which is lost to many because of the shorter time frame of Human mind. We always under estimate long term and over estimate the short term. In my earlier life as a Scrum Master, I saw people under-estimating themselves when giving an estimate for smaller project. If realistically a project takes 3 weeks, the team will say, it can be done in 4 weeks. This would mean a ~30% buffer. They end up finishing it quicker though. On the other hand, we over-estimate ourselves when committing for a longer term project. A realistically 2 years project, will be estimated to 1 year. We don’t have visibility to all the unknowns initially. Hence, we poorly discount the unknown. We are worst at doing long term predictions because we don’t have the ability to logically discount uncertainties from future.

But, we love to predict the long term deliverables. We predict even though we know it will be inaccurate. Deep down, we acknowledge that it will miss the mark by at least 50% margins. But, who likes uncertainty. So, we always start with prediction with low margin of error and as usual the confidence is high.

A case in point is Sydney Opera house construction. It was initially projected to be completed in 4 years with a budget of $7 million. In reality, it took 14 years to finish and cost $102 million—over 14 times the original estimate.

There are many examples where the long term predictions go horribly wrong. The important lesson here is ‘Planning Fallacy’ where we over-estimate our ability to make long term predictions.

Lets stretch this case to compounding in investing. When investing, we are good at predicting 10%-20% upside on a stock. Most of the brokers give you target in that range because that is more believable. If I tell you, a stock is going to be 3 times in 2 years, you will frown at me. Also, the chances are you will book the profits at 20% and call me a clown. While predictors are confident about long term, the prediction buyers are always skeptical. Like we over-estimate ourselves when planning long term projects, we under-estimate the returns when planning investment. Some amount of instant gratification is also playing here. The point here is that we underplay the compounding process like we underplay uncertainty in project execution.

There are very few research analysts who can tell that an investment will compound 3-4 times. They won’t place their bet on long term at the cost of risking their reputation. The short term is always easier to predict. Long term needs patience, delayed gratification and leaving it to chance and luck. Tell me one businessman, who says I will achieve 20% compounding every year for next 10 years. If a business can’t predict, how can an investor do so. Some choose the easier way of focusing on short term wealth. There are very few who can build generational wealth. For that, you have to bet on your winners for the longest term possible enjoying the ‘Joys of Compounding’.

This also explains why real estate compounding works better than equity. This is because we do not make predictions. We just sit through all the cycles and eventually enjoy the ‘Joys of Compounding’. We fail to replicate this in equity because there is a price ticker which rewards prediction higher than uncertainty.

Dealing with long term requires conviction and deeper belief in the projection. The long term has a larger margin of error, but with time on your side, you will achieve compounding. Warren Buffet built most of his wealth from several businesses by combining value investing with patience and delayed gratification.

Experience the joys of compounding once in your life. You will never return to active investing. Instead, you will continue to invest passively.

What is Passive Income and How do we generate it?

So far I was talking about passive investment. Lets look into Passive income now. Passive income is letting your money earn for you while you sleep. This is specially useful during your retirement phase. There are different ways you get there.

1. Real Estate Rental Income

Invest in real estate today and substitute your current cash flow with rental income of future. As you would agree, rents are going to go higher, this is a solid plan in that way. The issue is ability to own multiple properties with large enough rental income. Rental income normally ranges from 3% to 5% of the asset market price. Hence, you need to start early when you can buy it cheap enough. The rental yield doesn’t look good to start with. But, with time as rents go high, it starts looking lucrative. Best case is you don’t have to buy it and happen to own an ancestral property.

2. Dividend Income

Invest in solid dividend paying stocks and live your life through dividend. NIFTY index stocks have roughly 2% dividend yield. This would mean, you have a Equity portfolio of 10 cr. to get an annual income of 20 lac. You will argue, we can buy Coal India. But then, we are talking about a balanced portfolio here. So, first we need to build that size of portfolio to live out of dividend income. Through disciplined passive investing, it is possible. But, it will take patience and time to reach there. That being said, its a volatile asset and market caps can go down.

3. Fixed Interest Income

This is the most stable way of income. Whatever comes, you generate 7%-8% of interest income. A portfolio of roughly 3cr. rupees can help one achieve the same effect as Dividend income discussed earlier. A good systematic withdrawal plan on a debut Mutual Fund can help you achieve this passive income. There are also monthly income scheme available from banks/post office which can do this for you.

Final Thoughts on Compounding and Passive Income

Enjoy the Joys of Compounding by doing Passive investing (mix it with some infrequent activity if you will). Avoid too much activity, its not worth it. Investing and compounding is a slow process. Enjoy the journey, destination will follow with time. One should aim to reach a stage of Passive income to replace the current cash flow in future.

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Wealth Creation is always a subject of experience. Same product may give different results to different people. For example, if we say a Mutual Fund has a CAGR of 15% in last 20 years, it doesn’t mean every investor made that 15%. Depending on the cycle and the time of entry/exit, every investor will have a different outcome. Hence, it is important to take a holistic look and seek professional guidance wherever you don’t have an answer.

While knowledge has become democratized due to internet, this can be a problem many times. Knowing and having the ability to create filtered knowledge is important. If you look up ‘You tube’ or any social media platform, there are 100s of videos, explaining Mutual funds. But, they cannot help you decide which one to invest in. Whether you should invest all in Mutual Funds or diversify? What is the ideal level of diversification? Should you buy gold or real estate? These questions appear simplistic. However, their solution is going to be complex because every individual will have a unique risk profile and unique goals.

Which category of individuals should reach out for Financial Planning or Advice?

There are different kinds of individuals depending on their income and wealth status and risk management profile. Broadly, they can be put into 3 categories:

1. Ultra Wealthy individuals:

Rich HNIs with sufficient money to take care of their present and also future of few generations. Do they need Financial Planning? Of course not. Their focus would be mainly on Investment Planning and multiplication of wealth is their prime focus.

2. Low-income Group:

There are people with income just enough to meet their expenses or literally in the hand to mouth category. Can Financial Planning help them? Certainly not. They should first focus on their income to meet their present cash flow. Once their present is secured, they can plan for future. These are the people working hard to take care of their physiological needs and lowest on Maslow’s hierarchy of Needs. Hence, Financial Planning is not really for them.

3. Mid-income group:

The mid-income category of individuals have surplus cash flow. They desire to utilize their resources effectively to reach a stage when today’s surplus can become tomorrow’s cash flow. This category of individuals can really benefit from right Financial Planning advise. They are generally resourceful individuals as far as their present cash flow is concerned. They are on the edge. They can either rise to 1st or fall into the 2nd category, depending on how they plan it from here. They are either the salaried middle class or upper middle class. They desire to break the chain and move up the ladder. A little professional help can help them achieve their milestones better and with confidence.

Transform Your Financial Planning With Professional Guidance

Financial Planning has some core steps involved before we can arrive at a concrete plan:

1. Understanding Cash Flow today.
2. Understanding the net worth or balance sheet.
3. Taking near term and emergency funds into account. Just talking about it can bring up lot of discipline with Cash Flow Management.
4. Understanding long term goals
5. Preparing for the days when cash flow is gone, i.e. Retirement.

A discussion on these details can be an eye opener for many. There are minor behavioral flaws due to family or neighborhood induced reasons. This can be corrected when you begin these discussions with an experienced Financial Planner. This discussion cannot be about get rich quickly. It is about making maximum out of the limited resources available. The solution can vary for different individuals and situations. It can involve “finding the right job or income.” It may include “cutting down on discretionary expenses.” Another potential solution is “finding the best instrument for investment.” There can be various other solutions. It all depends on the uniqueness of ones situation. This is not just about dealing with money, but also discussing behavior and psychology.

Conclusion:

Financial Planning is a well known concept in many countries and taken very seriously by individuals. However, in Indian context, it is similar to how we avoid going to a doctor and instead depend on self-medication. We try to solve problems based on advice from people around or source information from social Media. We may end up getting into mediocre or risky products without completely understanding how they are going to help. Hence, it is worth reaching out for professional help. This can help get things in your hand and be better prepared for the uncertain future. Are you prepared to sign up with a Financial Advisor? Feel free to reach out Fleek Finance Team to help us plan your better future.

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Investing for Beginners: A Step-by-Step Guide

As you see, humans are not designed for delaying the gratification. Most would want to have it today and immediately and sacrifice is a remote concept. If you do not sacrifice some part of your today to fund your tomorrow, you may have to continue to work forever to fund your lifestyle. The system is designed for you to work forever to earn your living.

A smart individual would learn delayed gratification to fund their future. Once you understand this concept well, you are ready to start your investing journey.

If this is difficult to practice, here are some basics you can try:

1. Force savings

There are disciplined approaches like SIP in Mutual Funds which are known wealth creators. Once you start earning, allocate some part of it for investment irrespective of your expense. So, Income-Savings= Expense instead of Income-Expense = Savings. This is a simple, yet powerful strategy which can help you increase your savings.

2. Avoid Complicating

Most individuals spend too much time thinking where to invest. The financial world is complicated by design to keep investors confused. It is your job to de-clutter it and think straight.

3. Do not over-diversify

Some are confused and not sure about any investment and end up over-diversifying. You don’t need to pick 10 different mutual funds. Just pick 1-3 good funds and more or less they will generate similar returns.

4. Track your expenses

Sometimes, people don’t know how much they are spending. You should have clarity of your income, expenses and your savings goal. One of the best investment strategies is to keep it documented. There are software available to help you with it.

5. Think before making discretionary expenses

Yes, you have a solid cash flow today and you can afford it. But, do you buy just because you can afford it? Think, if you are buying something because of a psychological pressure? Many times, it is FOMO or peer pressure which make us get into discretionary expenses. Avoid using your future cash flow to fund your present by taking a loan for any discretionary expense. Debt is a very bad trap and one should avoid getting into it at all cost.

6. Be open about money problems in family

Never hide your financial status with each other if you are married. As a family, if you brain storm investing, you may find a better approach towards it. Never hide your status with your spouse. If you are not doing well, call it out and reach out to each other for support with managing expenses. Many times, people do not tell the truth to their spouse and they don’t have a clarity on Financial challenges. In the end, you suffer as a family.

Why Start Investing Early

Warren Buffet is a great investor and has made lots of money in his life. Do you know he started investing as a teenager? He loved the art and mastered it. However, he managed to get big only in his early 50s. He is this big because he managed to live long. Most of us may not out-live him or become as great as him because of our limitation in terms of tenure of spending. If we do not start early, we are missing on the compounding factor.

To understand compounding, simply understand the ‘Rule of 72’. Money doubles every (72/rate of return) number of years. So, if you earn at 8% rate, you will double your money in 9 years and at 9%, it will be 8 years and so on. For you to start compounding your wealth, you should have a good base which you can compound. If you do not start early, chances are your wealth creation journey will get delayed.

So, you should start early to enjoy the compounding journey.

Low-Risk Strategies

One should always be prepared for emergency. Once you start your investing journey, you will realize that returns are proportional to risk taken. There are some emergency funds you should always have before you can move to risky strategies. This emergency fund should be invested in Low-Risk assets.

Some Low-Risk assets include Fixed deposits, Government Bonds, Liquid funds etc. there are various debt based Mutual Funds which are relatively low risk and useful. The low risk strategy should be deployed when you are trying to do a goal-based investment.

Let’s say, you want to enroll yourself for a course for which you will need some fund in 2 years. You cannot fund this via an Equity Mutual fund because you don’t know where the markets will be when you need the money in 2 years time. Hence, low-risk strategies are needed in such situation. Simply, look for an FD or a Debt based mutual fund which will ensure liquidity because you can sell it any time you like and also give you reasonable return with minimized risk.

So, depending on your goal, you will need Low-risk strategies also along with investment in high risk assets.

Building a Balanced Portfolio

This is not an easy game and you should talk to a Financial Adviser to get your portfolio reviewed. An overall assessment of your assets/liabilities and cash flow will help a Financial Adviser guide you in making right and balanced approach towards investment.

Investment strategies: Common Beginner Mistakes

1. Over-thinking. Investing is easy and simple. The financial media and influencers are responsible in making you think it is complex. A simple Mutual Fund which gives you 10-12% returns is enough. Just stay invested and do not think much about loss. Loss aversion is a key human trait which makes us risk-averse and eternally confused individuals. There is no risk in this world that is not worth taking. Just do it, chances are you will succeed. If you are cluttered, consult a Financial Adviser like you go to a doctor when you are suffering.

2. Insurance trap. Understand different insurance products and see what you need. A 25 year old with no dependents, does not need a term insurance. But, they do need a health insurance. Similarly, a 40 year old will need to make sure they have sufficient insurance for the entire family. These are minor mistakes which can create bigger problems for future while choosing your investment strategies. Also, do not buy endowment plans. Never mix insurance with investment. Keep them separate and simple.

3. Investing in Equity to meet short term goals: Equity is never a short term asset. Equity assets should ideally be never touch kind of money. But, people juggle with it to meet short term goals. For short term, look for low-risk debt funds.

4. Investing in stocks based on tips from Friends/Relatives: This is wastage of time and money. Unless you are seriously looking to understand stocks and investment, do not waste your time in this. Buy stocks via Mutual Funds. This will give you peace of mind along with wealth creation.

5. Delaying investing and increasing your expenses: Since, as a beginner the amount is low, you tend to think if it is of any value. All big things start small. Never stop small savings. Remember, you are delaying compounding if you delay investing. Make yourself a promise to increase your savings with every rise in salary. Generally, people focus on meeting short term goals and delay starting the investment plan. This is a dangerous trap and should be avoided at all costs.

Unless you realize the importance of investment in your life, you will never appreciate the strategies enough. So, it is crucial to know that the cash flow of today is sufficient to fund your today’s needs. But, tomorrow when it stops or a big expense comes for which your salary is not enough, you need to plan in advance. You need proper investment strategies which are based on data combined with research to achieve your goals, be it short-term or long-term.

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We learned about moonlighting, where companies complained about employees holding multiple jobs simultaneously. A notable incident was when Wipro fired 300 employees for moonlighting, bringing the issue to the forefront, with many other companies following suit.

Then came the concept of quiet quitting, where employees disengaged from their roles without formally resigning, choosing to hang around until they were eventually let go. While quiet firing—where employers subtly force employees out—has long existed, quiet quitting was a newer trend.

We also encountered the term The Great Resignation. Many employees, prioritizing life over work, began resigning in pursuit of better career opportunities or better work-life balance. This shift caused quite a stir in HR circles, as the cost of hiring new talent is substantial.

COVID also brought a shift in perspective. People began to value life and sought to balance it with work. Businesses, in turn, realized that remote work was a feasible option and that employees didn’t always need to endure the daily grind of commuting to the office. The transactional nature of the employee-employer relationship became more evident. For HR professionals, maintaining trust and engagement in this new landscape became a significant challenge. Remote work made employee engagement even harder, leading to a gradual push toward a Return to Office (RTO). Employees who embraced the freedom of working from home may find this transition challenging, but many will need to adapt to the new realities. In response, employers are now striving to provide greater work-life balance than they did before the pandemic.

From an employer’s perspective, the relationship with employees has always been somewhat transactional. However, it’s the employees who, for the first time, truly embraced the concept of work-life balance, realizing that their careers didn’t need to dominate their lives. The pandemic gave people a new outlook, particularly younger professionals who now tend to be more demanding than their seniors. The older generation often found themselves more emotionally and financially dependent on their employers, making them less likely to push back.

All about Financial Independence, Retire Early (FIRE)

With this backdrop, let’s delve into the latest buzzword to emerge post-COVID: FIRE, which stands for “Financial Independence, Retire Early.” This concept embodies two main ideas: 1) Achieving Financial Independence and 2) Retiring early.

Let’s explore these ideas further.

Financial Independence:

The term independence is inherently tied to its opposite—dependence. We can only understand independence in the context of financial dependence. Early in your career, the primary goal is to earn enough to meet your financial needs. Financial independence becomes meaningful when you realize the freedom it offers from depending on a steady paycheck to cover basic expenses. The definition of basic expenses gets subjective from here on. As you grow in life, you tend to expand the basic expense definition. Many new things get added to this as you grow. This can be easily explained using Maslow’s hierarchy of needs.

Physiological needs are at the base of the pyramid of needs like food and shelter. Fulfilling the remaining needs beyond this level leads to greater happiness. While a house may be considered under Safety and Security, some may argue it falls under physiological needs. The focus here is on the fact that individuals strive to meet most of these needs during their lifetime, with only a few reaching ‘Self Actualization’.

We should learn to make a distinction between needs and desires. Once physiological needs are satisfied, the emphasis shifts to psychological well-being.

It is important to recognize that you are a product of your surroundings, regardless of how you perceive yourself and what you think, defines you. Once you understand this, it will give you a better understanding of root of your desires. For example, if you have friends who love to travel, chances are you will desire to travel. If your friends/family enjoy food, chances are you will be a foodie. The desires are really an outcome of your surroundings and fundamentally there is nothing that ‘Defines’ you. This is difficult to understand because you have always believed that there are certain aspects that define you and you are unwilling to change what defines you. Pay close attention to your habits, likes, desires and you will realize this is all an outcome of your surroundings. If you change your surroundings, your desires will change too.

This may sound defeatist to many, but the reality is that in one life time nobody can fulfil all their desires because there are no limit to desires, which are shaped by people around you. Once you stop internalizing the external factors, you succeed in defining boundaries to your desires. Unless this is done, there will never be ‘Financial Independence’.

Achieving financial independence occurs when our current assets can cover our future expenses to meet our needs. Many individuals lose sight of their initial motivation for entering the workforce, which is typically driven by financial dependence. People work to generate a steady income to meet their needs. As these needs are fulfilled, attention turns to fulfilling wants, which is optional. By prioritizing financial independence above everything else, one can focus on building assets to secure future financial stability. This approach helps avoid perpetual reliance on a job and ensures financial independence.

To summarize, Financial Independence is a state where an individual has built assets which can take care of their future cash flow to fulfil their needs. Once this state is achieved, you are not working for money any more. This is when you may get the ability to start your journey to the final stage in Maslow’s hierarchy of needs, i.e. ‘Self Actualization’.

Retire Early:

Lets look at the next stage of being Financially Independent. Once you have reached the stage when you can call yourself ‘Financially Independent’, you can choose to retire early. The retirement does not mean you stop working. You can continue to work, but you don’t work for money any more. Imagine the independence in your thoughts, once you know you do not have to work for money alone.

Many confuse retire early with getting out of work early. Retirement doesn’t mean not working, all it means is not having to work for money alone. Financial Independence early in your life will give back the time which you were renting so far to get the cash flow. You can focus on getting back your time to do things which are more meaningful to you.

I hear from people, what do I do if not work? This is a side effect of Industrial Revolution. It has converted Humans into efficient robots and made them believe that their only purpose in this world is to work for money. In fact, people do not appreciate the power of ‘Not doing anything’ enough. The thought of ‘doing nothing’ scares many because they never looked at it this way. As I said earlier, your desires are shaped by your surroundings, so is your need to do something. A majority has agreed to normalize ‘doing’ and their definition of ‘doing’ is to do something for Money.

Financial independence opens up a world of possibilities beyond the traditional notion of retirement. It allows individuals to redefine their relationship with work and money, emphasizing personal fulfillment and meaningful pursuits. By breaking free from the cycle of working solely for income, one can explore new passions, engage in creative endeavors, contribute to causes they are passionate about, or simply enjoy the freedom of time. The concept of early retirement, in this context, is not about idleness or escaping responsibility. Instead, it represents a shift towards a more purposeful and intentional way of living. It challenges the societal norms that equate productivity with worth and encourages individuals to prioritize their well-being and happiness above all else. Embracing the idea of ‘not doing anything’ as a valuable and enriching experience can lead to a deeper appreciation for the moments of stillness, reflection, and self-discovery that are often overlooked in a society driven by constant activity and productivity. Ultimately, achieving financial independence early in life is not just about reaching a financial milestone; it is about reclaiming your time and autonomy to live a life that aligns with your values and aspirations. It offers the opportunity to break free from the constraints of a money-driven existence and to pursue a more fulfilling and balanced lifestyle that prioritizes personal growth, relationships, and overall well-being.

Conclusion

After joining the workforce due to financial dependence, one must aspire to reach Financial Independence by creating assets which can take care of future cash flows. Once Financial Independence is attained (not an easy job), try to identify something that gives you more meaning and helps you utilize your time more efficiently to fulfil your dreams. It could be travel, reading, learning, anything that you would have wanted to do with your time, go ahead and do that. Work very hard to achieve Financial Independence early in life so that you can enjoy it in your prime instead of letting the external factors decide when you can get back your time. What is stopping you from taking back the control of your life?

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The bottom line is, everyone is looking for a place to invest and grow their money quickly. Especially with raging bull markets, there is a sense of FOMO too. The question then is, which mutual fund to invest in?

Mutual Fund Fundamentals

Definition: It is a fund or a pool of money collected from investors and managed by a Fund Manager employed by a Mutual Fund House such as ICICI/HDFC/Kotak/Parag Parikh, among others.

Minimum investment amount: Investors can start with as little as Rs. 500.

Fund Manager’s role and objective of fund: The fund manager is responsible for identifying investment opportunities and making investments. Each mutual fund has an investment objective based on the investor’s return expectations and risk tolerance. Depending on the objective or fund, the fund manager invests the money in various types of assets such as equity, gold, debt, etc.

Diversification and market cap categorization of funds:

Keep in mind that a mutual fund is already a diversified investment vehicle on its own. Typically, a fund manager will have 30-50 stocks in their equity portfolio. A Flexi Cap fund for example, includes stocks from large, mid, and small cap categories. For beginners, Cap her stands for Market capitalization which is the market value of a business, for example if you want to own Reliance, you will pay Rs. 20 lac crore today and that is the market cap of Reliance. Further, large cap companies are the top 100 in terms of market cap or valuation, mid cap companies are ranked 101-250, and small cap companies fall below the 250 mark.

On recent small and mid cap returns:

Analyze the monthly timeframe chart to compare the Sensex, Mid Cap, and Small cap indices in the exhibit below. It is evident that all three indices showed similar returns during the initial 6 years on the 10-year chart. However, starting from 2020, there has been a significant breakout in the Mid Cap and Small cap indices compared to the Sensex, resulting in higher percentage returns. This partially explains the situation. Generally, all funds aim to surpass these benchmark indices. For novices, an index comprises stocks chosen by BSE in this scenario. The sudden surge lacks a specific rationale. Could it be due to a surplus of funds chasing limited assets? In summary, based on the past four years, small and mid cap funds have significantly outperformed large corporations in terms of returns.

Risks associated with small cap funds and equity in general:

If you define risk as potential capital loss, it’s important to note that the risk only materializes if you sell the asset at a lower price. If you have a long-term investment approach and avoid selling in times of distress, the risk is limited. Small cap and mid-cap funds may not offer similar returns in the next 4-5 years, but over a 10-year period, they could potentially provide 10-15% CAGR returns. Therefore, the key factor is the duration of your investment in the market. Risk perception varies based on individual definitions. If you consider risk in the short term, such as the next 6 months, then it is indeed a risk. In general, it is advisable not to invest funds that may be needed in the next 6 months to 1 year in any equity asset. Fund Managers utilize diversification as a strategy to reduce risk.

Picking the right Mutual Fund

Having gained an understanding of the basics of Mutual Funds, let’s explore the process of selecting a mutual fund from a wide array of choices. It is essential for investors to be aware of where their funds are being invested. Typically, investors tend to base their decision on the previous year’s returns or the fund’s rating. However, this approach should be avoided as past performance does not guarantee future results. While the market may have experienced exceptional returns in 2023-2024, this trend cannot be assumed to continue in the future. It is more probable that returns will be more moderate in the upcoming year. Over the long term, equities are expected to provide an average return of 12-15%. Therefore, assessing a fund manager based on their performance over the last five years may still be a valuable criterion.

Utilizing a mutual fund is an effective strategy for establishing an initial capital base before transitioning into wealth creation through the multiplication of that capital. Mutual funds offer disciplined investment options such as SIP/STP/SWP, which facilitate savings. While it is not advisable to go overboard in fund selection, investors seeking returns superior to those of an index fund should conduct thorough research to identify a suitable fund.

Therefore, investors should consider maintaining a portfolio consisting of a maximum of 3-4 funds diversified across equity and debt, including a mix of large, mid, and small-cap equities. Opting for a flexi cap or equity-oriented hybrid fund can generally fulfill this requirement. Alternatively, investors may choose to include a large-cap, mid-cap, and small-cap fund, along with some allocation to a debt fund for risk diversification. Analyzing the fund’s portfolio is crucial in selecting the most suitable option.

6 Key Points to Consider when selecting the right Mutual Fund

1. An effectively diversified equity portfolio strikes a balance between diversification and concentration. A fund manager with a moderate number of high-conviction bets, making up around 7-8% of the portfolio and not exceeding 30 stocks, showcases expertise and commitment compared to an inefficient fund manager who holds hundreds of stocks in the portfolio.
2. Emphasize long-term returns over short-term performance indicators such as one-year returns.
3. Most funds conduct quarterly reviews of their portfolios. Take advantage of these opportunities to comprehend the portfolio and the rationale behind a fund manager’s investment choices. While this may be challenging for some investors, dedicating time to this practice can enhance your understanding of the stock market in general.
4. Sectoral funds such as digital/infrastructure funds are not suitable for ordinary investors, and it is advisable to steer clear of them unless you possess expertise in the specific sector. Often, fund managers introduce sectoral funds when a particular sector is performing well, like the recent launch of PSU funds due to the sector’s momentum. Ordinary investors are at risk of getting caught up in such trends, making sector funds unsuitable for them. This is a common mistake many investors make by investing in sector funds.
5. Do not overly fixate on the expense ratio, as a competent fund manager may come at a higher cost, and sometimes it is acceptable to incur an additional 0.5-1% for better returns. If the fund is managed effectively, paying a slightly higher fee is justifiable.
6. Opt for a direct fund over a regular fund to avoid paying a commission to a Mutual Fund distributor, provided you have a good understanding of the investment process. If you require assistance in fund selection, it may be beneficial to opt for a regular fund through a mutual fund distributor/advisor.

Conclusion

Pick the right Mutual Fund by thoroughly examining its portfolio, investment strategy, and other relevant factors. While diversification is important, avoid excessive diversification. Recognize the risks associated with equity investments, but do not allow fear to dominate your decision-making. To achieve returns that outpace inflation, accepting some level of risk is essential. Once you have a solid grasp of the fundamentals, consider taking calculated risks. Invest only funds that are not designated for emergencies in equity-based schemes. Lastly, exercise patience and stick to your plan, as long-term investment is your best defense against risk.

The post How To Pick the Right Mutual Fund (Kaun sa Mutual Fund sahi hai) appeared first on Fleek Finance.

It’s a poignant reminder of how life and science can be intertwined, sometimes with unforeseen consequences.

How Industrial Revolution Shaped Our Corporate DNA

So, why am I talking about Mendel’s Pea Pods genetic legacy or rather genes today? Genes are the carriers of whatever is left in you from your ancestors. The Industrial Revolution led the world to adopt European ways of life, including the education system and job culture we see today—a legacy of our imperial past. This culture has made us great followers, with the Industrial Revolution teaching us to put our heads down, follow the rules, and live the life planned for us. This mindset is so ingrained that we hardly acknowledge the possibility of an alternative life where we buy back our time. An alternate world where we decide what to do with our time instead of renting it out for living. Could it be in our genes holding us back?

If you look at the corporate food chain, the employee is at the bottom, while investors are at the top. Employees are kept so busy throughout their lives that they often fall in love with this system, rarely dreaming of reaching the top of the food chain. It’s uncommon for a salaried individual to reach the top in one lifetime. But don’t genes evolve? We’re witnessing a wave of change in the newer generation of salaried professionals who are challenging the status quo. Companies like Byju’s, willing to fail, and Zomato, writing new success stories, exemplify this shift. However, evolving genetically within a single lifetime requires a significant push. As a society, we need to support those who are on this evolutionary path! We are risk averse by nature and that needs to change.

For every dream that came true, there was someone who said with conviction, it was possible. Genetic Legacy is all about taking risks because the biggest risk of life is not taking a risk!!

Happy evolution!!

The post The Genetic Legacy: From Mendel’s Pea Pods to Modern Corporate Evolution appeared first on Fleek Finance.

Real Estate vs. Stock Market: Which to Choose?

The sheer exposure of real estate in the human mind space makes it the go-to investment. However, my job is to present logic over unfounded opinions.

How Asset Prices Appreciate:

To understand the difference between real estate and equity, let’s first understand how asset prices appreciate. The basic demand-supply curve tells us that higher demand for an asset with limited supply leads to price appreciation.

Before we delve into details, let’s understand how we represent returns on an asset mathematically.

Returns = interest rate + inflation premium+ liquidity premium+ risk premium+ maturity premium

For example, FD and debt instruments have inflation premium along with RBI determined interest rate. As we will see further, real estate comes with liquidity premium, but limited risk premium.

Understanding Real Estate Investment: A Local Market

Real estate is a a local market. The demand is limited to local buyers or a few investors with stakes in the area. The price depends on local factors, including the extent of urbanization, development, and buyer affordability.

Mathematically, real estate returns can be described as:

Returns = interest rate + inflation premium + liquidity premium

Real estate typically has an inflation-adjusted return and a liquidity premium. The liquidity premium is derived from ease of sale. How easily you are able to buy or sell an asset will define liquidity. The biggest risk in Real estate is the risk of not being able to sell at a desired price, when you want to. This leads to price appreciation due to the liquidity risk. The real estate however, lacks a significant risk premium since it is generally less volatile. Risk premium comes with business risk which is more applicable in Stock Market.

Key Benefits of Stock Market Investment

Equity represents an investment in a business, inherently tied to the risks and uncertainties of that business. Unlike real estate, equity comes with a risk premium due to the volatility and unpredictability of business earnings. Additionally, the liquidity premium in equity is sometimes visible in markets where demand outpaces supply. Liquidity of assets determine the returns. Highly illiquid stocks tend to give better returns similar to high returns sometimes in real estate when the demand is on rise whereas inventory is limited.

Mathematically, equity returns can be described as:

Equity returns = interest rate + inflation premium + liquidity premium + risk premium

As you see, the returns in Equity has an element of liquidity and risk premium. This tends to give better returns most of the times, specially when the business risk is high. The risk premium is what gives equity an edge over other asset classes.

Risk Factors : Real Estate vs. Equity

Understanding the liquidity premium is crucial. In real estate, liquidity premium can turn negative if there’s no buyer for the asset you hold. There are many such stories!! In equity, small-cap stocks often give better returns due to their lower market cap and hence faster reaction to demand changes. Liquidity premium needs to be used to your advantage. It can become a risk if you have to do a distress sell.

Challenges for Equity Markets

Despite the logical advantages of equity, real estate often wins in opinion polls due to several challenges in equity markets:

Infrastructure: The ease of buying and selling in equity is a big disadvantage for wealth creation, leading to short-term holdings. There are limited stories of people holding Asian Paints or HDFC bank for decades, but lots of stories where your grand father bought a land and you are reaping it’s benefits!! Very few tell u that grand father didn’t sell because he couldn’t.

Leverage: Real estate benefits from loans, allowing for larger investments with less cash, unlike equity, which is mostly cash-based. With 10 lac of limited capital, you can dream of buying a 1 crore house with a leverage of 20-30 years at low interest rates!! Equity has no such option unless we want to bring intra day and derivatives in the argument.

Financial Literacy: Many people are unfamiliar with capital markets, reducing demand for equity investments. We have tough time explaining people on treating equity as an asset. It’s seen as a ticket to amusement park where you can buy low and sell high!! Because of this simplistic explanation, people don’t pay attention to details and avoid learning it too. Real estate is relatively easier to learn and the strong belief that it never goes down makes it more popular.

Conclusion: Real Estate vs. Equity

Equity has the potential for significant wealth generation if treated as a serious investment rather than a short-term gamble. Real estate may lag behind equity in returns, but it remains a popular choice due to familiarity and accessibility. However, when it comes to Real Estate vs. Equity and long-term wealth creation, equity holds the edge. This blog is not to argue against buying your dream house. Home obviously is not an investment in real terms, but only an emotional one. Having a house of your own is always a blessing and consider buying one if it’s within your reach.

Happy investing!!

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Can Mutual Funds Generate Wealth – The Importance of Building a Strong Financial Base

Wealth creation is often understood as the process of multiplying funds. For instance, at a 12% post-tax return, money doubles in 6 years and quadruples in 12 years. If you have ₹1 crore at 40, you could potentially have ₹4 crore by 52, securing your retirement. But what if you don’t have ₹1 crore at 40?

The Challenge of Lower Initial Savings

If your liquid net worth is ₹50 lakh at 40, you’d need 18% post-tax returns to reach ₹3 crore by 52—a tall order, but possible. The key is having a strong base amount. Without a substantial base at 40, salaried individuals may struggle with wealth creation. Business professionals, however, are often already on their journey to multiplying wealth.

The Risks and Realities for Salaried Individuals

At 40, many salaried individuals face risks due to technological shifts and a slowing economy. With higher expenses, such as children’s education and aging parents or enhanced lifestyles, saving rates may drop to 10-20% of income, despite increased salaries. This highlights the importance of discipline and the ability to save effectively at a younger age.

Focus on Saving, Not Just Multiplying

For young professionals, the focus should be on saving—adding to your funds—rather than solely on multiplying them. Chasing higher returns on small amounts can lead to unnecessary risks. Instead, reducing expenses and focusing on building a solid base is crucial. It’s about making smart choices, like giving up that iphone and opting for a more affordable phone, to manage risk and strengthen your financial foundation. Delaying gratification is a less understood virtue.

Note: This doesn’t mean, you should stop living. Of course, living life to the full is as important. Do pay attention to saving too. Ignoring saving for future is a bad plan. If you have a high salary and you can afford to buy an iPhone or travel abroad while ensuring a decent 30% savings, why not? Explore cheap thrills like making the best from credit cards points also!!

Where Do Mutual Funds Fit In?

Since you have read so far, we have established the need to have a strong base for wealth creation journey to begin!! For creating a strong base, mutual funds are an ideal investment for young investors. When returns aren’t as critical, mutual funds offer a safer and more reliable option than risky assets like Futures and Options (FnO). Doubling a small amount in FnO doesn’t compare to steady returns from mutual funds on a larger sum. If you’re seeking the thrill of high-risk investments, this advice might not be for you. However, for most young investors, focusing on stable growth is key. So, next time your friend tells you he or she doubled their money in FnO, ask them the amount they doubled. Nobody bets their entire wealth in Casino unless you have a maverick friend!! At young age, you should be fully invested in equity based mutual funds with no urge for that ‘Instant Gratification’.

Conclusion: Are You Ready to Build Your Strong Financial Base?

Mutual funds sahi hai for young investors looking to build a strong financial base. But are you ready to commit to the discipline and patience required to secure your financial future?

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