Are you making these common mistakes? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are you making these common mistakes? 

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In this issue:
» Bank agents want a bigger portion of your money
» Gold woes deepen as large institutions sell
» World economy stuck in a rut
» Bitcoin - the bubble has burst
» and more....

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Saving should come as a habit to all of us. Savings help us get money for the contingencies and for the future. Money for healthcare! Money for retirement! Child education! The needs for regular savings are many. But to be able to meet these needs you have to formulate financial goals. This will help in making wise financial decisions. After all, if you don't know where you are going, then how will you get there? The underlying thing is to be prepared with the necessary cash as and when the need arises. But there are a few common mistakes that people make when it comes to setting financial goals.

Economic Times has tried to highlight these common mistakes. The biggest mistake that people make is not understanding the goals and prioritizing them. Though all of us know our basic needs, we still tend to overlook things that maybe required in the future. To get this right, it is necessary to be realistic when it comes to setting goals. In addition to this it is necessary to prioritize goals. Only then can you properly decide how much money you will need and when. This would also help you in your asset allocation. For if the need is coming up soon, then you cannot possibly invest in a very long term investment plan.

Understanding your cash flows is important too. This means you need to clearly understand your income sources as well as your expense. Just taking the fixed expenses into account will not be the right thing to do. Because it is the smaller but the random expenses which eat up your savings. And finally it is important to remember inflation when it comes to formulating financial goals. Inflation not just eats into your current income but will also impact your ticket amount for expenses in the future. So lets say something costs Rs 100 today. And the inflation rate is 10%. So the same thing is expected to cost Rs 110 one year later just because of inflation. So if you have budgeted Rs 100, then you will find yourself in need for the extra amount.

In our opinion there is one more mistake that people make when it comes to setting financial goals. And that is a mistake that hurts them the most. This is ignoring the power of compounding. To take the advantage of compounding, people have to increase the number of years that they save. This means that the sooner you start saving, the bigger the size of your savings at the time when your goals mature. The simple rule is more the number of years in compounding, more the size of savings at the end. So go ahead and build your financial goals. But keep in mind these mistakes and avoid making them. Once your goals are set, take time out and review them periodically. Only then will you be able to meet your goals successfully.

What in your opinion are the biggest mistakes that people make in setting financial goals? Please share your comments or post them on our Facebook page / Google+ page

01:15  Chart of the day
Gold prices have been correcting for a while now. This has led many to question the yellow metal's strength as an investment. But there is one investor who appears to be confident about gold. The investor is none other than our country, India. As per the World Gold Council, gold as a percentage of India's total reserves has been increasing. After dipping to just 3.4% in 1QCY05, gold formed nearly 9.9% of total reserves at the end of December 2012 (4QCY12) . India has been increasing its gold reserves. The essential thing is that gold is still a safe haven. It provides a natural hedge against inflation. With the global macroeconomic headwinds still prevailing, gold should emerge as a winner in the long term. Therefore investors would do well to hold gold as a small percentage of their portfolios.

Source: World Gold Council

Until 2012, gold prices had been rising continuously for 12 years. But 2013 hasn't been so good for the yellow metal. Gold prices corrected quite sharply recently. In fact, prices are down 20% since the all-time high recorded in June 2011. A price decline of 20% is generally seen as an indicator of a bear market. And suddenly investors across the globe are worried about the safety of this 'safe haven'. Many are already calling it the end of the gold bull cycle.

Some see the signs of recovery in the US economy as a hint that the US Fed will start withdrawing its money printing program. More recently, it is being feared that the central bank of crisis-struck Cyprus might sell off about 10 tonnes of its gold reserves in a bid to ease its financial troubles. The quantity with Cyprus is small. But what if other indebted Eurozone countries follow suit?

One cannot deny that gold might witness some bearish pressure in the short to medium term. But have the long term fundamentals of gold changed? We don't think so. We still believe paper currencies are at significant risk from reckless policy makers and central bankers.

Moreover, gold should be seen more as an insurance product than an investment. For thousands of years, Indians have known this precious metal to be a keeper of value. And more so in times of crises! We don't see why this will change now.

To avert the problem of excessive fixed costs, banks have been appointing third party agents to reach out to customers. Known as business correspondents (BCs), these agents work in far-flung areas where the bank does not have a presence. As per Reserve Bank of India (RBI) guidelines, they can be micro finance institutions, NGOs or even cooperative trusts. All they need to have is a point of sale (PoS) machine and minimum prescribed educational qualification. These agents do not just help customers open deposit accounts and withdraw cash. Being critical to the banking sector's financial inclusion objective, BCs are also allowed to sell other financial products. The implementation of the government's cash subsidy transfer scheme in fact hinges completely on BCs.

But it seems the BCs are losing no time in ensuring that they can milk the banks by colluding with the customers. At present banks pay up to 0.75% of the transaction value to the BC for facilitating a transaction. A deposit transaction earns a commission of 0.25%, while a withdrawal fetches 0.5%. Hence, higher the number of transactions, more lucrative is it for the BC. As per an article in Mint, BCs have now started sharing a part of commission with the account holders to encourage them into frivolous transactions. Banks fear that the menace will only increase with the direct cash transfer scheme. Some banks like State Bank of India have therefore capped the amount of commission per transaction. No doubt, the BCs are inevitable for banks to have last mile coverage. However, the RBI needs to look into stricter regulations for them.

The world economy is stuck in a low growth trend, unable to sustain a decent recovery and even threatening to slow sharply. After the financial crisis, the global economy recovered. But it never took off. The last three years of slow, steady growth, reduce the risk of another double dip recession. The US economy is growing. Manufacturing is stronger, vehicle sales are higher and housing market is showing a stronger pulse. Yet almost every push on the accelerator has been countered by a sudden brake. Thus keeping the recovery stuck at a frustrating half-speed pace. This is because the European recession has deepened and growth in China is slowing, hobbling exports and sapping business confidence. Hence the vicious cycle in which one country grows but is bogged down by a slowdown in other country continues. The growth potential of the global economy is substantially lower than before under the best circumstances and, if the problems are not solved, it could go even lower.

Looks like the supporters of fiat money have never had it so good. Not only their bete-noirs like gold and silver tumbling, a virtual currency that went around by the name of Bitcoins is also being taken to the cleaners. CNN reports how the price of Bitcoins has plunged more than 70% in the past two days. In fact such was the panic amongst holders of Bitcoins that trade engines froze up and trade had to be halted.

This enormous volatility is certainly not a good sign for a currency that had claimed to be a viable alternative to the Dollars and Euros of the world. So, does this mark the end of road for Bitcoins? Fortunately, it doesn't still look like it. There still seem to be people who believe in it. Thus, all it needs is riddance from speculators who are trying to speculate in it rather than use it as a means of exchange. However, over the long term, it is likely to run into a whole maze of Government regulations before it has any chance of truly establishing itself.

In the meanwhile after opening the day on a negative note, Indian equity markets are now trading in the positive zone. At the time of writing, the Sensex was up by 144 points (0.8%). Barring Malaysia, the other major Asian markets have closed the day in the red with Japan and Hong Kong leading the losses in the region.

04:55  Today's investing mantra

"Your life must focus on the maximization of objectivity." - Charlie Munger
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    1 Responses to "Are you making these common mistakes?"

    vikas sivaraman

    Apr 15, 2013

    I for one believe one should allocate funds towards good, well researched investments on a regular basis - but without setting goals. Goals force achievement. It's human nature to set goals higher than really necessary. All of which leads to unnecessary stress - or worse the need of a financial consultant - a breed that is ever gaining notoriety by the day. So put aside what you can, keep it there as long as you can, use it when you can, for what you can - is my mantra. Happy investing!!

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