Your Investment Goal :
The beginning point of any investment has to be you and your needs. Having a predefined goal or objective is crucial for shaping your portfolio and if you haven't given it a serious thought, we suggest that you do it as a mandatory exercise. A goal setting exercise can normally be anything from the following list and even beyond...

• Saving for a life goal like retirement, child's
• marriage, purchase of house, etc.
• Creating X amount of wealth in future...
• Arranging for regular income
• Protection of wealth over time
• Parking of funds for brief period of time
• Tax savings coupled with wealth creation

Scheme Category/Style Universe :
After finalizing the investment goal and objective, the next task is to shortlist the mutual fund scheme category/style depending on the investment horizon and your risk appetite. The scheme risk classification, based on uniform standards in the industry, can be used as a reference point to match to your personal risk profile. There are many categories of mutual funds available with primary underlying asset classes of debt and equity and varying mixtures of both.

The allocation between equity and debt should match your risk appetite and time horizon. Investing across different schemes and asset classes is a good idea for diversification of risks as they have their own risk-return trade-offs and advantages /disadvantages. If you are planning for specific investment /financial goals, they are however likely to dictate the type of schemes you will have to invest in. Once the investment objective is defined, it is now important to select the schemes and the investment/ withdrawal options to match the needs.

Fund House Universe :
There are around 40 fund houses in India offering their services. A fund house is at the heart of your mutual fund investing experience and performance of the schemes. When we invest in a scheme, we give a mandate to the fund house to manage the money on our behalf. There are fund houses specializing in different asset classes and also the scheme performance of the top and the bottom fund houses differs significantly. Knowing and selecting the right the fund house universe is thus important.

The fund selection focuses on the parentage, management quality, experience and investment philosophy. The quality of the team, investment processes, risk measures and operational efficiency are also important attributes that ensures good performance. While most of us may find it difficult to assess fund house on all these parameters, we can certainly get an idea of the fund house by visiting their websites, reading basic details in scheme documents or accessing on-line research articles /reports. We should try to shortlist fund houses that have a strong presence in the financial world and provide schemes that have a reasonably long and consistent track records.

Scheme Performance :
The performance of the scheme is benchmarked against comparative indices and most schemes provide performance comparison against these benchmarks. However, they may not be appropriate for us and we should look at performance against similar/peer-set schemes to get a better idea of performance. This exercise will enable us to differentiate the good performing schemes from the laggards in our universe of fund houses.

Within performance, a fund delivering the highest return in a particular period or recently may not necessarily be the best. One has to look for consistency in good performance over different periods of time. By consistency we mean that the returns are not over volatile over different periods while giving good returns steadily. We should also keep in mind that the past performance is no guarantee of future results.

Scheme Objective & other attributes:
At this final stage of selecting a mutual fund scheme, we are now evaluating between few schemes which we shortlisted in the previous step. Among the things we can check are...

Investment objective: which talks about the scheme's goal, investing rationale and asset class composition. We should check that the scheme matches our own financial objectives and needs.

Other attributes: Entry and exit loads, management fees /expenses, fund manager, size of the AUM, portfolio concentration, turnover ratio, are some of the other things can one can give attention to. These may not play as important role as the other factors but some of these attributes may carry significance depending upon one's needs /preferences. To know about the above information one may need to look into the scheme documents and other literature available.

Conclusion:
For success of any investment goal, there are many factors that play a crucial role. Most important is that of setting the right goals and having a portfolio with the right asset allocation. This is where most of investors are more likely to go wrong. As we have many times in past reiterated, asset allocation is the primary determinant, almost 94%, of long term performance of a portfolio as opposed to product selection and timing. Though we have talked about scheme selection in this article, investors having good financial advisors can rely on their expertise to recommend and suggest schemes and on which they can further seek clarifications as discussed here. As educated investors though, we should all know what important things should be known before investing under any scheme.

{s}
<script type="text/javascript">
$(document).ready(function(){
new DiscussionBoard("divDiscussionBoard", "120", "http://www.njwebnest.in/esaathi/index.php/discussion").load();
});
</script>
{/s}

Most of us have read the tale of “the rabbit and the turtle” in our schooldays. Let's recall the tale and refresh our childhood.

Once upon a time, there was a rabbit, who was overconfident because of his abilities. The rabbit used to boast about his skills and he used to make fun of a turtle since the latter was very slow. The turtle got really annoyed with the rabbit's behavior and one day, he challenged the rabbit for a race. The rabbit on hearing this, mocked the turtle believing that there is no chance that he can win, and they agreed to race.

The next morning, they reached the starting point and the rabbit pulled up his socks, still mocking at  the turtle. They started and the rabbit instantly picked up pace, while the turtle started the race taking baby steps, the rabbit leaped high and left the turtle far behind in no time.

Midway, the rabbit saw a restaurant, and he was feeling hungry too, he looked around and the turtle reached nowhere near him, so he decided to stop by and eat something. After the meal, the turtle was still out of his sight, and he felt lazy after the meal, so he decided to take a nap. The nap turned into a long careless sleep, and he did not realize when did the turtle ran past him. 

The rabbit suddenly woke up, alarmed, and started running as fast as he could to catch up in the race. But when he reached the finish line, he saw the turtle waiting for him. His head hung in embarrassment.

Moral of the story: Slow and steady wins the race

Let's try to relate this story to the life of an investor, how we manage our investments and understand its implications on our financial health. Let's see why the rabbit, in spite of being better positioned lost to the turtle.

• The rabbit leaped very high initially, like the investors who have  money and are pumped up to make more out of it.  They do not think and start putting in their money, in order to reach the finish line earlier. You have a good start doesn't mean you'll experience same trend all throughout your investments in long term. Your strategy should have a balanced approach to meet your long term goals as per your risk profile. There should also be a differentiation between short-term and long-term goals and planning should be done accordingly of where you want to reach and when.
• Overconfidence: There is a thin line between confidence and overconfidence and once the line is crossed, it can cause only harm. There are investors, who are overconfident on their knowledge about the markets and products and often their views are biased between different asset classes. They go very aggressive in their preference of any particular asset class, often debt and equity, and then risk their money. One has to realise that both asset classes are for different time horizons and suitable as per differing risk profiles of the customers. Going overboard on any particular asset class will put your capital to risk, and this includes investments in Bank FDs which carry of risk of loosing 'real value' over time due to inflation.
• The turtle was slow but was steady at the same time; our mutual fund SIP's are based on the same theme. SIP  investments are most suitable for small investors who can regularly invest irrespective of worrying about market levels. The turtle investor will be disciplined and will invest his regular SIP amount, no matter what comes his way, he will not get carried away by a restaurant (another hot investment opportunity) or need for a nap (other personal aspirations like desire to travel, or buying a car, etc). He will meet his other aspirations only after providing for his investment commitment. While a rabbit investor gets carried away by the restaurants and the need for nap falling in his way.
• The rabbit should have been vigilant even if he wanted to take a break. He got so overwhelmed with his hunger and nap, that he forgot his ultimate goal, and when the clock struck 12, he tried his level best to meet his goal, but to his dismay, the turtle was already there. Similarly, the investor who keeps his life goals ahead and religiously follows his investment plan, will meet his goals in time, while others who lose track for other things that come their way, end up repenting. At times, there is no way the investor can make up for his losing vigil, that he can't achieve the goal, no matter how hard he tries.
• The rabbit shouldn't have overlooked the power of patience that the turtle had. The rabbit investor invests and expect instant returns, he does not realize that it is not a magic wand, rather it is a seed which is just sown and will need time to turn into a tree and reap ripe fruits. The rabbit panics and sells at lower prices when the market falls and gets excited when the market rises, and buy more at higher prices. The turtle invests and then wait patiently, he too faces highs and lows but with patience, he keeps a control over his emotions and wins the race.

The story throws light on issues that we face when we become the rabbit and how we should adopt the virtues of patience, discipline, confidence, vigilance and balance of the tortoise in order to win the financial race.

Have you ever heard of the term – Credit Score? If not, it is perhaps one most important thing you have to learn about.

What is it?

A simple definition is that a credit score is a numerical score which is calculated based on an analysis of your personal creditworthiness. It factors in your present financial situation and your past financial behaviour. The data used to calculated your credit score is procured from various financial institutions or credit bureaus who maintain such information. All your records with banks, lenders, depositories, credit card companies, etc. have a lot of data on your finances which are used in calculating the score. The agencies which calculated the credit scores are

How is it used?

Credit score is primarily used by lenders, such as banks, housing finance and credit card companies, to evaluate the potential risk posed by lending money to you and to mitigate losses due to bad debt. The credit scores are used to decide important things like

• loan eligibility or qualification

• interest rate to be levied

• limits of credit

In other words, the lenders decide on the risk you pose and the revenue that can be made from you. As India gets data rich and more and more financial transactions are captured, such scoring mechanisms are bound to be used not just by lenders but also by others like insurance, land-lords, government departments, telecom companies and so on. Don't be surprised if few years down the line, your credit score is asked along with your Kundali /horoscope for marriage! And to think of it, there is a strong reason to ask for it.

You can get your Credit Score or a detailed Credit Report from the bureaus providing same, either free or for a cost.

Who has credit scores in India?

In India, there are four credit information companies licensed by the RBI who has jurisdiction on the same. These bureaus have their own methodology to calculate the credit scores. The Credit Information Bureau (India) Limited (CIBIL) is the most popular one who has developed the so called CIBIL Credit Score. There are three other bureaus namely, Experian, Equifax and Highmark who have been given licenses by RBI to operate as Credit Information Companies in India. These

Talking about CIBIL Score, it is a three-digit number that ranges from 300 to 900, with 900 being the best score but very rare. Typically a score of about 750 and above is considered very good. Individuals with no credit history will have a no-hit or NH. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months or more of credit usage to obtain a satisfactory credit score. The higher the score, the better it is for you.

How can I improve my Credit Score:

There are many things that go into defining your credit score and there is no way to know how the bureaus calculate it. However, keeping the following things in mind will surely help you in keeping your credit score healthy:

• Income: Have a good and regular income stream (cash dealings not counted here!). Try to channelise / deposit all your incomes through your bank accounts at regular intervals, especially if your a businessman.

• Repayment: Do not let any payments get rejected due to lack of funds (the biggest spoiler!). Always make sure that your bills, especially EMIs and credit card bills are paid on time.

• Investments: Have investments made in format investment avenues (physical gold/real estate won't help!). Have investments in relatively liquid avenues like mutual funds, shares, bank deposits, etc. helps your scores.

• Debt: Do not have debt or too much of it (that's the counter weight to your assets!). It shows that you are credit hungry. Try to have less than 40% of your income going to all loan servicing. Also try not using the full limit on your credit cards. If possible, start paying off your loans, starting with the most expensive ones first.

• Debt Mix: Have a fine balance between secured and unsecured loans. Unsecured loans have slightly less weight as new lenders prefer them against already secured loans.

• Inquiries: Do not use / request credit score or report often (it means if you are upto something!). Regular inquiries or asking multiple lenders, who in turn request scores, for loan details means that you are desperate for same. Better is to research online before sharing your requirements with lenders.