March 20, 2009

Evaluating various personal finance schemes

I typically don’t write much on personal finance. The key reason is that it does not hold much interest for me and does not challenge me. After you have spent 1-2 years reading on investing, evaluating a scheme is quick and easy. In addition, there are a lot of other blogs and magazines which do a better job of explaining personal finance for the lay investor.

Let me a list a few criteria I use to arrive at a decision on any personal finance instrument

- What has been the performance of the instrument in the past? If this is a new instrument of scheme avoid
- Has the instrument or scheme out performed a benchmark? If it is related to equity, has it outperformed the index for the last 3-5 years. If not, avoid
- What are the costs involved ? what is the expense ratio, sales load, exit loads etc. The total of all costs should not exceed 2% (typical of most open ended mututal funds which in itself is too high). If the expenses per annum exceed 2%, avoid
- What is the lock in period ? I typically avoid products with lockin periods. Product with high lockin periods do not necessarily perform better than open ended product. They just tie your money up and you can lose flexibility if the performance is poor
- What is the kind paperwork involved ? can I do it online ? I personally hate paperwork and have no interest in running to the bank to fill up forms and fill up paperwork every year.

I finally don’t care what is pedigree of the fund house or whether the fund or instrument is from a reputed bank or AMC. In addition I don’t care if the name sounds good or the sales person is a cute looking girl. I will open up my wallet only if the instrument meets my criterias listed above.

Finally you can see
this post where I have listed how I select equity based funds. As you can see, it is not complicated to decide on a personal finance instrument. Most of the times, I don’t bother to look for one and tend to buy mutual funds, stocks or ETFs online directly.


Vic said...

You summed it up pretty well.

U r sure that u won't fall for good looks? :-) just kidding.

Rohit Chauhan said...

how do you think i met my wife ;-) ? cant do it again now !

Ranjan said...

I love your blog. But I get a feeling that you think personal finance is about selecting a personal finance instrument alone. Investing is a part of personal finance, I think.

It's also about your financial behaviour vis-a-vis spending, maximising yr income, saving, etc. Not just investing.

Other than that, I fully agree with the post. Thanks.

Rohit Chauhan said...

hi ranjan
i agree with your comment and did not imply that personal finance is limited to selecting instruments.
i do not focus on that topic for multiple reasons - i went through that phase in the late 90s and have kind of made up my mind on what works for me in that area. due to that i dont explore much on that topic and hence cannot add much on it

in addition, i think there are several blogs/ magazines that do a fine job of analysing and exploring this area

Anonymous said...

Hi Rohit/Everybody,
Can we include below mentioned financial instruments in personal finance and short comments (how easy they are for new investors, who should dabble with them, pros/cons) on them:
A) Commodities
B) Gold
C) Debt instruments
D) Derivatives (options etc.)