Long-term asset creation in Share Market

(मराठी आवृत्ती)

Share market is indeed high-risk area for investment. I have been discussing an idea to create assets in share market with many of my friends (Nakul, Yogesh, Manoj and many). As the saying said, Big things can't be built overnight, similarly asset can not be created in a single day or even in short term. One of the traditional way of creating long term asset is buying a house. In my opinion it is a huge liability, you buy it once and keep paying over a long term (home loan) plus taxes, maintenance and then you get a house. 

Is it possible to create an asset in high-risk area like share market?

If you act smartly, yes it is possible. There are many different ways to do it. One of the way is as below

I bought 30 shares of Asian Paints @1370 Rs. in May 2019. As of Dec 2020, the share reached to Rs. 2770. It is more than 100%. Side note: I am not a good share market investor. Somehow due to strong fundamentals and holding it more than 1 year it gave me these returns. Not all my share decisions were such a good decision. 

I sold 13 shares @2700 in Dec 2020. It gave me back Rs. 35000. In May 2019 I had invested Rs. 34250. The tax and brokerage amount is already adjusted. Now I have left with 12 shares for which I have not paid a single Rupee. These 12 shares has to be locked in the account for next 20 years. This will work like an asset. 

If one can collect such shares in the portfolio, one can definitely create long term asset in share market. 

Few after thoughts

1. Should I not track those shares? 
1. In high risk area, stop-loss is very important. Share market will keep on rising but when to exit from investment is also important. Nothing in share market should be kept with closed eyes. Keep tracking the price. If it falls drastically or fundamentals of company is shattered. simply sell the stocks and get out of it
2. What is the right price to exit?
1. There is no single answer for this. Whenever you say the time is right, get out of it.   

What is better, buying car on loan or on cash?

Last few days I was searching for options to buy a car. I was ready to pay the total cost from my savings. Just today i had a discussion with Nilesh (my reporting manager) about this decision. I generally discuss the financial decisions with him. He gave me an interesting calculation which stun me. There were 2 options
Option 1: Pay 10 Lakhs as a down payment and purchase the car.
Option 2:  Put 10 Lakhs in FD and take a car loan for 10 Lakhs

Here assumptions are you have Rs. 10 Lakh and you also have capability to pay EMI. Both the things are achievable only then below options are viable.

Option 1 is straight forward. You have money and your paid it
Option 2 I take a loan of 10 Lakh Rupees for 5 years @ 9.8% interest per year, then EMI I need to pay  will be Rs. 20,977. In total 60 installments I will be paying. As car loans do not have pre-payment option I am bound to pay 20977 * 60 = Rs. 12,58,620. Simultaneously I put the amount which i have in my saving i.e. 10 Lakh in fixed deposit (the 2nd worst investment option, first is keeping money in saving account) @ 7.25% per year. Then due to compounding interest calculation I will get 1000000 * (1.0725)^5 = Rs. 14,19,013. This figure is more than what I will be paying over 60 months. Moreover I have the amount at my disposal. I can take out the money from FD and use it. At end of 5 year I will be saving Rs. 1,60,393 in option 2. isn't this amazing?

Then Lalit (friend sitting on next seat) jumped in the discussion. He said that in the above calculation we are not taking EMI amount in calculation. It was a valid point. If I pay all amount at once then I have EMI amount which should be invested. So we choose an option of creating Recurring Deposit (yet another worst option of investment better than FD) so 7.25% for 5 years with RD amount 20977 will give the Rs. 15,18,953. This created 3rd option.

Option 3: Pay 10 Lakhs and create RD of 20977 for 5 years. This will give Rs. 15,18,953 at end of 5 years.

Looking at the comparison it is clear to opt for option 3 of paying 10 Lakhs and buy a car. The catch here is one must create RD else the benefit is lost. If want to earn more profit, go for better investment options like mutual funds, corporate FDs, blue chip shares, etc..

To summarize it below are the options and benefits

Option 1: Pay 10 Lakhs as a down payment and purchase the car.

Option 2: Keep 10 Lakhs in FD which will give you Rs. 14,19,013 and take a loan of 5 Years & pay Rs. 12,58,620. Effectively at end of 5th year you will have Rs, 1,60,393. 

Option 3: Pay 10 Lakhs and create RD of 20977 for 5 years. This will give Rs. 15,18,953 at end of 5 years. Effectively you will have Rs. 5,18,953.

Moral of the story, best is option 3, but if you don't invest EMI amount then option 2 is better.