Wealth Vidya - Learn Wealth Creation through Value Investing

Monday, October 10, 2016

How Value Investors Meet Monthly Expenses?

Actual Question:

How did/does Rakesh Jhunjhunwala generate regular cashflows to meet his monthly bills? What I understand is that as a value investor his money is generally locked up for years at an end in investments. What am I missing here?

Edit: What I mean to say is in the beginning of his investor days, how did he manage it?

I am fully aware that he will be holding cash in his bank account which will be replenished periodically by dividends, and also that all his money is not held in the form of capital market investments.

Answer:

Dear Friend!

Thanks for the highly valuable and thought provoking question!

I really do not know the affairs of Rakesh Jhunjhunwala so I cannot talk about him but in general I will answer your question.

Every individual generally has two types of income:

A person who makes investments has an active income in the first place, which that person spends for meeting personal expenses and invests the surplus. The only exception is when a person has a huge inheritance at an early age that he or she need not and does not work and have an active income at all.

Secondly, it is not entirely correct that a value investor’s money is completely locked-up for long term. Value investors earn significant amounts of passive incomes by way of dividends and interest every year. Value investors do not like to spend the passive income for their survival and would like to re-invest it for generating further passive income. However, if they do not have a separate active income, naturally they can spend from this passive income.

In light of the above there are two possibilities as follows:

Meets his monthly bills out of the active income he has
Spends a small portion out of the passive income generated from investments.

Thank you,

Anand

What Is the Risk of Investing in SIP?

Actual Question:

What is that I am risking if I would be investing in SIP for more than 40 years? Supposedly I have been investing 10K for more than 40 years will I get a considerable return from SIP , How much is the percentage of risk in SIP?

Answer:

‘Systematic Investment Plan (SIP)’ is indeed a safe investment. However, SIP is not product or a mutual fund unit by itself but merely refers to a habitual monthly investment. Through SIP you may invest in a mutual fund or an exchange traded fund (ETF) or directly in stocks.

Therefore, when you want to invest Rs.10000 every month for 40 years, which is indeed commendable, you must know in what kind of product you must invest in. For example, if keep investing for 40 years in income or debt fund, while the principal may be safe you will not be a rich and wealthy person after 40 years. Besides your good resolve, you need to play smart too!

Please invest in a well diversified index mutual fund through the medium of SIP. Here is what you can be worth after 33 years of active investments and keeping the investments alive for another 20 years.