Personal Finance in India

This is a topic that is a bit close to me. Not sure why, but I have always been very interested in commerce, business and personal finance. Money or capital for that matter is key in terms of capital allocation and for risk. As far as personal finance is concerned, the entire point of view is to bet on growth within reasonable risk boundaries. Understand that there is no free lunch and thereby accordingly make the prudent investments.

Getting personal finance in India, correct is important to help you remove finance or money as an equation from this optimisation problem called life. By getting it right, one will be able to optimise for the more thing important aspects of life. This is the basis for the concept of FIRE or Financially Independent Retirement Early. While retirement is debatable the optionality is the key here.

Return vs Risk

These are the broadly two components of an investment or bet. With every bet or investment, we are trying to maximise our returns per the proportional risk. But at the same time, not all risk is the same and there are different ways to compute and account for them. An understanding of the kind of risk being taken with every investment or bet is needed.

With time and scenario, this relationship between return vs risk changes for the specific asset, bet etc. This is what someone is trying to optimise for when they trade. If you can consistently make optimal bets or investments where the return/risk favours you, you over the long run, should be able to win and beat even the index of the stock markets if you get the ratio better.

Types of Risk

When investing, it’s important to take into account the following risks

  • Counter Party Risk: Is the entity or the person, you are dealing with reliable. Can they hold their end of their bargain. When you buy from a centralised exchange like NSE, you are offloading this risk to NSE. They take care of it.
  • Liquidity Risk: Not all assets are liquidable as soon as we need money. One of the prominent ones being real estate and shares in private companies. Since, these are dark markets, there is no price discovery as well. One needs to do their own due diligience. It’s not easy to get out of such investments fast due to illiquid markets. Real estate, angel investments etc suffer from liquidity risk and makes accurate price discovery difficult.
  • Concetration Risk: Having majority of your savings/networth in a single asset exposes you to concentration risk. As most of your portfolio’s outcome is tied down to what happens to that specific asset/asset class. This is only good when you are running your own business. But also, how massive growth in wealth happens for lots of people!
  • Inflation Risk: The primary intent behind investing to preserve the capital’s purchasing. In growing economies, inflation is a constant threat and the investment vehicle chosen needs to beat inflation to retain its value. Bitcoin or cryptocurrenty find a use case here. After a long time, I was finally convinced about its investment thesis when I could position bitcoin as a store of value against inflation risk in lieu of gold.

There are more nuanced forms of risks associated with investing, which can be explored here. But one can broadly evaluate any kind of investment based on the above.

Resources

Given the broader understanding of the equilibrium, return vs risk. These are some of the popular sources of content around personal finance

  • IndiaNivesh : A personal finance, has some interesting insights, thought take everything with a pinch of salt as you should within the finance space.
  • IndiaInvestments: A popular finance sub reddit for Indians. Has grown quite a lot and has plenty of interesting points on take on personal finance dos and don’ts.
  • Let’s talk money: A personal finance in India 101 book recommended even on the sub reddit. Any one looking to start thinking of personal finance from scratch, should give this a read.

To be continued …