Active Vs Passive Investing

There is a very interesting discussion happening on Prem's blog. The moot point is that how much difference in returns one can make between passively investing (not your main livelihood) and actively investing. So if the difference is really huge, does it make sense to switch to active investment leaving your other income streams.

As per my thinking, all the number talk doesn't make sense unless you define "active investment". Do you consider job of a mutual fund manager an active investment? I would say no since he is getting a salary for making all the investment decisions and he is not directly affected by those decisions (of course his reputation will get a toss but he still will get the salary at the month end).

The moot question here is where it is good doing something as a part-time business or full-time business. A full-time business will require

a) Capital
b) Love for the business (termed as passion)
c) Risk-taking ability.

So the ups & downs of business will apply even to "active investing", and there will always be a learning curve. Nothing comes free (as in free beer).

Recurring Deposit

The income-tax filing is over for most of the salaried people and everyone now must have taken a sigh of relief with all the paper-work and headache now gone till the next year. It is really a great pain to collect a lot of money during the Feb-March period for putting it in various tax-saving schemes or paying life-insurance premiums for submitting the I-T proofs. It sometimes drains out almost entirely your salary to 'invest' in all these schemes.

Once you do that you make a promise to yourself that from next year I will save money from the very beginning so as to avoid such hassles, but every year it looks like the same old story. If you are stuck in such a cycle, then I assure you that you are not the only one.

The reason for most people not able to save money every month is because

a) People do not plan tax-saving unless made compulsory at year-end
b) There is no mechanism which automatically deducts certain portion of salary to be kept for year-end tax investments

I have realized that point (a) is very difficult for even the most disciplined financial planner. But there are always schemes which one can opt to materialize point (b). One such scheme is the recurring deposit offered by many banks.

For example UBI offers a recurring deposit at 9% PA for a period of one year. This for me a perfect way to put aside money every month in a non-risky investment earning a decent returns.

Let say I have to invest 1,00,000 Rs every year around Feb in various tax-saving policies. I opened a recurring deposit of 10,000 Rs from May for ten months. So in Feb I don't have to squeeze my other commitments to make way for the tax-saving schemes. It is very easy to time your recurring deposit maturity at the same time you would need funds. You can even open a recurring deposit in the same bank that your salary comes into and ask for a direct debt. This way every month you would have less money to spend, but that automatically will take care of your year end investments.

The same mechanism can be used for any of your short-term needs.

PS: Surprisingly for me, HDFC doesnt have recurring deposit scheme.