ArthaNITI

The monster lurking behind the devil!

2011-08-21T12:58:00.002+05:30

The battle between the Goliath of inflation and the fearless David (read The RBI Governor) continues – the recent tenure extension of David does indicate the collective faith of our leaders in the monster-slayer! But all tenure extensions are not equally welcome, as we shall soon see.

The number of rate hikes by the RBI in the last 18 months, have been too many and is nowadays looked upon with a sense of fear by all hapless souls including yours truly.

The wheels seem to be coming off at a rate much faster than Basanti could whip Dhanno to take her to safety! Am I getting too filmy here? I dare not.

Let’s get real. Even as late as 2009 and 2010, banks were luring customers with teaser loans. Calculations reveal the following - If a borrower takes a loan at the rate of 8%, for a 20year tenure and if after 1 year the rate of interest increases to 9% then his loan repayment tenure would have ballooned to 292 months and his total repayments would go up by 22%. If this is followed by another rate hike of 1% another year later then the corresponding figures will be 418 months and 75% respectively!

Shocked? Don’t be – because that is what has exactly happened to many customers. With every rate hike, the EMI should go up. In reality, this does not happen! Banks are ‘friendly’ enough to allow you to continue paying the same EMI. Their response – it is logistically impossible to inform all customers immediately and start collecting higher EMIs. The Devil advocates – The Banks do not mind that extra income by way of interest, after all that is the objective of their business!

The remedy is actually quite simple – keep a track of your loan by noting down the price of your loan. The reference rate (called by any name – PLR, BPLR, Base rate, whatever!) plus the spread (for HFCs and NBFCs it is negative as they are not subject to the latest RBI guidelines on lending rates which stipulates that the Base rate is the lowest rate that a Bank can offer a borrower – more of this trickery in another post). Every month visit the homepage (website) of your lender and confirm if there are any changes (usually hike in today’s scenario) in the reference rate. If yes, immediately get in touch with the customer helpline and find out how you can get the EMI enhanced to reflect the rise in rates.

Alternately, keep a copy of the loan amortization chart at the time of taking the loan and ensure that your projected loan outstanding amount at the beginning of every financial or calendar year is met (or bettered) by pre-payment of the difference. This may be due to hike in interest rates and/or under recoveries due to continuation in payment of same amount as EMIs.

If you are a borrower with a loan taken before the Base Rate was introduced, chances are high that your existing home loan could be at a rate of interest of 14% or more. You must certainly explore the option of getting your loan re-priced by the same lender. If that does not work, seek a transfer of your loan to a new lender. Chances are high that you will not only bring down the outstanding tenure of your loan but also the EMI that you are paying currently.

A little pro-active behavior on your part can save you from substantial financial damages later!

Creating a world of smarter investors

2010-09-16T07:50:00.002+05:30

Do you remember the Indiabulls TVC? When the speaker at a company AGM is about to conclude, Mr. Kulwant Bhatia raises a query on the impact of raising long term debt in a potentially inflationary economy!

The TVC is funny. No one can be blamed for failing to notice the significance of the question. The contrasting visage of the speaker and the person asking the query with his ‘gotcha’ expression and accompanying glee, perhaps over rules all other thoughts.

This column is not a TVC aimed at making you laugh and help brand recall. This column is to make you think, so we will dissect the query highlighted in the opening para.

We live in times of high inflation. The impact of high inflation is felt when the value of a unit of currency goes down and leaves the owner of the currency ‘poorer’.

Let’s turn around this scenario a little. What happens if you own negative currency? In other words, if you are a net borrower, do you become ‘richer’ if inflation is high?

No one borrows to leave money idle in the bank. You put it in a business or in an investment where you can earn a rate of return which is better than the cost of your borrowing. Without this, you are worse-off borrowing money.

The return that you generate in the business or on your investment (an asset), if it is not fixed (which is likely to be the case) or if the market value of the asset is fluctuating, then there is a risk. The risk is of losing money. Either, the returns may fall below the cost of borrowing or the asset value may fall below the cost of the investment.

If you have an asset that has less chances of either risk coming true, and which is not difficult to sell (demand outstripping supply), then, it is safe to assume that an injection of borrowed capital for financing will enhance the return on own capital.

This is a simple principle of ‘leverage’ at work. The term is derived from physics where a lever is the simplest form of a machine at work, the output is magnified or multi-fold that of the input.

To further control the risk, try coupling the target asset with an asset that historically has a weak or negative correlation. Do you have a winner in your hands?

This does not mean you have a perpetual winner in your hand as any of the following things may happen - Rate of interest shoots up, inflation falls, return on asset and/or asset price falls.

The trick lies in balancing the risks and getting a return which is an adequate compensation for the risk. Timing the ‘exit’ from the strategy also becomes important. Reducing the leverage, if not wiping it completely is easier than exiting the asset. Do not wait for peak price, peak returns, and lowest rates of interest or highest rate of inflation.

Are you wondering what that dream asset could be? Well, how about your own business!

Ask not how the market is doing

2010-09-15T16:28:00.002+05:30

By Vivek Reddy

"How's the market doing" or "what's happening in the market"! People ask these questions all the time, and expect short answers. The problem is whatever the answer, it usually leads to faulty understanding and wrong conclusions.

Let's take all three market scenarios — it has been rising, it has been flat or it has fallen. If the market has gone up, one has to answer, "the market is doing well". However, once these words register, the person hearing it usually becomes emboldened to put money into stocks. If the market has been flat or falling, the answer of the market not doing well is instantly interpreted as a signal to avoid investing. Clearly, such conclusions may be wrong and may not even have been intended by the person answering the question. If one were to analyze the causes of such miscommunications, they would be, one, an undue focus on the recent past and, two, a short attention span.

The way out is to communicate clearly that the past behavior of the stock market has little bearing on its future, and that a more reflective and studied approach should replace relying on sound bytes and one-liners on the market.

The more appropriate question, of course, would have been to ask, "what factors will influence the market" over whatever timeframe the investor is considering an investment/exit decision. And a sensible discussion will focus on the future and include:

expected future growth in corporate profits in relation to price-earnings multiples;

trends in liquidity and capital flows; and

impact of various economic and political events on corporate profitability. Thereafter, there has to be a view on how India's market compare on these factors to other developed and emerging markets. This analysis should give investors a basic idea on how much of their financial assets can be allocated to India's market.

It must be remembered that this broad understanding of the market will serve only those investors looking for a diversified equity portfolio or mutual fund. Those seeking to invest in individual stocks will need to study that company in depth before taking an exposure.

While deciding on an investment plan, there is always a multitude of expert opinions available in various forms. A sound approach is to ignore those analyses which dwell on the past and give a rear-mirror perspective on why the market behaved in a particular way. Also, distrust brokers who motivate you to transact often as they may be looking to profit at your expense.

So next time you feel like asking or have just been asked how the market is doing... pause, rephrase the question and take time to engage in a meaningful discussion. If there is a shortage of time, the best response is "only God knows".

(The author is former CEO, Kothari Pioneer Mutual Fund, which is now part of Franklin Templeton, this article appeared in 2006, however its relevance is timeless!)

Separating the (Rich)Men from the boys

2010-08-12T21:55:00.002+05:30

Meeting an entrepreneur who believes in exclusivity without charging a bomb!

The other day I visited the factory and sales outlet of a good friend of mine who specializes in customizing formal wear for ‘men with an eye for detail’. True to the spirit of Mumbai’s entrepreneurial class, he believes in creating and retaining a niche for himself in every sense of the word.

The location of his set-up is in a high security zone which also houses India’s most valuable prisoner (or should I say costliest?)!

What astounded me about his entire business, I will capture as briefly as possible – value for money without losing out on the quality of fabric (he showed me some real exclusive stuff from France & Italy too, in addition to the best of Indian fabrics), customizing the most minute detail (bespoke is the trade name for it I learnt) and guess what, choosing his clients exclusively by referrals!

Now, ask any successful entrepreneur about the exclusivity of his services and he will highlight the same without failing to mention the premium his services command. Yet, here was somebody for whom the premium came from the select list of clientele that he caters to.

If you are wondering about the logic of his approach – take a step aside and think.

Does it make sense for someone to base his business on referrals only?
Does it make sense for someone to choose his clients to ensure the referrals are also of a similar quality and bracket?

Aren’t you asking yourself, if he is so good then why is he pricing himself low? Let it suffice to say, he understands that if he can keep a tight control on his overheads and his inventory, his pricing will never be a ‘deal-breaker’ – excuses like it’s too far off from where I stay you know, will simply not work!

Lastly, can’t help resist making the statement – Even Mr. Buffet would not say ‘I buy expensive suits. They just look cheap on me!’

Power to Richman’s Clothing!

On value-investing - There are plenty of similar good businesses around us. Instead of chasing over-valued stocks in the market, ever thought of investing your money with such entrepreneurs? I don’t know if such deals are easy to source and structure, but what I know is the growth and returns potential which such (low-risk) investments offer can put many ‘blue-chips’ to shame.

Investing & the fine art of Wealth Creation

2010-08-09T06:38:00.003+05:30

Caveat – Read this only if you are not averse to exercising your mind.

What does the word investing mean to you? - Purpose

Parking your surpluses for a deferred consumption/purchase of asset?
Buying a ‘return-generating’ asset?
Buying a ‘cash-flow’ generating asset?
Buying something where the demand is expected to exceed supply for a longtime and hence drive up prices?

How do you go about making an investment? - Process

You refer to your Financial Plan from time to time for a review in light of any developments on the personal front and/or the opportunities available, irrespective of whether you have a surplus available on hand or otherwise?
You have a clear set of investment criteria which you ‘check’ before any decision?
You have your list of reliable information providers – Advisor, friend, colleague – seek specific information about the opportunity under consideration from at least 2 reliable sources, before making up your mind?
While evaluating the possible upsides do you also try and evaluate the possible downsides (in detail)?
You clearly evaluate all costs (including taxes)?
You pay your advisor a fee for consulting to ensure that between the 2 of you the expectations are clear at the out-set – Advisor to give unbiased opinion knowing that he is being compensated for his efforts irrespective of whether you buy or not?
The decision to buy (or not) is yours and entirely yours?

When do you choose to make an investment? - Trigger

Whenever you have a surplus and you can’t rest easy till it is put away?
When you see an asset available at price lower than its fair value?
When you are convinced (or is it impressed) by your advisor?
When everyone you know is investing or sharing their stories of impressive gains?
When your agent says the last date is not far off?
After you have kept aside sufficient money for foreseeable & unforeseeable needs (and, opportunities)?

Consistently successful investors are usually well-read, do their homework, and are never afraid to invest their time in finding the next opportunity even if it results in rejecting the offer ultimately.

Lastly, can’t resist recalling a Akbar-Birbal folklore which goes thus –

Akbar – Birbal, do you think all married men are subservient to wishes of their wives?

Birbal (as diplomatic as ever) – Can’t say about all, but most men seem to abide by the wishes of their better halves!

Akbar – Can you prove it?

Birbal – If your Excellency permits, certainly!

So one day in the court of the emperor, all in attendance are asked the question with the instruction that if they abide by the wishes of their wives, they should stand to the right and others to the left.

As Birbal had mentioned, all except one came and stood on the right side - there was one old, scrawny man who stood to the left, much to the delight of the emperor.

Akbar – Birbal, there you are, here is one person and he proves you are wrong!

Birbal – Your majesty, if you will allow me just once, to question this man, please!

The emperor nods and Birbal proceeds to the old odd-ball and asks him whether he does not abide by his wife’s wishes?

The old man replies – Sir, of course I do! I do abide by my wife’s directions and she says wherever there is a crowd, I must stay away.

Akbar as usual was impressed by the old man’s answer and even more so by the wisdom of his favorite minister and best friend Birbal!

….and, successful investors are never scared to stick to the set of rules they set themselves, irrespective of the compulsions at hand!

Wealth management for the wealthy vs. Wealth creation for the smart-set

2010-07-29T21:49:00.002+05:30

Every time I meet a new prospect for Financial Planning services, beyond the initial routine queries, the question that is inevitable is “Well, Aniruddha, what is the minimum portfolio size that you manage?”

Well nearly, almost all the time, I reply with a bemused look saying “it doesn’t matter!”

Well, if this raises your curiosity, let me clarify.

A Financial Planner helps secure the financial future of his clients. However, if you are wondering if people with insignificant savings are also welcome, then how would one sustain the cost of servicing the relationship?

For a better understanding, let me highlight the following from the purely commercial perspective of the business of Financial Planning. What is more desirable?

Clients who will rely/depend on you for your advice? Or, clients who can live without you (not because you are not sufficiently skilled, but because they have enough resources that it just doesn’t matter who manages their finances)?
Clients who will swear by the value-add that you offer after experiencing your services for a couple of years and then help generate referrals? Or, clients who are the who’s-who of society (good to boast at a party!). But, you alone know how tough it is to deal with someone who throws their weight around.

Actually some advisors who exclusively cater to this segment are perpetually pitching for new clients because in this segment both the advisor and the client are only loyal to their monetary interest!

Clients who will have a disciplined approach to an agreed plan? Or clients who are perpetually willing to try the current flavor in the market? As the HNI database is a marketable commodity and cold-calls and sms-intrusions are still in vogue, DNC registrations not withstanding!
Lastly, is there a correlation between the current net worth and future growth potential of a person? If, ever there was, it cannot ignore - the quality of the person, his education, professionalism, clarity of thought etc. – these are factors which decide the correct fit between an advisor and the customer. Did we ever mention net worth while debating this?

Give me a low net worth level headed 30 year old any day over a well heeled senior professional who is ‘too busy to spare an hour every quarter to review his portfolio!’ After all you can judge the maturity of your advisor by the way he manages his client-portfolio, right?

Professor C.K. Prahlad – God bless his soul, there is indeed a fortune to be made at the bottom of the pyramid!

Don't have answers? Ask the right questions!

2010-04-24T21:57:00.002+05:30

The last few weeks have resulted in lots of ruminations, yet, little by way of analytical expressions. For starters, read a fellow professional & friend’s blog-post extolling the virtues of celibacy (well, avoidance of debt) to which I only managed to pen my thoughts in the ‘comments’ page thus -

“….Debt is a financing option, which if one may say so is commonly mis-understood by both users and non-users alike. To explain further, first focus on the word option – did the borrower use debt as a means over an alternate option or was it the only option? When using a credit card, is the use, an option (with the presence of other alternatives) or a pure leverage to increase buying power? Can debt be used to accelerate wealth creation without increasing risks? Like atomic energy it all depends on the end-use which is needless to mention dependent on the level of understanding of the user or his advisor.”

Again, in another of the same columns, a discussion on whether you really need an advisor to plan your finances or you can do it yourself was discussed with a conclusion nudging you towards a - you can do your own thing. Now the problem with these guidance(s), are, that they are subjective and one really needs to understand the nuances of the game to be on-the-ball. I will make this easier to understand, shortly.

Let me recall another very personal discussion with a client & friend (in that order, strictly). Since I am responsible for the outcomes of his financial plan and how it benefits him, I also as an extension take a friendly interest in his non-financial decisions which may have some impact on his financials going forward. This gent is a professional engaged with a reputed organization but has recently decided to foray into financial advisory himself born out of an acute interest in helping friends & colleagues with their personal finances. He thinks (until the end of our meeting) that if this new activity starts paying-off (financially worth his while) he might think of making it a full time career.

He was open to my questioning him with a straight-face – Is financial advisory a core-competence for you? And, Do you see yourself earning decently in this dog-eat-dog competitive environment? His answers to both the questions were a resounding ‘No’! We did not have to debate this further.

Let me explain this line of thinking further – students of the make or buy decision-making theory will find this familiar territory. In any professional’s life-cycle, there is a period of steep learning growth, a period of steep earning growth, a period of consolidation, eventually leading to a plateau-ing of first the learning, then the earning and eventually the decline of both. Somewhere along this life-cycle you will find a ‘transition point’ where returns on your intellectual balance sheet will be overtaken by the returns on your financial balance sheet. It is till this point in time (if not always) at least, that you should outsource the advisory for a fee. If you have a doubt consult me, I will remove your doubts.

VC or PE (venture capital or private equity for the uninitiated) funding is fast catching the imagination of the entrepreneurial class in India. The VC or PE investor picks up a stake in the company of the entrepreneur and this injection of capital (which the entrepreneur could not have done on his own) is expected to provide a boost to the growth plans of the business the successful implementations of which is aimed at creating win-win solutions for both the promoter and the investor.

While this may be becoming popular, entrepreneurs need to ask themselves some basic questions – Is the cost of the external equity investment affordable? If bank funding were available which is more preferable? If bank funding is not available what are the reasons for the same?

In most cases of dilemma in decision-making asking the right questions is all the difference that is there to a right decision. The panacea lies in a patient and structured approach.

What hurts more Health risks or Insurance?

2010-01-30T20:07:00.003+05:30

In an earlier post, we had touched upon health insurance and how it has created a doubt in the minds of consumers. Here, we re-visit this topic for a better understanding.

Let me quote verbatim from a few websites, a couple of relevant but contradictory perspectives. 1^st, from the point of view of a consumer in the US -

“… My ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors…. and require evidence-based medicine… companies which fail at these pursuits go bankrupt or exile their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded.”

Another consumer responds. “The insurance industry may be the only private-sector institution that I trust less than government. In auto insurance, I find that unless I change providers every few years, my premiums just get ratcheted up for no reason. I think that life insurance is a huge rip-off, particularly considering that it starts out with a tremendous tax advantage.

I do not trust my fellow consumers to understand the concept of insurance well enough to make (force) insurance companies offer products that make sense. Too many consumers think that good insurance is something that provides payouts for small problems rather than protection against rare catastrophes.

In fact, as I have pointed out before, most people do not want insurance of any sort. They get homeowners' insurance to satisfy the mortgage lender. They get car insurance to satisfy the state. They get health insurance only when they think their employers are "giving" it to them. The insurance industry is heavily regulated, and it has gotten quite cozy with that arrangement.

My wife recently sought information on long-term care insurance. What I concluded is that we would be trading one risk for another. Now, we face the risk that long-term care would eat up our savings. If we had insurance, we would face the risk that the insurance company would not pay a claim, because of how it reads the fine print in the contract. I'd rather take the risk I understand …….than the risk I do not understand…….

I think that meaningful innovation in health care is more likely to come from Wal-Mart than from Aetna. …Wal-Mart is likely to be thwarted by the credentials lobbies. If practice regulations and licensing were not a factor, Wal-Mart could rely less on formal schooling and more on internal training for its medical workers. Then you would see real improvements in quality and reductions in cost.”

Counter perspective from a CEO of a new Indian Health Insurance company

“1. What are the major hurdles in the Industry in India in terms of customer perceptions and attitudes? Consumers are increasingly concerned about their health and rising healthcare costs…. this is an opportunity…. Awareness and knowledge levels of health insurance or products remain low…..Customers may not understand the benefits and the value proposition of the policy they are purchasing….not sold or serviced responsibly…..companies need to be more simple and transparent in their processes.

2. How can companies overcome these hurdles? Health insurance requires detailed explanation compared to other financial products….. Hence, need a personalized approach to help consumers make an informed decision…..by presenting information and product options in a simplistic manner…..products in turn need to be more comprehensive, transparent with minimal fine-print……Companies need to address issues related to servicing and low product innovation to successfully tackle these hurdles.

3. What kind of innovative approaches should Insurance companies adopt for a competitive edge? Approach built around service experience.…Companies have to take cognizance of the habits and needs of the consumer and build in better service delivery for both selling & servicing.

4. What role can employees in the health insurance industry play in educating the customers about health insurance? Customer service excellence holds the key….delivered by trained and motivated people, backed by technology…….

5. What are the challenges that you foresee in the Indian Health Insurance sector? …..many challenges... lack of data availability on disease and usage patterns of different socio-economic segments….most important challenge for India is the current low levels of awareness about the category among Indian consumers.”

Our take – Nobody talks about involving the various stake-holders in the process – our experience suggests that whenever you go to a hospital for treatment, response to a harmless question “Do you have insurance?” reveals two sets of charges for the same treatment! Also, should there be a stricter screening of the insured at the outset for a better assessment of the risk, which should lead to better pricing of risk? Also, given the criticality of the exercise to all concerned, is there a case for more appropriately qualified agents, instead of the prevailing “all are welcome” policy? This last measure can be furthered by structuring incentives on the basis of evidence of better disclosures measured by the claims track evidenced over long periods of time.

The key to innovation is in creating win-win solutions for all stakeholders. BTW, have you come across an agent who specializes in health insurance or a doctor who is dedicated to health insurance services? Let us know.

A quote from a wise man

2010-01-22T12:27:00.002+05:30

“It is of the nature of organized investment markets under the influence of purchasers largely ignorant of what they are buying and speculators who are more concerned with forecasting the next shift of the market sentiments than with a reasonable estimate of the future yields of capital asset, that, when disillusion falls upon an overoptimistic and overbought market, it should fall with sudden and even catastrophic force.”

John Maynard Keynes - Chapter 22, The General Theory

This definitely makes you ponder whether the pricking of an asset bubble or a sentiment balloon should be viewed with fear of the unknown or a welcome & refreshing cheer!

Readers, would love to have your views on this.

Wealth creation - Innovation is the key

2010-01-18T08:17:00.002+05:30

The health insurance industry is plagued by the problem of non-viability. The claims paid are in excess of the premiums collected annually. This has led to multiple problems.

Insurers are pretty non-committal about the premiums they charge. A minor deviation in the health parameters leads to levying of ‘significant extra’ premiums. Till date many prospective clients look at health insurance with suspicion. Will my claim be settled when the need arises? Will they pay me the full amount of the actual expense incurred on treatment? Etc.

The sheer details or terms & conditions (if you please) associated with the products are nothing short of a minefield of “subject to-s”. Your claim will be paid if the illness is discovered after a period of ‘x days’ from availing the cover and if you survive for at least ‘y days’ from the date of diagnosis. This is after you have undergone a proper underwriting procedure prescribed by the insurer. You won’t be blamed for thinking that this is a business to make you pay the premiums but find reasons to deny claims.

For medical service providers, the practices are ill-defined with very little standardization across the board. This applies to costs and procedures, both. Most private medicos and hospitals charge the patient differentially depending on whether she has a medical insurance cover. If the patient is covered, the charges are usually higher. It’s the law of the jungle at work. If the payment is going to be made by the insurer, then, it is almost as if the patient doesn’t care about the charges. The service provider takes advantage being well aware of the nuances of the insurers’ practices. This is a rip-off not only affecting the insurer, but, eventually all the buyer’s of insurance – present and future.

I’d like to quote from the IRDA Annual report of 2009 (pg 34) – “the incurred claims ratio (net incurred claims to net premium) of the general insurance industry increased marginally to 86.30% in ’08-’09 for 84.88% in ’07-’08. The increase was reflected in both public and private insurers……The health segment …..stood at 105.95% in ’08-’09 as against ….141.02% in ’06-’07. However for the public insurers, this ratio increased to 116.60% in ’08-’09 from 112.36% in ’07-’08…..for private insurers this ratio …76.84% in ’08-’09…”

Public & private insurers have significantly different roles, responsibilities and business practices. This shows in their performance. Availability, affordability and sustainability of health care, a key infrastructure, is critical for an emerging economy.

Health care is a huge business opportunity which can be driven by innovation. Innovation can deliver the objectives and provide win-win solutions for insurers, insurance buyers, health care providers and investors who provide the risk capital. We will discuss some instances of innovation which are at work and those that can make a bigger difference.

Wealth creation - Of gospel truths &half-truths

2010-01-16T07:49:00.002+05:30

I recently received a chain mail which went on to extol the virtues of long-term investing. It said - If you had invested Rs. 10,000/- in Wipro in 1980, today your investment would have been worth Rs. 200 Cr.+. Other such examples highlighted were - Cipla - Investment of Rs. 10,000 in 1979 is today worth Rs. 95 cr.+; Infosys - Investment of Rs. 10,000 in 1992 is worth Rs. 1.5 cr.+ and so on.

These are facts, however saying only this much is a half-truth, we will see how, soon.

Another mail I received from a multiple financial services provider. This mail says how the Sensex number has always been near about the price of 10 grams of gold. It adds, whenever there was a substantial disconnect, it became a clear case of over (or under)-valuation of one measure w.r.t. the other. A classic example of non-sense dished out with an objective to confuse and ‘steal’ your money!

In 1980, very few people invested in stocks. More importantly, awareness about the workings of business & industry was restricted to a miniscule set of people. Business media, of any consequence did not exist. The few who invested in stocks were ‘risk takers’ armed with better sources of information about businesses & industry or people who did the hard work to find out information which were not easily available or people who were speculators.

Of the 3, the last category is not the object of our understanding. About the other 2, it would be safe to say that they are more evolved and enterprising investors. They find out about investment avenues which are not commonly followed. They are willing to take uncommon risks and also stick to it, once they have made up their mind and invested. They know that they have made a right choice and will not exit their investments based on a panic reaction or short term profits or any emotion. This is the power of conviction in the long-term story of a business.

Sensex and the price of gold: I’ll not get into the debate of whether gold is a dud investment (that will be for some other time). For the moment, let’s assume that gold is a good hedge against inflation and its price moves accordingly. Then it will be safe to say that the price of gold does not offer any ‘real’ return since there is no economic activity linked to the ownership of it (say unlike a productive asset like property or plant & machinery or farmland or a real business).

Now contrast this with the Sensex – if the BSE Sensex stocks was all that was there to the Indian economy (assumption), it would be safe to say that the growth in the GDP (% terms) should be approximately equal to the growth in the Sensex plus the rate of inflation (since the GDP growth figure is calculated net off inflation).

Can the 2 or their growth numbers ever be identical? Oops…sorry! I am introducing arguments which will lead to demolishing a myth….A herd is meant to ‘follow’, not think!

Wealth creation - Life cycle planning

2010-01-12T22:23:00.002+05:30

Creating a financial plan is like looking into the future with a telescope that provides at best a blurred image, financially speaking. However, there are certain aspects of this vision which is fairly clear. Let us understand, why?

There are 4 stages of an individual’s career –

Green-horn
Office junior
Middle-level functionary/Managerial category
Leadership level / Senior babu

Each stage has its own characteristics - the roles, responsibilities, rewards and growth opportunities. In the green-horn years - one learns the ropes, works his back-off and tries to get recognized as someone who can figure in the organization chart. Roles are barely defined and responsibilities can be described as anything from running errands to doing the work of two people. From an earnings and savings perspective, you are lucky if you don’t get time to socialize - you get to save some money!

The office junior is the gal who has been confirmed in service. She gets a reasonable salary. She can look forward to some planned savings. This may not be much, as the family may be interested in getting her hitched and started off in a family way.

It is only at the middle-level - which if you reach at a relatively early age of mid-thirties, you get a reasonable opportunity to make some serious savings. This is when you can add some bone & muscle to your financial plan.

You are lucky to graduate to a level of senior leadership by the time you are in your forties. Then, you are really able to take off in terms of wealth creation. Only, if you have built a strong foundation, you are in a position to take some risks to push your returns from your investments and get to create some ‘serious’ wealth.

From this one can conclude that –

At all stages, your returns on investments are likely to be less than the returns you generate from your intellectual capital as a professional (job or business).
At every stage your priorities are likely to be in focusing on your profession, hence, the basic business of wealth management is better left to the pros.

A level-headed gal will realize that not until very late in life, the financial balance sheet will always be smaller in comparison to the intellectual balance sheet or the simple value of the professional, quantified in financial terms (remember, Infosys quantifies the value of its human resource).

You decide, whether you want to fight the battles or win the war!

Wealth creation: Zero-sum games - a killer virus

2010-01-10T19:16:00.001+05:30

Continuing from risk vs. returns, we move forward to compare and contrast activities which create or destroy wealth.

An activity or a part of a business that does not create any value cannot exist. If one does, I am sure you would be surprised. It would not exist only if the users or clients realized that it does not create value.

Let us take the example of stock trading. There are professional day traders. Their objective is to make money by spotting trading opportunities, e.g. arbitrage or intra-day price movements. Day traders are an essential part of the market eco-system. They provide the much needed volumes or liquidity that really adds depth to the market and attracts investors.

But, if day trading is not your profession, should you be placing bets or ‘punt’? Let us understand this better before deciding. On a daily basis, the total gains made by people who won (through day trading), will be equal to the total losses made by people who lost.

Investopedia.com says – “What does Zero-Sum Game mean? A situation in which, one participant's gains result (only) from, another participant's equivalent losses. Options and future contracts are examples of zero-sum games (excluding costs). Gambling is also an example of a zero-sum game. The stock market, however, is not a zero-sum game, because wealth can be created in a stock market.”

The last qualifier is very important. This is because over a period of time, a business, which is the underlying activity behind any stock, delivers in terms of sales, profits and creating return-generating assets. These are wealth creating steps. The stock market thereby becomes instrumental in improving the efficiency of price-discovery; and contributes in recognizing and aiding wealth creation.

For creating long-term wealth, actions should aim for minimizing risks for the same level of returns or enhance the returns without increasing the risk. Or, improve the returns per unit of risk. Day trading like zero-sum games is to be avoided at all costs.

2 questions to ponder over –

* Will an investment with a 50% chance of making money qualify for long-term wealth creation?

* Should SEBI mandate stock brokers display a warning “Day trading is injurious….and can also kill you financially”?

Buffet-speak “Only buy something that you’d be happy to hold even if the market shuts down for 10 years”!

Wealth creation - risk vs. return

2010-01-08T08:18:00.002+05:30

Investors in capital markets understand the connection between risk and return – higher the risk, higher the return. This is simplistic. To make this complete we need to add the elements of time spent in the investment and the ‘prospect’ or ‘expectation’ in the return.

The point is that all market linked investments are priced dynamically. Hence, there are minute to minute deviations in their price and return expectations. However, the longer the holding period, the dynamic price will eventually regress or settle towards the mean or the intrinsic value of the asset.

Also, let us not forget, for an investment in which the risk-assessed initially, has eventually gone bad, the price will settle towards its intrinsic value which at times may tend to zero.

Coming back to the self-evident truth about higher the risk higher the return, the situations when this may not come true are – when the timing of entry/exit is caught on the wrong-foot due to price volatility and when the investment may turn out to be a dud. Simple!

With this background understanding let us, going forward, try and understand how this impacts short-term trading versus long term investment. We will also add the perspective of off-market investment, private equity and venture capital.

Is your Banker, your best guide for Wealth creation?

2010-01-06T06:25:00.002+05:30

This headline is not to mislead you. As the byline to the masthead reveals, the underlying objective of this post is to serve as “The Layman’s guide to Financial Freedom”.

I clarify that, this post is only to provoke the layman to question what lies behind a banker’s actions, goals & objectives, strategies (and advisory?) etc.

In a tête-à-tête with a friend, he said - My young banker friend told me that he had just purchased his 3^rd property (all residential). What is it that is driving smart & intelligent (because he is a banker) professionals to have such high exposure to realty assets?

My friend was also lamenting about the high EMI he is paying for an under-construction property, having booked it during the 2007 peak property season.

Indian banking has evolved significantly over the last 15 years. This is the time (1994) a couple of leading private Indian banks were born. They carved a niche initially and then captured a significant mind and market share through -

Advent of anywhere banking and proliferation of ATMs
Wider ‘inclusion’ through lower (than foreign banks) min. average quarterly balances
Emergence of universal banking - new businesses such as retail loans (personal, cars and homes), credit cards, distribution of 3^rd party products (MFs & insurance) which generated fee income.
Growth of trade-finance and project-finance to manufacturers where sales financing tie-ups led to sharp growth in retail loan portfolios (q-o-q).
Increase in FII’s investments in listed Indian private banks; Private placements of equity at hefty premiums and ESOP programs for bankers; this led to Business Heads flogging growth in retail loan portfolios and distribution led revenues, which led to further increase in stock valuations.

The greedy consumer of banking services choked himself with personal loans, car loans, home loans MFs and ULIPs. As valuations kept soaring (2003-07), it was a win-win situation for bankers, manufacturer-borrowers, buyer-borrowers, wealth managers and their clients. The financial meltdown of 2008 put the brakes for a while.

2009 brought back the feel good factor, once again based on valuations (rather than earnings) of stocks, property, commodities. All of this was backed by easy liquidity through aggressive currency printing by Central banks across the globe. This was (euphemistically) labeled as govt. induced stimulus for driving growth.

The 2008 financial crisis was a wild fire that was doused by injection of liquidity. This was the mistake that created the mess in the first place. Now, there are signs of the currency printing machines getting weary (metaphorically). This cycle of growing valuations are not driven by real GDP growth but by growth in global money supply.

Is the cookie going to crumble? A trillion dollar question for valuation experts to figure! Will the all important ‘growth’ in the valuation equation last till eternity? Or is it a myth, whose time has come?

My reply to my friend was – In the long term, the rate of return from residential property will definitely be less than that of investment in equity*. Your banker friend will eventually realize this but after paying a heavy price. The longer any bubble survives, the bigger it gets. Eventually when it bursts, all bubbles leave behind a trail of damage and bigger the bubble, bigger the damage.

Sometimes a Banker may also become a victim of the chimera that he creates and sustains! For you, dear reader, the time to introspect is NOW – Will you blindly follow your banker’s judgment when it comes to taking decisions relating to your personal finances?

ESOP – employee stock option; MF – mutual fund; ULIP – unit linked insurance plan; GDP – gross domestic product; * Anybody seeking historical evidence of the same can email me.

Wealth creation - much sought after but rarely practiced!

2010-01-03T23:46:00.005+05:30

Everybody wants to be wealthy? Right! – What a dumb question to ask? Not really, as you shall see -

What do you expect a wealthy man to have? A strong financial balance sheet; a reasonably good health; and, a rational mind which continuously updates itself for financial (if not all) decision making (among other things).

Now look around you (no need to pry, it is easily apparent) to realize how we practice wealth or value destruction through some choices we make –

How many of us have a Balance Sheet? Don’t kid yourself by saying that since you are a salaried person, it is not mandatory for you to prepare a balance sheet. Without a balance sheet, how accurately would you know, what exactly are your assets, liabilities and net worth? What is the rate of growth of your net worth over the last year etc. etc.? Without a clue about this, how will you know how far you are from a financially safe retirement corpus?

How many of us go for an annual health check-up? How many of us keep a track of our vital health parameters and file records, so that in case there is an emergency hospitalization, the doctor on duty can quickly access the relevant medical records to know the history and proceed on an appropriate plan of action without losing time? In such an event, the potential damage health-wise and in financial terms can have long term consequence. But, then who cares? This is a typical ploy of an insurance agent to sell more insurance (or so you think)! Ok, this need not be the truth, but then neither is it far from it!

Most employers mandate that you have to submit details of your tax saving investments or any other financial detail, latest by some date in December, January or February. This is to help the department responsible for deduction of taxes and payment of salaries, so that it has adequate time on hand to take care of both without mistakes and delays. However, how many us, start planning and executing this activity from April 1^st, the first day of the new financial year? Apart from being way ahead of any deadline, this will also give us more time in deciding which is the best way to go about it, rather than do these in a hurry, when we have no time to evaluate the decisions we take nor evaluate the recommendations we receive.

You have some on-going insurance policies for which you pay a significant premium. A new-kid-off-the-block who is a self-styled financial planner says that they are not worth continuing, that you should surrender these policies, collect the surrender value and insure yourself with term insurance policies and invest in mutual funds and other long term investments. Now this guy is a relative on your wife’s side of the family and you are politely avoiding him, citing a busy schedule. Are you inclined towards finding out, whether there is a grain of truth in what he says? Do you have the where withal to evaluate the pros and cons? What will you do?

Sorry, to leave you with a teaser rather than a set of New Year Resolutions which would have made for a feel-good read but then you would have done nothing about it and hence it would not have left any impact on your thinking. You read in the papers sometime back that electricity consumers have been allowed to switch their service providers in the suburbs of Mumbai and that Reliance Infrastructure which is your provider has been found to have charges higher than their competitor Tata Power, because they buy power from Tata’s and supply to their customers, the higher bill you pay is simply the mark up which Reliance levies on its customers. Now, what you have to do is simple – i.e. if you are a Reliance customer, find out the potential savings per month and calculate the total value of your savings till retirement, assuming that you will be saving this amount and earning a return of 10% p.a. on the same.

Rounding off with another gem from the Oracle of Oklahoma, Warren Buffet “I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

What is the fun in having NYRs which are 7-foot bars, if we fail to notice & clear the 1-foot bars?

Mera Bharat Kahan-- Bala's Blog: Aegon Religare- Well Done-

2010-01-02T15:42:00.000+05:30

Mera Bharat Kahan-- Bala's Blog: Aegon Religare- Well Done-

The missing link - Wealth creation!

2009-12-21T00:24:00.003+05:30

Financial Planners explain their role saying how they take care of the financial health of an individual or his family in the same way that a doctor takes care of his physical health.

Hence it will be relevant to mention the various individuals or domain specialists who belong to both these professions –

Doctor * Dentist * Cardiologist * Orthopedic * Eye specialist * ENT * Endocrinologist * Urologist * Oncologist * Pharmacy * Diagnostic Aid * Physiotherapist * Nutritionist/Dietician * Gym Instructor

Financial Planner * Tax consultant * Stock broker * Insurance planner * Mutual Fund advisor * Estate Lawyer * Banker * Property consultant * Online Financial mart * Financial stress test * Financial rehab consultant * Career counselor * Personal coach

As you read this, I hope you will get the connect (or disconnect?) that I am trying to draw your attention to.

At a recent get-together of professional networkers for business opportunities, I was truly amazed to see the enthusiasm and energy of the members and their guests (I was one of them) at an early hour.

One of the speakers at the event, who was highlighting the manifold benefits of networking, asked the audience – “How many people want to be a crorepati?” The response was on expected lines as quite a few enthusiastic hands went up promptly.

While the speaker continued, my mind wandered off….I was pondering over the common thought that all of us face “How can I get rich?”

A point to note about this group of networkers is that they only allow one member from one business category. As a result there is always a scram for different types of financial intermediaries – LIC agent, MF advisor, Financial Planner, CA etc. You’ll realize that rarely you will come across a financial intermediary (yours truly included) who will stick to such a narrow band of specialization.

If you refer to the parallels between a physician and a Financial Planner – The numerous specializations that you come across in the field of healthcare, where each specialist is able to carry out a sustainable practice without encroaching into another specialist’s domain, vis-à-vis the financial domain where everybody is trying to be the proverbial “Jack of all….and master of ….”.

This is a reality and not my or anybody’s perception, hence not debatable. This reality hurts because the financial intermediary (at large) suffers from an acute myopic obsession of maximizing sales and commissions.

However, further pondering will certainly reveal that in the healthcare domain the multiple domain specialists can sustain their practice, because there is something tangible to create, look after and protect, i.e. our health.

In contrast, the financial domain is poorer as it can hardly sustain multiple domain specialists without an acute degree of cannibalization because there is no significant wealth to take care of. It is not that we do not have our share of HNIs and super HNIs (high net worth individuals) but their numbers definitely do not justify the existence of a vast army of financial intermediaries and the masses would rather look at them as ‘agents of commission’ rather than specialists capable of delivering any ‘fee-worthy service’!

At the root of this disconnect is the acute absence of a “wealth creation” culture. A life insurance agent is driven by MDRT and TOT goals, a stock broker’s earning is driven by the number of times a client churns his portfolio, a mutual fund advisor is driven by maximizing NFO (new fund offer) sales to the lure of an overseas junket or other goodies; and so on and so forth. Rarely do you come across intermediaries who will shun the limelight of being in the media glare because he needs plenty of time to do his homework in an ever changing financial landscape.

Back to the prompt affirmative response in wanting to become crorepatis – the need for a culture for ‘wealth creation’ needs to be driven by a vision, mission and plan of action backed by a passion to show up on time, every time round the clock and the year.

Then, the problems of overlapping domain specializations and the rarity of clients willing to pay fees would melt into oblivion. There would be something tangible to create, look after and protect. Any possibility of damage to wealth will be countered with a resolute determination and the need to keep growing one’s wealth will become the bed-rock of all exercise.

Rounding off with the oft-repeated Buffet-ism on wealth creation “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Saach ka Saamna - Your moment of truth!

2009-08-28T08:15:00.012+05:30

TRPs of a TV serial of the same name indicate that it has captured the imagination of TV viewers. As all my friends in the TV industry would vouch, they would give a limb in exchange for having the credits to a program which can boast of such high ratings. What else to expect in an age of fickle loyalties!

Reality TV is the new thing on TV these days and not only in India. Globally audiences are hooked onto watching their favorite TV stars facing up to some challenge or the other, but, set to a scene devoid of any script…completely unrehearsed, unedited, WYSIWYG – What you see is What You get!

The attachment is largely based on our obsession with the lives of our TV stars. We try to know every detail about their lives and how they fare in the face of real life adversity & challenges. This curiosity is heightened because mostly, our awareness about our favorite stars’ lives (and of course their actual abilities) is limited to some creatively spun media bits & bytes.

What has this got to do with personal finances? Well everything! This world is also getting real!

Sweeping changes are underway in the financial regulatory environment. Mr. Swarup, chair-person of the Committee on Investor Protection and Financial Literacy, says - “CIPFL is looking at aspects of greater transparency, common disclosure norms of financial products, and attempts to bring all financial products to a level playing field. It will also regulate the advisors.” The committee is also looking at removing commissions that are embedded in financial products, where the agent gets a commission from the investment.

The upfront commission on mutual funds has been barred by SEBI w.e.f. 1^st August 2009. But, the IRDA (the insurance regulator) allows commissions that are as high as 40 per cent in the first year. All these and more have been reported, discussed and pretty much highlighted by the media in a laudable effort to guide the investing public!

Having said so, let us see how you will fare under this new emerging reality. You are live on TV (or better still, stand in front of the mirror!) on the program Saach Ka Saamna – Your moment of truth! And, your questions are –

a. You choose investment & insurance products based on the latest fad (friends are buying)?

b. You buy a financial product and then forget all about it?

c. You feel asset allocation is a good theory but not for you?

d. You never review the performance of your investment portfolio and record the same every year?

e. You don’t know how much commission your agent/advisor gets for selling you any product?

f. You will not pay a transaction fee to your agent/advisor, even though mutual funds are now subject to ‘zero entry load’?

g. You have no idea of the name or the type of insurance policy that you own?

h. You last purchased a ULIP without verifying (from independent sources) the ‘expected return’, ‘promised’ by your agent?

i. You have bought 20 life insurance (endowment) policies of Rs 1 lakh each (sum assured) which will mature every year starting 25 years from now, because you were told that this is a ‘pension’ plan for your retirement?

j. You don’t like term insurance, because you do not get any money back on maturity?

k. You don’t want to buy a health cover on your own, because your company offers you a group cover?

l. Your banker is your advisor because you believe he is the best person to manage your money?

m. Your choice of agent for investments or insurance is based on his willingness to pass back (highest amount) commissions?

n. You refuse to pay a fee or offer a performance-linked-incentive to your financial advisor for his advice?

The above is a list of common mistakes made by investors who miss the big picture!

If your answer to any or all of the above questions is “Saach” - I’ll not be surprised if at the time of retirement, you feel you would have done much better in terms of your savings & investments; If, you had gone about the task in a more objective and methodical manner, based on sound principles and rationale!

We invite your feedback – constructive criticism, sharing of personal experiences, bouquets & brickbats…all of this. Without this, our efforts will be in-effective in making this platform, informative and interactive towards helping the layman achieve Financial Freedom.

Also, please take some time to cast your vote on what you think is the most important criteria for being a successful investor. Click on http://polls.linkedin.com/p/53641/jkbij

Choosing a Financial Advisor – a critical decision

2009-08-22T07:03:00.009+05:30

To understand this better, let us start by analyzing what are the objectives you want to achieve through your Financial Plan. To list them down, in order of priority -

a. Liquidity management

b. Risk management

c. Investment management to beat inflation & generate real returns

d. Tax Planning

In short, wealth creation for a lifetime and beyond (to leave behind an estate for inheritance or philanthropy)!

I come across many individuals and families who save a significant amount of their annual earnings (foregoing the pleasures of the present in order to secure their futures) have bought themselves Life Insurance policies which will damage their future like a 'slow-poison'.

Your advisor's qualifications & experience are important. But, more important is his advisory style. Check if he tries to explain & educate or is busy closing the deal with a sales-pitch that would leave you tongue-tied and afraid to ask questions. If you find an advisor who is e.g. a "Star Insurance Agent" you need to ask him about his strategy for beating inflation. They are likely to start fibbing, for sure!

While many advisors may still fit this mold - LIC or insurance for everything: marriage to death! "Zindagi ke saath and Zindagi ke baad". Some are evolving their practice into a more comprehensive approach. They look at not just insurance, but also investments, budgeting, taxes, retirement, education funding and estate planning.

A sensible advisor will not ask you to get into straight-jacketed solutions - long term products without flexible options for an easy & early termination. These may be considered only if they offer you asssured returns which beat the long term trend line inflation rate. Will you want to invest in a 20 year bond which offers 9% RoI (taxable)? This is not recommended because the post-tax return will surely be less than the rate of inflation. In short they will be "long term value-destructive".

If you'd rather not have someone who struggles to manage his or her own finances, manage your money (or even better someone who is extremely focused on his own financial planning and does not focus on your financial plan!) - Then, you had better do your advisor homework!

Be cautious with wealth managers affiliated to your bank or stockbroker. They are "glorified salesmen" pumped up by terrific incentive structures. They dump you with ULIPs, MFs and proprietary PMS schemes. They manage to get their targets like sharp-eyed eagles. They are continuously 'preying on the next kill' by browsing through your bank and de-mat accounts, sniffing for the smallest opportunity.

You will be better off to keep a check on - whether your advisor follows any benchmarks in measuring portfolio returns? How does he profile client's risk tolerance and allocates assets? Whether the recommendations are 'one-track' - only SIP recommendations or only MFs? Does he analyze your real estate portfolio (investments)? In short, does he have the band-width to put together a comprehensive and cogent analysis of your entire balance sheet (though it is not practical for an individual to have expertise in diverse areas) with the help of a team of experts?

If your advisor is a 'one man show' you can help him get closer to his goals of becoming a 'Star Agent' by being a proposer - you pay the premium, for a life insurance policy with the advisor as the life assured and you as the nominee! Are we not supposed to address the risk of what happens to you if something were to happen to him?

If you want someone to look at your entire financial situation, seek the help of a comprehensive financial planning firm. They will have on their panel an insurance agent, tax professional, estate planner and investment advisor.

Understand all that is on offer and what you are paying for?

* Will it track your investment on a total cost basis for you?

* Can it file your tax return and help you with other tax related questions?

* Does it look at risk management? (i.e. life insurance, long term care etc...)

* Can it help you plan your estate?

* Will it refer you to another professional if the firm cannot provide the service itself?

If the advisor works with a narrow focus of achieving short-term business targets, avoid them like the plague. Visit their office and you will have a clue about the same!

Once you zero-in on a financial advisor that you trust, you'll need to agree on how your advisor will be paid. Will it be a fee-only model, or commissions-only or fee-cum-commssions?

Good financial advisors are akin to 'life coaches'. They will help you tackle the many challenges and complex financial decisions throughout your life. Great financial advisors will help you make money on your investments and also save you money on your insurance premiums. They will help you reach your goals and positively impact major decisions throughout your lifetime.

To get the best results - meet your Financial Advisor regularly. set up meetings with specific agendas to update on the latest developments on the personal finances front, your concerns & goals. allow your advisor to review all of your financial and legal documents. After all, it's all about - his competence & reliability and your trust!

We invite your comments - constructive criticism, sharing of personal experiences, bouquets & brickbats...all of this. Also, if you find this post (or, any of our other posts) informative or helpful, please forward this to people in your network...without this, our efforts will be in-effective in making this platform, informative and interactive towards helping the layman achieve Financial Freedom.

Also participate in the poll - "Does a Financial Planner have an edge over your MF agent or Insurance agent or CA in helping you achieve your financial goals?" click on http://polls.linkedin.com/p/52394/mwkgw

Financial Planning for a secure future

2009-08-06T05:54:00.006+05:30

Everybody saves, just as, everybody eats. The big question is "Do you eat right?" or "Do you save right?" While what you eat will reflect on how you look and feel. Similarly, the way you manage your finances (from now onwards), will reflect on how secure you will be, financially, as long as you live.

In our (fairly complicated) lives where the use of jargons tend to put off the mild-mannered and the easy going, "Financial Planning" or FP, is an addition to the jargon overload. Before you turn this page without reading it fully, let me assure you it is no rocket-science.

FP is the art and science of managing finances in a manner, so that you always have sufficient money on hand to take care of your needs, at present and in the future. While in the present context it will suffice to say that your income should always exceed your expenses. Post-retirement, the accumulated corpus should be sufficient (amount wise) and should be invested carefully in order to generate a regular income to meet your needs. All of this has to be done in a manner so that an unfortunate twist in the tale - unforeseen expense, loss of income, damage to assets, or an increase in liabilities; will not leave you scarred.

To begin with you need to ask yourself the right questions -

a. Am I saving enough?

b. Am I spending right?

c. How can I enhance my income?

d. What are the various risks I face?

e. What is my ability to meet a risk without succumbing to it?

f. Are my investments and savings liquid (enough) to meet any emergency need?

g. Are they suitably diversified, so that they are not hit by any single event-risk, all at the same time?

h. Are my investments and savings generating enough returns to beat inflation?

If your answer to all these questions (in reasonable detail) leaves you satisfied, then, you are most likely to be up-to-date on your financial plan. In case, you are not, then you need to work on them and maybe a Financial Planner will be able to ease your worries.

A simple list of dos and do'ts will be just right as a starting point -

a. Track every rupee you earn and spend. Also teach it to your kids, it will serve them well for a lifetime.

b. Make a complete inventory of all your assets - property, MFs, shares, bonds, FDs, Insurance policies, gold, jewelry, etc. whatever you own and wherever they may be located.

c. Revisit the questions listed in the first section.

d. Keep going back & forth, working on all the small improvements that you can make. List down the plan of action and set yourself a date by which you will have them re-worked.

e. After doing this, if you feel you need professional help seek out an expert.

f. If you resort to action 'e' (above), without working on the steps that come before it, you will make a big mistake - please avoid it.

It's a common practice to have savings in the form of stocks, MFs, insurance, FDs, etc. done over a period of time without any method or plan. It is recommended that one reviews and integrates all assets rather than retain them in bits and pieces, as this will lead to sub-optimal results (jargon again, but an easy one!).

A Financial Planning exercise with the help of a professional will help you realise the best results only when you are prepared for it!

Myths that make up our daily lives

2009-07-26T07:00:00.006+05:30

The govt.'s take on inflation at -1.56%, could be circuitously extrapolated to infer that the neighbourhood priest and kirana-wala have the best pedigree in leading honest lives.

Think through - if you take one who preaches homilies, at face-value, without a peek at what lies behind the smokescreen, you may find a Ajmal Amir Kasab, the terrorist who wishes to be hanged, because he says, 'I wish to be punished by the people who I have sinned against, rather than by God, himself!'

Wow, conscience - thy name is Kasab!

A plethora of garbage is packaged as news bytes in print and the electronic-media, including tweets and wall-posts on FB. Garbage, that not only wastes your time and energy but manages to perpetrate some fabulous myths. This, in a simple moment of reflection would not only get busted, but lead to detoxification of a kind that you may begin to have withdrawal symptoms!

Just sample a few of them -

Inflation is negative
Aided by overseas capital (inflow)...we are in a 'falling interest rate regime'
Infrastructure development is happening ...TINA (there is no alternative)
Any businessman who is doing well must be cracking a few crooked deals
A business or technical degree-holder is a professional
Service providers loot their customers through the fees they charge, and .....I can go on and on, but that will defeat the purpose!

Now, let me help you analyze -

The growth in your bills - grocery, utility - viz. electricty, etc. and your monthly salary - Yes Sir! Your competence aside, the contribution of inflation is significant.
India will attract lots of portfolio and FDI, which will drive investments & growth...but a lot of which will also drive inflation and push interest rates higher.
Investments in infrastructure is on...albeit at a pace slower than we would like....this drives up costs and risks, as a result end-user affordability may go for a toss!
Businessmen essentially are entrepreneurs who risk career & capital to stay afloat. They use their resourcefulness to survive - because he knows there will be no bail-outs (remember Citi Bank and Air India?). His resilience adds to the resilience of the economy. In contrast, the middle class white-collar cribs at every opportunity - they will make you believe that they are doing society a favor by clinging on to their 'risk-free middle-class heritage' no less!
A degree holder and that's his badge - he is the self-anointed 'professional'. Ask him about his 'professional ethics' and he might shoot back - Aw, come on, what's that?
Service providers, if they are lawyers, as Mr. Chidambaram had famously remarked - They don't provide any service hence they need not pay any service tax! A big 'thank you' to Pranab-da for ensuring, that, now, lawyers are also 'service providers'. By the same yardstick, financial advisors have been providing service to their clients for a long time.

If you fail to understand how inflation eats into your long-term savings and can't seek remedies for it; If you are bullish on India because the 'firangs with money have nowehere else to go'; If you believe that all businessmen cheat and are a threat to the country's growth and prosperity; If you are happy to be 'professionally' qualified, without being 'qualified' to discharge your responsibilities like a professional; If it inflates your ego to be treated like 'royalty' by rogues masquerading as Wealth Managers at your bank (incidentally they too belong to the 'middle-class white-collar') -

Then, you are bloody right, to tell any advisor who dares to ask you for a fee for managing your hard-earned money to ****-***!!!!!

SEBI queers the pitch for Mutual Funds?

2009-06-21T23:13:00.005+05:30

On 18th June ’09 SEBI announced that henceforth, no entry loads will be applicable for mutual fund transactions (click here for details). This has set the cat amongst the pigeons. The agent fraternity is ‘up in arms’ and words like a ‘regulator-induced lay off’ are being use to describe the possible after-effects.

While I can understand the antecedents of the reaction, unfortunately, it is not a simple & easy thing to either support or oppose this view. Let us understand the background –

SEBI thinks the investor and investment advisor should come to an agreement on what is the fee to be paid for a particular transaction and this is a ‘fair practice’. This is something that is (perhaps) agreed upon by the entire industry – AMCs, distributors et al.

However, the hue & cry being raised is not the ‘negotiation’ aspect of the fees to be paid. It is the method and manner in which it is to be paid by the investor to the advisor/agent. According to SEBI, the investor should henceforth, pay the agent separately. So far, the practice has been that the entry load is deducted from the amount invested by the fund house and paid to the agent.

Most AMCs – though they’ll not admit publicly, and agents are outraged or should I say ‘shaken by the prospect of an uncertain future’; but, for different reasons. Understandably so….let’s examine why?

Typically the investor approaches a MF agent/distributor asking for their recommendations on how or where he should invest his money. The agent dutifully shares with the investor, what, according to him is the ‘best’ way to invest his money and the reasons for the same. The investor feels obliged by the help provided by the agent. Hence he does not mind paying for the entry load; he understands this is towards the commission earned by the agent for his efforts.

So far so good! However, there is a twist, as always.

MFs are managed by intelligent people. They are hired to contribute an ‘alpha’ to the job they do. Let’s say this ‘alpha’ is the ‘extraaa’ that the guy brings to the table. So what does Mr. Extraa do?

He puts together a concoction of strategies resulting in multiple product launches. Some of them may be identical to each other but are launched as “New International Lux”….ok, ignore the FMCG parallel!

He plans a roll-out which catches the imagination of the investor; and, has a mouth-watering gravy train for the agent. The rewards are not restricted to the entry load paid by the investor. Plenty of other rewards in kind follow - which makes the agent go weak in the knees, he succumbs to it, going all out to achieve targets.

I lay particular emphasis on the last word – I am sure in this context, it will not be difficult to understand where the agent’s loyalties would lie – with the investor or the MF.

The agent/distributor community has allowed itself to be ‘used’. It is the role of a regulator to remove any (actual or perceived) unfair practice exercised with the help of an undesirable clout which a manufacturer may have over its distribution channel. Please remember what the ‘I’ in IFA (Independent Financial Advisor) stands for!

I suspect SEBI has specifically tried to remove this. However, as in so many other areas the articulation that should have preceded the actual implementation has left a lot to be desired. Part of the reason could be the regulator’s efforts at conducting ‘intelligent communication’ using the media to mould mass opinion is fairly limited in comparison to that of the Mutual Fund houses.

I have been an agent/distributor for more than a decade. Over the years one has seen how the average agent’s vision and mission of doing business has got thoroughly distorted. He has lost his ability to think independently. He is completely dependent on fund house inputs to decide on what to recommend to clients. The removal of entry load has almost, as he sees it, pitted him as an adversary of the investor.

He is completely missing the point. He is supposed to play a collaborative role with the investor in helping him create long term savings and wealth.

However, I will not blame the agent entirely. Many a time, investors behave in a short-sighted manner. This creates a sense of insecurity in the agent about the ‘lack of loyalty’ factor. Most importantly it contributes negatively, discouraging the agent from improving his service delivery and advisory practices.

We have to understand that all of us – investor, agent, mutual fund house and the regulator; are part of the same eco-system. We have to work together in ensuring the eco-system is strengthened…that, we are ALL able to achieve our objectives through sustainable practices and win-win solutions.

A better way to handle the abolition of entry-load would have been to abide by a time-frame for the change-over. This would have provided sufficient room to all stakeholders to thoroughly understand the pros and cons of such a change and take appropriate measures for adjusting to the same.

The biggest Buy vs. Rent decision of your life?

2009-06-02T08:00:00.007+05:30

“Manufacture vs. purchase (or outsource)” is a common topic in business strategy. Simply, put, this is about deciding, which is preferable from a strategy point of view, given a host of myriad situations.
Buying houses and repaying loans over 15 to 20 yrs periods (with higher cost of apartments and fluctuating rates of interest, the average loan repayment tenor is seen to have increased from the historical average of 6-8 years to 12-16 years)? Or should one simply take them on rent?
Buying houses when kids are staying with you, leads to buying bigger houses. Post-retirement the need for a home is modest in comparison. By this time the house purchased while working, is not only older but also costlier to maintain.
Financially speaking, this leads to sub-optimal cash-flows. First, while paying EMIs for the loan and also, since the cost of maintenance of a property (which is bigger than post-retirement needs and also older by the time you retire) will be higher.
Compare this with staying in rented apartments till close to retirement – loss of tax-breaks due to avoiding housing loan can be set-off by adjustment of rentals paid to HRA (tax-wise!) and the flexibility of choosing apartments based on location of employment/profession, size of family and/or socio-economic status – a highly flexible package. Also, the low levels of house rentals as compared to their capital values (3to4% annually) will lead to accumulation of retirement corpuses with lesser probability of outliving them.
Post-retirement, if you out-live your retirement corpus, the need for reverse-mortgage leads to a second incidence of sub-optimal cash-flows. Since, this is driven by value (older the property lower the value) and hence lower will be the sum of annuity through RM. Add to this a high rate of interest (prevalent rate?) and a low cap on loan to value. The cash-flows from the RM could be way below the needs and/or expectations.
Alternately, if say, 1-2 years from retirement an apartment, closer to actual needs post-retirement, is purchased (as the unit is likely to be smaller, the need for loan may be minimal if not required at all), then….the possibilities look rosier.
Chew on it! Our back of the envelope calculations suggest that practiced over a 25 year period of working life, right from the time one gets married (assumed @ 30 yrs) till age 55 yrs (a well managed corpus of retirement funds should make it possible to retire at that age) – the retirement corpus could be at least 2 times the corpus of the more conventionally inclined.
Caveat - Even if you are convinced about the numbers, there are actually plenty of risk factors in this course of action and they are –
a. There is a lack of adequate and steady supply of apartments for rent.
b. The non-existence of landlords who give apartments on long term lease
c. Can the popularity of the renting vs buying option lead to a speculation in rentals as we have seen with respect to asset prices of apartments in most towns and cities in the country?
We will be discussing about what is required in the macro-environment and the attractiveness of this proposition from both the macro as well as the micro points of view, in the second part of this article.

What did Shahrukh Khan and KKR forget?

2009-05-19T07:40:00.005+05:30

(This is the second part in a series on the need for Customized Financial Planning)

Imagine! Ages ago, life for our fore-fathers must have been very difficult – what with all kinds of predators roaming all over the place, the most sensible thing to do would have been to stick to others, as in a group, the collective intelligence or strength or survival instinct of the group would have ensured the highest probability of surviving any ‘clear and present’ danger.

Point to note here – the hunter and the hunted belonged to different species of life forms. In layman’s terms ‘even a child could recognize the difference’!

Cut back to the 21st century – Long gone by are the days when the greatest threat to a man’s survival was from any other form of life. Man’s ingenuity at surviving the various odds has helped him in ensuring that most life forms which pose(d) a threat to him are either at a significant dis-advantage or are already extinct.

However, life never ceases to surprise us! Doesn’t it? We now face the risk of annihilation – physical and economic, from fellow humans who have armed themselves with WMDs and varied financial instruments (which can also be labeled as WMDs?) through the use of which life can change irreversibly for a vast segment of the population even before they can blink or think!

The hunter and the hunted now belong to the same species….though luckily, some things never change….. ‘even (now), a child can recognize the difference’!

Let me explain – Let us begin by assuming that there are 2 ways to reach a mountain-top which signifies achieving your goals. Path A leads you to the top through a rough terrain, through a forest of thorny bushes, a few life-risking steps etc. Path B leads you to the top by taking a chopper, a relatively comfortable-ride, provided you are able to get into the chopper. Since, quite obviously, there are many people willing to take Path B. There are few choppers available and each can carry only a fixed number of passengers. The probability of getting ahead in the queue and getting into a chopper, to reach the top within a certain time-frame is then subject to a number of variables. Variables which are uncontrollable, viz. – the total no. of people ahead of ‘you’, whether people behind ‘you’ will not break the queue to go-ahead, whether the choppers will be reliable (mechanical faults and weather related problems) etc.

It is in the context of the higher number of uncontrollable variables of Path B, that many or at least a few may choose Path A, where physical endurance, route planning and having a reasonable back-up (in the form of equipment and provisions) will likely ensure the successful completion of the journey to the top, albeit with a lot more sweat than in Path B.

However, based on real life experiences familiar to all of us, more people will opt for Path B. Why? Let’s try and understand. Perhaps more people prefer to avoid hard work, are not physically fit, don’t want to get involved in any planned activity etc. etc…..However; I get the feeling while all these could be factors, they are NOT the most important factor. The bigger, if not biggest factor at play is the unwillingness (or the ability?) to THINK!

….and, Any kind of unwillingness repeated over a period of time can become an inability, but the more pertinent aspect about thinking is that since the dawn of industrialization or mechanization (it has become more acute with the advent of computing) humans are increasingly becoming lazy. The expectation that every bit of work that we do can be ‘outsourced at a price’ to gadgets or other humans has led us to this current state of physical and mental laziness.

What is the relevance of all this to personal finances or Financial Planning?

Everyone wants to make a quick buck by investing in the stock-market or doing a ‘leveraged’ investment in real estate. Money making was never easier, right? Ask the guy who invested at 21000 (Sensex) and finally threw-in the towel at 8000! Do you think he is ever going to come back to the markets easily?

Path B definitely is like the ‘age-old stereotype’ - without any glamour or hype, but I’ll tell you what, it requires more brains and thinking and has a far higher probability of making it to the top (your goals)…….and that is exactly what is the objective behind doing Financial Planning - Reaching your Financial Goals, within an appropriate time-frame by taking ‘tolerable’ risks.

Caveat – For all those who are looking for some quick buck in stocks, riding on the decisive mandate given by the people to the UPA, will do well to remember the lessons from the past and not get carried away by the ‘euphoria’.

Footnote – For those who are wondering about the relevance of this write-up to the headline, I assure you that it was not a cheap attempt at grabbing eye-balls…..it was a deliberate ploy to make you ‘read between the lines’ and figure out the obvious…..maybe, I should apologize for playing mind games…..but then, isn’t that what the team management at KKR has been doing from day One?