Ranjan Varma's Blog

Finance is Passing the Parcel Game?

Ranjan — Fri, 10 Jul 2009 11:26:35 +0000

Finance is the art of passing money from hand to hand until it finally disappears. Robert W. Sarnoff

Do you agree?

Have you figured out the difference between Insurance and Investments

Ranjan — Thu, 09 Jul 2009 08:16:42 +0000

The Simple Dollar reviews The Total Money Makeover and even though these are US figures it applies much the same to India. Here’s an excerpt (a point I keep harping upon):

All of the [extra payments beyond the price of term insurance] per month disappears in commissions and expenses for the first three years;

after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds.

These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers.

Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. [...] Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of a policy [...].

The truth is that you would be better off to get the [inexpensive] term policy and put the [extra payments beyond the price of term insurance] in a cookie jar!

That pretty much sums it up. If you want insurance, buy bread-and-butter term life insurance. If you want an investment, buy an investment from a brokerage with low-cost investments . Mix the two and you’ll find yourself eaten alive by fees and commissions.

So Much Noise on Goverment’s Budget, What about Your Personal Budget

Ranjan — Tue, 07 Jul 2009 06:45:53 +0000

Newspapers, TV, Websites move into top gear covering the pre budget expectations and report all the details. Add to it all the pros and cons and my head starts spinning.

Now you’ll snigger at me and say that all this information should actually help me with making better financial decisions. But actually the poor me gets a decision paralysis with all this abundance of information.

Another thing which bugs me that people are so worried about the Government’s budget but when you ask them whether they have a personal budget of their own, they look at me as I’ve gone nuts asking that question. Personal Budgets is so boring, they cringe.

Don’t you think it’s like बेगाने की शादी में अब्दुल्लाह दीवाना

Recently I attended my cousin’s marriage. I got a few gifts as part of some rituals. Similarly the FM gave me a few IT sops. But then the FM taxes me hugely. I guess it’s similar to the amount I had to spend to attend the marriage. In any case it’s my cousin’s marriage and not mine!

Coming back to the budget 2009, things which impact us at a personal taxation level is as under:

Marginal Increase in Tax Exemption: Personal income tax exemption limit raised for senior citizens by Rs 15,000 and for all others by Rs 10,000.

Higher Deduction under Section 80DD: Annual deduction in respect of maintenance, including medical treatment, for a dependent with severe disability (more than 80%) has been raised to Rs 1 lakh from the current Rs 75,000.

Expanded Scope of Section 80E: Annual deduction in respect of interest on loans taken for higher education purposes has been expanded from the current limited list of courses to cover all fields of studies, including vocational studies, pursued after completion of schooling.

Elimination of Surcharge: The 10% surcharge on taxes for those earning annual income above Rs 10 lakhs will no longer exist. This will lead to a tax saving for higher income earners.

Abolishment of Fringe Benefit Tax (FBT): FBT on the value of fringe benefits provided by employers to employees has been abolished.

Increase in Wealth Tax Exemption: The exemption limit for wealth tax has been increased from Rs 15 lakhs to Rs 30 lakhs.

Automation of Tax Filing Procedure: Reiteration of the re-engineering of the key business processes around the filing of direct taxes.

To be fair, Union Budgets are an important policy document for the country and which means a lot of things to a lot of people. Every industry looks forward for incentives, schemes and fair taxation laws.

My own interest area is the Infrastructure Sector, Education and the Fiscal policies of the country.

It’s a matter of concern that the fiscal deficit budgeted is 6.82%. Specially when we recollect that the FRBM Act, 2003 mandates the Central Government to eliminate revenue deficit by March, 2009 and to reduce fiscal deficit to an amount equivalent to 3 per cent of GDP by March,2008.

For budget insights check out Ajay Shah’s Blog and TT Ram Mohan’s The Big Picture

You can also download BUDGET09 which gives a snapshot idea of the impact of budget on various industries.

Do read and understand the Union Budget for sure. But do remember to do your own personal budget too. :)

Stock Market Lesson in a DTC Bus

Ranjan — Thu, 02 Jul 2009 05:22:50 +0000

While travelling on a DTC Bus near Kashmere Gate, Delhi yesterday, I saw this interesting con game played out.

A young man with a wad of notes and coupons announced that he was giving away prizes. All coupons will ensure atleast a return of investment and people can win jackpots too.

A man ventured his Rs 50 and immediately got Rs 100 in return. Then another guy got Rs 100 for his 50.

Then the floodgates opened. A guy got Rs 150 for his 50. And the stakes continued to rise.

Suddenly there was a frenzy. In the melee that ensued, the guy sitting next to me joined the melee with Rs 500/-. He came back clutching a handful of “gold rings”.

And the guy with the midas touch had vanished.

I could see the greed writ large on my co-passenger’s face. And later, the wry smile of a loser. !

Obviously the Midas guy had friends planted as passengers. He worked up greed and vanished with a few thousands in a few minutes.

And even though it was obvious that it was a con game, people got sucked into it.

That’s how the sharks operate the stock exchange too. No?

ULIP Investment: 50000 turns into 47000!

Ranjan — Thu, 02 Jul 2009 04:58:05 +0000

A CEO of a tech Startup invested Rs 50000/- in a ULIP when the Sensex was around 10000.

“Why is the value Rs 47000 now when the markets have gone up to 14000+?”, he asked me.

“Well, only 30-35000 would have been invested in the markets. Rest goes to the advisors and other costs. So your fund has performed well. Only you were not told about the costs”, I replied politely.

I did not tell him that even though he is a CEO, he’s still a moron when it comes to investing.

Infact, he’s lucky that the fund value is Rs.47000. It could easily be 25-30000 only, if the markets were not rallying so well in the recent past!

With the costs involved, ULIPs are indeed daylight robbery.

Confessions of an Insurance Agent

Ranjan — Sat, 27 Jun 2009 07:00:27 +0000

Srinivas is an Insurance agent and has a confession to make. Thanks Srinivas for the permission to blog this.

good morning sir!
i am located in vijayawada,andhra pradesh.it is a busy railway junction connecting north to southern states.very fertile lands and our neighbour town GUNTUR is well known for its tobaco leaf.

i work for aviva,hdfc and birla sunlife insurance as a agent for last five years.our innocent customers lost their money in ulips.i was very very innocent when joined, blindly beleived what my employers said.

today all those regular pay roll bosses jumped from one company to another like forest monkeys with pay rise, and dis appeared finally.

i failed to understand the hidden charges which are deducted on MONTHLY basis from the UNIT ACCOUNT.eventhough the NAV is highly appreciated the fund value becomes very very less due to lower number of units.

irda failed to promote simple term plans and giving timely advice to ordinary indian innocent citizens.
recently all pvt. life companies came with very attractive guaranteed polices on maturity.

But i want to confess before this board that very huge incentives and very very easy money we all make in this bussiness.very few people know how policyholders money is spent.
thanks

The Process of Transition

Ranjan — Fri, 26 Jun 2009 05:50:28 +0000

Click to enlarge

The image is my desktop background. It’s from BusinessBalls

Debt & Equity Investing

Ranjan — Thu, 25 Jun 2009 07:17:07 +0000

Debt and Equity are two broad classifications for your investments. When we talked about asset allocation, it was about allocating your money between debt and equity funds. In a way, this post should have come before the asset allocation one. Anyway, let me share some basics.

The basic difference between debt and equity would be the ownership level. Let’s take an example where you invest in me.

If you give out some money to me and expect that I return the money along with interest that I pre promise, that would be a debt investment. I’m indebted to you but since I have promised you a return with interest, you don’t actually own me.

In another case, you give me money at your own risk. But you trust me/hope that I’ll be a billionaire in the future and I’ll payback from my profits. The more profits I make, the more you do. If I am bankrupt, you don’t get anything back. And so you have invested in my equity. By trusting me, you own me in a way!

In other words, by investing in a debt instrument such as a bond, you are guaranteed the principal of the bond, plus any interest that is owing.

However, for equity investors, you become an owner. As such, you also take on the risk of the company not being a success. Just as a small business owner has no guarantee of success with each new venture, neither is a shareholder. As a shareholder, if the company is successful, you stand to make a lot of money. On the flipside, you stand to lose a lot of money if the company is less than successful.

Now debt and equity is just a classification of financial products and not a product by itself. So let me share the products available within the two classifications:

Equity: You can own any stock on the Stock Exchanges and you have invested in an equity product. If you invest through Mutual Funds who have schemes for equity. Even ULIPs invest in equity and so part of your Insurance buy goes to equity. The NPS also invests in equity.

Shares come in different sizes and categories. There are large, mid and small caps and there are penny stocks. As a beginner, you can invest in large and mid cap companies and only after you gain experience, you can consider investing a small portion in small caps and hot penny stocks. These are the riskiest but if handled adroitly, give the largest returns. However, it needs expertise and nerves of steel.

Debt: Mutual Funds also have debt funds where you can invest. Some people may find investing in bonds simpler than investing in stocks. Your friendly neighbourhood financial advisor can provide you with government bonds like NSC/KVP. Your banker provides you with Fixed Deposits and PPF accounts. You can also pick up some highly rated corporate bonds.

Then there are hybrid funds where the Mutual Funds invest a part in equity and a part in debt.

To compare debt and equity, you need to consider the risk and the reward tradeoff. But that I guess would be another post.

Would you like to add your thoughts on this? Welcome and Thanks.

How to Apply Asset Allocation Principles

Ranjan — Wed, 24 Jun 2009 07:35:46 +0000

This is part 3 of my posts on Asset Allocation. New readers, see Part 1 & Part 2. Part 1 and 2 were about why Asset Allocation is a good idea and what’s it all about. I tried to relate it to the institution of marriage to articulate my thoughts.

The previous posts were theory, this is practical, the tangible part. Understanding a few things about asset allocation doesn’t really help. It helps only when you are able to apply that understanding. So what are the take aways from this knowledge of asset allocation? Let’s take it in steps.

Step 1: Understand Yourself

There’s always a risk-return trade off. You must know whether you can absorb the shocks of short term losses when you aim at higher returns. It’s not possible that you want attractive returns and you are not exposed to a few shocks here and there. So be aware of your risk profile to start with. The three broad categories of risk profile are: Aggressive, Moderate and Conservative. Which one is your risk profile?

Step 2: Understand the Asset Classes

Sumi ( comment to my previous post) says that “we must invest in assets we understand. Blindly investing in any of them could be disastrous especially equity”. That’s so true. So one should know what options are available under equity & debt assets and then take a reality check on our comfort level with them. I’ll share my thoughts on Debt and Equity Asset classes in a future post. But let me share the link to some of the options available

Step 3: Decide your allocation ratio

Now you knew the thumb rule that if your age is X, invest X% in debt and 100-X% in equity. Example, if you are a 25 year old guy, invest 25% in debt and 75% in equity. But after going through steps 1 & 2, it’s time you set a allocation ratio for yourself. Remember it’s personal, personal finance.

Step 4: Balance the Portfolio

We need to monitor the portfolio and rebalance it to the original allocation ratio. Why? Well, once you have invested (for example) Rs 1,00,000 , Rs 50,000 in equity and Rs 50,000 in debt funds the portfolio will change it’s ratio over time. In a few months, the equity portfolio may be valued at Rs 75,000 and debt portfolio at Rs 55,000 , total Rs 1,30,000. (just an example). So if you want to maintain your asset allocation ratio of 50% each, you may have to sell Rs10000 from your equity and invest the same in debt to make them valued at Rs 65,000 each.

By maintaining this asset allocation ratio, you are booking profits when the equity markets rise. Similarly, you are buying more equity when the stocks go down. This is what many experts do. So, by just maintaining your asset allocation ratio, you have become an expert!!

So there, I have made you into an expert. But despite this, there are people who after listening to all this, look at me with a befuddled look and say, “Now what should I do?”

I take a deep breath before I say, “Go to Hell”. “See, this is what I have done for myself. You can try that for yourself. But remember to do the step 1 & 4 for sure. And there’s the disclaimer…..”

Asset Allocation Strategy Part 2

Ranjan — Tue, 23 Jun 2009 06:24:56 +0000

Continuing on my previous post on How Asset Allocation is Like Marriage, here are some more thoughts. (Btw, if you don’t believe in the institution of marriage, skip this post. But do come back later

Marriage is a committment towards family and your social future. So is Asset Allocation. Towards your financial future.

Marriage can be an arranged one or a love marriage. (Even if you talk of a live in relationship, that’s a committment too) Similarly your asset allocation can be done in a number of ways.

In an arranged marriage, the parents try to match the kundalis. When it comes to asset allocation your risk profile is your kundali.

In a love marriage, you are focused on the one guy/girl you love. With asset allocation also, one may stick to one asset class like equity or debt only. For example, people who are into stocks scoff at the idea of investing in debt and people who are invested in debt may be scared of wading into stocks. They love their own asset class.

It’s a good idea to stick to the asset class you love and understand. The only problem is that of lack of diversification. Though you can diversify within your stock portfolio or spread risk over within your debt portfolio.

In any case, you need to work on your marriage even though they may be made in Heaven. So do you need to continuosly evaluate your asset allocation and do course corrections.

Do stay tuned in for concluding thoughts on Asset Allocation. It’s Part 3

Ranjan Varma's Blog

Finance is Passing the Parcel Game?

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Have you figured out the difference between Insurance and Investments

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Asset Allocation Strategy Part 2

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