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Don’t place all your eggs in the ‘property’ basket

2012-02-11T06:13:00.000+05:30

In September this year,I met Deepak and Saloni – a DINK (double income, no kids) couple – who wantedmy financial planning services. This young couple earned well, but had parkedall their investments in one asset class – property. They had a portfolio offive houses, a term plan, a mutual funds portfolio worth a few thousands andsome shares. We started discussions 0n financial planning. By the time I visited themagain – in October – they had added one more property to their list.

I had anotherinteraction with a couple in their forties with a similar story – they too had parkedall their investments in property. Four, to be precise. The rest of their moneylay in their savings account.

A recent email from aclient mentioned that “I am also actively considering investing in real estate- sometime after July next year by re-allocating funds from the MF portfolio...as real estate tends to provide the best long term appreciation.”

Wehave been taught to ‘invest in property and LIC policies, as their value nevergoes down and will always fetch you positive returns’.

Inthe cases I have listed above, and plenty more, property is only investmentasset class. There seems to be a craze for buying property so much so that wetend to lose focus on all other forms of investments. This has been further‘confirmed’ by the boom in real estate over the past 7-8 years.

Disadvantage ofinvesting only in property:

· Thebiggest disadvantage with real estate is that it is an illiquid investment.

· Youneed to spend on its maintenance and also pay taxes and duties.

· Speculationis rampant in the real estate industry. These speculators make lump-sumpurchases during a boom, without bothering about the purchasing cost and the ongoingcosts such as maintenance.

Now,I am not implying that real estate is a bad instrument for investment. But itbecomes dangerous when it is the only asset class that one invests in. Here, ofcourse, I should mention that the ‘first house’ (which is bought for thepurpose of residence) is not being included assuming that it is not for resale.

Withthe ‘pressure’ created by real estate brokers and builders that the rates aregoing up every day, lay investors fall for the trap, thinking that it is now ornever. With property prices sky-rocketing across urban and semi-urban areas,larger chunks of money are required to fund even the down-payment. For asalaried person, this may not always be easy.

Anumber of investors fall for the “initial payment of 10 percent only” trap.Without even calculating how they will service the balance down payment andsubsequent equated monthly instalments (EMIs), people rush in in the hope ofmaking a quick buck. They often sell-off the booking when the second instalmentbecomes due. This is a gamble which could go seriously wrong.

Withfinancial planning and proper management, you can own your dream house.

Afew points that one should keep in mind before investing only in property:

Illiquid asset: Since it is an illiquid asset, itcan have serious repercussions in case there is an emergency. Lack of liquiditycan lead to a distress sale. If there is a medical emergency and you require afew lakh rupees, you would have no choice but to sell off the house (whichcould be worth much more) to fund thatimmediate requirement.

Property prices can fall: We have an innate ‘belief’ that theprices of property only go up. This is a generalised statement. It could alwayshappen that the area / locality / city where you have purchased your propertymay not grow due to certain factors, beyond your control.

Long-term returns may not be thebest: Another strongnotion that we carry is that property gives the best returns in the long term.Now this is true depending on your definition of ‘long-term’. If in yourdefinition, long-term is 3-5 years, then you may be right. But it has been seenthat over 25-30 year periods, equities have delivered the best returns. Thereare studies to prove this.

Can affect your goals: Financial planning through propertyalone is like putting all your eggs inone basket. It can affect meeting your goals since there may not be a buyerwhen you wish to sell, at the time of your goal.

Oneshould have a robust, diversified and liquid portfolio, to ensure sufficientliquidity before ‘investing’ in property.

People should carefullyplan their investments to meet their goals in an organised and structuredmanner with due importance to asset allocation. Putting all the eggs in to onebasket could lead to severe consequences.

The importance of taking a timely and well-informed decision

2012-01-13T22:35:00.001+05:30

I recently shifted my residence within the same locality. As I was rushed for time (due to my travelling schedules) I had only five days between the day I came back from an outstation visit and the day of the ‘grihapravesh pooja’. The packers and movers had to be organised and all the stuff had to be shifted before the date of the ‘pooja’.

I called for quotes from three packers, selected a new and young (in terms of experience) packer whose quote was quite obviously, the lowest. So far so good (or so I thought).

Shifting day finally arrived and the chaos began. Wherever I was around I got the cartons packed the way I wanted them and marked the boxes with the contents. But since I could not be at all places at the same time, trouble began to get packed. When I enquired what was in the boxes, they said it was ‘mixed’. Basically those boxes got shifted without any marking of the contents.

Worse was to follow. The packers opened up the boxes and piled up the contents into drawers and cupboards at their own will. Since the contents were ‘mixed’ there was no one proper place for the contents to be emptied into. So they just got dumped into the first open drawer. I did not realise it then, but all hell had broken lose.

Within a few days of the shifting, my younger son had to be hospitalised and when the hospital asked me for the health insurance card or policy, I was at sea. I rushed home and searched high and low, but could not track the papers. The reason being, all the contents had been mixed and were lying somewhere. Now where that somewhere was, I had no clue. Anyway, I called the insurance company and they helped me dig up the policy papers from their records. All’s well that ends well, but it was a huge learning for me.

Let me try and co-relate this with my field of work – financial planning. If I had applied the same principles to my shifting I would have been so well off and none of this madness would have occurred.

We leave all our investments and planning for the last minute because we are in a job or are running a business and are unable to find time. Only when the issue is right upon our head (when the accounts department says show me your tax-saving investments or the taxes will be deducted from your next three-four months’ salary) do we rush to make the investments. As Sophocles (one of the classical Athens’ three great tragic playwrights) said “Quick decisions are unsafe decisions.”
We start planning or look for a financial planner only when we have been hit by a ‘reality bomb’ – this is when reality strikes you (one fine morning) and we realise that we have no investments to speak of or all the investments are making a loss.
We then rush to friends, neighbours and colleagues to ask for references. Again, since there is not enough time we cannot do a background check and go with our gut feel.
The previous decision in most cases is primarily based on the quote or the rate being charged. The cheaper the better. “Why should one waste money on such a mundane activity”. What we do not realise is that there is a price for quality. In my case, the ‘rookie’ packers were cheaper than the established names (who have a track record to show), but they made a complete mess by not labelling and packing stuff haphazardly. Finally, I had to bear the brunt. So much for bargain hunting. Plato has rightly said “A good decision is based on knowledge and not on numbers.”
Now comes the more serious part of ‘mixing’. Based on the quality of your packer (read: financial advisor), the packing (read: advice given) is based purely on finishing the job at hand (read: getting your signature on the forms) as early as possible with giving as much as a second thought of how you, as a customer, would have to deal with a situation, later on. The idea is to move to the next customer as quickly as possible. So haphazard and unnecessary products are recommended where there is a mix of all kinds (like mixing health insurance and investment returns or life insurance and investment returns). It is only later on when you open the carton (read: policy document) do you realise that you cannot figure out head or tail of the contents. You are not even sure that whether what you are looking for is there in that particular carton.
In times of emergency, one is at a loss at to which instrument should I redeem or sell, since all the products are ‘mixed investment products’. If only, care had been taken right in the beginning, as to why a product was being purchased and the investments had been clearly marked to each goal, the investor would not be at sea. If each carton had been properly marked with the contents, unpacking becomes so much easier. In other words, clothes are not put in the same carton as office papers.

Life becomes so much easier if we plan properly (be it our shifting or for our future goals) and have sufficient time to evaluate options and select the best-suited rather than rushing decisions. Finally, it is vital that we take well-informed decisions – selecting the right advisor (packer) and clearly demarcating the investments and not mixing the contents.

Simple matters, multiple complications

2011-03-23T16:20:00.001+05:30

Most of us are so busy with our daily schedules that we often forget to do some simple things – like informing banks, financial institutions and mutual fund houses that our address has changed, a particular bank account has been closed, or that our nominee needs to be changed. We act on these matters only when we are forced to act upon them. Then we run helter-skelter, use all possible sources to get the work done. Had we not overlooked these seemingly inconsequential but important issues, we would not find ourselves in a mess at the last minute.

In the last two months, I have come across quite a few such issues related to one’s personal finances. Some of them are cleared and some are taking time to be solved, even two months later.

I have listed out a few of them which I feel all of us must check and update, whenever required:

I. Change of address
When you move residence you need to inform a lot of people that your residence has changed. But I have seen that more often than not, people forget to change the addresses in their life insurance policies, mutual funds, National Saving Certificates (NSC), Bonds and bank accounts (especially those which have been around for a number of years and are not so frequently used). The result is that the investor is clueless about regular returns from money back policies, dividends from mutual funds or even getting the money back on maturity of various bonds and insurance policies. So all the hard-earned money that was diligently invested over the last so many years , would not come back to you and would go back to the company.

II. Update your bank details
There are times we rush to close our bank accounts without going into the linkages of the same to our investments. It is only when we redeem the investment or it matures, do we realise that it is linked to a bank account that we have since shut. Then the process of changing the bank account and getting a fresh cheque issued, begins. The whole process could lead to a delay of even 2-3 months in getting your money.

III. Nomination
Make sure every investment has a nominee. One thing I have noticed is that most unmarried men nominate their mother (and not their father, strangely; i have not figured out the reason why). Post-marriage some do change their nominees to their spouses, but again this is quite often forgotten and the mother continues to be the nominee. You also need to change your nominee in the event of death or divorce. People often overlook these matters.

IV. Shut unused bank accounts
I have come across people who hold multiple bank accounts. When I use the term multiple, I mean 8-10 accounts. Three-fourths of these have been lying dormant for quite a while and have probably even got ‘frozen’. Money is lying idle. Ideally, 2-3 accounts are more than enough. More than this just complicates matters. So the idea is to not have too many bank accounts and to close any unused bank accounts.

V. Correct name on your PAN card and other investments
I have come across cases where the spelling on the PAN card is different from that in the bank account and in some cases there is a third spelling in the investment. All this looks fine till the time the investor decides to redeem the investment. Then begins the ordeal of sorting the mess out and arriving at a commonality. The whole affair can be quite painful and time-consuming. So do check this for all your investments and correct any errors when there is still time.

VI. Setting up reminders
A number of times we miss out on our life and health insurance premium payments because we forget the due dates. This is dangerous as your policy could lapse. This means all the money you had invested previously, would be jeopardised. . Mutual fund SIPs, loan EMIs are some of the dates which we need to remember. Apart from this, we also need to know when various investments like life insurance policies, NSCs, Kisan Vikas Patra, Public Provident Fund (PPF) accounts, fixed deposits, recurring deposits are maturing. Setting up reminders on your computer and syncing it with your mobile is the best way to remember these dates.

VII. List all your assets and liabilities
This is the most crucial of all. Make out a complete list of all your assets and liabilities and share it with your close family members – spouse and children (once they are of an age where they can understand financial matters). It is very important for every member of the immediate family to know what and where all the investments are parked. After all the investments are being made by you for the entire family – spouse and children.

Apart from the exercise of making out a financial plan, investing and tracking the investments, these seemingly inconsequential but crucial matters will only help improve you and your family’s financial wellness.

Beware of Insurance Mis-sellers

2010-09-01T12:36:00.002+05:30

Mis-selling of insurance products is rampant in our country. Here’s are a few thoughts to protect yourselves.

The new regulations coming into effect from September 1, 2010 in the insurance industry is most certainly a welcome change. But in the short-run, it is leading to considerable mis-selling by agents. In fact, it has become a menace that is peaking now, as the ‘D-date’ (read: Dooms-date for agents selling only ULIPs) draws to a close.

Read on at http://www.fpgindia.org/2010/08/insurance-mis-sellers.html

Financial Planning mantra #8

2009-06-26T15:08:00.000+05:30

Never try and time the market. You may get it right a few times, but more often than not you will be wrong.

Be a regular and disciplined investor. Even the wisest cannot predict the market. Warren Buffet lost billions in the crash of 2008. Ratan Tata went on record saying that if he had known of the coming slump in global markets, he would not have gone ahead with the Corus and JLR deals, at least not at the prices that he paid. In 2008, when the Sensex slumped from 22000 to 8000 every equity fund slipped by at least 50%. When the markets rose by 50%, from 8000 to 12000 most funds managed only a 15-20% upside.

What I am trying to get to is that even the best of the best in the business find it impossible to predict such movements. As a retail investor you don’t stand much of a chance of being correct. Even if you manage to catch the downside or the upside, it is more a question of luck than any skill.

SEBI’s latest ruling on mutual funds - its impact and after-effects

2009-06-19T19:13:00.002+05:30

SEBI’s recent announcement on mutual funds has two important bearings:
1. There would be no entry load on any mutual fund investment
2. Distributors would have to negotiate their commission with their investors

No arguments about the first point, it is of immense benefit to the investor. This will probably lead to a higher exit load which is good for investors since they would be incentivized to hold their investments long-term. A couple of years back when there was no entry load for SIPs, but was later withdrawn.

As far as the second point is concerned, I think it is a good move, but ahead of its time. The Indian investor is still not well informed in matters relating to investments and mutual funds. Besides, the penetration of mutual funds is rather low. Insofar as investor education is concerned, we have a long way to go before we can bring ourselves at par with the developed markets (whose systems and methods we are keen to emulate).

Though in the long-term the move will prove to be good for the financial planning industry and for the investor, it will have several short-term impacts that may be deterrent to the interests of the small investors, distributors as well as the mutual fund industry.
1. INVESTORS MAY END UP PAYING A HIGHER COMMISSION: On the commission issue, I foresee a lot of unnecessary bargaining happening between the distributor and the investor. In fact, distributors maybe charging a higher rate now -- say Rs 500 on Rs 5000 investment. Even if the investor bargains and brings it down by 50%, he would still be paying a much higher fee / load than was applicable earlier. Since a fair percentage of investors today are not even aware of the kind of commission the distributors get or that there is anything called an entry load, they might feel happy about the bargain. However, they could be paying a much higher percentage as commission.
2. COMMISSIONS MAY BE PAID IN CASH: Distributors may also charge commission in cash, leading to loss of both service tax (that the distributor would now be liable to pay) and as well as income tax to the government. Small amounts of commission – perhaps in the region of Rs 1000 or more may be passed on in cash to the distributor.
3. SIPs MAY SUFFER: SIPs or systematic investment plans may suffer since the investor may not be open to paying commission each month, or paying a lump sum at the beginning of the SIP term. So the distributor would probably stay away from recommending SIPs as lump sum investments are good and less hassle for him/her.
4. DISTRIBUTORS WILL FOCUS ON ULIPs: Distributors may start focusing more on ULIPs where there is low transparency regarding the commission going out to the agent. Since commissions are much higher in ULIPs, the obvious tendency for ‘sellers’ of both would be to maximize their revenue by proposing ULIPs and presenting them as mutual funds. Again, the small retail investor will lose out. As it is there is enough talk of ‘mis-selling’ of ULIPs.
5. EXPENSES TO INCREASE AFFECTING NAVs OF MUTUAL FUNDS: To get into more nitty-gritty of things, the charges are going to go up. One reason for this would be that mutual fund houses would probably work on higher trails and various marketing schemes to keep distributors happy (incidentally 90% of all business of mutual funds comes from distributors). Where would money for all this come from? From charges, which result in reduction of the NAV. Again who will suffer more? The small retail investor.

There is immense amount that SEBI and mutual fund houses can and need to do to increase investor awareness and grow the market. Ad hoc measures like this and an uneven playing field among various financial products would only lead to more confusion initially and consequent mis-selling by distributors. Unless tackled at a much broader level, the small and uninformed investor will continue to pay the price and will remain a small participant.

Financial Planning mantra #7

2009-06-16T20:10:00.001+05:30

When is a good time to start investing? Simple answer - NOW!

Should I start now or wait till I get my bonus next month. Many people drag their feet when it comes to saving money. It is always NEXT week, NEXT month, NEXT year, NEXT increment, NEXT bonus. It is a never ending NEXT cycle. Time flies by and before you get down to it in a serious manner, maybe even 5 or 10 years have gone by. The cost of a 10-year delay (in starting) can be as huge as 50%. In other words, if you start at age 40 instead of age 30, the difference in the end corpus can be as much as 50% plus.

The longer you are able to grow your investments, the better returns you are bound to see. The ‘power of compounding’ kicks in only when you have given your investments a long time to grow. Hence, the earlier you start, the better it is for you.

Mark Twain has rightly put it - October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. Simply put, there is no ‘safe’ month (which you should wait for) to start your investments.

Financial Planning mantra #6

2009-06-09T12:22:00.001+05:30

Investment in ULIPs should be for a period of 10 years (minimum) or more, since it is a long term investment product and not an option for insurance cover.

Investors seeking insurance often end up investing in ULIPs, not realizing that ULIPs are market-linked and focus more on returns than on providing sufficient insurance cover.

ULIPs are investment products with very heavy costs (entry loads) in the initial 3 years, the highest being in Year 1. Broadly speaking, it can range from 10% to as high as 60% in Year 1. In short, if you are paying a premium of Rs 1 lakh annually, only Rs 40,000 is invested. Rs 60,000 is a sunk cost. So before investing in any ULIP, always check on the initial costs. The costs in the next two years are additional.

I have come across a number of people who buy ‘insurance’ in the form of ULIPs which are of 3-5 years of duration. There are three vital mismatches here:
- ULIPs are primarily investment products with little focus on the quantum of insurance
- In order to get good returns on short-term ULIPs (of 3-5 years maturity), one has to be very lucky, since the costs are prohibitive in the first 3 years, especially.
- If you pay the premium for the first 3 years only (when the costs are at their peak), then you tend to lose out. In the later years larger sums of your premium get invested (since costs are lower), so the chances of getting much better returns is more in the long run (10-20 years).

If the investor has a horizon of 3-5 years only, ULIPs are not ideal products to invest in. ULIPs are good products provided your time horizon is 10 years or more and you purchase it as another asset class of investment and not as insurance.

Financial Planning mantra #5

2009-06-02T17:21:00.003+05:30

Invest in New Fund Offers (NFOs) of mutual funds ONLY if there is something really very unique about them or it is the first of its kind. Even then, evaluate before you invest.

Each time a NFO hits the market you are bombarded with great flyers, posters, ads and presentations to convince you that this is the right time to invest. As an advisor, I have kept away from most ‘me-too’ NFOs. But I must humbly admit, in my initial days, I too failed to realize the ‘disguise’ in a few NFOs. Thankfully, I could not muster more than a handful of clients (some of whom themselves came forward) to invest in them, probably because somewhere in my mind I was not fully convinced. Today, three-and-a-half years and over 100 NFOs later I am a much wiser man. At all NFO-distributor meets, I pull out all stops to ask all wise and foolish questions. Because till the time I am fully convinced, I should not be taking it to my clients.

The only ‘plus’ point in any NFO is that ‘they do not carry any deadwood’ (as a friend of mine puts it).

Two major why investors fall for NFOs are:

- Most people equate a mutual fund ‘unit’ with that of a ‘share’ and consequently believe that a fund with a Rs 10 NAV is cheaper than that with a NAV of Rs 50. In mutual funds, there is no difference. In fact, a fund with a higher NAV is better, in the sense, it is more ‘experienced’. Of course, this cannot be applied as a blanket rule while choosing funds.

- Aggressive ‘selling’ (because of higher commission rates) by the banks (through ‘financial advisors’ and ‘relationship managers’) and individual distributors

Of late, I have noticed fund houses coming out with NFOs to shore up their AUMs (assets under management). Incoming money into equity funds had almost dried up from mid-2008 through the first few months of this year. With huge drop in share prices, the AUMs of all funds came down drastically. With sentiment improving, the last two months has seen fund houses ‘putting old wine in new bottle’ so that they can collect a few hundred or thousand crore (which would not happen under normal conditions).

The fund houses claim that the one of the purposes of a NFO is to grow the low base of retail investors (from 2%). But this logic is beyond my realm of understanding. If they really wanted more investors, they should focus more on their existing funds and show higher returns rather than just trying to mop up money in the name of growing the market. Look at it logically:
- Any one putting in money into an NFO would in all probability be an existing investor in mutual funds.
- A new investor (with no past experience in mutual funds) would come in only if he is made to believe that a Rs 10 NFO is cheaper. So he is made to start off on a false premise. It is not going to be long before he feels ‘cheated’ and vanishes forever.

Today NFOs have become a money mopping up exercise. Almost all kinds of permutation and combinations of funds are already there in the market (the only thing that is still not there is a ‘Silver ETF’).

A fund manager recently lamented that the size of the entire MF industry is less than one month’s of domestic savings. It is bound to be till fund managers and AMCs realize that the way to grow the size of this industry is to record higher and better performances of existing funds (thereby attracting fresh and new retail investors) and not by bringing out NFOs.

Financial Planning mantra #4

2009-05-28T23:35:00.001+05:30

Never borrow money (take personal or other loans) to invest in the stock markets. It is a sure-shot recipe for disaster.

Financial Planning mantra #3

2009-05-26T23:31:00.000+05:30

A financial planner does not sell you a single financial product, but a financially secure lifestyle. In a sense, he buys for you.

Most so called relationship managers / wealth managers / insurance agents / mutual fund distributors are out to sell you their financial products. They will blindly recommend one particular mutual fund (usually a NFO) or a ULIP to all their customers. They follow a ‘one-product-for-all’ strategy. This is not financial planning. It is product selling, irrespective of the client’s needs or requirements. A lot of people fall for this because the person calls from XYZ Bank where you have your account, so one tends to automatically believe them. And you end up buying into the ‘flavor of the month’. Think for yourself before you invest in any product.

As far as investing (in equity in India) is concerned, India is still in its nascent stages. People are still understanding what investing is all about. They tend to buy products ad hoc rather than in a planned manner. But investors are learning and gradually moving to a planned and focused method of investing. As the market matures, so will the investor.

Financial Planning mantra #2

2009-05-21T16:43:00.002+05:30

Ensure a proper asset allocation before making any investment

Plan your resources in such a manner to give you maximum possible returns in achieving your goals. The three primary asset classes are equity, debt and cash. Some other asset classes include real estate, metals (like gold) and even art.

It is imperative that before making any investment you must ensure proper allocation. Asset allocation depends on factors like - age of the investor, time horizon available, holdings in current portfolio, etc.

In India, a lot of people buy financial products in an ad hoc manner, with the result that their portfolio is heavily skewed towards debt and low-return instruments - PPF, PF, money back and endowment policies, FDs, NSCs, debt options in ULIPs. All these have fixed or low-returns, thereby making them unsuitable options if you are investing with a horizon of 15 years or more. Of course, depending on your risk-profile, the amount of investment in equity (direct or indirect) would vary, but it has to form a part of your portfolio, provided you have time on your side.

Investors love to do their retirement planning (25-30 years from now) with debt as the sole option, not realizing that in the long run returns from debt are not as attractive as those from equity, resulting in lower corpus creation.

All said, it does not mean that investing in debt is bad. It is the proportion of the various asset classes that one must get right if you need to build a comfortable corpus. Too much of any particular asset class is bad since it either leads to increased risk levels or there is a chance that it may not even meet inflationary costs. Again, building a corpus needs continuous rebalancing of the portfolio depending again on things like new or fresh objectives coming up or when one is close to achieving one’s goal.

Financial Planning mantra #1

2009-05-19T20:25:00.001+05:30

Always have your goals and objectives in place before making any investment.

Whether you are making the investment for tax-saving or from the point of capital growth, clarity on the objective is a must.

Most people purchase products without a real thought of the goal or objective. Simply put, I have invested in Y product because I want o make money. No time horizons are defined, no clear goal set. The result, either you sell it off too early or you invest in a long-term debt based product (where the optimistic returns are in the region of 5-6% p.a.). In either case you either end up losing money or not making enough to cover even inflation.

If one has these objectives always in mind, then one is neither affected by greed nor fear, either of which always leads to wrong decisions. There is a clear focus on achieving the pre-defined goal through a chalked out plan.

Making an investment without any goals or objectives in place, will only lead to ad hoc buying of investment products and will lead you nowhere. There will be quantity but little or no quality. A very dangerous thing to realize too late in life.

Sensex and NAVs

2009-05-18T19:01:00.001+05:30

Today was truly a spectacular day at the markets. For the first time in its history, there were two consecutive circuits, resulting in shutting down of the markets for the day.

Nobody I know, managed to get his order through. So much for retail participation.

Till Friday, uncertainty loomed large. There was talk all around that the pre-election rally was headed for a correction and that the results on Saturday would cause the markets to slide once again. The discussions were centered around whether it would retest old lows of 8000 or would it slip to 10,000. All that vanished on Saturday morning. After a neck-to-neck race (in the early hours of counting), that dreadful feeling began to vanish. By late afternoon, there was a change in mood and the gloomy feeling was replaced by happiness. Social networking sites like Facebook and Twitter reflected the growing euphoria. Messages and comments, bouquets and brickbats poured in left, right and center. It was quite something to be a part of the ‘virtual world’, that day. Felt real!

Quite obviously all the pent up frustration was let loose on the markets today. For a change, I received quite a few calls from friends, relatives and clients. It was mostly - Should I sell my mutual funds now? / Are my investments back in the green, since markets have moved up 60%?

What we forget is when had we invested. Most people got in in 2007 and had their NAVs wiped out by 40-50% and in some cases by almost 80% by end 2008. So if your fund had a NAV of 12 when you invested, it crashed to 6. Now all mutual funds missed the up rally from 8000 to 12000. Technically, the market moved up by 50%, but NAVs moved by 20-25% only. So your NAV was only at 8. Where is the full recovery?

Another point to note is that there is actually no direct and perfect correlation between the Sensex (or Nifty) with your NAV. At best, it is a broad indicator of the direction (up or down). The composition (large/mid/small caps) of the fund will decide the quantum and direction of its movement. So there may be days when the Sensex and the NAV may move in opposite directions.

Investors should always remember that selling a mutual fund should not be based on what the Sensex is. It should depend on whether you have reached the goal / objective for which you have made the investment or a fixed percentage of return (which you had decided at the time of investing) has been achieved.

The New Pension Scheme is here!

2009-05-05T21:45:00.002+05:30

The New Pension Scheme (NPS) has finally arrived. It was opened to the general public on May 1, 2009. I did get a few calls – asking questions like ‘Can I invest in NPS?’, ‘Should I invest in NPS’ and ‘What is NPS?’. Well I guess their initial campaign paid off - the full page color ads and coverage in the television media did what it was supposed to - generate awareness.

So in this blog I will try and bring in a little more clarity for those who are keen to know more about the NPS.

Highlights:
- This is a government-regulated pension plan.
- It is on the lines of ‘401k – retirement plan’ in the US.
- Market consists of equity, corporate bonds and government securities.
- Funds will be actively managed by six AMCs (asset management companies) - Kotak, SBI, Reliance, UTI, IDFC and ICICI Prudential.
- AMCs will make investment decisions under guidelines issued by the Pension Fund Regulatory and Development Authority (PFRDA)
- The investor is free to choose a mix between:
- Equity (E)
- Corporate bonds (C )
- Government securities (G)
- There is a ‘lock-in’ / binding period till the age of 60.
- It is open to anyone (citizen of India, resident or non-resident) between age 18 and 55 years.
- Minimum investment per annum - Rs 6,000. No upper limit.
- Minimum contributions per year are four.

Downsides:
• Returns at maturity are taxable (unlike PPF, EPF)
• There are no guarantees. Returns are market determined
• Costs can be high for those investing the in the region of the minimum amount (per annum) only. Hence it is not a good option for the small saver. The more you invest the more cost-effective it is.
• Maximum limit in equity (E) is capped at 50 percent.

My advice to all those interested is:
• The intention behind the scheme is very good.
• The PFRDA still needs to give some clarifications. Wait till the new government is in place and announces the budget, wherein hopefully it will set to rest all doubts especially on the EET (exempt-exempt-tax) front.
• Don’t rush into investing in the NPS.
• This cannot be your sole investment for retirement. Talk to your Certified Financial PlannerCM before taking the plunge.

Inflation - ‘Deflation’ - Inflation

2009-04-21T08:35:00.001+05:30

The current phase of low inflation is temporary. With governments across the world pumping trillions of dollars into their economy, we must all be prepared for yet another phase of inflation.

It was just ten months back that we were grappling with mind-boggling double-digit inflation. The price of oil came crashing and so did the rate of inflation. From 13 percent levels, today it is struggling to stay above zero. And the media is full of stories on ‘deflation’ and its after-effects!

Initially, they scared the living daylights out of the common man with their stories on deflation and depression that has hit global economies. Thankfully, those stories seem past us today.

What I am more concerned about is inflation! Yes that’s correct - inflation.

I am no great economist, but I can definitely tell you that with the trillions of dollars being pumped into various economies (in order to bail out these economies by increasing liquidity) fiscal deficits are expected in the region of 12 to 14 percent. My concern stems from the fact that once these monies start reaching the retail consumer, they are bound to fuel inflation. It will be a case of too much money chasing too few goods - the latter being the fallout of the slowdown / recession in global markets.

In the last 12 months, the supply of money through various stimulus packages has grown manifold. Interest rates have eased and are expected to ease further (at least here in India) so that the consumer and businesses start availing loans and increase consumption.

Prices have witnessed a steep drop in order to boost consumption. But the start has to come from the consumer, and his or her desire to start purchasing (all over again). This will fuel demand and will make the manufacturer increase his production level. So the wheel will start rolling once again.

This, in turn, will cause the prices to increase as (in the beginning) there will be more money chasing fewer goods. Hence, inflation will rise from the near-zero levels (0.26% for the week ended March 28, 2009).

Provided crude oil prices (as one of the crucial factors) remain at around $60 levels, my guess is that inflation will claw its way back to 4-5 percent levels by the end of this year. The new government at the Centre will have to manage the fiscal deficit in a very deft manner.

New Day. New (financial) year. New Horizons. New Hopes.

2009-04-01T16:59:00.002+05:30

Last night as I lay on my bed to sleep, I could not help but think of the (financial) year gone by and what lies ahead in the new one.

Thoughts (of new tidings) kept popping into my mind. Here are some of them that I would like to share with you:

• Access your money through all ATMs: No more waiting in queues (hopefully) at ATMs. From today I can walk into any ATM and withdraw money without being charged by my bank. This should have happened long ago. But better late than never. I could never digest the fact that I have to pay to withdraw my own money.

• Save money, buy the Nano: From today, the Nano would be displayed in all showrooms and later this year, the roads will be full of them (at least I hope for Tata’s sake considering the fact that the last financial must have been his worst ever in terms of luck).

• New government, new rays of hope: By the end of the current quarter, we should have a new government in place. And I hope it is a more ‘functioning’ government. Not a paralyzed one.

• Power to the youth: For millions of young people this election would be their first. I hope they all go out and exercise their right.

• New investments: Time to start fresh SIPs in ELSS (tax-saving) funds.

• Stock markets should start looking up: I think we have seen the worst in terms of the fall in the markets in 2008 - from 21000-odd levels in January to 7700-odd levels in October. This financial year is definitely going to be better. My personal feeling is that things should start looking better from Q3 / Q4 of FY10.

• My new initiatives: I have started some new initiatives to grow my business and I hope they will fructify this year. I hope to take a gigantic leap forward this financial year. Enough of blaming the markets. I will develop new and out-of-the-box ideas to tap fresh clientele.

• New Pension Scheme soon: The New Pension Scheme was supposed to have started from today. But now we will get to know more only in June after the elections are over. This will mark a big leap forward for the Indian financial markets. For investors, this is one scheme to look forward to.

It’s quite rightly termed as the new financial year, since all the things that begin today seem to be related to money and finance. Here’s wishing you a very prosperous new financial year!

The annual ritual of tax-saving

2009-02-25T20:59:00.002+05:30

It is that time of the year when the most mundane exercise of all - tax saving under Section 80C of the Income-Tax Act – needs to be undertaken. Most employees loathe the last four months of every financial year - December to March – when all employees get the ‘last reminder’ from the accounts department to submit proof of having invested in tax-saving instruments under Section 80C. There is a last minute scramble to meet the deadline.

People often confuse tax-saving with financial planning (or rather, saving for a financially secure future). In reality, the two are quite unrelated. Tax-saving should fit into your overall, larger scheme of ensuring a financially secure future for yourself and your family. Therefore, investments in tax-saving instruments should never be undertaken haphazardly. These investments need to fit into your overall financial plan. In order to accomplish that, we need to pick tax-saving instruments with care. People rarely share the same perspective on tax-saving.

Common mistakes

Here are some common perceptions and mistakes of investors:

I. 80C Limit - Current policy = New policy: The most common ‘mistake’ is to take the prescribed limit (Rs 1 lakh currently), subtract current investments and put the balance into another insurance policy.
II. Buying the product closest at hand: If there is an insurance agent at hand, then the ‘flavor-of-the-season’ insurance plan is purchased. If the bank is close by, then all the money goes into Public Provident Fund. The least ‘hassle’ product gets the maximum attention.
III. No investment required: If, for example, the annual PF deduction is more than the limit of Rs 1 lakh, then in most cases, no fresh investment/saving is made.
IV. Buying without a thought: In the rush to get over with this ritual, most people just pick up anything with little or no thought and move on.
V. Last minute stampede: This is where most of the investors are trapped. Instead of making the investment during the year, most choose or are reduced to making the investment at the fag-end or (even) on the ‘last day’.

Avoiding the mistakes

Have you ever asked yourself - ‘Why do I work?’ The answer to this question is likely to be one of the following:
i. To be gainfully employed
ii. In order to be economically stable and to provide yourself and your family a financially secure future

What is the point of working so hard and putting in such long hours if at the end of the day you can’t have a financially secure future? It is crucial that one spends some time with a financial planner to decide the way ahead in terms of the investments. What one sows now in terms of the kind of investment will one reap in future.

A careful and studied analysis needs to be done before making any investment. It is not sufficient to just buy a product for the sake of fulfilling a requirement. Tax saving has to fulfill your overall goal of ensuring a financially secure future for you and your family.

Some crucial questions that must be answered before making the investment:
a. Have you looked at what you have purchased? (Most people I know cannot even remember the name of the insurance company or mutual fund whose product they have bought; and yet others have no idea about the kind of policy that they have purchased.)
b. Is this what you really need? Or is this just another blind investment in the myriad investments that you have accumulated over the years?
c. Is the compulsory saving (within the limit of Rs 1 lakh) enough to meet your financial goals? Have you spoken to an (unbiased) financial planner (as opposed to an agent who is selling you a product) to figure out what kind of returns you may get after 10 to 20 years? Take a look at the table below to get an idea about what your investments would be like 15 years from now if all the saving you made are those under Section 80C:
i. Time horizon - 15 years
ii. Inflation @5% p.a.
iii. Annual investment - Rs 1,00,000
Type of investor Expected return End-corpus
Conservative @ 6% p.a. Rs 16.04 lakh
Aggressive @ 10% p.a. Rs 21.19 lakh

Assuming that your objective was to utilize the investments you made each year for your retirement, is 21 lakh enough for you to meet your post-retirement expenses? Do a quick back-of-the-envelope calculation and figure out how many months the money will last?

This clearly brings to the fore the fact that saving just the Rs 1,00,000 per annum cannot make you financially secure. It simply saves you some tax. In the above example, we have not taken any other milestone/event – such as your own marriage, buying a house, education of your children, their marriage, family contingencies, etc. into account. Setting aside Rs 1 lakh a year certainly cannot help you achieve all these goals.

Tax-saving vs. financial planning
Most people believe that buying a tax-saving product is equivalent to financial planning. Products are purchased by the name like ‘XYZ Children’s Plan’ or ‘ABC Retirement Plan’. The investor buys the product and thinks that all will be well in future. But there is much more to planning for the future than just buying a product. Just as in financial planning proper asset allocation and the dynamic management of the portfolio in tune with the changing of goals and objectives is a necessity, so it is in the case of tax-saving investments. In most cases, tax-saving products are haphazardly purchased every year or the entire limit is exhausted by putting the money in a single product. This is not a good approach since these are supposed to result in long-term benefits. But since the whole exercise is without any planning it is most likely not to give the desired results. Hence it is of utmost importance that there is a well-planned and analyzed decision before investments are made.

Where a Financial Planner can make a difference

Financial planning is still a nascent concept in India. Today most financial products – such as insurance, mutual funds, fixed deposits etc – are being bought and sold without the slightest of care and concern about the future. The presence of an agent with a glossy presentation and flashy numbers is enough to convince any investor, with scant regard for what these investments would actually fetch him/her 10-15 years from now.

This is where a financial planner can and should step in. He/she is there to sell a lifestyle and not a single product. His/her knowledge and acumen is bound to make a huge difference in approaching the subject of financial security and in providing an appropriate solution. His or her interest lies in providing proper long-term financial planning, thereby making the investor look at the ‘big picture’ instead of having a narrow and short-term outlook. A thorough analysis should be done of the current holdings and objectives that are to be met by making these investments. And based on these considerations, the financial planner must recommend a product that is suitable for his/her client.

In short, investments should be towards achieving a certain objective, with a tax-break thrown in. The goal should be to maximize your post-tax income since there is a limit to saving tax.

Recession, slowdown or an opportunity?

2009-01-29T11:43:00.003+05:30

The current slowdown offers a huge opportunity to investors who feel they missed the bus during the stock market boom. The slowdown is your opportunity to catch the lows and reap benefits when the markets turnaround.

2008 will be remembered as the year when the R-word became a reality in the developed world. In fact, the current recession is being compared to the Great Depression of 1929, though the world may still be refraining from using the word “depression”.

The developing world (or rather, India and China) has been impacted by the recession – but in a different way. In these economies, growth has slowed down. Therefore, it’s more appropriate to use the term slowdown, in the Indian context. Our economy is still growing!

We have entered 2009 with all sectors reeling under the slowdown (thanks primarily to the US and other developed nations). The developed world, on the other hand, continues to grapple with the consequences of excessive greed and lack of checks and balances, as also commonsense. It will be a while before we are able to pick ourselves and move on, hopefully learning from mistakes (or rather, blunders).

Well, so much for looking at it negatively. I choose to look at the slowdown in a more optimistic and pragmatic manner. Looking at it from a pure financial planning point of view, I see this as an OPPORTUNITY!

An opportunity to learn, an opportunity to explore other products, an opportunity to make investments at much lower levels (as compared to those that were made in 2006 and 2007).

For investments that have a horizon of 5 to 10 years or more, there couldn’t be a more opportune time than TODAY. For those who continue to think that they missed out on the bull-run or joined in late, this is one opportunity they should not miss. Just when you thought you had missed the bus, the bus comes back. It has stopped for you so that you can get on. And believe me, it will certainly take you to where you want to be – your personal financial goal – provided you show the right patience and are guided by the right financial planner.

A slowdown is an opportunity to learn. The first lesson is - don’t put all your eggs in one basket – an oft-spoken adage that is more preached than practiced. The slowdown teaches you how important it is to have a proper financial plan in place and work according to it, rather invest in a haphazard manner (based mostly on what others have to say). In short, common sense and understanding of the basics is more important that a glossy presentation and flashy returns!

Till 2007 the only product everyone noticed was equity and equity-related instruments. There was no ‘apparent’ need of a financial planner as no matter where you were invested, humongous returns of 30% plus were almost ‘certain’. There was so much that existed, but was swept under the carpet, thanks to the mind-boggling returns from equity. Since early 2008 a number of options have come to the fore - liquid funds, fixed maturity plans (FMPs), fixed deposits (FDs), arbitrage funds, Nifty-linked debentures, gilt funds, income funds etc.

Since September last, I have been advising slow and steady investments after doing a proper analysis of what you have, what you want and how you can achieve it. The how, when and why of each product has to be analyzed and investments have to be made in the right perspective.

I reiterate – there is no better time than today to start your financial planning with the ‘big picture’ in mind.

Recently, someone asked me: “How can you be optimistic when markets keep falling every day?” I have a simple logic for this. Globally the developed nations are in a recession with zero to negative GDP growth forecast for the next year or so. Indian businesses have also been hit by the slowdown and the high interest rates (thanks to the spurt in oil prices last year). Despite this, the GDP growth in India has been forecast at 6% in FY10. This is phenomenal compared to that of US and Europe.

In 2008-09, there was a huge outflow of money by FIIs and hedge funds to their parent companies, to prevent bankruptcies back home. Once that goal is achieved, they have to invest the monies of their clients / investors to give them reasonable returns. The only places where they will see some glimmer of hope is in developing markets, such as India and China. So money will flow back to India.

There are two other things I want to point out. One, the crisis is not over yet and two, you can never catch the bottom of the market. The latter is more a matter of luck, than skill. In short, take proper advice before you invest and if you have already started investing then ensure that this is the time to continue those investments. And if for any reason you have stopped investing, then don’t delay restarting those investments now. Don’t miss this OPPORTUNITY!

Luring distributors to overcome the market downturn

2008-09-23T01:06:00.002+05:30

From giving a kilo of gold to ensuring trips abroad for distributors, mutual funds are adopting new tricks to increase AUMs

In the last month or two, there have been a few mutual funds that have launched insurance-linked products. The reason – the markets are down and so are the investments into equity mutual funds. So how does one entice the investor? Spice it up with insurance. Suddenly there is a huge surge of applications into equity funds.

Now you may ask the reason why? What has the linking of insurance got to do with sudden upsurge in the number of applications? Well, the distributors are being lured with ‘exciting guaranteed gifts’ ranging from movie tickets to a kilo of gold, bikes and even a trip abroad. All that he has to do is to bring in as many applications as he can. And what are the distributors doing to win the race – if you want to invest Rs 5,000 in a mutual fund, he will convince you to sign 5 forms. Then he will fill in the forms for you and submit 5 applications. The terms and conditions in fine print are not even mentioned, forget being evaluated and compared.

Being a distributor myself, I am appalled to see fellow distributors and sales managers of mutual funds running against time to ‘log in’ applications. I am not against marketing, but this is pure self-gratification. The investor’s interest is the last thing on the distributor’s and sales manager’s mind. Both are simply trying to achieve targets at the expense of the poor investor. Knee-jerk reactions like this to increase AUMs (assets under management) will increase mis-selling and kill investor interest.

Are we here to advise on mutual fund investments or is it just another ‘grand sale at a shopping mall’? I wish that the authorities realize what is going on and put an end to this ‘gift mania’ before it gets out of hand.

Who is 'KING'? Equity, debt or cash?

2008-07-31T20:01:00.011+05:30

This is one helluva time for investments. With stock markets down and interest rates on an upwards spiral, all the three instruments today are ‘kings’ in their own right

This is one question which everyone today is confused about. Should one invest in the equity markets now or in fixed maturity plans (FMPs) and other debt instruments or is it best to be in cash (meaning cash at bank or in liquid funds; I am not referring to bundles stashed underneath your mattress).

The answer would vary from one individual to another. Of course, it would depend on certain factors like risk profile, tenure of investment, allocation, etc. But if I were to speak from a general point of view, I think this is a good time for all round investment. In short, all the three components are king!

Equities have had a downward roller-coaster ride since January 2008. The Sensex has slipped by over 30% since the beginning of this year with sectors like real estate and banking being pummeled by over 50%. With most people being caught between the devil and the deep sea, it is more out of compulsion that they are not in a position to sell their stocks today. So is this the ‘right’ time to get into equity or equity-related instruments? Well, I would say yes. But your perspective should be long-term perspective. In the short-term, your investments will encounter more volatility. Therefore, the selection of quality funds / stocks is imperative.

Now you would ask – “what about debt?” With deposit rates moving up, both FMPs and fixed deposits look attractive. With indicative ‘post-tax’ returns of 9-9.5%, FMPs and liquid funds are attractive options for the risk-averse, who fall in the highest tax bracket. For those in the nil or lowest tax bracket, FDs present a good investment avenue.

For those who are ‘convinced’ that markets have not bottomed out yet, cash is the ultimate answer. I would still recommend you to invest via the SIP option rather than trying to catch the bottom (which, in any case, is more a matter of chance than actual skill).

This is one of those ‘rare’ times when investing in both equity and debt is a good option. It is extremely rare to witness times when good opportunities present themselves both in the equity and debt segments. And with such volatility in the markets, it is always good to keep some cash ready to invest -- either when the markets slips further or when the interest rates rise again. Happy investing!

Inflation and its impact on our investments

2008-07-21T12:37:00.006+05:30

Price rise or inflation is a ‘silent killer’ of our investments. The return you get must be higher than the inflation rate for your investments to serve their real purpose.

Inflation is a hot topic of discussion these days. Newspapers and TV channels are full of reports that talk about how inflation, or price rise, is affecting the lives of Indians. Every week, the inflation numbers are more eagerly awaited and discussed than the Friday’s film release.

So what is inflation? And how does in impact us in the long run?

We have all heard stories of their good old days from our parents and grandparents tell us about how you could get a litre of milk in twenty five naya paisa and eat a meal out for Rs 5; how movie tickets used to cost 50 paise and more recently how with one hundred rupees of petrol in your car you could drive to office and back for a week.

“Look how times have changed. Things are so costly now,” they tell us. In layman language, this is inflation. It is nothing new. And yes, it is reflected in the prices of all items we buy.

But let’s look at it from another angle – inflation suggests that the purchasing power of money has come down. In short, for example the Rs 100 that could get us to office and back has probably become Rs 1000 today. In order to get the same service or product we have to pay 10 times more now.

This is one truth that most of us don’t budget for while planning for our future.

Inflation is a ‘silent killer’ of the investments that we are making today. A client of mine had purchased an insurance plan wherein after paying Rs 12,000 p.a. for 10 years, he was ‘promised’ a return of Rs 1,50,000 after 10 years. Looks good on the face of it? But look at the return that you are getting after an investment of 10 years – 6-odd percent per annum, which is lower than the inflation rate. So in reality your money at that time will not even allow you to purchase what it can, today. A sheer loss and a waste of time and opportunity!

Let’s take two examples and look into the future:

Assumption – you are 30 years old today and inflation rate is 10% p.a.

- If your monthly household expenses are Rs 30,000 today: at age 45 you would need Rs 1,25,000 to meet these same expenses.

- Rs 10,00,000 today would be worth Rs 2,05,000 by the time you are 45.

Whenever we buy products like insurance or invest in mutual funds or PPF, etc. with the purpose of achieving a financial goal, we must always take into account the impact of inflation on our end-corpus. It is definitely not going to be worth what the numbers today indicate. It is imperative that the return on our investments beats inflation in the long-run. Only then will we be able to meet our future requirements.

So the next time your ‘advisor’ tells you that so-and-so policy will get you Rs 1 crore in 25 years, do ask him what that Rs 1 crore will be worth then.

How can I become a crorepati?

2008-06-30T11:35:00.009+05:30

Most of us want to become one, but ‘believe’ that crorepatis are born and not made. Wrong!

As Noel Whittaker (a well known Australian money columnist) put it: “Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do….it is a matter of managing your money properly”.

Some people believe that ‘they’ cannot make money. Wrong again! Money can be made by anyone and everyone. All it requires is planning and discipline. Any investor who takes care of these factors is bound to make money in the long term. There’s nothing like a quick buck. If you made it, consider yourself lucky and not skilful.

The legendary investment guru, Warren Buffet (his net worth in 2008 is USD 62 billion or Rs 2,48,000 crore) has said: “Time spent IN, is more important than TIMING the market”.

The more time you give your money to grow the more it will grow. In other words, the younger you start investing, the more money you will have at your retirement. Each year delayed would mean a loss in earnings. Let us look at an actual example:

Investment: Rs 5,000 per month up to age 60
Expected Return: 7% per annum

Notice how the ‘cost’ of a 10-year delay is HALF the amount.

The chart above clearly indicates that the best time to invest is NOW! More so, when markets are down and the long-term picture looks encouraging. Every day, every month, every year that you delay is an opportunity lost. And the loser is no one else but you!

To conclude, as Mary Kay Ash (a business woman and author of three best-selling books) says: “Don’t limit yourself. Many people limit themselves to what they think they can do. You can go as far as your mind lets you. What you believe, remember, you can achieve.”

When is a good time to invest?

2008-06-20T10:15:00.004+05:30

Focus on your long-term goals. And stop trying to time the market. Even the wisest pundits have failed to predict the ‘top’ and the bottom of stock markets

When should I invest? Whether the markets are up or down, this is a million dollar question that constantly looms over an investor’s mind. Should he/she invest now or wait for the markets to fall even further. This waiting for a ‘more opportune’ time goes on and on. As a result, time passes us by.

Over the last two years, I have seen people withhold the decision to invest, despite my spending considerable time with them to convince them to make the investments. Their reason - they feared that the market has ‘topped’ or they had the ‘greed’ to wait for the markets to hit the bottom.

It is not possible to time the market. Even the wisest pundits have more often than not failed to predict the exact ‘top’ and the ‘bottom’ of stock market.

So is there really a ‘right’ time to invest or is it merely a myth or an illusion? The answer is a YES and a NO. ‘No’ because there is nothing like a right month or a date to begin. And ‘yes’ the right time to start (if you already haven’t) is NOW!

There is an old adage – ‘buy low and sell high’. But reality is a lot different from that. Most investors actually end up doing the reverse. They get into the market after the prices have risen because they believe that the ‘bull run’ is back. Such investors tend to panic the minute the prices begin to slip.

Investors must have a horizon for all equity or equity-related (mutual funds) investments of at least 5 years. The longer the better, since only then will they realize the ‘power of compounding’. Discipline and planning are crucial to achieving the goal that the investor has set (be it his own retirement or children’s education or marriage, or any other goal).

As a basic thumb-rule, during volatile markets (like the one we are currently witnessing) invest every time there is every dip. There should be no fear in the investor’s mind if he/she has a long horizon. In the near term, he/she may see negative returns because of volatility. If he looks at the big picture and has a long horizon, he should just keep plugging in the money. The returns will happen in due course.

If you wait to time the market, fear (of seeing short-term negatives) and greed (of trying to catch the bottom) may leave you stranded, thereby seriously affecting your long-term goals and objectives.

Caveat Emptor

2008-06-17T13:37:00.004+05:30

Investors, beware of advisors who ‘guarantee’ you high returns on insurance policies. Though the fancy returns may or may not happen on maturity, your advisor will certainly be a satisfied person.

Around three months back, I met a young lad at a call centre - he wanted to invest in mutual funds that would give him at least 40% returns per annum. For a brief moment, I was stunned. When I tried to explain to him that it’s impossible to guarantee such a return, he told me that he had just bought a product from an advisor (from a well-known private insurance firm) who had told him that if he invests Rs 30,000 p.a. he could redeem double the money (i.e. around Rs 2 lakh) after 3 years. He showed him some numbers to convince him and clinched the deal.

It’s not just the educated who get taken in by such advisors. Last week, I got a call from my father’s ex-driver who said that someone from a bank was with him, who was promising him Rs 1 lakh after 5 years, if he deposits Rs 10,000 per annum for 3 years. I was shocked that someone from a reputed bank (coincidentally, I bank with them) was actually trying to dupe poor people of their hard-earned money.

I wonder when all this will stop. Will advisors stoop to any level to earn a living? These advisors are trying to make a living by ‘mis-selling’ insurance products - by guaranteeing returns these policies just won’t fetch. And since there is ignorance at the buyers’ (and in most cases the seller’s, too) end, these agents are getting away with it (and with fat commissions to boot).

What happens at the time of maturity – which maybe anywhere between 10 to 25 years away? I am sure the agent would probably have retired, thanks to the commissions he made during his ‘selling’ days. The agency manager would have moved on. While the insurance company would exist, they’d probably tell you that you didn’t read the fine-print.

Our friendly neighborhood advisors are getting away with making false and unrealistic promises. Unfortunately, the “sab chalta hai” culture has trickled down to even the personal finance industry. But it’s your hard-earned money, after all. It’s only you who will pay the price for your ignorance and not anyone else.

Shouldn’t there be a minimum qualification in finance / financial products before one is allowed to advise on such products? And no, I am not talking about the IRDA certification. Because almost everyone (even your neighborhood aunty or your office receptionist is now selling insurance) who has tried his hand at ‘clearing’ this exam has managed to do so and is now an ‘advisor’.

To pay or not to pay – is that your question?

2008-06-16T20:19:00.008+05:30

Fee-based financial planning service is still new to this country. Though there are firms and individuals who charge for their advice, the number is still very small. Investors often wonder, as to why they should pay a fee when they can get the same advice for ‘free’. Is that really so? Is that ‘free’ advice in your interest?

Let me explain this point through an incident. Some time back, a senior executive of a BPO firm had called me to discuss his financial plans. When I told him that I charge a fee for my services, his facial expression changed. “I’ll get back to you.” He curtly told me. I realized what that meant and why he had said that.

I decided to try and reason it out with him. I pointed out to the two insurance policies that he had taken a year back. Till we started the discussion, he did not even know the name of the policies he had bought nor what kind of policies those were - whether it was a term plan, an endowment policy or a ULIP.

During our discussion, he realized that one of the policies (a ULIP) was not going to be of any use to him in the long-run since he needed the money after 4 years. His ‘advisor’ had told him that he could pay for 3 years and redeem the policy in the 4^th year. What he did not tell him was that in the first 3 years almost 40-50% of his premium paid would be charged as fees (for his advisor) and that out of the Rs 3 lakh that he was going to invest over 3 years only Rs 1.50-1.80 lakh was going to be actually invested. (Don’t read me wrong, I am not against ULIPs. ULIPs, as investment products, are suitable over long horizon -- of over 10 years -- but absolutely unsuitable if your investment tenure is going to be short.)

To cut a long story short, he was actually paying a fee of Rs 1.50 lakh over a three year period. Since he was unaware that he actually shelled out that kind of a fee, he didn’t seem to mind it. And just because I asked him for a fee upfront, he was upset about it. (Incidentally, he would be paying me a similar fee for almost 10 years of unbiased advice, for a host of financial products, not just insurance).

Isn’t it better to know upfront the fee you are paying for getting unbiased advice, as compared to paying a huge fee and not having a clue about it? The ‘free’ advice feeling is actually just a misconception. The reality is far divorced from that. As we all know – ‘there are no free lunches’ in life.

Why hesitate in paying up for financial advice? After all, the financial planner is spending considerable time with you to understand your needs, your lifestyle and a host of other parameters in trying to help achieve your financial dreams. He/she is sharing his/her knowledge and expertise.

It’s better to know what you are paying for. If you don’t, you too may get mislead and will have to pay for it quite dearly (both in terms of cash outflow and a wrong product). And you won’t even realize it…till it’s all too late.

An introduction to financial planning

2008-06-14T13:38:00.012+05:30

Here’s a lowdown on financial planning and how it can help you lead a life of your dreams.

Welcome to my first blog. Let me begin by introducing myself, my firm - Knowledge Partners - and our philosophy. I am an Associate Financial Planner and have also done my PGCBM from XLRI, Jamshedpur. In 2005, I moved to Gurgaon after spending 14 years in equity research, media and marketing at various firms in Bombay & Calcutta. Numbers always intrigued me. So did various financial instruments. But I also saw how people all around me were getting mislead by so-called ‘advisors’ and ‘agents’. While everyone wants a financially secure future, most people were either unaware or confused as to where and how to start. The result - decisions got indefinitely postponed; or wrong products were bought based on misinformation.

That’s what reinforced my decision to start my own financial advisory. And in 2006, Knowledge Partners took shape.

Financial Planning, as a concept, is still quite new to India. Traditionally, financial advice in Indian homes (invariably) comes from a family elder - who is, more often than not, heavily under influence of an insurance agent or a family friend.

Often, agents and advisors give you an improper advice so that they can make a quick buck. They often sell you a insurance policy or a mutual fund that gives them the highest commission or brokerage.

At Knowledge Partners, we believe in having a long-term relationship with all our clients and advise them to buy financial products they actually need. Our endeavor is to be a partner of our clients till the time they achieve their financial goals.

Have you planned your financial future?

You can get answers to this question by answering these simple questions:

· Have you started planning for your retirement?

· Have you wondering how to plan for retirement, children’s education and marriage in the face of rising inflation?

· Do numbers boggle you?

· Are your savings fetching you sufficient returns?

· Have you ever thought as to how many years you can maintain your current lifestyle if you were to take a sabbatical / retire?

· Is your money lying ‘idle’ in your savings/current bank account – would you not like to earn more than the meager 3.5%?

· Most of us limit our investments to tax saving instruments – or the amount that is to be covered under section 80C. But is that enough to meet all your future expenses? Will that create a sufficient corpus?

If these are some of the questions that are bogging you down, Knowledge Partners could be of help. We are a Gurgaon-based firm offering fee-based services in the area of financial planning having a clientèle in the Delhi-NCR region, primarily, and also in Bombay and Calcutta.

How do we go about it?

Our investment process begins with you. We perform a careful assessment of your individual needs and aspirations, and our evaluation is based on:

· Goals and objectives,

· Investment time horizon,

· Liquidity needs,

· Desired rate of return, and

· Tolerance for risk

The result is a complete understanding of your personal profile that will serve as the foundation for defining a long-term investment strategy tailored to your specific needs and preferences and not just catering to your ‘tax planning’ requirements u/s 80C.

Our philosophy is designed to achieve long-term investment goals, and is based on the following core principles:

1. Identify Your Unique Needs, Goals and Objectives

2. Build an Asset Allocation Roadmap

3. Formulate a Plan & Portfolio Selection

4. Continuous Portfolio Monitoring

We educate our clients so that with time they are more focused to achieve their goals and objectives with the help of their financial advisor, rather than by relying blindly on the latter.

Our fee-based approach is designed to eliminate conflicts of interest and results in unbiased and honest advice.

Money isn’t everything, but having control and confidence about how you are managing it can allow you to concentrate on other things like your family, your career, and your future. We believe that all your dreams are achievable and we look to partnering you so that you can live your dreams!