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.
Friday, 26 June 2009
Friday, 19 June 2009
SEBI’s latest ruling on mutual funds - its impact and after-effects
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 A couple of years back when there was no entry load for SIPs, but was later withdrawn.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.
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.
Tuesday, 16 June 2009
Financial Planning mantra #7
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.
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.
Tuesday, 9 June 2009
Financial Planning mantra #6
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.
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.
Tuesday, 2 June 2009
Financial Planning mantra #5
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.
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.
Thursday, 28 May 2009
Financial Planning mantra #4
Never borrow money (take personal or other loans) to invest in the stock markets. It is a sure-shot recipe for disaster.
Tuesday, 26 May 2009
Financial Planning mantra #3
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.
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.
Thursday, 21 May 2009
Financial Planning mantra #2
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.
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.
Tuesday, 19 May 2009
Financial Planning mantra #1
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.
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.
Monday, 18 May 2009
Sensex and NAVs
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.
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.
Tuesday, 5 May 2009
The New Pension Scheme is here!
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.
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.
Tuesday, 21 April 2009
Inflation - ‘Deflation’ - Inflation
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.
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.
Wednesday, 1 April 2009
New Day. New (financial) year. New Horizons. New Hopes.
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!
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!
Wednesday, 25 February 2009
The annual ritual of tax-saving
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.
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.
Thursday, 29 January 2009
Recession, slowdown or an opportunity?
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!
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!
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