Moved my blog to http://mysimplemoneylife.wordpress.com/

My new blogging address http://mysimplemoneylife.wordpress.com/ 

How must you plan your Investing

You could be investing, keeping in mind the different goals that you have . Your goals could be Short,Medium or Long term in nature depending on the time you have in hand to finally reach your goal

But, no matter what kind of goals you may have , your investment must be spread across different investments type or very simplistically must be spread across at least Debt and Equity.

• Short Term Investment Horizon ( 1 year )

            Debt : Bank Fixed Deposits and FMP and Balanced Funds

            Equity : Large cap Focused Diversified Equity Funds

• Medium Term Investment Horizon ( 3-5 year )

           Debt : Bank FDs, Corporate FDs , Debt Mutual Fund

           Equity : Large Cap and Mid Cap Focused Diversified Equity Funds

• Long Term Investment Horizon ( > 5 year )

         Debt : Bank/Corporate  FDs,PPF/PF,Long Tenure Bonds

         Equity : Large Cap Focused Diversified Equity Funds ,

                     Mid/Small Cap Focused Diversified Equity Funds

                     Direct Exposure to Equity.

You can add Gold to all of these for stability .

As the saying goes, "Failing to Plan is Planning to Fail" , so lets be prudent and plan

Image: renjith krishnan / FreeDigitalPhotos.net

Why is Investing important

If you have been able to save money and have been able to spend less than what you earn, that is great, you have taken a tiny step towards wealth creation, since you could never have hoped to create wealth by spending more than you earn.


The question that now begs to be answered is, is just saving enough.

Let me explain

I usually have Idlies for breakfast, about two years back my breakfast costed me Rs.10 and today the same breakfast costs me Rs.14.

Now If,

· I had saved Rs.10 as cash, I would have found after two years that my Rs.10 would no more be able to buy me the breakfast.

· I had kept this Rs.10 in a savings bank account that which gives me a interest of 3.5 % a year, I would have got Rs.0.35 the first year and another Rs.0.35 the next, so ideally I would have ended up having Rs.10.70, which would still not buy me my normal breakfast.

Which just shows that, saving thought extremely important is just not sufficient, it must be backed by a push to invest, else rise in Prices (Inflation) eats into our purchasing power, reducing the value of money.

If you see all great wealth creators, the one consistent thing you find is that, they have learnt to make their money work harder, they have learnt, left on its own money would start loosing value hence it is a far better proposition to convert money into Stocks, Bonds, Real Estate, Businesses, Gold, etc.

Do work hard , but also learn to make your money work harder .

Indexation ... Double Indexation

As per the Indian Taxation law , whenever an asset has been held for the long term, "Indexation Benefit" can be availed by the investor when the investor finally sells the asset.

The term "Long Term" is different for different instruments.

• Stocks and Mutual funds,a period of one(1) year is considered long term
• House, Property a period of three (3) years is considered long term

When an asset is sold after the above mentioned period , the profits/losses that are made  are called "Long Term Capital Gains/Losses"

In case of Equity there is no Long Term Capital Gains Tax (LTCGT). But in case of other assets like Debt Mutual Funds, Property there is a Long Term Capital Gains Tax to be paid .

Long Term Capital Gains Tax (LTCGT) is computed as

• 20% of Long Term Capital Gains with Indexation
• 10% of Long Term Capital Gains without Indexation

What is Indexation ?
Capital gains would be usually calculated as

Capital Gain = Selling Price – Purchase Price

But fortunately government realised this is not a fair assumption because , rise in inflation usually eats into your profits . So in order to compensate for inflation , governments lets you increase your purchase price.

But arbitrary increase of purchase price cannot be allowed , so every year CBDT  (Central Board of Direct Taxes ) comes out with a Index value for Cost Inflation Index (CII). using this Index to reduce the cost of purchase is called Indexation

How is this index to be used
Capital Gain = Selling Price – Cost Inflation Indexed Purchase Price

How is "Cost Inflation Indexed Purchase Price" calculated
Cost Inflation Indexed Purchase Price = Purchase Price X (CII for current year / CII for year of purchase )

Suppose you bought a 370 day FMP on 28th March 2009 (Financial Year 2008-2009) for Rs. 50,000 and then it was redeemed on 3rd April 2010 ( Financial Year 2010-2011 )  for say Rs.70,000

Then the Cost Price = Rs. 50,000
Cost Inflation Indexed Purchase Price  = 50,000 x ( 721/582 )  = 61,941

Please note: Financial year is considered not the calender year . so thought it was only for a year ( 370 days ) that this money was invested, since this crossed two Financial year ( 2008-2009 to 2010-2011) , we are doing a "Double Indexation" here

So Capital Gain

• With Indexation  = 70,000 - 61,941 = Rs.8,059
• Without Indexation = 70,000 - 50,000 = Rs.20,000

Capital Gain Tax would be :

• 20% with Indexation       = 20%  of  8,058.5 = Rs. 1,611
• 10 % without Indexation = 10 % of 20,000 = Rs, 2,000

The Income tax payer can choose any of the two options , based on his option to pay less amount of tax.

So, the month of March each year see a heavy offerings of 370 days FMP by mutual funds to let investors take advantage of "Double Indexation".

Bonus Debentures

Dr. Reddy's Laboratories the pharma major has decided to issue "Bonus Debentures" , below is the gist of their corporate announcement.



"Dr. Reddy's Laboratories Limited has informed the Exchange that the Management Committee of the Board of Directors of the Company at its meeting held on March 24, 2011, has approved the allotment of 1,015,516,392 Unsecured Redeemable Non-Convertible Debentures of Rs. 5/- each carrying a coupon of 9.25% per annum, ("Bonus Debentures") amounting to an aggregate value of Rs. 5,077,581,960/- from the General Reserve by way of distribution as bonus, to the Members, based on their equity holding on the Record Date i.e. March 18, 2011, in the ratio of 6 (six) Bonus Debentures of Rs. 5/- each for every equity share of Rs. 5/- each held."

Corporate Announcement PDF

What does this mean:
If Instead of Bonus Debentures , if they had declared dividends , then it would have meant that each (1)share would have been eligible for 6 x Rs.5 ( 6  Bonus Debentures of Rs. 5/- each ) = Rs.30 as dividend

Now, instead of giving cash to the share holders , the company would issue FD ( Company FDs ,which are also called Debentures ) , so each share would now receive 6 (Six) Debentures of  Rs. 5/- each with a interest rate of 9.25% payable annually .Which means every year you would get Rs.2.775 as interest and these Debentures (Company FDs ) would mature , that is you would get your Rs.30 back in 2014.

These are called Bonus Debentures , because you did not pay that original Rs.30 , it was something the company invested in the Debentures , but in your name.

How does the company benefit :
The company would have needed money to expand their business or for some other business expense , so they normally would have , had to borrow from a bank , which could have charged them higher rate of interest . But with "Bonus Debentures" , they would get money at a lower rate of interest.

And it is also a way of treating/rewarding their share holders and hence enhancing their corporate image .

How does the share holder benefit :
The share holder finds that , company has invested in his name some money which fetches him 9.25% interest each year for 3 years , at the end of which he gets the Principal Amount too

The record date for this "Bonus Debentures" was 18th March 2011.

SBI Lower Tier II Bonds

SBI Bonds have listed on the Bombay Stock Exchange ( BSE ) and they are all trading at a premium. If the premium were to reduce , would be a good chance to buy, especially the "Series 4 Lower Tier II Bonds - Retail"

These are the BSE code of the listed bonds

SBI Bonds Listing Date: March 23, 2011 - Wednesday

Face Value of NCD: Rs.10,000/-

Series 3 Lower Tier II Bonds :9.75% Per Annum

Scrip Code: 961701

Scrip ID: SBIBIIIR

Series 3 Lower Tier II Bonds :9.30% Per Annum

Scrip Code: 961702

Scrip ID: SBIBIIINR

Series 4 Lower Tier II Bonds :9.95% Per Annum

Scrip Code: 961703

Scrip ID: SBIBIVR

Series 4 Lower Tier II Bonds :9.45% Per Annum

Scrip Code: 961704

Scrip ID: SBIBIVNR

Source : BSEIndia

Rupay

I had written in my article Indirect lesson from Wiki Leaks  about the risks involved on our over dependence on VISA and Master Card , to process our card transactions .

If you like to know more about, how VISA and Master Card work , please read this

National Payments Corporation of India , has finally woken up to this risk and has come out with a India specific card transaction gateway and has named it "RUPAY"

This is a good move, once formally launched , hope all our Nationalised and Private banks would enthusiastically adopt this , especially for the Debit Cards and Non international Credit Cards

This must see significant revenue saving for the banks , if NPCI , prices this service very conservatively .

Only risk involved is, will NPCI be able to stand up to the arm twisting that most of these MNCs resort to , using their government , when they find their dominance challenged in a foreign market .

So in this customer driven market . If we as customer demand that the Banks Issues us cards based on "RUPAY" , we may then give "RUPAY" a fighting chance to survive and thrive .

So watch out for the formal lauch of "RUPAY" .

Image: worradmu / FreeDigitalPhotos.net

SPARKLINES

Picture speaks a thousand words .

In Stock investing ,especially in technical analysis of stocks, plotting how a stock or an Index has moved over the last year , may be Month or may be all though the day is a good indicator of the investor sentiment about a stock.

You would not have to look far for such data , there could be lot of different websites that may provide you this information , but none as elegantly as the NSE website

NSE ( National Stock Exchange ) has a feature called "SPARKLINES", where not only are Indexes plotted but , every constituent stocks are plotted over a Intraday, 30 days , 365 days period . the different indices covered are ( click on the Index to see the chart )

• Nifty
• Junior Nifty
• CNX IT
• Bank Nifty
• Nifty Midcap 50
• CNX Realty
• CNX Infra
• ETF

You even find the ETFs listed on NSE plotted here. You can even click on the small "Post-Its" on the charts to see any corporate actions like dividend/split/bonus information.

Image: winnond / FreeDigitalPhotos.net

My learnings from Ramit

I follow a blog that is run by Ramit Sethi "Iwillteachyoutoberich.com" and two of his teaching that have profoundly influenced me are

• Automate your Finance
• Ask your Seniors

Automate Your Finance:
This aims at removing all the "Human Element" from the act of investing and tries to make it as mechanical a process as you can possibly think of . In my limited investment experience i have see that Human Elements like fear,greed,procrastination,laziness are the biggest stumbling blocks to disciplined investing and Automating your Finances focuses on removing these stumbling blocks.

Are you desirous of Automating your Finances , you can automate in these ways click here

Ask your Seniors:
This is about , learning from mistakes , more importantly, from mistakes of others .
Ramit suggests that you approach a person about 5 years your senior , may be a colleague or a friend or may be somebody in your family and ask them , if they had the chance to re-live last five years of their financial life again, what would they have done differently . how would their priorities be different , what investment they would have avoided , what investments would they have maximised .

Think about these two points , see how simple and yet how drastically can these alter your investment style.


Thank you Ramit for these insights.

Do they practice what they preach

This is a interesting discussion with some of the most respected Mutual Fund managers and we find that not all the Fund Managers practice what they preach .

Many of the Fund Managers , have not invested their own money in the funds that they them self manager . If such is the mindset , how would you expect the general public to invest their hard earned money in the Equity Markets

Interesting conversation , please do watch

Warren Buffett in India

Warren Buffett the legendary Investor, one of the richest individuals on earth , philanthropist, the "Demi God" of value investing will be in India .

Having picked up a stake in Bajaj Insurance and the shrewd businessman that he is and knowing fully well that Indians buy a Insurance policy for all the wrong reasons , he has made an irresistible offer

"Buy a policy on BerkshireInsurance.com and get invited to meet Warren Buffett"

Want to meet this legend , go right ahead and buy a insurance policy at BerkshireInsurance.com

Did You Know

It has been quite sometime now that Mutual Funds have enabled their own website for Online Transactions , Initially the Mutual Funds wanted

• You to be a existing investor with a Valid Folio Number
• You to have a online transaction PIN ( which the investor would have received from the MF after filling in a Online Transaction Form and mailing it to them )

Now all this is changing , MF now allow you to Invest and even start a SIP ( Systematic Investment Plan ) , even if you do not have a PIN . All that you would need now would be

• Your Valid Folio Number ( which means you would still need to be a existing investor )
• Your PAN number
• Your Bank Account Number ,that is registered with the Folio

KYC is mandatory , this goes without saying .

Which means , if you have a online transaction enabled bank account , you are all set to start investing .One less excuse for you not to invest

Currently i find these fund houses allowing investor to invest without a PIN
HDFC Mutual Fund
DSP Blackrock Mutual Fund

But remember , without a PIN you can only Invest/Buy , but you can never sell , this is a safety feature , So do remember to apply for a PIN , you would need that , the day you want to redeem your MF investments online.

So, go ahead and start investing from the comfort of your couch .

Image: Idea go / FreeDigitalPhotos.net

Global Index based ETFs

Motilal Oswal is launching an ETF based on the Index, NASDAQ 100 .

Those of you, who do not know what an ETF is, ETF is exactly like a Mutual Funds , but the units of a ETF ( Exchange Traded Funds ) can be bought on the stock market during the trading hours.

Want to know more about ETF , please check here

About a year back Benchmark Mutual Fund had launched an ETF based of the Hang Seng Index.As far as i know, these are the only two ETFs , that an Indian investor can use to invest in stocks that are listed outside India

The current offering from Motilal Oswal , would invest in the NASDAQ 100 companies in the same proportion as in the Index

NASDAQ 100
NASDAQ stands for "National Association of Securities Dealers Automated Quotations". Details here

NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. More details here .

There are arguments both in favour and against , Indian investors investing in foreign companies .

Arguments in favour :

• The Investor would be able to diversify his investment in non Indian companies and markets
• The Investor gets a chance to invest in some true blue multinational giants

Arguments NOT in favour

• The Indian investor has better growth opportunity in India itself
• The Investor may suffer from currency fluctuations

I would wait and see how this ETF would perform ,before i even think of investing
Image: scottchan / FreeDigitalPhotos.net

MF Statement

When you start investing in Mutual Funds ( MFs) you are suppose to receive a Mutual Fund statement every quarter , especially , if you are investing through SIP.

Watch out for these details on your MF statement

Scheme Name and Option :
Make sure your money is being invested in the correct Mutual Fund scheme of your choice and also make sure the Option of the scheme which could be Growth, Dividend - Payout , Dividend - Reinvest , is as per your choice

Name and Address :
Make sure your Name is spelt right and also check your contact address ( Postal Address in case you received the statement by Email and Email address, in case you are getting your statement by Post ).

Email  Address and Mobile Number:
Make sure your email address is proper as, then you can get a statement from CamsOnline.com ,anytime you like using your registered email Id. Check you mobile number too , so that you can be sent SMS alerts by the MF when your SIP is due and when a purchase has been made

KYC Status :
Make sure your KYC status is OK/Validated on your statement .if your are not KYC compliant , you will not be allowed to make any new investments nor will you be allowed to sell your current holdings

Bank Details :
Make sure proper Bank Account details are mentioned , along with the IFSC code ,
If IFSC code is mentioned then MF can directly credit the dividends as well as redemption money into your bank account saving you time and effort of depositing cheques into your bank account and also avoid getting into the agony of losing/misplacing cheques.

SIP Amount/Lumpsum Amount:
Make sure the amount that has been invested is correct .

Broker Details:
If you were helped by a broker to invest , you would then see the Broker's name here, else you are suppose to see "Direct". This must not affect your investment directly , but brokers are usually paid a trail commission by the Mutual Funds , which is paid from charges deducted from you . So, in case you have invested directly/Online without any broker's help make sure it is "Direct"

Image: renjith krishnan / FreeDigitalPhotos.net

Business Magazines on the net

Reading is a inseparable part of investing .It is impossible that we can be good investors without reading. Reading may help us to spot investing opportunities , help us to learn from other investor's mistakes and help us to learn about new financial products like say ETF/DVR which did not exist may be about 5 years back .

Here is list of Business Magazines ,which focus of Personal Finance and Business and which are Online too

Forbes : http://business.in.com/

Outlook Money : http://money.outlookindia.com/

Money Life : http://www.moneylife.in/

Money Today : http://businesstoday.intoday.in

Outlook Profit : http://www.outlookprofit.com/

ET Wealth : http://economictimes.indiatimes.com/etwealth.cms

Business World : http://www.businessworld.in/

IFSC ( Indian Financial System Code )

RBI statistics show that Investors are increasing using NEFT and RTGS for funds transfers .

Even companies and Mutual Funds have made it mandatory to provide bank details along with IFSC ( Indian Financial System Code ) and MICR ( Magnetic Ink Character Recognition ) codes

Only pain point would be that , you may not be knowing these code for your branch , here is a website that can help you find this piece of information without any hassle

This website provides you the MIRC code and the bank branch address too :
Find IFSC CODE here

Why are Sectoral Funds not good

DSP BlackRock Technology Fund
HDFC Infrastructure Fund
Reliance Pharma Fund

Are a few examples of Sectoral or Thematic funds , as the names suggests , they are allowed to invest in specific themes only . for example a Reliance Pharma Fund , can invest in only pharma companies and cannot venture out to invest in say a Cement or a IT company
 
The problem with thematic funds is that , If in case the sector is going through a bad phase , even in that condition the Fund cannot invest in other sectors or even if the fund manager realises some other sector is going to perform better , he still cannot invest in that sector .
 
Suppose the "Pharma Fund" manager realises that "Banking Sector" is going to do better than pharma , still he will not be allowed to invest in "Banking"
 

By investing in a sectoral funds , you are restricting your money from getting invested in different better performing sectors
 






You can invest in a sectoral fund if you

• Know for sure , with deep working knowledge of a particular sector , that for next year or two or more a particular sector would return phenomenal returns
• You are a very active investor , who will be tracking your investments very very regularly and have the foresight to exit a sectoral fund when you either spot other better sectors or see problems with the current sector

But these are quite tough to achieve for a retail small investor.

In contrast a Diversified Equity Fund , has no such restrictions and can invest in any sectors they like and take advantage of growth in any or all of the sectors.

So i would suggest , avoid sectoral funds and stick with the Diversified Equity Fund , like the three i had suggest in my earlier post .

This is just a suggestion, as investing heavily in a Sectoral Fund could be akin to putting all your eggs in one basket

Image : FreeDigitalPhotos.net,Photographer: Ashley Cox

Are these your reasons too

I keeping speaking to lot of my friends and colleagues , about investing and i see a whole set of reasons for NOT investing , let me list a few

• I have no idea how to go about Investing. may be i will learn to invest and then start
• I would start investing , when my financial situation gets better
• I would start investing after i have saved , some X amount
• I have no time , work and family takes up all my time

 I would say all these are flimsy reason not to start investing .

Yes, you would need to know what you are investing in, you would need to be knowledgeable , but then it is something that you ought to do along your investment journey.

There would never a point in your life , when you would feel that i know enough , nor would you ever feel that i have enough money now and let me start investing .

So start off investing how little it may be , make adjustments and more knowledgeable investments as you go , it is important to build the momentum for investment and let it help you build knowledge and the mindset

Best of both worlds

For a conservative investor who is taking baby steps towards investing in equity , here is combination that must work really well and help build confidence

Investor can try a combination of  Post Office Monthly Income Scheme ( MIS ) - with a SIP in a Equity Mutual Fund

Let me explain :
Suppose you have Rs.3 Lakh rupees that you want to invest , open a Post Office Monthly Income Scheme. MIS provides you with a interest rate of 8% and at the end of 6 years, the term of an MIS account, you will be get a additional bonus of  Rs.15,000 ( 5% of 3 Lakh )

So at 8% interest you would be getting an annual interest of Rs.24,000. Which means an amount of Rs.2,000 would be paid to you every month . MIS pays out the interest every month

Investor could channel this Rs.2,000 into a monthly SIP of a good diversified Equity Mutual Fund like the HDFC Top 200 or DSP Blackrock Top 100 or may be a Fidelity Equity Fund.

This mode of investment is very similar to what is called STP or Systematic Transfer Plan , where a lump sum amount is invested in a Debt Mutual Fund and every month a fixed amount would be taken out of the Debt Fund and invested in a Equity Mutual Fund .

Know more about MIS here

The advantage with this approach could be that , the Rs.3 Lakh would have continuously earned about 8% interest and the equity investment would add a additional kicker to the returns earned with the original lump sum of Rs. 3Lakhs protected.

This combination of Debt and Equity may prove to be your best friend for a long time to come

Also read my previous blog Investing ? -- Make it boring

Image : FreeDigitalPhotos.net,Photographer: Ashley Cox

Random Thoughts

KYC :

Three of my friends who wanted to invest in Mutual Funds , found that they cannot invest , because they are not KYC compliant . Since Jan 01 ,2011 , being KYC complaint is mandatory

KYC , is Know Your Customer guidelines for Mutual Funds to know who their customers are and to make sure that no ill gotten money is being invested in MFs

So,even if you have no plans of investing in MFs in near future , Please make sure you get your KYC compliance letter ready , so that you would not have to run around when you really need it .

You would need this letter to make fresh investments in MFs and also to sell/redeem your old investments in MFs

How to get your compliance letter , click here

Online Investing :

Most of the Mutual Funds , now provide an Online option for investing , If you are an existing investor in a mutual fund , all that you would need to do , is to fill their Online Investment authorisation form and post it to them and the MF would mail you back the Online PIN , which can be used to transact Online

So in case you have not yet enabled online transaction for your MF Folio number, go ahead and do that , Investing becomes so much simpler when you can invest online .

Life is about seizing opportunities and you can seize opportunities only if you are prepared

Fixed Maturity Plans

When we think of Mutual Funds , we usually only think of Equity Mutual Fund Schemes , but we forget to take notice that , there are other kind of funds too that invest in debt , which are comparatively less risky and would normally given lower returns.

In both these kind of Mutual Funds schemes, Equity and Debt , after you buy the units , you would then need to decide when to sell them and I find that, this decision of when to sell is not so easy to take especially for a small investor .

Apart from these normal Mutual Fund schemes , there is another product called FMP , that Mutual Funds offer and this is a good product to invest in

Features of a FMP

• Duration :As the name suggests , they are of a Fixed duration , when you are buying a 90 day FMP , you would know that at the end of 90 days , your invested amount would be returned back to you , along with the profits or dividends . Currently there are FMPs available in the range of 35 days to 365 days
• Investment :The FMPs invest only in debt instruments . usually banks and other corporates , when they need large amount of money for small duration , may be less then a year , they come out with corporate FDs or short duration FDs which are available only for large institutions like MFs as they can then invest hundreds of crores . FMPs usually invest in these FDs.
• Rate of return :As per SEBI guide lines MFs are not permitted to disclose the interest rate they can return . So unlike a normal FD , you will not be able to know the rate of return , but it has been usually found that FMP returns are better than a comparable duration FD 
• Premature Withdrawal: FMP are listed on the stock market in Demat form hence if you need your money back before the maturity of your FMP you would need to sell your FMP on the stock market.Please note demat is not mandatory to invest in FMP
• Tax : FMP of less a year can be invested with Dividend option , in which case the MF company will pay the dividend distribution Tax , hence any dividend that the investor receives would be Tax free.And for FMP which are for more than a year , Investors can choose the growth option and this would be tax efficient using Indexation ( Watch out for a post on Indexation and how it saves tax )
• Offer Period: Unlike a normal MF scheme , which can be bought at any time , FMP have fixed offer period , usually a of couple days and investors can buy the FMP only during those days.

FMP currently on offer :

• HDFC FMPs
• DSP Blackrock FMP
• Fidelity FMP
• FMP List

Image : FreeDigitalPhotos.net,Photographer: Nutdanai Apikhomboonwaroot

Very Senior Citizens

This time around the Annual Budget had a interesting thing to offer , the Finance Minister (FM) has created a new category of citizens called "Very Senior Citizens" and the age limit for this, has been set as 80 years

In a country like ours where there are so few facilities provided by the government for the senior citizens,this is a welcome move by the FM

The FM has made sure that this category of citizens do not have to pay taxes for taxable income upto Rs.5 Lakhs , this limit was earlier half this figure at around Rs.2.5 Lakhs .

I'm not sure how many people really benefit from this , as the percentage of population above the age of 80 must be very small and a miniscule percentage of that, may probably be earning above Rs. 5 Lakhs a year but none the less a good move by the FM

The FM also reduced the qualifying age for senior citizens from 65 to 60 , so someday hope he will also reduce the qualifying age for Very Senior Citizens from 80 to 75 ,which may be a more appropriate qualifying age

In these times of high prices and uncertain interest rates , any change that helps our Senior Citizens is a welcome move

Buying a Life Insurance Policy

This is a very appropriate commercial from Religare Life Insurance . I have spoken to lot of my friends and i find that in most cases , they have no idea what kind of Insurance policy they have and they also have very weird reasons for buying, like

• The Insurance agent was a family friend and so i bought this policy
• I was spending too much , so thought of buying this Insurance policy as a saving
• I had to save taxes and did not know any other way to save taxes

Let me ask you a very simple question "Lets say , if tomorrow, you ( earning member ) are no more , would your family ( Spouse, Kids, Parents ) who survive you , be able to make a living based on your today's savings and Insurance claim amount of your insurance policy"

If your answer to this is "Yes" , then you do not have to read further , if your answer is "No" then do read further.

How can a Insurance for say 2,5 or 6 lakhs really help your family that you leave behind, to survive , as these are too small a amount for them to spend a life time on .

Let me take the analogy of a vehicle insurance , when we buy a vehicle insurance , we do so as something that would help us in an emergency and not as a saving tool and i would be glad at the end of the year , if i did not have to use it , but i make sure that i renew it for the next year.

We would have to take a Life Insurance with the same mindset . Only kind of Life insurance policy that would be useful is a Term Insurance Plan or Pure Insurance Plan . These type of Insurance Plan do not give you any returns , but for a small premium per year would give you huge life insurance cover.

No Insurance agent would ever recommend a Term Insurance Plan or Pure Insurance Plan to you as the commission on these type of plans are the least .

So remember that it very important to have Big Life Cover or Sum Insured , as that is what would help your loved family in case of a unexpected event and help your family not only to make a decent living but also see to it that your kids get uncompromised good education they deserve

If you would like to know more about different kind of Life Insurance Policies , click here

You can even buy couple these term plans online

• iProtect
• iTerm

you could probably buy a insurance cover of 1 crore for a yearly premium of Rs.15,000 for a person in his mid thirties., that is how cheap term plans are .

Mutual Fund Investing

For an investor who wants to invest in the Equity Market or Stock Market , but who may not have the time and knowledge to pick stocks ,Mutual Funds are an idea way to go about.

If you would like to learn more about Mutual Fund , watch this video about Introduction to Mutual Funds

Now that you have understood what MFs are, and would now like to choose a few good Mutual Funds to invest in,  I would recommend that you visit Valueresearch , this is wonderful website that help you select a MF . They also have a rating system , that has already rated MFs based on their past performance

Click here to visit ValueResearchOnline

Investor must have the patience to stay invested for a period of 2-3 years and must choose the SIP method to invest

SIP: Is where you invest a fixed amount every month , on a fixed day of the month in Mutual Fund .This help you build discpline to invest and also help you buy at lower prices , in case the market is falling , thus helping you to lower your average price of purchase

For the current market conditions my recomendations would be these three Equity Mutual Funds .

• DSP Blackrock Top 100 - Growth( This is Large Cap fund , which mean it invest in biggest 100 companies only )
• HDFC Top 200 - Growth ( This is Large Cap - Mid Cap fund , which means it invests in top 200 companies which are big as well as averagely big companies )
• Fidelity Equity Fund - Growth ( This conservatively managed fund , which has consistently performed well for last 5 years )

You can download the application form for these funds here HDFC , DSP Blackrock , Fidelity

KYC is mandatory for mutual fund investing , see here to know more

When filling the forms for the Mutual Fund , please use these TIPs

Rs. 150 Coins Will Be Here

On the occasion of  taxation in India being 150 years old , the finance ministry would be releasing a Rs.150 rupees coin .

This would be the first time that Rs.150 denominated coin would be released and only about 200 of such coins would be released

So in case you happen to lay your hands on one , make sure you do not spend it and hold on to it , as someday it may be worth a lot lot more.

As a tax payer not really sure if this is a occasion to celebrate , it could be,  if i could get hold of one of these new coins

MOAT

A MOAT is a deep, broad ditch, filled with water, that surrounds a castle and it would contain not just water , but there could be crocodiles and snakes in it too. The intent of having a moat was to keep away the enemy or to make sure that the enemy has to try really hard and has to encounter lot of casualty to reach the castle and wage a war against a empire.

In modern age there are no empires , just that , empires have been replaced by Business Empires .

Every modern day business dreams of creating a "MOAT" around it , so that

• It is not too easy for somebody else to start a similar business
• Even if somebody did start a similar business , they cannot price the product as profitably.

a MOAT can be any competitive advantage like

• A extremely well recognised and customer loyal Brand ( Nestle,TITAN )
• A Financially intensive business , which needs huge investments ( RIL )
• A massive distribution network ( ITC, HLL, GAIL )
• A High technology industry protected by Patents ( Bosch )

Look for companies like these ,because of the MOAT that they build around them , they can keep competitions away , and hence can have better profit margins.

And we have found that companies with MOAT do return phenomenal return , if investor has the patience and conviction to stay with them

 Image : FreeDigitalPhotos.net,Photographer: Nick Coombs

Chanakya ...On Governance

This is a amazing episode from Chanakya .Please do watch the entire episode .

Today were are confronted with very high levels of corruption in public life  and in this episode we see that a student of Political Science is asked question about governance

When asked "Whom should we protect wealth from ?"
The student answers "Wealth must be protected from Thieves and Nobel Men "  

Nobel men ...our current day politicians , ministers , chief ministers .

When the king, annoyed by his answers asks the student , "As per the scriptures , what is the position of a King ?" ... to the utter astonish of the king the student answers " King is nothing more than a salary drawing public servant "


These very same questions are something which current day people in power find it hard to come to terms with.

There is a saying "Power corrupts , and absolute power corrupts absolutely" to be in public life and maintain a high level of integrity is not a joke

I think another way for people in public life to be dispassionate , would be to be spiritual and keep reminding one self of these words from Adi Shankaracharya from his "Bhaja Govindham"

"maa kuru dhana jana yauvana garvam harathi nimEshaath kaala "

Meaning :
"Do not be proud of wealth, friends, relatives and youth,when your time( death ) comes you would lose all of this in a moment"

Our political would not have to look far to know this , death of AP chief minister Y.S.R is all that they would need to remember.

 In this age of greed , there is only one way to be happy ...
"Contentment is better than Riches"

Do we understand compounding

State Bank of India , is coming out with a Bond Issue and one of the Investment Option is a 15 Year bond with 9.95% interest rate . When I mentioned this to a friend of mine , his immediate reaction was , wow this is better than PPF ( 15year , 8% ) . This made me think , how little we understand compounding

These are how the SBI bond issue and PPF are different , I would be considering just the duration and Interest rate and keeping all other issues like tax superiority of PPF out of this article for now

• SBI Bond provides 9.95% interest and PPF provide 8%
• SBI Bonds provide simple interest , which means interest calculated each year would be returned to the investor , where as the PPF provides annually compounded interest  , which means interest calculated would be added to the principal and this new principal would be considered when calculating the interest for the next year 

So if you invest Rs.1,00,000 in the SBI bond , you would be earning Rs.9,950 each year so at the end of 15 years you would have earned Rs.1,49,250 ( 9,950 x 15 ) , so along with original invested amount , you would have Rs.2,49,250 

Now if the same Rs.1,00,000 was invested in a PPF , you would have Rs. 3,17,216.91 at the end of 15 years that is about Rs.68,000 more and this "more" is due to compounding . try the Calculator

Please also note that all returns from PPF is absolutely tax free and your initial Principal is also Tax Deductible under sec 80C , where as the entire return from the SBI bond issue is tax able.

This SBI issue is a good investment , i would recommend you to go ahead and invest , but please do not make the mistake of comparing the PPF with the SBI bond , as PPF is head and shoulder above all debt investment options that you have in the Indian market .

But also remember that compounding is double edged sword , that is, if you have a home loan, it is compounding that makes the amount you borrowed grow so quickly and by the time you close the loan you would have paid nearly twice or more the amount you had borrowed.

Compounding is something we learnt in class eight but, it may take us a lifetime to understand how powerful a tool this is .

In case you still did not understand how compounding works , try harder to understand it , make it your partner in investing and you would have no regrets.
Image : FreeDigitalPhotos.net,Photographer: graur razvan ionut

Provident Fund

Provident Fund is a blessing in disguise for people who struggle to save . It is a ideal case of  "Automated Investing" or what you say investing on "Auto Pilot" .

But the Provident Fund is not without its share of problems. Since it is to a great extend at the mercy of the government , it remains extremely non transparent .

My experience has been that it has nearly been four years since i got my Annual Statement from the PF office , this makes a subscriber like me, extremely uncomfortable . And when we finally get a statement I struggle to make sure that the amounts shown on the statements are correct

Now here is a solution , This is only for subscribers with PF accounts in Bangalore. The PF number in Karnataka has this format KN/Establishment Code/Employee No.

Find your PF amount

Use the link above and enter the details , you may most probably see the amount in your PF account.

I only wish PF

• Someday have a small exposure to equity, may be a Index Fund  
• Someday be like a online bank account into which i can login and check anytime
• Someday have a unique number which would not change with my employer.

Would this "Someday" ever come or will this just remain my wishfull Someday

Image: i owe credit to the photographer

Reliance mutual fund has launched "Reliance Gold Savings Fund". Since Gold ETFs were launched the uncertainty in purchase and sale of gold as a investment has been removed and investor could invest in gold without being concerned with the purity of gold, how to store the gold safely and also where to sell it finally.

But investing in gold ETF had certain drawbacks.

• Investor needs a Demat Account
• Investor needs to approach a broker to buy ETFs ,
• If the investor is not a regular stock investor , these would have just added to the investors overhead expenses.

 Now the investors have an alternative ."Reliance Gold Savings Fund". This is a fund of fund , which means it invests in other mutual funds. and this Reliance fund will invest only in Gold ETF

Pros

• Investor does not need a demat account
• Investor does not need to approach a broker
• Investor can start a SIP in gold investment

Cons

• Invests only in Reliance Gold ETF , though there are other Gold ETFs in the market
• Annual charges of ETF and Annual charges of "Reliance Gold Savings Fund" need to be borne by the investor

I would have liked if the "Reliance Gold Savings Fund" had kept its mandate open to invest in any Gold ETFs , but it has not done so . I'am not comfortable with this because , this means my investment is entirely concentrated with Reliance Mutual Fund and this fund house is currently not in pink of health

I would suggest investors to wait and watch , i'am sure other AMCs would come up with similar offerings , where the ETF invested into may be across different Mutual fund houses and not concentrated

Download "Reliance Gold Savings Fund" details here

Image : FreeDigitalPhotos.net,Photographer: dan

The illusive wealth

In Hindusim , the benevolent goddess of wealth is "Goddess Lakshmi" and every picture of the goddess you would come across would picture the goddess either standing or sitting on a Lotus , a symbolism for how carefully she needs to be taken care of .

Have read a lot about people who win lottery or who have come to suddenly inherit a fortune and have found them self unable to handle this sudden wealth and let it slip through , We also find with lots of celebrities from world of sport and music , they find them self simply incapable of handling wealth.

This is just not only with individuals but also about companies and businesses . Here is a list of companies in BSE Sensex 1986,

ACC, Bombay Dyeing, Ballarpur Industries, Ceat Tyres, Century Spinning, Food Specialities (now Nestle), Great Eastern Shipping, GSFC, Glaxo,Gwalior Rayon (now Grasim), Hindustan Aluminium (now Hindalco), Hindustan Lever(now Hindustan Unilever), Hindustan Motors, Indian Hotels, Indian Rayon, ITC, Kirloskar Cummins, Larsen & Toubro, Mahindra & Mahindra, Mukand, Pieco Electronics (now Philips), Premier Automobile, Reliance Industries, Siemens, TELCO (now Tata Motors), Tata Power, TataSteel, Voltas, Zenith.
This list was from here

These were cream of the stock market in 1986 and we find that in 25 years , we find that only 15 of those companies are still considered to be good investments .

This means that in about a generation 50% of the companies have not been able to generate wealth in a manner they were expected to or have lost wealth.

It is not just about individual companies , we find entire sectors have fail to generate wealth, like textile and totally new sectors, like IT have generated phenomenal wealth.

So challenge in wealth creation ,is not just about creation but also about sustaining wealth . and only thing that can help you to sustain wealth is "Knowledge"

How is PPF interest not calculated

How is interest calculated on a PPF account ? This has been a mystery and if you google you will find all kind of answers and based on the answers, people try to find the most efficient way to use their PPF account

A couple of ways in which PPF interest is not calculated

• It is not compounded monthly
• It is not calculated only in the month of March

Here is my take ,
Interest in a PPF account is calculated each month . Please note the stress is on calculated not credited .

Each month the least amount in the account between the 5th and the last day of the month is used for calculating the interest and 12 such calculations are done and finally in the month of March , the 12 interests are added together and  credited as interest for the year.

This is something unique ,

• This is not monthly compounding, though interest calculated so, as the interest amount is still not credited hence not considered for the next month's interest calculations
• Neither is the interest calculated only in the month of March , though interest is credited in March .

This means if you think crediting your money in March, is the best way to do so ... you are wrong , as in that case your would earn interest only for the month of March

You want to take full advantage of the PPF interest calculation ? then, deposit as much as you can in the month of April and if you can , before 5th of April ...that would be a smart move

Image : FreeDigitalPhotos.net,Photographer: jscreationzs

Are Market Crashes bad ?

The Indian stock market has been on a downward path for sometime now . Every time i switch on CNBC TV18 i see Udayan Mukherjee sitting there with a dud face saying "It has been a bad day for the markets"

Are Market Crashes really so bad ? ... think not .. for these reasons

i) Had the conviction to buy a stock at a higher prices , isn't it now available at a discount

ii) Lower your average purchase price by buying more at a lower price

iii) Dividend yield would be better if your average purchase price is lower

iv) Have a SIP ? , then you must be happy that , your SIP amount would now buy you more units

v) Did not buy a certain stock as it was pricey , now it should be available at lower price

vi) Buying for the long term , buy the crashed blue chips during a market crash

I would reiterate , what i said earlier , money is made when you buy , so buy at the right price .It is during the panic of a crash that you start seeing stock priced at a bargain . But to be able to buy during a crash, you would need to be prepared . Be prepared with the money , prepared with the list of stocks to pick and also prepared with, at what price to pick .

So start preparing for the crash that is impending

Image : FreeDigitalPhotos.net,Photographer: renjith krishnan

SIP, is this something new ?

"MANY DROPS MAKE A FLOOD"....Pigmy Deposit Scheme

After August 2010 , when SEBI removed entry load for Mutual Funds, it was no more as lucarative for financial advisors to recommend MFs .

MFs had to find ways not only for investor to continue to invest in them but also to stay invested and suddenly they started seeing SIPs as the panacea for all their problems.

If you see how SIP's works , it is exactly like a Recurring deposit . Recurring deposits are deposits where a investor is suppose to invest a fixed amount every month on a date chosen by the investor .

When we are on Recurring deposit , let me tell you about a very innovative scheme that was run since my childhood by Syndicate Bank this was called Pigmy Deposit Scheme . This was innovation in every sense of word , not ony did it generate employment for large number of people , but also helped people to save in denominations as small as Rs.10 and helped the bank raise low cost deposits .

The way Pigmy Deposit Scheme worked was exactly like a Recurring Deposit ,but the difference was, the Pigmy Agent would visit the investor and collect the amount from the investor's doorstep and deposit the amount in the bank and the agent would get paid a commision based on the amount collected.

Pigmy Agent was an agent of the bank and not an employee so that kind of freed the banks to engage large number of agents as there was no recruitment red tapism involved and for the investor it helped them build descipline to save and there was no question of forgetting to save , as the agents would promptly come to collect the amount.

This was a win win for all invoved . We now have to wait and see how successful would SIP prove for all involved .

Image : FreeDigitalPhotos.net,Photographer: hinnamsaisuy

Coinage and Cannibalization

As weird as these two words may sound , these are two terms from Consumer Goods Industry .

Coinage:
In India when a quick single bite chocolates are launched they are usually for Re.1 or Rs.2  or may be Rs.5 ,have you wondered why. Well this is more to do with Reserver Bank of India .

The reason is because we have currency coins of those denominations . That puts these companies in a fix, as they cannot change price from say Rs.2 to Rs.3 , as doing so would be disastrous and they would immediately lose market share. So either they would need to reduce size of the chocolate or try some other internal cost cutting mechanism

This constraint where the product price need to match the denomination of a currency coin is called Coinage

Cannibalization:
This term has nothing remotely violent about it . This term is used when a certain new product launched by a company starts eating into the market share of another product of the same company . Net result,company sees that sales of its new product has increased but it does not see any increase in its profits and later realises other product has lost market share to its new product

This is a nightmare for any company as the intent was that the new product was suppose to take the market share from its competitor not from its own product

Shariah index

Shariah is the religious law of the followers of Islam this guides their normal day to day life and also their investment decisions . Shariah prohibits "believers" from investing in companies dealing in alcohol, financial services as they earn by lend money and charging Interest , tobacco,entertainment (cinemas),pork,weapons.

This would mean , a whole range of companies are "Haram" for the believers , these includes companies like ITC,United Spirits,All our Banks , Housing Finance companies and lot of other companies.

So Shariah Index would be a index of companies listed on our stock exchange that conform to the tenets of Shariah Law

The Shariah Index would give a chance to the followers of Shariah law a chance to participate in the Indian stock market , if they so desire.

S&P CNX Nifty Shariah is a India based Shariah Index , know more about this Index and ETF based on this Index here

Image : FreeDigitalPhotos.net,Photographer: maple

CHITRA SANTHE

This is the annual road side painting and craft exhibition and sale organized in Bangalore .It is an amazing site to watch hundereds of artists from all over India , come to bangalore and setup stalls . Read more about this here

The road would be closed for traffic and it is wonderful to see people buzzing around watching the paintings , buying some , kids getting their face and arms painted and people also getting their portraits done . I joined in and got my portrait done , in flat 15 minutes ..

It was good to see so many young people willing to make career out of art . I'am always fascinated to see the astonishing sculptures in many of old Indian temples , but one thing that we miss to see is that , those temple were created during times of stable , prosperous and wealthy empires . Feel that , when the society is wealthy and prosperous enough to see beyound mere survival it starts to appreciate art and music .

So we as a society need to make sure that , as more bigger and stronger we grow economically , we also try and learn to appreciate our art and music . and also see to it that people can make a living following their passion in art and music .

My regrets in my investment journey

I have been investing for some time now , but there are somethings i wish i had done differently

1. Wish i had started Earlier : I have no regrets about when i started investing in equities directly , but wish i had started investing in MFs earlier , wish i had started SIPs earlier . If have to change somethings , i would have started a SIP , the day i started working .
2. Wish I had placed bigger bets : I have never bought any stock on a TIP, i did listen to tips and then tried to study those stock and if i was comfortable , after tracking and reading about that stock for atleast a couple of months would then invest . But being a novice , i did not have the conviction to place larger bets , that is invest larger amounts.
3. Wish I had "Accounts" as a subject in school: I wish i had studied "Accounts" . so that i could learn to read Balance sheets and P&L statements better.

Final regret , there are no UNDOs in life ...so you just have to live with the pain of regrets.

ATM usage

We had heard of numerous instances , where the ATMs were misused by fraudsters. The modus operandi was to try and pull out cash when the card holder has left the ATM , after entering the the PIN, thinking the ATM was faulty .

RBI has now made it mandatory for banks to incorporate extra safeguards in ATMs , it has made it mandatory that the PIN has to be entered every time a transaction is done . Earlier it was possible that we would enter PIN once and could withdraw cash multiple times , now that is not possible. This is a good move by the RBI.

One of the best practices in ATM usage would be, once you have finished using the ATM and have been again brought back to the welcome screen or any out of order screen  ,make sure you press the Cancel button a couple of times this would prevent any misuse of already entered PIN.

ATMs could still be prone to other kind of frauds , so be cautious

Repay the loan or Invest ?

I have read quite a few articles on different blogs and also seen people calling in on some of the call-In programs asking if they should repay the debt they carry or invest the money they have .

I have a simple take on this question . If you have at least a couple of months expense put aside as emergency saving and have a life insurance cover and also a medical Insurance cover for your family . Then go ahead and repay as much of your loans as possible .

In case you carry multiple loans , repay those loans that do not provide you with any tax deductions first as also probably they carry higher interest rate and once those have been repaid ,start repaying the others.

Even in case of a mortgage or a housing loan , if you can , prepay as much you can without paying penalty and If you are allowed to increase your EMI do so.

Nothing can describe the sense of relief and freedom a person can experience, when he owes nobody no money .

Image: Credit is due