Getting Started or Re-Started

Posted on July 29, 2011 by Ranjan

Newton’s law of inertia works. To refresh your memories, it says,

Every body persists in its state of being at rest or of moving uniformly straight forward, except insofar as it is compelled to change its state by force impressed

So if you want to brake your inertia, laziness, procrastination, idleness, you need an external force.

And among examples of such forces like will power, finding a mentor, the hard knocks of experience, etc, the most effective is setting up a DEADLINE, with a witness/reminderer thrown in.

Just saw this status update of a student:

We are all Like Rockets.
Its Not that we always aim at the sky,
but we never Start Studying Until our tail is on Fire !

Here’s an example: I have been in a state of lull with this blog and even though I had time and inclination, I was not updating this space.

A friend wanted a column on his website and I said yes. Then I forgot about it. But then I got a deadline.

Check this post that I did on my friend’s website. Money Grows Like a Tree, Not On It

Some excerpts:

When the young engineer wanted instant solutions without learning more about financial products, she made herself vulnerable to financial advisors who sell products that suit their requirements and not the engineers’. These financial advisors come to know that their client/prospect is an ill informed person and they make the best use of this information to sell products that maximize their commissions and not their client’s!

So by looking for instant solutions, we end up hurting ourselves. Instead of building a money tree, we end up cutting the tree. As with a tree, nothing happens instantly. To be successful in any field, we need to constantly increase our knowledge and skills in that field.

So even though I wish I had a magic pill for all your investment needs, here’s a starter regimen that I recommend. These are 4 steps that can launch you into becoming a smart investor. Interested? Read on.

Coming Soon! RupeeCamp "Financial Planning Workshop". "Join us"

Welcome back! Join me on this journey to improving our financial IQ and sharing what we know. Updates at RSS feed or Email. And spread the word please Thank You!

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How To Beat Australia: Theory v/s Practice

Posted on March 24, 2011 by Ranjan

The TOI has a headline on what the Indian cricket team needs to do to dethrone Australia. The advice is as follows:

1. Get Openers (Watson and Haddin) early. 2. Bye bye Ponting. 3. Handle Batting powerplay wisely. 4. Attack their spinners. 5. Play out Lee. 6. Bat out full 50 overs. 7. Field well. 8. Bat, if win toss. 9. Improve review strike rate.

The headline does not mention who wrote all this junk. I am sure that it has been written by a guy who has never played beyond gully cricket. But he has done such a big thing for the country.

MS Dhoni and the players of the team would not have known all this, na!

To say that I am pissed off with such junk advice would be an understatement. But that’s what is all around.

I see Financial Planners who dole out advice on doing Budgeting while they have never done that for themselves. Personal Finance writers who are late in filing their taxes themselves.

Can you see junk, non sensical advice when you see one? It is a good talent to be able to discern between good and bad advice. I wish that for you and me.

Update: India won against Australia today. Good well fought game where the Indian players used better skills on the field. And won, without following any of the 9 advices given by TOI above.

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Pictures Are Worth Thousand Words

Posted on March 22, 2011 by Ranjan

Hemant Beniwal has 5 well researched images on TFL, that lucidly explains the basic and critical questions in personal finance.

Check 5 Important Charts that you must understand.

Another admirer of the above post, Madhupam said it succinctly:

……the simplest explanation to the 5 basic questions, which bother an investor. And these are:
1) Where to invest? (India)
2) Which asset to invest? (Equity)
3) How to invest? (SIP)
4) What minimum return to aim? (Alteast above inflation)
5) When to invest? (Always, with no timing)

Thanks Hemant.

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What is Debt and Equity

Posted on March 6, 2011 by Ranjan

When we talk about asset allocation and selecting financial products, we also need to understand the difference between the two broad classification of financial products: Debt and Equity.

(Note: This is a very basic concept and I talk about this when I speak to students. It is a part of the Rupee101 series which is about first steps. So if you are an advanced user, please excuse!)

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

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

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

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

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

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

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

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

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

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

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

However, this understanding of debt and equity can help you understand the Hare and Tortoise story in a better way, where the debt products are tortoise and equity products are hares!

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Pay Rs 2.5 Lakh, Get Back Rs 80K

Posted on March 4, 2011 by Ranjan

I am sharing an anguished letter that explains how you can shave off 75% of your investments by giving in to pushy ULIP sellers! The idea of sharing the letter is that you don’t commit the same mistakes.

We all encounter pushy Agents who are hardselling their products. Many of us lack the courage of saying “No”. It’s because we don’t give attention to buying financial products.

The cost of not doing enough research and believing the pushy agent is huge. Read the following letter where the person invested Rs 2.5 lakh and got back Rs 80 thousand after a few years!

The sad news is that nothing much can be done about it as the Insurer has the right to charge surrender and other charges and which is documented in the policy papers that the he customer recieved. The customer may well have blindly signed the benefit illustration document that shows all the charges!

It’s difficult to prove mis-selling and going to IRDA/Insurance Ombudsman wouldn’t really help.

Here’s the letter, below the fold

Hello sir/madam,

I write this mail to you with utter disappointment and anguish.

My father-in-law parked his entire savings in a Bajaj Allianz scheme called Unit Gain Gold Plus. When the consultant visited him to campaign for the policy, he highlighted all the features and got him to sign for a premium of Rs. 2.5 lacs a year.

What he failed to tell him was the surrender value. The agent smartly hid the fact and took the insurance coverage. The policy requires mandatory payment for three years, lest it would attract surrender value.

After the first year, my father in law could not continue to pay the insurance premiums, the sums being very heavy. I now receive a letter of cessation of policy from the company with a cheque for Rs. 80,000.

This has incurred us a heavy loss, and my father in law is unable to recover from that. Please let me know of ways to salvage the money. Again I impress upon the fact that the the agent sold the insurance without highlighting the risks.

We would be grateful for any advice on this.

Thanks, Gayathri

Can you help Gayathri? Atleast help yourself by not repeating the mistake!

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Opportunity Cost of Not Creating a Financial Plan

Posted on March 2, 2011 by Ranjan

NetworkFP is a community of Financial Planners and provides resources for the Financial Advisors to make them more professional.

Though the website is targeted at service providers and not service recievers, it has some useful resources for those who would like to get started with their financial planning. Check out their Files section where you can download some calculators. Like the tax calculator for 2011-12.

Here’s an interesting study on delaying the financial planning process. (I am not clear about the assumptions made, but look at the big picture)

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HDFC Charges 1% Penalty on Sweep-in/Premature withdrawals

Posted on February 6, 2011 by Ranjan

A reader wanted the HDFC penalty to be shared on my blog. While there’s nothing illegal with the charge and Banks are at liberty to charge this, it’s important to be aware of these things.

Moreover, if you happen to know the right guys and/or are able to make the right noise, I’ve seen that some of these charges can be waived. I especially have seen the waivers happening in case of prepayment charges which your loan company charges for paying early.

The reader writes:
Note: “As per the Terms & Conditions of Fixed Deposit Accounts of the bank, the penalty on premature closure of Fixed Deposits including sweep-in and partial closures has been fixed by the Bank at the rate of 1%.” This will be applicable with effect from 24th January 2011.”
******
Does this not sound a little weired and trust breaking. Probably bank does not want to increase the interest rate and at the same time do not want the fund to flow out hence, made a new rule starting Jan 24, 2011 and not even bothered to advertise this.

As I said, it’s normal for Banks to raise charges to keep their profit margin up and healthy. In India, it’s normal to consider the interests of the shareholders first and consider the interest of the customers last.

But things are changing. You are becoming more aware of your rights and responsibilities. You need to raise your voice. Raise your voice so that you become a priority for your Bank/Financial Institution.

After all, they need you as much as you need them.

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