Ranjan Varma

Changing the way we learn and manage our money

Archive for the ‘Financial Awareness’ category

Dozen Rules For An Economist To Remember

January 20th, 2010

I receive a newsletter from Sundaram BNP Paribas Asset Management Company and it’s worth reading. I guess you need to invest in their funds to get that newsletter.

I found the “Rosenberg Dozen” in that newsletter and I am sharing that with you.

David Rosenberg, Chief Economist at Gluskin Sheff, has the following economist’s dozen of rules :

In order for an economic forecast to be relevant, it must be combined with a market call.
Never be a slave to data, they are no substitute for astute observation of the big picture.
The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
Fall in love with your partner, not your forecast.
No two cycles are ever the same.
Never hide behind your model.
Always seek out corroborating evidence.
Have respect for what the markets are telling you.
Be constantly aware with your forecast horizon – many clients live in the short run.
Of all the market forecasters, Mr. Bond gets it right most often.
Highlight the risks to your forecast.
Get the (US) consumer right and everything will take care of itself.

Interesting, No?

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Posted in Financial Awareness, Miscellaneous

How to Sell ULIPs to Unsuspecting Customers

January 19th, 2010

Recently, I was an unannounced visitor to my Aunt’s place where a bunch of people were explaining a financial product. It turned out that the people were Branch Head and Advisor of a private insurance company and they were selling a ULIP.

My Aunt is a successful Doctor and seeing me, she immediately offloaded her burden of understanding the product to me.

Even though I hate ULIPs, I pretended to be another uninformed customer. I listened to their articulate description of the benefits, their customer service policies, their ethics, etc. They said that the product will no longer be available after a week and they were interested in getting a good deal for their valued/high networth clients!

Impressed, but I did have a question for them. What were the charges?

The Branch Manager continued his rhetoric. Unlike other insurance companies they charge 0% premium allocation charge, he thundered.

He gave me the pamphlet detailing other charges like policy administration charges, surrender charges, etc.

I was intrigued by the 0% premium allocation charges and which normally ranges from 15-40% for other companies. I looked deeper for the fine print and here’s what I found.

The policy administration charge which is normally Rs 60-100 for other companies was given in %age. The pamphlet said that for a premium band upto Rs 25000/-, it would be 2.50% per month of the ATP.

ATP, I came to know was Annual Target Premium.

What it meant was that 2.5*12=30% would be shaved off your investment as policy administration charge.

So the marketing savvy private insurance company has been innovative in redesigning their product so that the noise about the premium allocation charge is addressed. And at the same time, adding back the charges in a new form!!

Interesting, No? That’s why you need to be alert all the time. Do read Manish’s Top 10 tricks of mis-selling.

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Posted in Financial Awareness, Insurance, ULIP

The Iceberg Theory of Money Management

November 26th, 2009

I have seen smart people make stupid money mistakes.

I see smart marketers of our financial institutions hiding more than they reveal. Ofcourse they have all the financial jargons to their support.

I have also seen seemingly dumb guys making a pot of gold for themselves.

I have wondered why people avoid money management before.

But this post is about the visible and the hidden components of money management. In other words, the iceberg theory of money management.

Iceberg Theory of Money Management

As I said, knowledgeable people make financial mistakes too. This happens because despite knowledge they may not have the right skills or the attitude towards money management. Other characteristics like confidence, values they have learnt from their parents, fear of numbers,etc.

The Visible:We can see our knowledge level as well as our skills level. It’s about reading up blogs, dailies, magazines and upgrading your knowledge. Also about keeping your records tidily, operating the accounts like the demat, broking accounts, etc.

The bad news is that the visible part is only 10-15% of what it takes to manage your money.

The Hidden: My take is that 85-90% of your money management depends on your attitude and other characteristics. Like there’s laziness, greed for extraordinary returns, fear of numbers, fearing the markets, etc.

Some of us are benefitted with the values we have learnt from our parents/influencers. For some, the parent/influencer effect is a handicap.

Conclusion: Money management expertise has four components. 1. Knowledge 2. Skills 3. Attitude 4. Characteristics like confidence, values.

Just reading up a blog/magazine won’t help you with your money management. You need to be aware of your attitude and various other self concepts, values to make improved financial decisions.

Update: Ideasmithy has another example of the Iceberg model in her post Just Chemistry. She writes:

Good sex is a little more complicated – a combination of attraction, talent and emotions. The first, we’ve already established is plentiful. The second, talent, is slightly harder to come by. Yet, like some slightly expensive things, with some effort, it can be discovered and earned.

But the last, emotions, that’s the tricky bit. Emotions are that vital ingredient, the salt in a receipe.

I guess, attraction is the visible part & talent and emotions is the hidden elements. What do you say?

Do you agree? Disagree?

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Posted in Financial Awareness, Investing gyaan

SubraMoney: Commoditising “Ideal Portfolio” is Wrong

October 25th, 2009

P V Subramanyam is a Chartered Accountant by qualification and a financial trainer by profession. He also is a popular blogger and writes regularly for financial websites and magazines.

He responded immediately to my questions that I have asked fellow finance bloggers. I found the answers full of insights and am sure you’ll do too.

1. Why is it that generally people avoid or have a fear of financial planning?
Just like having a health check up – you do not know what you will find! And the doctor may say “No drinks, no smoking, do exercise….” Who wants to? What is the fundamental problem? Man is a victim of his habits, not what is good for him NOT EVEN WHAT HE ENJOYS. Look at a cigarette addict – he hates smoking, but smokes (I am happy I am a shareholder of ITC)

2. What are the various options available for investments? What would be your recommendations?
Equity, Equity and Equity sensibly. Closer to the event debt. If you know how to do it on your own great, or go to a mutual fund.

3. Can you give a brief overview of how should one’s portfolio be at different ages.. Eg at 25 years, 35 years, 45 years etc.
Wrong question. Each person is different. I know most people try to create ‘ideal portfolios’. I call it “Personal Financial Planning”. Trying to commoditise it is wrong.

4. Is it advisable to have a personal finance consultant who maintains ones portfolio?
No harm, but do not allow operational authority. Are there people who do this? No idea whether it is available for retail. For HNIs yes, at a Rs. 20 crore + portfolio it is worth it. If so how much do they charge? Rs. 5 lakhs + Are they really helpful in the first place? Extremely.

5. Are there some online resources that you would recommend for readers to handle their money?
I use and like myirisplus.

6. Do you visualize a growing use of personal finance software to track and manage money in India?
Mostly people are too lazy to do all this. Unless the INCOME TAX authorities ask for too many details (which they will shortly) that too in electronic form.

7. What prompted you to start your Blog?
Students asking for notes. What motivates you to keep on blogging? I tell them the syllabus is the whole blog….so I have to keep adding.

8. What are your three best blog posts?
Readers should answer this, correct?
Ranjan’s Note: A few that I liked:
a. Archive for National Pension Scheme (NPS)
b. Do you need an Investment Advisor?
c. Financial Problems: How to tackle?

Do hop over to Subramoney for more insights from PV Subramanyam

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Posted in Financial Awareness, Investing gyaan

Raag Vamdatt: Helping People making Right Investment Choices

October 6th, 2009

Raag Vamdatt is another personal finance blogger who is actively trying to build financial awareness through his website Financial Planning Demystified. I asked him 10 questions on the financial awareness levels in India and was happy to see his insights. Here they are:

1. Why is it that generally people avoid or have a fear of financial planning? What is the fundamental problem? Is it specific to India or is it a global phenomenon.
I am not sure at the international level, but I can talk about India. There are two things that go here.
First is our obsession with saving income tax and all instruments that help in achieving this. This means that most of the time, we end up “investing” just to save income tax instead of following a well planned path. Thus, the concept of financial planning itself is quite alien to us.

Secondly, we are used to getting free “advise”. Be it from TV, newspapers or from the so called insurance and MF investment advisors, we have been getting it free. Most of these people drive clients towards what is beneficial to them (read: fat commissions), which tempting them with things like saving income tax!

2. What are the various options available for investments? What would be your recommendations?
There are quite a few options – equities, real estate, gold, and of course, fixed income instruments.
My personal favourite is equities. India is on a long term growth trajectory – and I am talking in terms of the economy. This would of course reflect in the stock market as well. This is a great time to invest and ride the growth curve.

3. Can you give a brief overview of how should one’s portfolio be at different ages.. Eg at 25 years, 35 years, 45 years etc.
The traditional belief is that you should take more risks when you are young, and less when you are older. So, traditional advice says: more equities in 20s, more debt in 40s, 50s and 60s.
I agree and disagree. It depends not just on the age, but also on the risk taking capacity of the individual and the time frame. So, if someone is in his 50s, but has no liabilities, has good cash flows, and can set aside the money for 8-10 years, why not invest in equities??

4. Is it advisable to have a personal finance consultant who maintains ones portfolio? Are there people who do this? If so how much do they charge? Are they really helpful in the first place?
Nope. Investment advise and investment management has an inherent conflict of interest, and should be kept separate as far as possible. And a financial planner should definitely not handle your investments.

5. Are there some online resources that you would recommend for readers to handle their money?
We do not have too many such resources in India.

Outside India, these are websites where you can consolidate all your incomes, expenses at one place – automatically. The website collects all your data from your bank account, credit cards, etc. So, tracking expenses, categorizing them and budgeting based on them becomes very easy.
We lack such a service in India – maybe its an opportunity waiting to be tapped?

6. Do you visualize a growing use of personal finance software to track and manage money in India?
Yes, definitely. With increase in incomes, awareness towards money is also increasing. So, I definitely see a push towards personal finance software.

7. The Regulators are cracking the whip on Asset Management Companies and Insurers. What’s your wish list from the Regulators?
They are doing an awesome job – I just wish that the stick that is applied to MF agents is also applied to insurance agents.

8. What prompted you to start your Blog? What motivates you to keep on blogging?
I realized that the people working with me in my job were earning good amounts, but did not know how to invest it. They had no idea about the various investment options. They also lacked awareness about income tax rules and tax saving avenues.
These are the people who could have excellent financial stability in their life, or could be living hand to mouth – depending on the investment choices they made.
Since I have a keen interest in personal finance, and am also well qualified in the field of finance, I thought why not help everyone, while doing something that I am passionate about? That how www.RaagVamdatt.com was born!
And it’s the same driving force – helping people understand various investment options and make right investment choices – that keeps me going even today.

9. What are your three best blog posts?
It is really difficult to arrive at just 3 good posts. Here are a few that I consider helpful to readers:
Goal Based Investing
Want to own a company? Buy stock!
Saving Income Tax – Understanding Section 80C Deductions
Your Personal Net Worth – Importance & Calculation
Start saving early and gain from Compounding – Early bird gets the worm
Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage

10. What would be the three blog posts of other Bloggers that you would like to share?
How much emergency cash
Where to Invest
Income Clubbing Provisions