Teaching Personal Finance

Posted on December 7, 2010 by Ranjan

I am often disappointed at the vanity of teachers (spiritual teachers especially) who put themselves on a pedestal and start preaching instead of teaching.

To my mind, you cannot teach a person who does not want to learn. And teachers are mere facilitators/guides who can show you the direction if you want to take the journey.

I keep this in mind when I am doing workshops on personal finance.

Following is excerpts from “The Prophet” by Kahlil Gibran on the subject of teaching:

No man can reveal to you aught but that which already lies half asleep in the dawning of your knowledge.

The teacher who walks in the shadow of the temple, among his followers, gives not his wisdom but rather of his faith and his lovingness.

If he is indeed wise he does not bid you enter the house of wisdom, but rather leads you to the threshold of your own mind.

The astronomer may speak to you of his understanding of space, but he cannot give you his understanding.

Are you ready to learn? Or do you want to be taught?

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How to be a Smart Investor

Posted on December 6, 2010 by Ranjan

I enjoyed speaking to students at Alibaug, Roha & Pali on the above topic and came away impressed with their questions. The events were cosponsored by CGSI (Consumer Guidance Society of India) and NSE (National Stock Exchange) and I was invited by CGSI for the talks.

Since the target audience were all students, it was a challenge to enthuse them about financial planning and investing. Additionally, financial planning is a dry topic for adults with income and the financial jargons can easily put many to sleep!

Anyway, I started off with the importance of knowing theory before applying it into practice. The example I used was Newton’s third law of every action having an equal and opposite reaction. The application of this theory is the Aeroplane, which takes off because of the equal and opposite action exerted by the wind.

Then I gave the example of the difference between no financial planning and an ideal financial planning. I said it was Rs 10 lakhs!!

Moving forward, I explained the Magic of Compounding and Rupee Cost Averaging.

A simple example of starting as early as possible is the following:
A 25 year old person who starts investing Rs 1 per month at 10% return till he reaches 65 years of age will have Rs 6324.08 while a 30 year old person will have only Rs 3796.64. At 14 per cent, you will have twice as much wealth than someone who started investing just 5 years later (Source: IndianExpress)

I also briefly outlined the four parameters for researching a financial product i.e. growth, liquidity, security and expenses.

That’s what I could do in the allotted 40 minutes. What else do you think is absolutely essential for students?

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How to set up your financial freedom?

Posted on August 11, 2010 by Ranjan

As we celebrate another Independence Day, let’s take a look at setting up your financial freedom. The following article was published in Jetlite’s in house magazine Flylite.

Freedom is being free of restraints and means having liberty from slavery, detention, or oppression. So, Financial Freedom would entail being free of money worries, to be free from working under oppression for money. Sounds interesting? Or does it look like too difficult thing to do? Does it look to be a utopian idea? The good news is that it can be achieved. Read on for the details.

It important to remember that freedom does not come for free and does not mean doing whatever we like. The fact is, Freedom is earned and freedom comes with responsibility.
Financial Freedom: Financial freedom comes when you’ve built a capital so that the interest earned from this capital takes care of your expenses when you decide to retire. We shall keep our discussions limited to managing our money. And managing money has three important components too.
1. Investing, to get more bang for your money.
2. Maximizing your income, to control the game of money.
3. Frugality, to save and not leak money.
So, personal finance is not just about investing. It’s also about optimizing your expenses as well as maximizing your income. In this article, we will focus on building the capital required for your financial freedom.

The situation: There are more than 300 life insurance schemes, numerous health insurance schemes, over 1000 Mutual Fund schemes, 2500+ stock scrips to choose from. Then there are 100+ deposit schemes with Banks, Corporates and the Government itself.
Wouldn’t it be a good idea to bring down the choice galore to a maximum of 20 products to choose from? Can’t this group of 20 products be the best in class and stands validated through a reasonable thought process?

Setting up your investments: The answer, to my mind, is yes! Read the following 7 points that gives you a set of 20 products to choose from for your investments.

Before we go on to investing our money, it’s a good idea to take a bit of cover. Let’s start with the emergency fund.

1. Emergency Fund: Keep an amount of three times your monthly expenses in your Bank in a Savings Account.

2. Insurance: Many of you who are just started having an income, are single wouldn’t really need insurance now. But some of you who have started a family need to get a cover. Trying to find how much insurance do you need from the internet will throw multiple calculations and options. Each one of them have their own logic. A simple thumb rule for me is to get insurance worth 60 times your monthly expenses. Not 60 times your gross monthly salary, mind you. Insurance is for taking cover, not profiting out of it.
You also need to get health insurance. A group health insurance privided by your company should be enough. If not, start with a mediclaim policy with one of the General Insurers.
To start investing, you need to first exhaust your tax planning options.

3. Tax Savers: Apart from the PF that might be deducted from your salary, getting a PPF account is a good idea. Plus you might go for equity linked tax saver Mutual Fund schemes. HDFC Tax Saver, SBI Magnum Taxgain, Sundaram BNP Paribas Tax Saver, Franklin India Tax shield and Sahara Tax Gain have given a return of 20%+ over the last 5 years.
From the money left after taking a cover and exhausting your tax planning options is available for investment.

4. New Pension Scheme (NPS): NPS is THE best & effective tool that covers capital protection and also provides growth for your retirement plans. With its lowest charges, it also is the cheapest way to get an exposure to the market. Despite being such a fabulous product, there’s not much sales to boast. This is because there’s no commission for an agent there. Infact getting a PRAN (Permanent Retirement Account Number) under NPS is not easy.

5. ETFs: This Pdf will tell you why ETFs are the best. Nifty Index ETFs which benchmark the Nifty that are available in India are NiftyBEES, KotakNifty, UTISunder, .QNifty

6. Equity Diversified/ Balanced Mutual Funds At a young age, you can take more risks and I will not ask you to invest in debt funds. A few Equity funds that I like are HDFC Top 200, Franklin India BlueChip, Sundaram Select and SBI Magnum Global fund. But to get a bit of diversification in your portfolio, I will recommend investing in a few balanced funds. Balanced funds have exposure to both equity and debt and their fund managers take a call on when to focus on equity or debt. HDFC Prudence, DSP Blackrock Balanced, Birla Sunlife 95, Tata Balanced are balanced funds which have done well. In fact some of them are at par with Equity Funds!

7. Gold ETF: Gold has been outperforming the equities for the last decade!. Looks like it’s on a dream run. For diversification purpose, investing 5-10% of your money in Gold ETF isn’t a bad idea. Gold ETF is seeing the highest turnover these days and there are a lot of players which are offering Gold ETF these days.
To set up your financial freedom, we have shortlisted a set of 20 odd products out of 5000+ financial products. Does it help you get started?

Advantages of the set up recommendations:

It tunes out the noise of the market place which is worse than the fish market.

It takes care of Diversification, Rupee Cost Averaging, Asset Allocation principles, Magic of Compounding and all principles and theory of investing.

It also gets you real bang for every Rupee at a very low cost.
Disadvantages: It’s boring and non-happening. More like a Cricket Test match when it’s the age of Twenty-20.
But the question is, do you need an audience for your finances? Or do you need to perform in front/for the benefit of others? Remember, it’s “personal” finance.

And once you set it up, you can forget about it and focus your life on more happening things! Yes, you have earned your financial freedom! And it is also the time when you become more responsible. And being responsible is easy. Just stick to the plan!

Yes, Freedom is earned and freedom comes with responsibility.

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Providing Investment Advice Services

Posted on August 3, 2010 by Ranjan

I received a mail from Namrata Mehta asking about my investment advice services. To be more specific, here’s an edited version of the mail:

My husband and I work in the IT industry in bangalore and are looking at investing around 3 lacs per annum. We have been looking for a good financial advisor but didn’t find someone we could trust. I liked what I saw on your blog and I am glad that your advice and services are for people in India.

I saw that among the courses listed on personalfinance201.com, you also have finacial advice listed under your professional/paid services. Can you please send me the details on how we can avail this and of course, the fees to avail this service?

My answer:I still have a day job and am not providing any financial advice/planning services as yet. (Question to self: When will you have the guts to go into personal finance business fulltime?)

See, financial advice is easy. Just invest 10k, 10K & 5K every month through a SIP in three MF scheme that I recommend and it takes care of your Rs 3 lacs investment per annum. I don’t know whether I should charge for that! Though I shouldn’t be saying no, no?

But financial planning is slightly complicated. Any person who can help you set financial goals and setup a financial plan will have to understand your situation and protect you from either dreaming too big (getting greedy) or from being too conservative (being fearful). It’s almost the job of a Counsellor.

To my mind, managing your money is also about maximizing your income and optimizing your expenses apart from the investing part.

Additional comments: So as a financial counsellor, I would also explore the possibilities of maximizing your income. Check How to maximize your income. I would be keen on doing a thorough Financial Health Check on a spreadsheet that I have developed.

I would also set up metrics so that you can measure what you earn and what you spend. Once we start measuring, we find ways of improving upon the findings. I’m sure, RupeeManager will help.

I also talked about asking the right questions in my last post. (Link). A financial counsellor would be able to ask the right questions too. To help you arrive at the right answers yourself. I’m a strong believer of DIY! Ultimately, you are responsible for your well being, no?

Conclusions:To my mind, the financial advice service has two main components.

One, the transactions part, where you advice your client about specific investment products. Two, the counselling part, where you understand the client personal situation and customize your recommendations.

It seems like an utopian concept as I write this post. But having travelled for 20 years in financial services industry, making a lot of mistakes and now mending a lot of financial decisions, I feel confident of providing that service.

Infact, that’s the idea behind the workshops, where I can guide people in a group. For individual attention, I may have to charge much more.

My question to you: Do you think such services are available in India? Or is it possible to provide such services? And would you be interested in just the investment (transaction) advice or want a complete financial planning package?

Comments and email are most welcome. Thanks.

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Financial Inclusion & Financial Literacy: Intentions & Realities

Posted on July 14, 2010 by Ranjan

The newspaper today has stories on financial inclusion and financial literacy. This post is about my thoughts on the noble intentions v/s the hard realities in the areas of financial inclusion and financial literacy.

Mumbo Jumbo? Finance Minister Pranab Mukherjee described the FE Best Banks Awards function held yesterday as having evolved into a “popular event” for India Inc to highlight the importance of bringing banking to those “who need the very basic financial services.” He said that the event could significantly contribute towards highlighting the importance of expansion of banking activities for economic development.

High sounding words: Speaking about financial inclusion, the Finance Minister said competing needs for the financial resources required for high growth necessitate that these resources should be used at the maximum possible efficiency.

“The financial intermediation for these financial resources should be cost-efficient and allocation efficiency should be high,” Mukherjee said.

My Questions: It’s all good to network and celebrate performance. But I fail to understand the connect between the celebrations and the financial inclusion part. I don’t really understand the rhetoric. Am I fast becoming a dyslexic? What about you? If you are able to make sense of the high sounding words, please educate me.

As an aside, the Akshaya Patra Foundation in India has found a way to feed a child daily for the entire school year on just $28. (Source)

As another aside, the event cost of the Awards would be in crores. Just a rough guess.

As aside no.3, I quote Subramoney on the poor small investor, “small investor, financial literacy, financial awareness, financial inclusion….what an amazing array of words we have created for bureaucrats, politicians, businessmen, capital market pundits to meet and eat!”

Next is Financial Literacy. Here’s another high sounding quote:

U K Sinha, CMD, UTI AMC said, “Swatantra’ is India’s Journey to financial freedom and is the largest investor campaign in the country which will cover over 300 cities in 100 days through 100 investor meets. Financial Education is very crucial for the growth of India’s capital market and India will progress at a faster pace if there is higher retail participation in the capital markets. This Campaign will target inculcating financial literacy to potential investors which will help them to take informed decisions.”

My take:
Handing out visually beautiful brochures about the do’s and don’ts of finance does not help the small investors take informed decisions. Financial decisions are personal and you need to understand each individual’s situation to help him make an informed decision. A town hall method of imparting financial education will be totally ineffective.

Further, the financial education needs to be unbiased and independent. But who will be the resource persons for imparting the education. My feeling is that the Branch Heads of the UTI Branches across the country (having stiff sales targets) will be used. What will they do other than selling UTIMF products to the investors.

Conclusions:
There’s a wide disconnect between noble intentions and hard realities. If wishes were horses, beggars would ride, an English language proverb , clearly suggests that it is useless to wish; better results will be achieved through action.

But here the action itself is useless, IMHO. A lot of effort needs to be taken to design a financial literacy program. What do you say?

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How to design a Financial Literacy Program

Posted on July 6, 2010 by Ranjan

Today I had an interesting discussion with a friend on designing content and effective training programs.

To my mind, understanding the end user of your workshops and use that understanding to design content and the workshop on financial awareness is important. I think that a “bottoms up” approach towards financial literacy would be a much preferable way than a “top down” approach.

And I see a “give them some training as they need it” approach very common instead of “asking what they need” approach. I guess it’s the easy way out.

Another insight I read a few days ago was Gautam Ghosh’s post on the Indian way of learning where he says,
” But the crux of the learning method for India – is encapsulated in Devdutt Pattnaik’s statement that while the rest of the world believes that “Feed a man a fish and you feed him for a day, teach him how to fish and he will not be hungry again” in India the belief is “help him discover his own way of catching fish, because then that is his own!”

More on Instructional Design: Perhaps the most common model used for creating instructional materials is the ADDIE Model. This acronym stands for the 5 phases contained in the model:

* Analyze – analyze learner characteristics, task to be learned, etc.
* Design – develop learning objectives, choose an instructional approach
* Develop – create instructional or training materials
* Implement – deliver or distribute the instructional materials
* Evaluate – make sure the materials achieved the desired goals

The analysis phase is the starting point. Only after you thoroughly conduct the analysis by talking to the end user—you can then design content, activities, games, videos, etc based on your findings. Normally we decide what gyaan to spout or what is good for the end user without asking him or taking him into the loop.

Only when we analyze the learner- only then we can help the user design his/her own way of catching fish!!

This applies in personal finance even more so because everyone financial decisions are personal. It depends on his/her own situation which can vary despite having the same age/income profile.

But as I write this post, I need to remember the following too:
The key is to get started. Start simple, but start. Do the best that you can for now. There is no perfect plan.

This is true for your financial plan and my plan to design the perfect training plan!!

I edit Personal Finance Online Resources, nurture Financial Literacy Foundation, deliver Financial Awareness Workshops and have built a desktop RupeeManager.

Invite me for a talk. Email me on ranjan@ranjanvarma.com or Call me on +919867755615

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The 88% Solution To All Your Investing Problems (Part 2)

Posted on June 6, 2010 by Ranjan

This is the second part of a simple solution to all your investing problems. Check out the part 1 which is about the background to this post. This post is about the thought process that went into making of the 88% solution.

The Thought Process:
Before I tell you about the 88% solution, it would make sense to know the thought process behind:

1. Paralysis by Analysis: There are 300+ insurance schemes, 1000+ mutual fund schemes, 2500+ stock scrips and hundreds of deposit schemes to choose from. Is it possible to analyse them and come to a rational decision? Even if it’s possible, wouldn’t it paralyze your decision making ability? Wouldn’t it be a good idea if I have to choose from a set of 10 products which is being recommended by a person not interested in selling those products?

2. There’s a lot of noise: If you look up to TV, Newspapers for tips, let me pray for you. There are so many conflicting views (and all of them appear confident and right), that you can get confused. I look for information, not views/tips from the Newspapers/TV. But it may be a good idea to close down that noise altogether.

3. Timing the market is impossible: Nobody actually knows whether the market is going up or down. And When! I have made countless attempts at predicting the market and hoping to time my investments. I have failed more often than not. There’s merit in being regular and automate your investments rather than trying to time the markets.

4. 4 Parameters for your investment decision: Before taking an investing decision, you need to look at the likely returns, liquidity, safety and the cost. Figuring out all the four factors can help you take a rational decision.

5. Mutual Funds are more costly than ETFs: Having discovered the abilities of stock experts, I also discovered that we pay a lot of fee for their fund management abilities. I have also learnt that majority of the fund managers under-perform the market indices. And they get paid from our pockets for underperforming the markets!

6. Riding the momentum wave is not for long term: We have everyday reports of top gainers and losers. And there’s a whole lot of day traders riding the wave and appearing to make good money every day. But along the way, we have also seen suicides when the markets crash. To me, it is a zero sum game where you win some and lose some. Eventually balance it out.

7. Discipline/Emotion Control is important: It is easy to get waylaid by emotions of greed and fear. It is important to understand this risk and continue with your investing.

8. Getting Started is the best Investment decision: Yes, we delay getting into money decisions because of a variety of reasons. Like:
• Huh, I’m just 24.
• This financial planning is so non happening thing.
• I have no money.
• I don’t understand the jargon.
These are excuses and not reasons. It prevents you from getting started. But how do I get started, you ask.

You can check out the 88% solution!

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