What Is The 88% Solution?

Posted on June 7, 2010 by Ranjan

This post is about a simple solution to setup your investments. I call it “The 88% Solution”. Why 88%? Because it works for 88% people. It works 88% of the time! This is the third and the final part.

Part 1: The Background & Part 2: The thought process.

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?

The answer, to my mind, is yes! Read the following 7 points that gives you the 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. Two products that I would recommend choosing from is LIC’s Anmol Jeevan and Religare’s iTerm. The first one a trusted name in Insurance and the other one is the cheapest one available.

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. I’ll do a detailed post later.

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. Debt Index/ Balanced Mutual Funds At a young age, you can take more risks and I will not ask you to invest in debt funds. 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.

So the 88% solution has shortlisted a set of 20 odd products out of 5000+ financial products. Does it help you get started?

Advantages of the 88% solution:
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.

And once you set it up, you can forget about it and focus your life on more happening things!

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 infront/for the benefit of others? Remember, it’s “personal” finance.

I’ll wait for your questions and your views on the 88% solution. Thanks.

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

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What’s In It For Me in a Personal Finance Workshop

Posted on April 20, 2010 by Ranjan

Talking to a group of people, I was waxing eloquent how taking control of their finances was so important. Until I saw a young guy frowning and thinking why he was wasting his time with me. Yes, I can read minds!

In any case, What’s In It For Me (WIIFM) is an important question that needs to be answered.

“Important, Need to be more responsible” are good sounding words when we are speaking from a high, parental ground. Unfortunately, they don’t make an impact on a young guy!

To my mind, it’s important to put a tangible figure on the difference between good and bad money management. Let me give you my own example. Btw, it’s a bad example

I have been working with a PSU for 20 long years and had I been saving regularly right from 1990 when I joined work and investing them properly, I would be having a networth as shown in the following Excel sheet.
Click to enlarge

The assumptions are very simple. I invest 25% of my income every year and get a return of 10% annually. The investments are made every year and not every month. Every month investment will lead to a much higher figure!

Ideally/ theoretically, I should be having a Networth of approximately Rs 23-24 lacs. But, the actual Networth (excluding my House/Ancestral Property) is not even half of that.

That means that my less than ideal money management has resulted in a loss of over Rs 10 lacs. Yes, that’s a million rupee mistake!

I have woken up a little late. I am on my way to mend whatever I can. And I can share my learning with you and help you manage your finances in a better way.

Does it make sense to save yourself from making the “Million Dollar Mistake” (Oops, it’s our Rupee)? Do you think attending a Financial Health Check & Planning Workshop is a good idea?

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Personal Finance Websites in India

Posted on September 21, 2009 by Ranjan

Personal Finance space in India is getting the attention it deserves. I have chronicled some of the efforts in this space and you can also see all the posts under the personal finance websites category

The Opportunity:
India has over 300 million households and the household savings amounts to Rs 12,00,000 crore. But there is a huge information asymmetry in Financial Services industry where the sellers have much more information than the buyer. This lack of transparency leads to uninformed financial decisions by educated people also.

There’s a huge market out there. To my mind, more than the big market, it’s the huge potential that’s attracting online ventures in this space.

New Kids on the Block
There are three personal finance portals that has caught my attention. They are InvestmentYogi, iTrust and RupeeTalk.

Overview:
Both RupeeTalk and iTrust provide articles, comparison table on financial products and have tied up with leading financial product companies to sell their products. They appear to be the online channels of the financial majors. Both iTrust and RuppeTalk’s tag lines say that they want to make it simple and easy.

InvestmentYogi has content focused on helping individuals on financial planning, retirement planning and tax planning. It doesn’t sell any financial products but focuses on helping you to learn, share and grow.

RupeeTalk
The reach out mail from RupeeTalk says that they are the first-of-its-kind personal finance web portal with a marketplace. To me, they are just another addition to the 3 million strong financial advisors community with a unique online presence.

I tried to search and compare life insurance on their site. Their database returned a choice of 11 products from 10 different companies for the data entered by me. Good choice, but there are actually 22 companies offering life insurance in India. The comparison chart for the four featured products made my head spin as they were too complicated to understand. (Even though I’ve worked in the Insurance industry for quite some time!!)

Can they make life easier for a newbie by recommending just one product? They can explain why they have chosen that product and I would be willing to believe them rather than trying to understand all the jargon!!

iTrust
iTrust has a similar business model like RupeeTalk’s. But they are more uncluttered, thanks to the lack of ads on the site.

Their “life insurance” search does not ask for the category (term, endowment, etc). Simple search options, but there were only 8 responses. (I repeat, there are 22 life insurers in India) . The “Compare” option does not really help a newbie to decide on which product to choose. Again, can iTrust decide and tell me which one is the best and why?

InvestmentYogi
InvestmentYogi has the most disruptive business model, to my mind. That’s why they are not making money right now!

They are producing a lot of content related to 5 different topics: Taxes, Investments, Planning, Spending and Insurance
The articles are written in a very unbiased manner and they do not push any products. Their goal is to promote a holistic financial planning approach to investing and managing wealth. They also have an ask the expert section where anyone can ask a personal finance related query to their experts. The QnA is posted for everyone’s benefit. Link

As the regulators have started cracking down on high up front commissions and other hidden costs the market will slowly and surely move towards an advisory and portfolio management model since the distributors have no incentive to promote one product over another. And InvestmentYogi would be right there when the recommendations of the D Swarup Committee on Investor Awareness and Protection, of No-load structure (all retail financial products should go “no-load” by April 2011) is approved. This will remove the bias of selling products with the highest commission.

My Take:
It’s good to see such initiatives in the online space as being done by RupeeTalk, iTrust and InvestmentYogi. The personal finance vertical has a huge potential. The online ventures in this space have a responsibility to reduce the information gap between the buyers and the sellers of financial products. So, to my mind, there’s a case of these companies to collaborate and build the financial awareness in India. (Rather than compete with each other)

Do you agree?

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Wrong Question: Should One Mix Up Insurance and Investments?

Posted on August 6, 2009 by Ranjan

This is further to my post on Insurance v/s Investments

A friend pointed me to this question posed at BimaWorld: Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.

Insurance and Investments are two different things. Insurance depends on your economic value to your family. Investments depend on your surplus income and your financial goals. So, to my mind, mixing up the two is misleading.

But in India, this mix up is common place. So even though the question asked may be misleading, it really begs for an answer!

So if I have Rs 100000/- with me, I would first figure out the amount of cover that I require. I will take my annual income, multiply it with 8*, add liabilities and reduce assets to arrive at the figure.

Let’s take an example: Annual Income: Rs 5 lacs, Assets: Rs 10 lacs, Liabilities:Rs 5 lacs. So my approximate cover would be 5*8+5-10 = Rs 35 lacs.

*There are a lot of variations in calculation of the insurance cover by the Insurance companies. Multiplying the annual income is the most debated one. I use 8 years because I feel that this is enough for my family to start generating income on their own after a gap of 8 years.

Some Insurance Companies recommend multiplying the annual income by 18-20 times! There would be a real hazard of doing away with the spouse!!

Now for an Insurance cover of Rs 35 lacs, there would be a range of products that could cost you from approx. Rs 10-15000/- to over Rs 1 lac.

I would recommend taking a term insurance cover for Rs 35 lacs paying a term premium of Rs 10-15000/- and invest the balance in low cost Mutual Funds/ETFs.

But I would also recommend checking out your risk profile and learning the relevant asset allocation rules before you go on to invest your money.

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Financial Planning Workshop

Posted on April 12, 2009 by Ranjan

While attending a workshop for Trainers, I remembered that I have been planning a “Personal Finance Workshop” for quite some time. I have been telling myself that one should “Do it well, or don’t do it”. The result: no progress!

Let me list out the workshop objectives and the things that I want to cover in the workshop to get me re-started on this job.

Workshop Objective:

The workshops will help the households to make better financial decisions and avoid common financial mistakes

Workshop Contents: