Tuesday, December 26, 2006

Guide to Investing by Warren Buffett

There was a one hour interview on CNBC with Warren Buffet, the second richest man who has donated $31 billion to charity. Here are some very interesting aspects of his life:

1) He bought his first share at age 11 and he now regrets that he started too late!

2) He bought a small farm at age 14 with savings from delivering newspapers.

3) He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.

4) He drives his own car everywhere and does not have a driver or security people around him.

5) He never travels by private jet, although he owns the world's largest private jet company.

6) His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.

7) He has given his CEO's only two rules. Rule number 1: do not lose any of your share holder's money. Rule number 2: Do not forget rule number 1.

8) He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.

9) Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.

10) Warren Buffet does not carry a cell phone, nor has a computer on his desk.

11) His advice to young people: Stay away from credit cards and invest in yourself.

Amazing individual indeed!!

Monday, December 25, 2006

Merry Christmas and a Happy New Year

Merry X'mas and a very Happy and prosperous New Year to you.

Value of Money

This blog wants you to "Get Rich". Getting rich could mean different things to different people. And working hard/smart to earn more money is one way to get rich. Another way is to minimise your needs, so that you have more than you require!

Let's take a look at a Chinese proverb about money.

With Money you can buy a house, but not a home.

With money you can buy clock, but not time.

With money you can buy a bed, but not the sleep.

With money you can buy sex, but not love.
With money you can buy books,but not Knowledge.
With money you can buy a Doctor, but not good health
With money you can buy a position, but not respect.
With money you can buy blood, but not life.

Saturday, December 23, 2006

How to do nothing

This post by Amit has been an eye opener for me. It seems there are competitors who can match my "doing nothing" skills. And as Amit says, it ain't easy!

Want to try? Read the full " How to do nothing"

Five Common Investment Myths

To make informed investment decisions you have to shift through an overload of investment choices and advice. And this overload has led to the rise of a number of “investment myths”.

Investment advisors and agents use these myths to their advantage. As a result, the investor’s interest is often compromised with. Let us take a look at five common investment myths to enable investors to make well-informed investment decisions.

Rs 10 NAV makes a cheaper buy Thanks to the large number of new fund offers (NFOs) being launched by fund houses and the attractive commissions being offered thereon (vis-à-vis existing funds) to investment advisors/distributors, NFOs have emerged as the most frequently “recommended” investment avenues. Investment advisors often use the Rs 10 net asset value (NAV) as a factor in their sales pitch. In effect, they suggest that buying into the fund at Rs 10 makes it a cheaper buy. Nothing could be farther from the truth. The NAV is simply representative of the assets backed by each unit of the mutual fund (MF). Hence a Rs 10 NAV (offered by an NFO) is no cheaper than say a Rs 100 NAV (offered by an existing fund).

The long-term always pays off We are strong proponents of long-term investing in equities and equity-oriented avenues. However, along with the long-term investment comes a caveat - investors should be invested in the right avenue, i.e., in case of say, MFs, the right schemes. A bad investment stays unchanged even over the long-term.

Universally suitable investment avenues exist An investment can be termed as being ideal, if it is in line with the investor’s risk profile and can contribute towards achieving his investment goals. In effect, it’s right for the investor in question. Investing is a personalised activity and what could be right for one investor can be completely unsuitable for another. For example, a well-managed diversified equity fund with a fantastic performance history over a longer time frame and across market phases can make an apt fit in a risk-taking investor’s portfolio. But the same fund may not find a place in the portfolio of a 70-year- old gentleman who has no appetite for taking risk and accords importance to assured and regular income along with safety of capital invested.

SIPs are always right We have maintained that investors should invest using the systematic investment plan (SIP) route. However, SIPs need not always succeed or deliver the expected results. For example starting off an SIP (in isolation) without any investment objective or an SIP in a poorly managed fund is unlikely to serve any purpose. Similarly, an SIP, which runs over shorter time frames (like six months) may not even help lower the cost of investment, if the same coincides with a bull run in the markets.

There is no such thing as too much diversification Diversification across asset classes and investment avenues is vital. By doing so, investors can ensure that investment portfolio is insulated from a downturn in a given asset class/investment avenue. However, it is also pertinent that an optimal level of diversification be maintained. At times, investors tend to stretch diversification to absurd levels, by investing in just about any fund that comes their way. Often no thought is paid to the value, which the fund can offer to the portfolio or even the fund’s aptness. Eventually, investors are left with a portfolio that is fragmented. There is a cost associated with MFs, both in terms of money (entry loads) and time (to regularly track the funds). Instead, the right approach would be to have a well-diversified portfolio constituted of not more than 6-7 funds, which have broad investment mandates.

Friday, December 22, 2006

It's not about being a genius, it's about getting started

It's not about being a genius, it's about getting started.

Getting rich is no big deal. You just have to earn more than you can spend or spend less than what you earn. A man/woman can be rich by maximising his earnings and/or minimising his/her needs. Simple, isn't it?

Moreover it can be proved that Money is inversely proportional to knowledge. Meaning as your knowledge increases, the money you have will decrease!!

Well, there's a formula in Physics that says that Power=Force/Time. Now Knowledge is Power and Time is Money! So if we substitute the figures, it comes out that Knowledge= Force/Money. That indicates the truth that Knowledge is inversely proportional to Money!!

Take responsibility for your finances, get rich or die trying!

Thursday, December 21, 2006

The alpha beta war against Mutual Funds

While the Mutual Funds are moving into top gear, the detractors are also arming themselves with new jargons. Here comes Alpha & Beta.

Beta is what the fund earns simply by being in the game, and can be measured using the market index that corresponds most closely to its style of investing. We can take the example of Sensex or Nifty50.

And the skills component of our fund managers ( some are consistently beating the market) is alpha.

The very model of an MF is outmoded, argues a large and growing group of financial researchers and professional money managers who are busy describing, building and proselytising for a different way of doing things.

The New Age thinker says there are better ways to get both alpha and beta. For the beta segment, any good index fund will do — and there is no need to pay any manager more than rock-bottom index-fund rates for that. In fact, there is no need for an index fund either. Futures contracts based on the index, or some similar item from Wall Street’s inventory of financial derivatives, will do the job. As to alpha, well, our poor managed mutual fund tries to achieve some sort of market-beating return by one simple means — owning, or in the parlance of the trade, “being long” stocks.

Thanks to DNA for the story.

Wednesday, December 20, 2006

Don't limit yourself

Here's a story about George Dantzig - the famed mathematician who's contributions to Operations Research and Systems Engineering have made him immortal.

As a college student, George studied very hard and often late into the night. So late, that he overslept one morning, arriving 20 minutes late for Prof. Neyman's class. He quickly copied the two maths problems on the board, assuming they were the homework assignment. It took him several days to work through the two problems, but finally he had a breakthrough and dropped the homework on Neyman's desk the next day.

Six weeks later, on a Sunday morning, George was awakened at 6 a.m. by his excited professor. Since George was late for class, he hadn't heard the professor announce that the two unsolvable equations on the board were mathematical mind-teasers that even Einstein hadn't been able to answer.

But George Dantzig, working without any thoughts of limitation, had solved not one, but two problems that had stumped mathematicians for thousands of years.

Simply put, George solved the problems because he didn't know he couldn't.

You are not limited to the life you now live. You have accepted it as the best you can do at this moment. Any time you're ready to go beyond the limitations currently in your life, you're capable of doing that by choosing different thoughts. All you must do is figure out how you can do it, not whether or not you can. And once you have made your mind up to do it, it's amazing how your mind begins to figure out how.

A person is limited only by the thoughts that he/she chooses.

5 things that you must not do with your money

Here's a story on things not to be done when your own money is concerned by Personal Fn people. Simple things, but more people do that mistake than those who avoid that. Read on.

There are individuals who have some money and others who have more money. And then there are financial planners, investment advisors and agents offering advice on what one should do with his money. Investment avenues like equities, mutual funds and insurance products like ULIPs (Unit-linked Insurance Plans) and endowment plans among others vie for a share of the money available. It would be safe to say that we are spoilt for choices, thanks to the varied avenues available. Furthermore, we are in a situation wherein there is a sort of an information overload, in terms of what one should be doing with his money.

In this article, we highlight 5 things that you must “not do” with your money.

1.Don’t hoard your money in a savings bank account: The savings bank account often ends up becoming a default option for storing one’s money. This isn’t surprising considering that most of us receive our incomes i.e. salaries and fees through cheques. But the trouble with this arrangement is that the funds are squandered earning a measly return of 3.50% (or thereabouts).

The same money can be better utilised by gainfully investing it in an appropriate investment avenue. Sure, liquidity is important. So you should set aside a sufficient sum to meet your day-to-day expenses and to provide for contingencies as well. But the balance should be invested in avenues like fixed deposits (FDs), mutual funds in line with the investor’s risk profile and needs. Considering that even an AAA rated FD yields an annual return of 7.50%, the savings bank account should come across as an unattractive “investment” option to most.

2. Don’t invest your money based on hearsay: Never make investments based on hearsay. Your relatives, friends and neighbours need not be appropriate sources for availing investment advice. In any case, what’s right for them need not be right for you. The right way to invest is by engaging the services of a qualified and competent investment advisor.
Steer clear of agents and advisors, whose “core competence” is offering rebates against investment made. Similarly, don’t associate with an advisor who only approaches you when an NFO (new fund offer) is launched. Instead, what you need is an advisor, whose mainstay is his expertise and prompt service.

3. Don’t manage your money without a plan: No game can be won without a proper strategy; likewise investing without having predetermined objectives like planning for retirement or providing for children’s education, among others could spell disaster. It’s a bit like setting off on a journey without knowing what the destination is.
In fact, setting objectives should be the starting point of any investment activity. Having done that, the next step would be to draw out a proper plan. The investment advisor has an important role to play at this stage. Rigidly adhering to the plan at all times, should also be treated as vital.

4. Don’t invest all your money in the same avenue: Investors would do well not to disregard the importance of diversification and avoid investing all their money in the same avenue. The investment portfolio should be comprised of instruments and schemes from across asset categories. Over longer time frames, such portfolios are best equipped to deal with changing market conditions and deliver on the returns front.
For example, market-linked investment avenues like equities and mutual funds are likely to occupy a lion’s share in a risk-taking investor’s portfolio. However, assured return schemes like FDs and bonds should also feature in the portfolio (from a diversification perspective) since they can impart a degree of stability to the portfolio.

5. Don’t lose track of your money: Investors should never lose track of their finances. Whether the money is in a savings bank account or available in liquid form, it pays to be aware of how the finances are placed. By doing so, the investor is placed to make well-informed financial decisions. Similarly, it would also help to keep track of the investment portfolio. Changing market conditions, interest rate fluctuations and other factors could necessitate the need to make modifications to the portfolio.

Monday, December 18, 2006

Housing Finance in India: The Road ahead

Housing is a significant engine for growth and development of the economy. Housing constitutes an important component and a measure of the socio-economic status of people and it is a critical sector for the India growth story.

The disbursement figures available from NHB reflects a robust growth. From disbursement of Rs 23858.43 crore in 2001-02, the figures of disbursement was Rs 76819 crore in 2004-05. Figures for 2005-06 are expected to touch Rs 100000 crore!

The proportion of outstanding housing loans as percentage of GDP has increased from 3.4% in 2001 to 7.25% in 2005. However it also indicates the vast potential of growth when we compare the figures with that of USA ( 54%), UK (57%), European Union (40%), Thailand (17%), Malaysia (34%).

As per the Tenth Plan (2002-2007), the total number of houses that would be required was estimated at 22.44 million( 2.24 Crore)

Fiscal concessions provided to individuals under Section 80C (for principal repayment upto Rs 1 lac) and Section 24 B (interest repayment upto Rs 1.50 lac) continues to be a major attraction which reduces the effective rate of interest.

Now FDI is allowed upto 100 % under the automatic route in townships, housing, infrastructure and construction development projects. SEZs, which is the current rage, also will include world class residential premises.

Looks like a promising highway ahead!

Contrary Proverbs

Every Action has an equal and an opposite reaction. Similarly, every proverb has an equal and an opposite proverb! There always exist two sides of the same coin! U be the judge.

All good things come to those who wait. BUT Time and tide wait for no man.

The pen is mightier than the sword. BUT Actions speak louder than words.

Wise men think alike. BUT Fools seldom differ.

The best things in life are free . BUT There's no such thing as a free lunch .

Slow and steady wins the race . BUT Time waits for no man .

Look before you leap . BUT Strike while the iron is hot .

Do it well, or not at all. BUT Half a loaf is better than none.

Birds of a feather flock together. BUT Opposites attract.

Don't cross your bri dg es before you come to them. BUT Forewarned is forearmed.

Doubt is the beginning of wisdom. BUT Faith will move mountains.

Great starts make great finishes. BUT It ain't over 'till it's over.

Practice makes perfect. BUT All work and no play makes Jack a dull boy.

Silence is golden. BUT The squeaky wheel gets the grease.

You're never too old to learn. BUT You can't teach an old dog new tricks

What's good for the goose is good for the gander. BUT One man's meat is another man's poison.

Absence makes the heart grow fonder. BUT Out of sight, out of mind.

Too many cooks spoil the broth. BUT Many hands make light work.

Hold fast to the words of your ancestors. BUT Wise men make proverbs and fools repeat them.

Sunday, December 17, 2006

Top personal finance websites in India

Net has an amazing load of information for anything and everything. But you have to know the right place to look at. Or else you'll be looking stupefied by the tons of search results thrown back at you. So even if you google for "personal+finance+website+India", you get more than 132000 search results.

Here are the top websites which has helped me in my journey of taking financial responsibility for myself.

1. PersonalFn: Money simplified It has a whole range of articles, guides, calculators on everything related to personal finance. Great web site.

2. ValueResearchOnline It is a great site for everything on Mutual Funds. The articles are lucid and the portal is independent.

3. NSE, India It has a very educative section on Financial Markets where you can download the material for certification in Financial markets.

4. Yahoo! Finance Yahoo! has a dedicated portal for finance in India. Though Google too has a portal on finance, it doesn't have an Indian finance portal.

5. Ramit Sethi"s blog Even though it's not on Indian financial scene, it is a great read for everything on personal finance and entrepreneurship.

I can list some others, but the five should be enough. After all there's my blog too, eh...

Saturday, December 16, 2006

Google gift for Christmas

Building a website is a daunting exercise for newbies like me who don't even know HTML. But Google Apps appears to be the "Angel" for people like us.

Now you've got one-stop shopping for all the services currently on the Google Apps for Your Domain platform -- just find a domain, buy it, and get started. Google will do all the behind-the-scenes configuration work for you. Presently, the features available are Home page, Gmail, Calender, Gtalk and Page creator.

As of now this is available for .com, .net,.org, .biz, and .info domains. Google is also constantly working to introduce more cool new features to this service, so be sure to check back for updates.

Wanna control the market?

Read this insight By Flexo: Rule for building wealth: Don't try to beat the market. Some excerpts:

If the professionals—people who spend hours each day studying the markets—can’t do it consistently, why do you think you can? Sure, there are success stories, but they are anecdotes, not true representations of what trading in the stock market is really like.

Survivorship bias also shows that we’ll hear about success stories much more often than we’ll hear about failures, leading towards more misunderstanding of the way markets work.

Matching the market does not mean you’ll receive average returns. Considering most fund managers don’t beat indexed mutual funds, matching the market will exceed the average.

Fortune says, “The most straightforward way to avoid this trap is to diversify your assets and then rebalance your portfolio at least once a year.”

Do you check your pulse everyday?

If you check your stocks every day, you're dumb. Think long-term.

Keep it simple: You need to set up a good investment portfolio with the kind of asset allocation you know about (stocks, mutual funds, real estate, whatever), and then make sure you're roughly on target with your investment goals.

You need to occasionally monitor your investments to see how they're doing. And you may want to set up automatic alerts through your broker/Google news to keep you informed on major news in the company. How often should you manually check on things? Probably every few months, with a major review every year. But not every day!!

If you’re reading in the press about the hottest investment technique or philosophy, stock, or mutual fund, chances are you already missed that particular boat. By the time everyone knows about it—whatever “it” is—its market has become efficient; no more spectacular gains to be had.

Happy investing!

Sensex at 30000

Sensex was on a roller coaster ride as always in the past week. A slight nudge by RBI increasing the CRR drew first blood with the Sensex going down by 400 points . And then the next day, the Industrial report about the growth for the month figures made Sensex shed another 400 points. Phew!!

And then as talks of the fundamentals being strong, Sensex gains by 300 points.

Looking at the ways of the Sensex makes me remember my ride on "Thunder" in the Essel World amusement park. Unless you have a strong heart, you should not attempt that. While in the "flight", you wonder why you ventured in! They hang you upside down and you pray that the "flight" stops asap! But when you come out, you are releived and happy. It's fun, you proudly say, prodding others to enjoy the hell you have been through!

As an asset class, equities has the largest growth prospects among all investments. But the ride is frought with jerks, upsurges and turn arounds. If you are brave enough to monitor your way within the roller coaster ride, you can reap the benefits too. And as always the "IF" is important and critical.

Normally, people like us have sleepless nights with the slightest tremors. But here's what I read in an article by an Economist I respect, Swaminathan S Anklesaria Aiyar.
" Six years from now, I would expect the Sensex touch atleast 30000! "

So if you can ignore the noise and pick up good companies and stay with your investments, share market may bring you good growth. Sounds inviting,eh!

Friday, December 8, 2006

Top five posts of the week

Here are the top five blog posts that I read in the past week.

1. Youth Curry: Insight on Indian youth

2. Google blog: Thoughts on healthcare

3. Free Money Finance: Thoughts on Financial advisors

4. All Financial Matters: 9 ways of managing money effectively

5. Digital Inspiration: How to cure a hangover

Read somewhere that bloggers are failed writers and half wits. Obviously the author did not find the above blogs. Power to the above bloggers

LIC:Way to go!

Here's a list of achievements by a Public sector Insurance company:

  • NDTV Profit Business Leadership Award 2006.
  • Asia Insurance Merit Award 2005 and 2006 in the area of ‘CORPORATE SOCIAL RESPONSIBILITY’
  • Awaaz Consumer Awards 2005 and 2006 given by CNBC-TV 18- ‘Best Life Insurance Brand in India’ –an award given on the basis of a market /consumer survey done in conjunction with AC Neilson ORG Marg.
  • Golden Peacock Global Award for Corporate Social Responsibility in emerging economies (Public sector) for the year 2005 by World Council for Corporate Governance.
  • LIC adjudged No.1 in Net Worth & Net profit and No.2 in Total Income among the TOP 500 companies of India by Dun & Bradstreet.
  • Adjudged Number One Service Brand in India by Economic Times and AC Neilsen Org Marg for the year 2005 for the third consecutive year.
  • GOLDEN PEACOCK AWARD for being the Winner of Special Commendation Certificate for Excellence in Corporate Governance (PSU sector). A
  • djudged No.1 Insurance Company at the ‘Businessworld Most Respected Company Awards 2005’.
  • Awarded Reader Digest’s Trusted Brand 2006 (voted by consumers).
  • LIC – Adjudged Superbrand India 2003/04 and 2004/05.
  • Second largest investor in Asia among insurers. (Source : Asian Investor)
  • Largest Financial Institutional Investor – both in equity market and term loans.
    LIC - An Institution Builder promoting many financial and insurance institutes like NSE, NCDEX, LIC Mutual Fund, Stock Holding Corporation of India, National Insurance Academy, Insurance Institute of India etc.
  • LIC is the second largest PC user in the country.
  • LIC is the number one insurer in the world in volume and has sold around 31.5 m policies in 2005-06 with historical growth of 31.77% over 2004-05.
  • LIC posted a growth rate of 48.56% in new premium income for the year 2005-06.
  • More than 1 crore policies sold under new plan ‘Bima Gold’ during a period of just 7 months. LIC settles 2 claims per second.
  • LIC’s e-portal (website) has won Webby’s Consumers’ voted best website award.
  • The Hindi version of the website has been launched.
  • More than 40 different plans catering to the changing needs of different segments of the society.

Way to go LIC!

Tuesday, December 5, 2006

Buying gold from your bank? Beware!

Got mail from a friend which is an article by Personalfn.com. Read on.

Banks have hit upon a new idea to get a larger share of your wallet – retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ.

In fact we would go so far as to say that if you want to buy gold, don’t go to your bank! Why Gold?There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio. You can read our detailed note on the reasons for and against investing in gold. Suffice it is to say over here that you must have about 5% of your wealth in gold.

The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130. So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality. ",1]

The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say “biscuits”!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries. There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.

Where to buy Gold?In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a “neat buck” off you.

Here’s an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the Bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!
The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.

The answer to the question of where you should buy gold from is simple – give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium – do your homework well before you buy gold). And, of course always buy standard hallmarked gold.

If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.

Beware: Based on our interactions with thousands of individuals every month, we find that instances of mis-selling of investment-related services and products is growing at an alarming rate. As an individual with limited knowledge about such products and services you probably are not geared to ask your advisor the ‘right’ questions. The best way then to eliminate the risk of being ‘cheated’ is probably to spend time in selecting an honest financial planner for yourself.

And it's all about "taking responsibility for yourself"

ULIPs : is there a better way?

Unit linked insurance plans (ULIP) is a bestseller today. Life Insurance companies are falling over each other to introduce and market their ULIPs. Backed by aggressive selling by agents and the booming stock market, the sales figures they have notched up is mind blowing.

Traditionally, life insurance products have usually been considered as ‘safe’ investment options, which also offer a life cover. However, since unit linked insurance plans (ULIPs) burst onto the scene a few years ago, the rules and definitions of life insurance have undergone a sea change. The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’ insurance schemes and falling interest rates which rendered conventional products like endowment plans unattractive.

And instead of taking insurance based on their economic value( human life value-HLV), people are going for ULIPs which is Mutual Funds plus term assurance rolled into one. To my mind, one should look at the following issues before writing the cheque to your persistent agent.

Transparency: The quality of data and its presentation need to improve significantly, if investors, both existing and potential, are to be able to study portfolios and make intelligent decisions. ULIP portfolios need to be disclosed regularly. Mutual funds are required to disclose all relevant information like portfolio, assets under management (AUM) and the benchmark indices to name a few.

Expense: The annual expenses incurred on the ULIP are 3.50% (2.00% recurring and 1.50% fund management charges) apart from insurance charges, In contrast, mutual funds are managed at an annual expense of 2.50% (maximum) of net assets.

Past performance: While the Mutual funds have a history of past performance, the ULIPs have a short history and the current bull run to boot. Performance of a fund manager will be tested when the going gets tough. ULIPs have not been tested apart from the May crash.

Isn't it more worthwhile to go for term assurance from an Insurance company and a trusted and performing equity fund from a Mutual Fund/AMC?

Monday, December 4, 2006

Fund of Funds on their way

Here's a story in Hindu Business Line by Nilanjan Dey. Feedback may be sent to nilanjan@thehindu.co.in .

One question that I have in mind is how do they compare with ETFs. I guess ETFs are less expensive and is a much larger diversification. Any way read this story by Nilanjan Dey

If there is one class of products that is not fully appreciated by MF investors, it is the FoF (Fund of Funds). Opinion now may be divided as to the FoF's real worth - it is probably much too early to examine that - but there is no denying that this category is here to stay. And actually prosper, if you listen closely to those who are championing its case.

Ask Mr Sumeet Vaid, one of its most resolute defenders. As Chief Marketing Officer at OptiMix, the multi-manager arm of ING Investment Management, he knows all about the common investor's penchant for stand-alone, single-manager funds. He has to constantly talk to clients about the merits of creating a portfolio of equity and debt funds, choosing from an assortment range of funds, each with an investment style of its own.

Selecting the best fund managers is not easy, as anyone faced with this diversity in the country's MF space will realise. And diverse it has truly become. Just check out the numerous competing products and you will know.

An FoF, in this backdrop, can combine a number of single managers, each of whom may be acting differently, guided as they are by different investment mandates. That, says Mr Vaid, is the core of an FoF's unique selling proposition. The process, he adds, paves the way for sensible asset allocation.

Talking of selling propositions, investors must be told about the risks as well. For this, let's check out OptiMix's latest offer, a three-year product that will be benchmarked against the Crisil balanced fund index. To begin with, an investor needs to be aware that such an FoF will be as good as the funds it invests in. In other words, its performance will be shaped by whatever is done by these underlying schemes. Also, investments in the underlying assets will have to face such factors as performance of their portfolio, exposure to derivatives and security lending.

It is important to realize that if the AMC levies an entry or exit load and the underlying funds do not waive the load charged on investments/redemptions, the investor concerned will incur load charges on two occasions.

As the offer document indicates quite clearly, the first will be on investments/redemptions/switches in the options under the scheme. The second will be on the scheme's investments/redemptions/switches in the options under the underlying schemes.

The offer document also underscores the fact that investors are incurring expenditure at both the FoF level and the schemes in which it invests. Their returns may, therefore, be impacted by this; such returns may on occasions be lower than what may be secured if investors directly invest in those schemes.

It may be pointed out that an FoF may normally provide a limited quantum of information on the underlying funds. It may not always be possible for a lay investor to access specific data, especially exact details of their portfolios.

Having said all this, there is little doubt in our minds that FoFs will do better in the days ahead. One, there will be more products. Two, the performers among the current crop of FoFs will begin to attract more assets. Granted, these are still microscopic, particularly when compared to some of our giant stand-alone funds. How soon the situation will change is not for us to predict. But that change seems inevitable.

Sunday, December 3, 2006

Open ended Mutual funds v/s NFOs

I was part of an interesting discussion between a group of people(unknown to each other) who got the same mail from a mutual fund advisor regarding a closed ended new fund offer(NFO)

Nirmala Mani started the discussion by saying, " I am trying to get an idea of how many people in this mailing list were interested in investing in the fund" He wanted to know, "I am taking advantage of this mailing list to find out how many of you were going for the fund"

Sridhar responded by saying, "
I am going for it purely on raghu’s recommendation"

I had the following to say on the issue, "
My own small research on the issue says that Mutual Funds have their own hidden agenda today. With SEBI allowing them to charge upto 6% as entry load in closed ended funds and the facility to amortise the expenses over the period of the fund, NFOs have become fashionable. They come backed by a huge ad spend and collect thousands of crores from unsuspecting consumers who don't know the difference between open ended and closed ended fund. They are blasted with financial jargon and a well researched advertisement on the print and visual media backed by the persistent agent into succumbing into signing the cheque"

Nirmala responded by saying, "
I have simple calculations.
Let us take SBI Magnum Global ... I can now get it in the market @ Rs43+ ... Say in a year it goes to Rs.55 +,
With all the hidden agenda that Reliance Long Term Equity Fund has ... I will get it at par @ Rs 10 ... Say in a year it goes to Rs. 20 in a year. Would I not have doubled the money in a year (tentatively) if I had put my money on RLTEF versus SBI Magnum (since it is already at premium).
You see where I am going ? What would you say in that case.

I again responded with the following:
What I've learned from experts in Mutual Funds (and one of those also happen to be my brother in law and officials working with MFs ) is that we must understand that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance.
Investors should choose a scheme based on its merit considering performance track record of the mutual fund , service standards, professional management, etc
Moreover as you must have read in my blogs that these closed ended NFOs are allowed to have upto 6% entry load amortised over the no. of years. This expense of yours goes into marketing, advertising and commission to agents....
In open ended funds u can measure the past performance of the fund managers. In NFOs, u don't know that.

To be fair enough, past performance is not guaranteed in future.

What is your take?

Saturday, December 2, 2006

World AIDS Day

From the Google Blog:

December 1st is World AIDS Day. We want to remember all those who have suffered from HIV/AIDS in the 25 years since it was first identified, and we want to support everyone working to eradicate this scourge: Today, there are about 40 million people living with HIV worldwide, and it is increasing in every region in the world. In Africa, it is the leading cause of death -- 5,500 Africans die each day from this insidious disease.

One effort that is making a difference is (RED), a company founded this year by Bono and Bobby Shriver. A percentage of the profits from each (RED) product sold is given to The Global Fund. We are supporting the (RED) effort by offering promotional support to (RED) and (RED) products on Google properties throughout the holiday season.

We hope you choose to support them with your purchases. Companies offering (RED) products have committed to contribute a portion of profits from the sales of that product into Global Fund-financed AIDS programmes in Africa.

Together, let's make a big difference. Read more at JoinRED.com or visit the (RED) blog.

I will teach you to be rich

Here's an interview, I would have liked to do on my favorite blogger, Ramit

Ramit's interview

Just one of the excerpts to show the depth of the interview: "When I was in high school I got so frustrated because so many people would say, "Oh I'm not going to apply to Stanford, because even if I got in, I couldn't afford it." This is exactly the wrong way to think about it. The right way to think about it is "I'm going to apply everywhere. I'm going to do a great application, and if I get in, then I'll think about the money." And usually what happens is if you're good enough to get in, then they'll take care of you. I saw a lot of kids doing this and it made me sad. My parents were very middle class and there were four kids in the family. They told us, "You guys have got to get scholarships, otherwise you can't go to college." So we did! And there's no secret, it's the same things I talk about: take the initiative, be patient, learn from your mistakes, that sort of stuff".........

Cody McKibben's blog is a nice read too.

Friday, December 1, 2006

Journey of a thousand miles !

The journey of a thousand miles start with a single step. I mean I was very happy at my 25th post on my blog and now that I'm approaching 125, it's time to reorganise the blog.

The blog looks a bit cluttered with too many things at one place. So now I have decided to build a web site for my blog and I've called it Investing Gyaan: Taking responsibility for yourself.

The website will take its final shape in another month or so but do visit them and send suggestions.

The underlying philosophy of the site will be that it is vital to "take responsibility for yourself". And the first step to do that is to be well informed. We are not selling any financial product and do not represnt any financial product company. So we'll be independent and unbiased.

We are surrounded by persistent agents and financial advisors, aggressive financial product companies and our own ignorance of the knowledge required (and maybe the inertia?) to manage our money!! And it is said that Money is a bad master but a good servant. In any case, you have to manage it properly so that it may serve you properly.

We welcome your feedback and suggestions to improve this site. If you want to contribute by writing articles on a relevant subject, you are more than welcome. Please write to financeforu@gmail.com or ranjanvarma@gmail.com

Check them out!

Thursday, November 30, 2006

Simplifying financial jargons: Part I

Financial jargons have a stupefying effect on me. And financial "experts" use them to their own advantage to confuse and throttle any more questions from vulnerable people like me.

So I'll try to understand them, one/two at a time, and try to articulate my understanding in the language of a newbie.

I'll start with a word that sounds real awesome and weighty,
standard deviation.

Standard deviation simply means the level of fluctuation. For example if a fund or scrip is showing 10% growth every year, the SD here will be zero. However if the growth in each of the four years is, say -5%, 15%, -1%, 20%, then the SD will be said to be very high.

In other words, SD measures the volatility of the returns of the fund or scrips. A high SD will mean that the returns have been highly volatile or fluctuating in nature.

Another word we get to hear is Beta. Similar to SD, it also indicates the volatility of the fund or scrip. But it is calculated or expressed in comparison with its index or benchmark fund.

For example if the beta of a scrip of sensex is 1.1, it means that the scrip will move 10% more than sensex. Therefore if the sensex moves up by 10%, the scrip will move up by 11%. It also means that if the sensex looses by 20%, the scrip will loose by 22%.

I am also told that these statistical measures are indicative in nature and actual performance may differ from the published data. In theory there is no difference between theory and practice but in practice, there is.

Next I'll take up more terminologies: Sharpe ratio, CAGR, Treynor ratio....get ready for the onslaught!!!

Wednesday, November 29, 2006

Baby steps to Insurance

Life insurance is a potent tool that not only offers the ability to plan for unforseen events that can affect the family's financial situation adversely, but is also looked up to as an important tax saving cum investment tool. (Source: The Money Times.com)

Though the importance of buying an insurance cover is well known, one needs to do a certain amount of spade work before purchasing a policy, to ensure the best possible coverage at the right price.

Here are some helpful tips to get you started:

As premiums vary widely from company to company and cover to cover, it’s important to look around. One can try internet sites to get instant quotes.

Plot your value
The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you'll be paying unnecessarily for higher premiums. On the other hand, it's important not to have too little coverage, resulting in you being underinsured.

Health matters the most
Healthy people get better rates on life insurance. Higher premiums are quoted for anything that poses a risk for longer life expectancy (smoking, on regular medication, etc).

Sooner the better
As premium rise with increasing age, the younger you are when you purchase life insurance, the lower premiums you will be required to pay.

Review your cover periodically
Any life change indicates the need for an overall review of the financial plans. Make sure you have enough cover for all important events of life.

Check out for no-commission deals
One of the reasons for higher premiums is that most life insurance policies pay commissions to the agent/broker. However, you may be able to purchase a no-load policy through an insurer that sells no-load policies directly to consumers.

Focus on annual installments
You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.

Ensure to be adequately insured
Many employers offer their employees group life insurance. But this amount of coverage is usually not enough to adequately meet the life insurance needs. Also, as group life insurance policies are not portable, you’ll be left uninsured when you leave the job.

Never conceal facts
Though, age and negative health related conditions attract higher premium, don’t think about lying on the insurance application. If your insurance company gets the knowledge of concealed facts they can terminate the cover.

Buying more is sometimes cheaper
As the amount of sum assured goes up, the premium amount also rises, but at a decreasing pace. If the numbers work out, you may be able to pay a lower premium while increasing your coverage.

Tuesday, November 28, 2006

Boss is always right: Your workplace obligations

Add to: Del.icio.us | Digg | Google | Reddit

Paul Glen has developed a rather simple philosophy of boss-subordinate relationships. Some excerpts

Wouldn't it be nice if every boss came with a standard API? It would be so easy to look at the interface specifications and know exactly what he expected, in what format he expected it, when you should deliver it, what predictable events would result from your input and how you should handle error conditions. All the politics would go away. Those pesky emotions would become a nonissue. Success would become deterministic.

Sadly, it will never be so simple. Every boss-subordinate connection is a custom job. This is both the promise and the pain of workplace relationships; they are cobbled together not of hardware or software, but of wetware (the gray, squishy stuff between our ears).

Part 1. A subordinate owes the boss and the organization three simple things:

That's it. If I deliver on all three of those things, I can look myself in the mirror and feel that I've fulfilled my part of the employment bargain. Let's take a quick look at each one, because they are deceptively simple.

Part 2. Bosses owe their subordinates three simple things too:

Paul Glen is the author of the award-winning book "Leading Geeks: How to Manage and Lead People Who Deliver Technology" (Jossey Bass Pfeiffer, 2003) and Principal of C2 Consulting.

Baby steps to Investing gyaan:

Add to: Del.icio.us | Digg | Google | Reddit

If you are a novice at investing, terms such as stocks, bonds, badla, undha badla, yield, P/E ratio may sound Greek and Latin. Relax. If you made it through fifth grade math, you can do it, says Peter Lynch, a formidable man of investing.

To start with, take your investment decisions with as many facts as you can assimilate. But, understand that you can never know everything. Learning to live with the anxiety of the unknown is part of investing. Being enthusiastic about getting started is the first step, though daunting at the first instance.

Simply put, you should invest so that your money grows and shields you against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time.

By investing into the market right away you allow your investments more time to grow, whereby the concept of compounding interest swells your income by accumulating your earnings and dividends. Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors 1. Invest early 2. Invest regularly 3. Invest for long term and not short term

While it’s tempting to wait for the “best time” to invest, especially in a rising market, remember that the risk of waiting may be much greater than the potential rewards of participating. Trust in the power of compounding Compounding is growth via reinvestment of returns earned on your savings. Compounding has a snowballing effect because you earn income not only on the original investment but also on the reinvestment of dividend/interest accumulated over the years. The power of compounding is one of the most compelling reasons for investing as soon as possible.

Let's start with the first steps: There is always a first time for everything so also for investing. To invest you need capital free of any obligation. If you are not in the habit of saving sufficient amount every month, then you are not ready for investing. Our advice is :-

Save to atleast 4-5 months of your monthly income for emergencies. Do not invest from savings made for this purpose. Hold them in a liquid state and do not lock it up against any liability or in term deposits.

Save atleast 30-35 per cent of your monthly income. Stick to this practice and try to increase your savings.

Avoid unnecessary or lavish expenses as they add up to your savings. A dinner at Copper Chimney can always be avoided, the pleasures of avoiding it will be far greater if the amount is saved and invested.

Try gifting a bundle of share certificates to yourself on your marriage anniversary or your hubby’s birthday instead of spending your money on a lavish holiday package.

Clear all your high interest debts first out of the savings that you make. Credit card debts (revolving credits) and loans from pawnbrokers typically carry interest rates of between 24-36% annually. It is foolish to pay off debt by trying to first make money for that cause out of gambling or investing in stocks with whatever little money you hold. Infact its prudent to clear a portion of the debt with whatever amounts you have.

Retirement benefits is an ideal savings tool. Never opt out of retirement benefits in place of a consolidated pay cheque. You are then missing out on a substantial employer contribution into the fund.

The investing options are many, to name a few are Stocks, Bonds, Mutual funds, Fixed deposits, Others that include gold, real estate, commodities, art and crafts, antiques, foreign currency etc.

Monday, November 27, 2006

Spearheading the Indian mortgage finance industry

Add to: Del.icio.us Digg Google

Spearheading the growth in Indian mortgage finance industry over the last two decades, HDFC has remained the largest housing finance company (HFC) in the country. Consistency in its incremental home loan disbursal rates has helped it grow its outstanding loan book at a CAGR of 29% (higher than the industry average of 25%) over the last 5 years. Also, sustenance of high margins and one of the best asset qualities in the sector has helped retain its valuations. The HFC however, has faced stiff competition from banks, especially ICICI Bank which is now the market leader in home finance, resulting in loss of market share (from 40% in FY95 to 26% in FY05). HDFC however, continues to enjoy better margins than its rival LICHF, mainly backed by better geographical reach (through arrangement with HDFC Bank) and income from subsidiaries.

Mortgage loan industry poised for growth: The dynamics of the mortgage industry have changed substantially over the past few decades and the preference for owning homes is clearly higher than renting one. The percentage of homes owned has increased from 53% of total number of dwelling units in FY89 to around 65% in FY05. Also, the average age of the home loan borrower has reduced from 45 years in FY89 to 35 years in FY05 (Source: CRISINFAC report). As per the company's projections, the housing finance industry is expected to grow at a CAGR of 18% over the next 3 years from Rs 569 bn in FY05 to Rs 1,347 bn in FY08.

In FY05, HDFC had 67% of assets and 66% of liabilities on a floating rate basis. This leaves very little scope for asset liability mismatch, which stands to be one of the major problems with most banks (competitors for HDFC in home loans market) that have a high proportion of fixed loans. Thus, while banks have increased interest rates on floating rate loans by an average of 100 to 150 basis points in FY05 (to counter hardening of interest rates going forward), HDFC has exercised only a 50 basis points rise in its benchmark rates. This has given HDFC a cost advantage over its peers that can help it retain its market share.

Besides expanding its geographical reach through wholly owned distribution company Home Loan Services India Ltd (HILSIL), HDFC has also focused on its marketing efforts through the DSA (direct sales agent) force. Percentage of loans sourced through DSAs has increased from 5% in FY02 to 38% in FY05. This is of cost advantage to the company as the compensation is sales linked and the entire expenses is written off against fee income, instead of being booked as operating overheads. It must be noted that this effort has helped HDFC consistently reduce its cost to income ratio (11% in FY05), which is the lowest in the financial sector.

The institution has also been very consistent in terms of asset quality. Even as the revised 90-day delinquency norms (effective from FY05) increased its gross NPA to advance ratio to 1.1% in FY05 from 0.8% in FY04, the HFC maintained its net NPA to advance ratio at zero percent levels through higher provisioning. Also, HDFC's coverage ratio went below 100% for the first time in FY05 (due to the new norms). The HFC remains very conservative in terms of risk assessment (of loans sourced through HDFC Bank and through DSAs) and has centralised appraisal of loans. It is thus expected to maintain its asset quality going forward.

Sunday, November 26, 2006

Get screwed by Financial product companies

Add to: Del.icio.us | Digg | Google

We have a tendency to blame the agent and the tele marketer for all our financial mistakes. It is he/she who incessantly prodded us into taking that decisions which we are regretting now. Be it Insurance, Home finance, credit cards, Mutual Funds or any other financial product for that matter.

However in the process of "taking responsibility for myself" on financial decisions, I have come to the conclusion that the big institutions are behind all this mis selling by petty agents and advisers.

Remember a leading private Insurance player exhorting their agents to become "Jihadis" and with the single minded devotion and focus of Osama Bin Laden and "kill" as many prospects as possible! Yes, it actually happened in Kanpur a year back.

Yes, the Network marketeer and distributor is given training to smile at unsuspecting strangers only to lure them into buying dreams of better health and beauty at a very high cost. It has reached such alarming levels that now if you smile at a stranger, you are likely to be snickered back suspecting you to be a network marketeer.

With the entry of private players in the Indian life insurance market, consumers were expected to have better options of policies. But look at the product profile today. Almost 80% of insurance that is sold today is ULIP(Unit Linked Insurance Plan) which charges upto 15-20% as entry load apart from risk coverage charges. Compare that with 2-2.5% charged by Mutual Funds and you have a very costly proposition. Thousands of crores have been collected from uneducated consumers by these big insurance companies. And ofcourse they can afford to spend huge amount on advertising the product since they know they are able to fool the people through their agents.

And Mutual Funds have their own hidden agenda today. With SEBI allowing them to charge upto 6% as entry load in closed ended funds and the facility to amortise the expenses over the period of the fund, NFOs have become fashionable. They come backed by a huge ad spend and collect thousands of crores from unsuspecting consumers who don't know the difference between open ended and closed ended fund. They are blasted with financial jargon and a well researched advertisement on the print and visual media backed by the persistent agent into succumbing into signing the cheque.

Credit cards and housing finance companies have built an expertise in duping customers with clever calculations. Their IRR (Internal rate of return) is quite different from the publicised ROI (rate of interest).

To be fair to the big guns ( read mighty financial product companies), they indulge in all this because the consumer allows them to. And they have a loyal army of petty agents and advisor who are ready to spread the untruth around.

We are uncomfortable in asking them the right questions. Possible reasons for this is lack of knowledge and/ or lack of respect for your own money!! That is why "taking responsibility for oneself" is so imporatnt.

Saturday, November 25, 2006

Best of blogs: The fab five

Add to: Del.icio.us | Digg | Google | Reddit

Being a blogger makes you increasingly narcissist. So I am making amends by posting what others have written and which I really would have liked to write myself one day. So here's the fab five posts:

  1. Best of Free Money Finance by FMF. It takes the first spot since it is loaded with 9 posts within the post.
  2. Book review on performance chasing and market timing by Ramit. Ramit gives a lot of thought and effort into his posts and you'll know when you read him.
  3. I hate Indian network marketing by Ramit again. Even I'm scared of smiling at strangers now, they might snigger while assuming me to be an amway distributor!!
  4. Mastering your investments means to master your emotions by IJM. Amazing insights.
  5. Teaching a six year old kid to save money by Nickel

Friday, November 24, 2006

Inflation: taxes without legislation

Add to: Del.icio.us | Digg | Google | Reddit

Inflation is one form of taxation that can be imposed without legislation, says Friedman. Inflation is not just a persistent increase in the level of consumer prices but a persistent decline in the purchasing power of money.

It is caused by an increase in available currency and credit beyond the proportion of available goods and services.

It is said that Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages diminish.

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

Let's take an update on the current inflation trends. The Wholesale Price index (WPI) inflation was up to 5.30 % in the first week of November which is on an upside. More alarming is the continued rise in the food prices where the inflation is higher at 6.8%.

The measurement of the price level is a difficult task and, therefore, so is the measurement of the inflation rate. For example, many economists believe that the consumer price index has overstated the rate of inflation in recent decades because improvements in the quality of goods and services are not adequately reflected in the index. An index that held quality constant, according to this view, would show a smaller rate of price increase from year to year, and thus a smaller average rate of inflation.

It is important to recognize that a positive rate of inflation, as measured by a price index, does not mean that all prices have increased by the same proportion. Some prices may rise relative to others. Some might even fall in absolute terms, and yet, on average, inflation is still positive.

In the Indian context what are the factors influencing the rate of inflation? According to what I read in the papers, it should be the oil prices, our erratic monsoon, RBI's monetary policies, credit and money supply and maybe the statistical base taken for calculation of the inflation rate.

Fools rush in where angels fear to tread

The past couple of days have seen three fund houses launching three-year close-ended diversified equity funds. SBI Mutual Fund, Reliance Mutual Fund and LIC Mutual Fund are the latest to join the close-ended fund bandwagon. While I wrote about it earlier about the mad rush, I want to keep singing about this organised, massive and institutionalised misselling.

Fools rush in where angels fear to tread!

While all three funds carry fancy names, how different these are from the existing bouquet of funds by the abovementioned houses remains to be seen. With benchmark indices at stratospheric levels, it appears that fund houses cannot seem to resist the short-term favourable climate for mobilising fresh assets from retail investors.

At the end of ’05, there was only one close-ended growth scheme. So far in ’06, already 10 close-ended growth schemes (excluding the abovementioned schemes) have hit the market. More are in the pipeline for regulatory approval.

Sebi issued a circular in April, 2006 that said open-ended schemes would have to charge the initial expenses in the entry load of the scheme itself or should be paid by the asset manager. Earlier, funds could charge up to 6% of funds collected in a new fund offer (NFO) as expenses.

Off the record, asset management company (AMC) officials agree that the regulation, allowing close-ended schemes to amortise expenses over the life of the plans, is the primary reason why there is a spurt in NFOs of close-ended schemes.

Market watchers also allege that close-ended schemes, which are variants of their existing open-ended products, help fund houses skirt the Sebi diktat to trustees of AMCs to certify that a new scheme being launched is not similar to any of the company’s existing ones.

Open ended funds also provide a history of performance which is not available in the NFO.

Clearly one should avoid these NFOs which is misselling institutionalised!

Thursday, November 23, 2006

Funds rush in, time to be careful

THE last week saw a number of new fund offers on the shelf. While Reliance MF offered a long term close-ended equity fund, HSBC and Lotus mutual funds launched equity-linked saving schemes. Fidelity offered a cash fund and Prudential ICICI a equity & derivatives fund. LIC Mutual Fund has also announced the launch of its 36 months close-ended equity scheme, LIC India Vision Fund.

The investment objective of the LIC scheme is to generate long-term appreciation by identifying growth sectors and investing in the universe of companies within such sectors.

The NFO of the Reliance Long Term Equity Fund will invest in select small and mid-cap stocks. It is a 36-month fund with an automatic conversion into an open-ended scheme at the end of the period. The offer is open till December 11.

Lotus India Asset Management Company’s Lotus India Tax Plan too is on and ends on December 5, 2006.

Also open till December 7, 2006 is Prudential ICICI mutual fund’s Equity & Derivatives fund.

The SBI Mutual Fund also announced launch of its region-specific equity scheme, One India fund, which will invest in diversified stocks while aiming to pick best investment opportunities from all regions of the country and the NFO ends on December 22.

Two funds managed by Reliance Mutual Fund -- Reliance growth and Reliance Vision have been recently ranked top global funds based on their five year performance track record by international fund intelligence agency Lipper. Maybe that explains the sudden rush of NFOs.

Index funds beat stock pickers

Bloomberg reports that the $14 billion iShares MSCI Emerging market index, the largest exchange traded fund (ETF) beat those that are actively managed.

Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand.

It is important to remember that while ETFs attempt to replicate the return on
indexes, there is no guarantee that they will do so exactly. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.

There are various ETFs available in India, such as:

NIFTY BeES: An ETF launched by Benchmark Mutual Fund in January 2002.

Junior BeES: An ETF on CNX Nifty Junior,launched by Benchmark MF in Feb, 2003.

SUNDER: An Exchange Traded Fund launched by UTI in July 2003.

Liquid BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003.

Bank BeES: An ETF launched by Benchmark Mutual Fund in May 2004.

Wednesday, November 22, 2006

Start Young And Watch It Grow

Here's a lucid and extremely readable article by Dhirendra Kumar, CEO, Value Research

Sunit, a friend of one of our colleagues, is a young bachelor in his early twenties who has just landed his first job. His aim, be it in his social life, the car he drives or branded attire, is to "live life king-size".

And why not? After all, this is probably the only time in life when one's financial liabilities are zilch, with little or no contribution towards household expenses.

Now we don't want to sound like a wet blanket and say that Sunit is probably committing a huge financial mistake here, but the fact is that he is not being very money savvy.

With limited financial liabilities - in his case, none at all - and the ability to take a higher risk, the situation could not be more conducive to saving. In fact, the potential to save will never be higher than it is now. No dependents, no household expenses, no liabilities, and with age on his side, Sunit is in a win-win situation.
Unfortunately, the newly-acquired financial freedom for someone like Sunit induces lavish spending. The underlying thought process would go something like this: "I've just started to earn and I have decades ahead of me to save. What's the hurry?"

Sure! No hurry. But procrastination on this front can prove to be very costly. Want to know why? Because money saved in the first few years of your life contributes the maximum to your overall wealth. So logically, the earlier you start, the wealthier you are likely to be.

Let the math prove our point.
Monthly investment = Rs 5,000Tenure = 30 yearsReturn = 12 per cent per annumResult: Rs 18 lakh invested over this period would have grown to Rs 1.75 crore. Now do the same exercise by knocking out the first five years. Result: Your wealth is now cut down by more than 46 per cent. Quite an eye-opener, isn't it? The Rs 3 lakh saved in the first five years contribute as much as Rs 80 lakh to your overall wealth of Rs 1.75 crore.
We rest our case.

Action plan Make a commitment to invest at least 15 per cent of your salary each month. Gradually try and extend it to 25 per cent. This won't curb your lifestyle too much and will get you on the path to financial freedom.

Be an aggressive investor. There is not likely to be any significant capital expenditure in the near future and, therefore, an all-equity portfolio is recommended.Within equities, you can be more aggressive by allocating higher percentages to mid-cap oriented funds. For tax saving, you can look at a couple of Equity Linked Savings Schemes (ELSS). You can narrow down to five or six equity funds of different investment styles.

Since there aren't likely to be any financial dependents, there is no need to go for life insurance at this stage.

For your liquidity and emergency cash requirements, adequate money must be kept aside. A widely recommended thumb rule is to hold an amount equivalent to three to six months of your living expenses. This money can be kept in a savings account and a portion of it even in a liquid fund. If your bank has the option of linking your fixed deposit to the savings account giving you the flexibility to break it anytime, then explore that option too. The idea is to have funds readily available to meet sudden expenses and not having to resort to selling your equity investments.

Lesson to be learntStart now, however small the amount, and be aggressive. This is one time when you can cut your cake and have it too.

Tuesday, November 21, 2006

I'll do it tomorrow.

No, start today: Get your ass kicked at iwillteachyoutoberich.com

Did you say that on January 1 this year?

Today is 21st November!!

Why bother with retirement planning?

Time to get people to think about getting started managing their money.


Adopting lifecycle approach to investing

"Indians are not really in love with passively managed investments - in this case, index funds." She might come across as just another tourist from the West trying to catch a glimpse of Kolkata as the winter months set in. Talk to her some more, and you might get an idea of how the Indian stock market could fare vis-à-vis the rest of Asia or how the pension reforms should go forward.

Ms Michala Marcussen, a first-time visitor to the city, is no stranger to the market. As Head of Strategy and Economic Research at Societe Generale Asset Management (SGAM), she knows how Indian stocks have fared of late compared to those in other emerging markets. Her Paris-headquartered organisation runs an India fund (and a China fund as well) and has a joint venture with the fund management company promoted by SBI.

SGAM is actually quite aware of the current state of the Sensex - the fact that it did cross 13,500 points, that stocks have been getting more fairly valued and that the good ones might still be worth buying if an investor is willing to stay committed for 3-5 years.

Higher valuations or otherwise, Ms Marcussen has a word or two to offer to young Indian investors. "There is merit in adopting what is often called a `lifecycle approach.' If you are a young investor, you could consider greater allocation to equities, which might perhaps come down in favour of fixed-income securities as you grow older." SGAM has been advocating this in France and elsewhere.

Indians, she says, are not really in love with passively managed investments - in this case, index funds. The latter are often seen as the classic second choice, actively managed funds being the first. Also, certain basic investment strategies (for instance, those focused on absolute returns) are likely to win the average investor's vote in this country, she adds.

Much could change when financial sector reforms are carried forward. That could, in turn, mean a lot for SGAM, which, like so many others of its ilk, is rooting for changes in pensions regulations. The Parliament has to take the final call on this, she says.

Story credit goes to The Hindu Business Line

Monday, November 20, 2006

Retirement thought starters

What is it that you want to do in retirement? If you don't know yet, this site is a great place to start. The articles in the site can help you bring your vision for retirement into focus. You can note down your thoughts into your retirement dream book for a beginning.

Questions to ask are:

What do you most look forward to doing?
Where do you dream of going?
How do you want to make your lasting mark?
If you could do anything you want, time and money aside, what would it be?
Do you have a certain destination in mind? How much traveling do you plan to do, and with whom?

And as you run wild with your imagination, a reality sets in when you see old men and women around. Maybe this will help you as a wake up call.

A small pointer: If you want to be spending Rs 20000 a month after 25 years, your income every year after 25 years should be more than Rs 13 lacs every year taking inflation at 7%!!

Sunday, November 19, 2006

Money wise pound foolish

The other day a friend complimented me on my "timely" decision to buy a house. He was appreciative in the light of the fact that the said house has appreciated in value by more than two times in a span of two years!! Though the appreciation is of little value to me unless I sell it off and book a profit, which is a very remote possibility.

Any way this brings me to review some of my financial decisions. And as I go through the process, it begins to dawn on me that every small and petty decisions have their financial ramifications. For example if I buy a IInd class seasonal ticket for my daily local train journey instead of a Ist class pass, I save around 500 bucks a month. If this 500 is invested every month from the time my son was born and upto his age of 15, we can draw more than 6000 bucks every month when he attains the age of 18 and upto the age of 22!!! Ofcourse, I have assumed a return of 10% on the investments.

Well, this example appears to be an extreme one. But I'm convinced about my point about the financial ramifications of every decision you make.

So let's take a look at some of my financial decisions:

Buying a house: As I mentioned, this decision has got me a lot of compliments. But the truth is that it is more of a coincidence rather than a decision. I happened to be the Area Manager in an Housing Finance operations and I stumbled upon a house that had a 300 sq.ft. terrace apart from being a duplex and a penthouse. Much more than that, I had the benefit of my siblings encouraging me with both moral as well as financial support. Now that the value has appreciated more than two times, this decision stands out.

Buying a car: This one is "bad in principle". Well, I've been used to having a car since my employers paid for that for the last 10 years. But now since I have come away from the "Marketing" assignment, my conveyance reimbursement do not match my car bills. Even then I continue with the car, though most of my friends with similar change of job profile have adjusted themselves. Even though in Mumbai there is little use of the car, I refuse to stop using it. Heart (read ego) prevails over mind( read common sense).

Loans to friends: We know that money matters should be separate from friendship. But when a friend asks for money and you want to help but the money asked for is high and the possibility of it coming back soon is a bit remote, what should one do? Well, I gave the money ......, though I won't recommend this .

Isn't it a bit difficult to talk about your decisions without looking at the emotional part of them? So your financial decisions are also emotional in nature.

And when you allow emotions it effectively means that you allow "Fear" and "Greed" also. That explains the mob psychology of stock investors and the reason most people loose money in investing in stock markets.

For the moment, I'll try to watch my financial decisions and learn about myself from them. Why don't you try it for yourself.

Saturday, November 18, 2006

Men of substance

Tributes to two men influencing the lives of millions. Hasmukhbhai T. Parekh and Milton Friedman.

Hasmukhbhai T. Parekh made ICICI and HDFC "the springboard for the country's development in new areas of social progress." On the 12th anniversary of his passing, R. M. LALA, pays tribute to the person who helped lakhs of Indians realise their dreams of owning a home. Hasmukhbhai T. Parekh was instrumental in shaping two of India's largest and most respected financial institutions — ICICI and HDFC. Twelve years ago, on November 18, he passed away. This is a tribute to a man who, when studying in the UK, dared to dream of common people owning their own homes. Forty years later, when he stepped down from ICICI, a million Indians owned homes.

Sixty years earlier, Hasmukhbhai lived in a chawl with his father, Thakurdas. He managed to take up a part-time job, study and pass out from the London School of Economics. He also worked as a lecturer at St. Xavier's College, Bombay, for three years and that made him a fluent public speaker.

The soul of a man who made homes available to so many would, find shelter in a far more beautiful place.

Milton Friedman,(1912-2006), Noble laureate,(1976) was a profound Economist who was a votary of the virtues of free markets. In a speech he said,

"My life as an economist has been the source of much pleasure and
satisfaction. It is a fascinating discipline. What makes it most fascinating is
that its fundamental principles are so simple that they can be written in one
page that anybody can understand them, and yet that very few do."

Friday, November 17, 2006

Global toppers in MF schemes

Two domestic Mutual Fund schemes -- Reliance Growth and Reliance Vision -- managed by Reliance MF have emerged as the two top performing funds globally on a five-year basis, the data available with international fund intelligence agency Lipper shows. According to Lipper, Reliance Growth and Reliance Vision topped the list of 20 best performers from a global universe of open-ended equity funds based on their five-year performance till October 31.

Reliance Growth Fund has given compounded returns of 71.39 per cent per annum, while Reliance Vision Fund has given return of 68.16 per cent over the past five years in the US dollar currency, the Lipper data shows.

The two schemes have also emerged as the top performers among all the domestic open-ended equity schemes based on their five-year performance as on yesterday, data available with Association of Mutual Funds in India (AMFI) reveals.

Magnum Contra, managed by SBI Mutual Fund, is at third position with five-year return of 60.83 per cent, followed by Franklin India Prima and Magnum Taxgain with returns of 60.83 per cent and 59.85 per cent, respectively.

Btw, I have invested in Reliance Vision and Magnum contra!! Pray that these fund stay on with their rankings. Way to go, Reliance MF! Power to them!!

7 deadly sins of financial planning

Kartik Jhaveri, an expert at Financial Planning, has written an article which is amazing. I'm reproducing the entire article published on IBNLive here.

Financial planning is a critical necessity for each one of us who seeks financial control of our affairs and wish to create wealth. Then why is it that most of us do not have a Financial Plan or have not even given a thought to it?Why is it that we keep trudging along and feel that all will become right one day? Why is it that we always think of how to earn more but hardly give a thought to what our earned money is earning for us?

Most of us have not even thought of having a dual income stream – one from our work and the other from our investments.Whether we accept or not, each day or each time we think about creating wealth we are imprisoned by what I call - the seven deadly sins.

Pride: Caused by excessive belief in one's own abilities, Pride happens because in school we were taught to believe in ourselves. But that belief was with knowledge. This sin is committed when we believe in ourselves and choose to act without adequate knowledge. All we want to have is only some idea of what is the best investment. And believing it to be the best for us, we commit that sin forever under the pretext of “I know how this works.”

Envy: You've just seen someone make a killing. And you think, that is reason enough for you to take the plunge as well! But then what if you have taken the plunge at the wrong time. We all know the old age wisdom, “Do not break your own hut by seeing someone else's palace.” Then why is it that we change our asset allocation and bet on something that has worked for another?

Gluttony: Have you incurred credit card debt? Well...in that case know for sure that you are committing a sin each day. Have you taken a loan for a depreciating asset? Now that’s an example of financial gluttony. But then, if you're able to manage the installments of that depreciating asset from your investment returns you're a smarty.

Lust: Whatever you do you are driven by money only. And if you're prepared to move from one job to another for a 20 per cent rise without considering the credentials of the company and the nature of job, you're far from being smart. What if you've just missed on the stock options there. Besides you could have always had the opportunity to create a niche for yourself no matter how large the organisation.

Anger: This is widely seen when you are dealing with an agent to who comes to make a sales call and objects to your knowledge or when your broker did not sell when the markets were falling. In both the cases, you were to take the decision. You recall that with anger and/or arrogance you commanded that nothing be done without your consent. Know that in financial management there are two choices – either you take all decisions yourself or let your advisor take that for you. Of course given that you trust his skills and knowledge.

Greed: I hardly need to say anything here. Most people rush to invest in the stock markets when they touch an all time high. Others think markets will go up forever. Surely you cannot time the market but when the goal is achieved why not sell? After all, that's precisely the reason why you invested in the first place. Now if there is no goal and no plan to manage that goal, it is quite likely that this sin will keep revisiting you from time to time.

Sloth: This is the one that I love to talk about. The bible says, “Whatever we do in life requires effort” so if we wish to ask for tips and then act, it is a sure way to disaster. Either we must take effort to do all the hardwork ourselves or take the effort to search for a trusted advisor and outsource our efforts. Finding a trusted, knowledgeable and skilled advisor is not a very easy task to do.Sins that were spoken of centuries ago are still so relevant. Needless to say, it is up to us how much we wish to cleanse

Thanks to Mr. Kartik Jhaveri again.

Posting my century!!

This is my post number 100!! It's around two months since I started this space and it has been a huge learning experience for me. Even though I've been working for over 16 years now, I never ever bothered about my finances, both the income and the expenses part. Thankfully my wife is a spendthrift and till now I have been saved from any nasty experiences on the money front.

Even though I've been lucky, it's time I started looking at my finances. If not for myself, for my family atleast. And isn't one of my ultimate financial goal is to be able to "do something without bothering about money". That goal requires me to be educated and informed about my financial position.

The journey of writing these 100 posts have been educative. I've written about Business Finance, Equity, Insurance, Mutual Funds, Investing Gyaan, Derivatives, Sensex, Real estate, Funancials and even Economics.

Apart from this blog, three articles on "Investing Gyaan" has been accepted at Desicritics too. Read them here, here and here. And I recieved an invitation to start a portal on personal finance for Indian users!!

I have enjoyed the blogging process. Pray that I "keep at it" as one senior blogger suggested to me.