Saturday, September 30, 2006

Where r Indians investing?

Looking at the fascination of the pink papers about them, your guess may be 'equities'! High proportion of disposable income, contained inflation and benign interest rates has facilitated Indians to grow their savings over the last couple of years. This is well reflected in the rise in the savings to GDP ratio (29% in FY06)

While the risk profile of Indian households has been traditionally low, the rally in stock markets and real estate has often caught their fancy. The latter is more justified given the fiscal incentive to it.

But there has been little change in the broader portfolio allocation. Despite the Sensex having multiplied 4 times in the last decade, the allocation to equities has merely grown from 4.5% of total household assets to 5% in the same period. It is also interesting to note that the same was 3.3% four decades back

The risk averseness is also evident from the fact that Bank FDs (47%) and tax saving schemes like the PPF (10%) continue to enjoy a higher allocation in the Indian investors' portfolio

While statistics reveal that equity as an asset class outperforms all other asset classes over the longer term, the investor needs to ask himself / herself a few questions

  • Whether you have an investment plan?
  • Whether you are saddled with an incompetent advisor?
  • Whether your investments are lop-sided?
  • Whether you lack discipline?

Indians are not over-invested in equities for sure! This, however, offers them a very feasible investment opportunity, if done with the correct perspectives.

Eight principles of strategic wealth management

Here is a useful article from Wharton. Click here to read the full article

The gist of the article is :
The Eight Principles of Strategic Wealth Management are
1. Take charge and do it early.
2. Align family and business interests around wealth-building goals and strategies.
3. Create a culture of accountability.
4. Capitalize on your family's combined resources.
5. Delegate, empower, and respect independence.
6. Diversify but focus.
7. Err on the side of simplicity where possible.
8. Develop future family leaders with strong wealth management skills.
Every decision I make, whether it involves choosing an investment manager, thinking about tax strategy, or working with my family to set goals for next year, gets filtered through these principles.
Stuart E. Lucas. His book: Wealth: Grow it, Protect it, Spend it and Share it is published by Wharton School Publishing

Friday, September 29, 2006

Capital account convertibility

The Economic Times, Mumbai, 2006 Sept 02

In the second week of March, after PM Manmohan Singh called for a relook at capital account convertibility, RBI set up a committee, headed by the former deputy governor of RBI, SS Tarapore, which will this time around present a report by July 31. This is the second report on capital account convertibility Mr Tarapore will author after the first one in ’97. A fact that often escapes attention is — China had also announced a movement towards freeing capital controls in ’97, but did not pursue it enthusiastically. Following the Asian crisis in ’97, which hit many economies in the region, the wisdom of going in pursuit of this goal was questioned. It is now widely accepted that some sort of controls ought to be in place and certain milestones are met before opening up.

What is capital a/c convertibility? In a country’s balance of payments, the capital account features transactions that lead to changes in the overseas financial assets and liabilities. These include investments abroad and inward capital flows. Capital account convertibility implies the freedom to convert domestic financial assets into overseas financial assets at market determined rates. It can also imply conversion of overseas financial assets into domestic financial assets. Broadly, it would mean freedom for firms and residents to freely buy into overseas assets such as equity, bonds, property and acquire ownership of overseas firms besides, free repatriation of proceeds by foreign investors.

How does easing of capital controls benefit economies? Once a country eases capital controls, typically, there is a surge of capital flows. For countries that face constraints on savings and capital can utilise such flows to finance their investment, which in turn stokes economic growth. The inflow of capital can help augment domestic resources and boost growth. Local residents would be in a position to diversify their portfolio of assets, which helps them insulate themselves better from the consequences of any shocks in the domestic economy.

For global investors, capital account convertibility helps them to seek higher returns by sharing risks. It also offers countries better access to global markets, besides resulting in the emergence of deeper and more liquid markets. Capital account convertibility is also stated to bring with it greater discipline on the part of governments in terms of reducing excess borrowings and rendering fiscal discipline.

What are the pitfalls of easing of capital controls? One of the main problems an economy that has opted for a free-float has to contend with is, the prospects of outflow of what is termed as speculative short-term flows. Denomination of a substantial part of local assets in foreign currencies poses the threat of outward flows and higher interest rates, which could de-stabilise economies. The volatility in exchange and interest rates in the wake of capital inflows can lead to unsound funding and large unhedged foreign liabilities. This is especially so for economies that go in for a free-float without following prudent macro-economic policies, and ensuring financial reforms.

How far has India moved towards capital account convertibility? Capital account convertibility is in vogue in terms of freedom to take out proceeds relating to FDI, portfolio investment for overseas investors and NRIs besides leeway for firms to invest abroad in JVs or acquisition of assets, and for residents and mutual funds to invest abroad in stocks and bonds with some restrictions. India seems to be taking the approach that easing of capital controls would be marked by removal of capital outflow restrictions on NRIs first, corporates next, followed by banks and freedom for residents in the last stage.

What has been the experience of some of the countries that have opted for capital account convertibility? The initial experience has been that of an improvement in their balance of payments position. In Malaysia, Indonesia, Mexico and Argentina, the surge in capital flows meant a widening of their current accounts. Inflation was also subdued for some time and the reserves were also bolstered. But after the current account deficit could be not sustained, some of these countries introduced some controls. Mexico and Argentina reintroduced controls in the 80s, while Chile also placed fetters after it faced a crisis between ’82 and ’89. However, all of them subsequently opened up.

Thursday, September 28, 2006

Information and time

As the popular saying goes Information is Money & another says Time is Money -- which effectively means Information and Time, both are critically for making money.

Any body trying to look for all information on investing has to invest his time too. Moreover in this age of information overload, you are not sure whether you have the right information.

Moreover though Investing is not "rocket science" , it appears to be for most people. People start getting jitters even for your tax planning for the year.

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

Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation.

Considering the unpredictability of the markets, research and history indicates these three golden rules for all investors

1. Invest early2. Invest regularly3. Invest for long term and not short term

Is it worthwhile to take the help of a consultant ? Here are the some web portals where you can seek investment ideas:
Equity Master , Sharekhan , ICICI , Personal Finance .... And there are too many.....

Take your time !

Knowledge Exchange on Finance: Capital account convertibility

Knowledge Exchange on Finance: Capital account convertibility

About Insurance

Insurance is a protective measure for valuable things in your life. It is a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.

The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safely. The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors.

When shopping around for an insurance policy, look for the best priced package that is right for you - prices can vary from one insurance company to the next. And make sure you know what you want. Some individuals, for example, prefer 24-hour claims service or face-to-face contact with an insurance representative. Also consider the claims settlement process, the amount of the deductible and the extent of the replacement coverage. Insurance companies and the policies they offer are not all the same, so think about more than just the price.

Yaksha Question: What is the greatest mystery on earth? Yudhisthir answers, “Every one has to die. But no one thinks that for himself. This is the greatest mystery.”

In a broad economic sense, insurance transfers risk from individuals to a larger group, this is better able to pay for losses.

You are worth more than you think. The financial security for your family is important. Let’s determine your number of income-earning years from now until you retire. The following data is required to calculate your HLV (Human Life Value): Current age, retirement age, annual income and the expected increase, other benefits, monthly expenses on self and family, your assets and your liabilities.

Your first step towards financial planning should start with insurance. In India, it is easy to be misled because of lack of awareness. Most people associate insurance with investment which is a completely wrong notion.

Personal Finance

Failing to plan is planning to fail. It is very true for personal finance. Personal finance looks at how your money and future is managed. Personal Finance is financial planning for individuals. Generally, it involves analyzing their current financial position, predicting short-term and long-term needs, and recommending a financial strategy. This may involve advice on retirement planning or pensions, wealth creation through stocks and mutual funds, children’s education, home loans, life insurance, and other investments.

Financial planning is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, home loan). A personal cash flow statement lists personal income and expenses.

2. Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of Rs 5000000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term.

3. Creating a plan: The financial plan details how to accomplish your goals. It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in the stock market.

4. Execution: Execution of one's personal financial plan often requires discipline and perseverance, and many people obtain assistance from professionals such as accountants, financial planners, investment advisors, and lawyers.

5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.

It may appear a daunting exercise for many and many more may feel that it is too late for them. It is said that you are young at any age if you are planning for tomorrow. And there are so many tools that are easily available and still easier to use which you can search here.
For example, a simple MS Excel sheet can help find out your monthly withdrawal between the planned retirement and a particular age, say 80, when you plan to invest a particular amount every month. Fill in with the variables like your monthly investment, preferred age of retirement, expected rate of return and you get your withdrawal amount. Toggle around with the figures and you can arrive at setting goals for yourself. Write to me at for the Excel sheet.

Read an article on how to become a crorepati in Mutual Fund Insight (Value research publication, July-Aug, 06). It says that if you invest Rs 20000 per month in a systematic investment plan of one of the top ten mutual fund for ten years, the value of your investment will range from 1.05 crore to 2.06 crore. A simple strategy, but a lot of discipline, mental strength, and self control is required.