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

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

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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:

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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

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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

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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

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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

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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

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? 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.

Thursday, November 16, 2006

I'm the CFO of my own life

Read this post by Flexo who writes about himself as the Chief Financial Officer of his own life.

It is a cool way of conveying that “Taking responsibility for yourself’ is the key to your life. It ain’t easy to analyse your own self. For many of us, it takes a hard knock when we are able to go back to our drawing board and analyse the situation. Mostly it is a roller coaster ride, expending all our energy and gaining nothing.

I have been trying to apply this concept of being a CFO to my life as well. However, I have struggled to have the emotional clarity a CFO would demand. You have to analyse your current financial situation, develop your financial goals document and then work sincerely and regularly at enhancing your own financial value.

While we talk about becoming CFO, isn't it a better idea to become the Chief Fun Officer of your life too.!!

Wednesday, November 15, 2006

Warren Buffet on Derivatives

I wrote about the derivatives basics a month back and learnt that it has a speculative element. Here's another dissection of derivatives by none other than Warren Buffet. See the entire article on Warren Buffet on derivatives.

Buffet sees derivatives as "time bombs" and a weapon of mass destruction!! Download and read on for his insights. Thanks are due to Sourav Saha who has posted this on an Orkut community called Finance Club.

Anybody needing an Orkut invite can write to me. Now I hear that your google account can log you into orkut, a google community. Send a mail if having any download problems.

While talking about downloads, Mr. Ram has put a number of books on his blog. It is a collection that will impress you for sure.

Tuesday, November 14, 2006

Technical analysis

Technical analysis, also known as charting, is the study of the trading history (the price and volume over time) of any type of traded security (stocks, commodities, etc.) to attempt to predict future prices

Wanna know more, go to Wikipedia ofcourse.

Technical analysis rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited. Two well known sayings among technical analysts are, "The trend is your friend," and "Forget the fundamentals and follow the money."

Critics of technical analysis include well known fundamental analysts. Warren Buffett has exclaimed, "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer" and "If past history was all there was to the game, the richest people would be librarians." Still, even an investor like Buffett occasionally recognizes technical analysis. In a recent conference on investing in mining companies, Buffett commented, "In metals and oils, there's been a terrific [price] move. It's like most trends: at the beginning, it's driven by fundamentals, then speculation takes over...then the speculation becomes dominant."

In the process of learning about Technical analysis, the question that bothers me is whether it is possible for a small investor to be able to harness the value of TA( if at all there is some value) ? I ponder over the time and energy required vis a vis the investment amount.

There is a perennial debate between technical analyst and the fundamentals analyst about the effective way to making big money in the stock market. But I feel that the only way is to understand the various strategies for investing oneself and strive to achieve the proper state of mind for successful investing. So pretty soon you’ll be able to make your own stock picks. Isn't taking responsibility for oneself a better idea?

Maybe it's the hard way. But being wary of the self proclaimed experts who have a knack of making their way with sophisticated terminologies and jargons, I prefer that. These experts use advanced Statistics, I'm told. But Statistics is the only science where the same figures are used by different experts to arrive at different conclusions. I'm baffled, how about you?

Monday, November 13, 2006

Investing gyaan in school

This news can make you feel that it should have been started in your time. The Government is thinking of starting a course on Investing in the schools in Std. XI/XII.

For me the first principle of investing is "better late than never". But actually it is to "start early". And when it comes to making money by investing, time is on the side of the youngsters.
Investing and the stock market will play a vital role in the future, irrespective of what the youngsters choose to do with their life.Whether they want to build a career in business, be a freelance artist, or whatever, knowing about managing their own money will give them freedom and choices in life that they wouldn't otherwise have.

Actually investing is no rocket science that it is made out to be. Agreed that it is a bit complex, but the important aptitude too have is to "spot trends" and to "break away from patterns and convention". And our youngsters excel in that.

Moreover, you don't need to be a car mechanic to learn driving. Operating a car and servicing them may need an effort to understand the mechanics of the car. But you need to understand the functions of the steering, gear, clutch and accelerator only to learn driving. Like investing, it may appear daunting for the newbie. But leave him on the steering for a week and there he goes.

The ideas behind investing are really very basic. And you don't need to know everything before you start putting some money. For the teenager, the biggest enemy is `inertia ; the tendency to do nothing', says Bamford. To combat this, take a few steps to learn about investing, and then take a few steps to actually do it! "These can be the most profitable steps you've ever taken." Janet Bamford in Street Wise from Bloomberg Press ( "The great thing about investing is that you can start slowly, bit by bit, and get more deeply involved as you learn more."

Critics might argue that teaching teenagers the nuances of financial markets is putting too much pressure too soon. But being protective of our children may hinder their growth. Throwing the baby into the swimming pool and letting him learn swimming might seem heartless. But it actually helps the child.

Ultimately it is important for all of us to take responsibility for one self. Managing your money is critical in the game of life. And instead of learning theory of history, civics, etc, investing will be one practical aspect of our education. And maybe it will help the youngsters to face the "fear" of stock market and the "greed" that it brings along, and make them better investors than us.
Bring on the course fast, GOI.

Sunday, November 12, 2006

Indian investing habits

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. Another interesting figure is that the total fund manged by LIC is more than Rs 5 lac crore while the total Asset under management (AUM) of the entire Mutual Fund industry is approaching Rs 3 lac crore only.

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.

Now India’s GDP , in real terms, grew by 8.4 % during FY06 compared to 7.5 % during FY05.India’s growth story has been led by continued increase in contribution of the service sector (54%), and to a lesser extent by the industry (26.1%). This makes the case of taking risks by the Indian investor even more stronger.

Time will tell if we continue playing safe or start taking some risks. Don’t we know that there’s no gain without pain or no growth without risks.

Saturday, November 11, 2006

Financial ratios (Cont'd)

Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm. Properly analyzed and interpreted financial statements can provide valuable insights into a firm’s performance. To extract the information from the financial statements, a number of tools are used to analyse such statements. I looked at four important ratios in my last post. Here I try to understand another four, thanks to CRISIL.

Profitability margins broadly indicate both a company’s competitive position in an industry and the industry’s characteristics in terms of the strength of competition, pricing flexibility, demand supply scenario and regulation. A company’s profit performance offers a litmus test of its fundamental health and competitiveposition. Profitability margins, observed over a period of time, also indicate whether a company can sustain its current cash accruals. A profitable company exhibits ability to generate internal equity capital, attract external capital, andwithstand business adversity. PAT margin = Profit after tax / Operating income

Return on capital employed (RoCE) indicates the returns generated by a company on the total capital employed in the business. The ratio comprehensively indicates how well the company is run by its managers, and how unaffected it is by the extent of its leveraging or the nature of its industry. Aconsistently low RoCE reflects the company’s poor viability over the long term. CRISIL uses a three-year moving average RoCE in order to iron out the impact of short-term deviations and evaluate trends. RoCE is computed as:RoCE = Profit before Interest & Tax (PBIT) divided by (Total Debt + Tangible Networth + Deferred tax liability)

Net cash accruals to total debt (NCA/TD)is a ratio which indicates the level of cash accruals from the company’s operations in relation to its total outstanding debt. In other words, the ratio is a reflection of the number of years a company will take to repay all its debt obligations at current cash generation levels. The ratio is computed as follows:NCA/TD = PAT - Dividend + Depreciation divided by [Total debt (short and long term including off-balance sheet debt)]

The current ratio indicates a company’s overall liquidity position. It is widely used by banks in making decisions regarding working capital credit. The current ratio broadly indicates the matching profiles of short and long-term assets and liabilities. A healthy current ratio indicates that all long-term assets and a portion of the short-term assets are funded using long-term liabilities, ensuring adequate liquidity for the company’s normal operations.

As mentioned in the last post, although the eight parameters are crucial in analysing a company’s credit quality, they do not by themselves capture the company’s financial health in its entirety. Keep on chugging!!

Thursday, November 9, 2006

Financial ratios

Read an article on Financial ratios by CRISIL which has to say the following:


The overall financial health of a company can be captured by eight primary financial parameters: capital structure, interest coverage, debt service coverage, net worth, profitability margin, return on capital employed, net cash accrual to debt ratio and current ratio.  Other financial ratios such as asset turnover ratio, inventory turnover ratio, dividend pay out, debtor levels, and return on net worth are also important but the eight parameters are sufficient for a primary definition of a company’s overall financial risk profile.


A company’s capital structure commonly referred to as gearing, leverage, or debt/equity ratio, reflects the extent of borrowed funds in the company’s funding mix. The equity component in a company’s capital employed has no fixed repayment obligations; returns to investors depend on the profits made by the company. Debt, on the other hand, carries specified contractual obligations of interest and principal. These will necessarily have to be honoured, in full, and on time, irrespective of the volatility witnessed in the business. A company’s capital structure is invariably a function of the strategy its management adopts.


Interest coverage represents the extent of cushion that a company has in meeting its interest obligations from surpluses generated from its operations. The interest coverage ratio links a company’s financial charges to its ability to service them from cash generated from operations.


The Debt service coverage ratio (DSCR) indicates a company’s ability to service its debt obligations, both principal and interest, from earnings generated from its  operations. The textbook definition of DSCR assumes that debt repayment gets higher priority over working capital expansion. In practice, however, the priority is often reversed: working capital funding takes priority over other payments. Low DSCRs may not necessarily have an unfavourable impact on ratings; the company’s ability to replace its existing debt with fresh funds may act as a favourable factor.


A company’s net worth represents shareholders’ capital that does not have fixed repayment or servicing obligations. It therefore provides a cushion against adverse business conditions.


I’m getting weary after studying four ratios. So I’ll come back with the other four (profitability margin, return on capital employed, net cash accrual to debt ratio and current ratio.) ratios later. Phew.



Wednesday, November 8, 2006


Bajaj Auto is the second scrip in Sensex in alphabetical order and I try to understand the business here. India’s second largest manufacturer of two-wheelers has reported its second quarter and half-year ended September 2006 results on 18.10.2006.

Bajaj Auto Limited, with a market share of 32% in FY06 (23% in FY04), is the second largest player in the two-wheeler industry. In FY06, the sales mix (in volume terms) consisted of 82% motorcycles, 12% three-wheelers and the rest 9% step-thrus, ungeared scooters and geared scooters. Though the company has traditionally been a key player in the geared scooter segment, aggressive pricing coupled with a slew of new launches has resulted in a rise in market share in the motorcycle segment from 16% in FY00 to 32% in FY06. It has also entered into an agreement with Kawasaki for export of motorcycles to emerging markets

The Group has posted a Income attributable to consolidated group of Rs 2867.70 million for the quarter ended September 30, 2006 as compared to Rs 2631.30 million for the quarter ended September 30, 2005. Net Sales has increased from Rs 19695.70 million for the quarter ended September 30, 2005 to Rs 25388.60 million for the quarter ended September 30, 2006.

Motorcycle sales, which accounted for 91% of domestic sales and 70% of exports, continued with their dream run by notching up growth of 34% YoY and 105% YoY in the domestic and exports segments respectively. This is significantly higher than the industry growth rate of 15% YoY and 59% YoY in both the markets under consideration. The highlight of the company’s performance during the quarter was the inroads the company was able to make into the value segment of motorcycles.

On the three-wheeler front, Bajaj Auto continued to dominate the segment with a market share of 77%. The cargo segment continued to impress with a growth of 50% YoY during 2QFY07 as against the industry growth rate of 30% YoY.

Raw material costs as a percentage of sales have increased by 310 basis points (3.1%), and this is the primary reason why the company’s operating margins have contracted by 190 basis points.

Other stocks in the automobiles industry are Ashok Leyland, Eicher, Escorts, Hero Honda, Kinetic, LML, Mahindra, Tata and TVS.

Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling incremental unit comes down when demand recovers. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

In an interview, Sanjiv Bajaj, Executive Director, says that they are looking at building competetive advantage vis a vis Hero Honda and not just ape them. Time and customers will tell whether his efforts bear fruits or not.

Tuesday, November 7, 2006

Real Estate Sector review

I'm glad to have readers like Deepa who has some interesting insights and would like to know more about real estate sector. Here I make an attempt to understand the goings on in the Real Estate sector and how and why it is a good investment option.

  • The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
  • The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($ 1 billion = Rs 4,400 crore).
  • The real estate prices have stabilised and showing a steady growth after the boom and crash in the mid 1990s.
  • There is a steady growth in Housing Finance sector of approx.30 % over last four years.
  • The rate of interest for housing finance has become reasonable and affordable which has resulted into more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
  • Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
  • Income of the urban buyer has grown substantially.
  • There is tremendous scope and growth in the Infrastructure Development.
  • Foreign investment by way of FDI has been approved.
  • Emergence of professional builders in the market with proper accounting standards.
    Emergence of rating systems for building projects.
  • The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
  • Last year in July, 2005 SEBI approved the country’s first venture capital fund, HDFC Property Fund, in real estate. Thus SEBI has not allowed to a property fund to come up as a mutual fund but as a venture capital fund. This will allow only the high net worth individuals and corporates to subscribe for this fund. HDFC board had approved the corporation’s entry into business of real estate venture fund after SEBI amended, the venture fund act.
    With the real estate prices of both residential and industrial properties in major cities sky-rocketing in the last two years and with housing still remaining a major bottleneck for urban planners and developers, the bullish outlook on the real estate market is justified. And many are projecting a 15-25% growth for the sector in the next 5 years.
  • A report by the CII has pointed out that globally the real estate is and should always be considered as an attractive investment option.
  • The scrips in the construction sector are doing very well. The Mutual Funds who have invested in Infrastructure stocks are doing well too.
  • Key Construction stocks to my mind are Gammon, GMR, Mahindra Gesco, Hind, Patel Engg., Era Constructions.

RBI thinks the real estate sector is a bit heated up or prone to be over heated. So there might be some go slow on Real Estate Mutual Funds and Real Estate Investment Trusts (REIT) but they are bound to come, sooner or later.

Monday, November 6, 2006

Financial Goals

It's easy to talk theory about the importance of financial planning. How about a financial goal & objectives document for myself. Hmmm...., well I would like to segregate them into Ultimate goal, long term goal/s, and short term goals.

My ultimate goal would be to be able to not getting influenced by money!! More specifically, I will want to be able to survive without bothering about money. It may seem a bit paradoxical now, but the only way to get over the "greed" is to work at it. Go to a pshychologist and he'll suggest that the only way to overcome fear is to face them.

It's also important that I plan my resources so that I may do what I want to do without bothering about money. At my stage of life, I'm responsible towards my family more than myself. A growing kid and the ever dependable wife. It's vital that they are provided for in full measure before I venture out on my own "purpose of life". This leads me to my long term goals, and they are:

  • Build a networth of Rs 10,00,000 by 2012 for my son who will be 18 then. It will take care of his studies. Though I believe Kabir when he says that: " poot sapoot to kyon dhan sanchay, poot capoot to kyon dhan sanchay", it's a different issue.
  • Bring my mortgage debt to zero by 2016, another ten years from now. Currently it's Rs 10 lac.
  • Build a corpus of Rs 25,00,000 for my wife so that she can survive with interest @ 10 % by 2012.

This exercise leads me into the question whether I have the required resources to achieve the above targets. Infact, an assessment of my current financial situation should have preceeded this goals exercise. But since I'm a bit wary of sharing that, let me assure myself (and you too!!) that the resources are there for sure!

But with the current resources I need to earn atleast 15% CAGR to reach the targetted goals. This leads me to my short term goals, and they are:

  • Understand the various investment options available by 31st December, 2006. Write my understandings so that I can check back and it can serve as my e-scratch pad.
  • reallocate my investments by 31st December, 2006.
  • Learn, learn and continue learning about investment.

And since it's my own blog on Finance, I must continue to update this. And maybe edit it too (this post only!)

Investing Gyaan in practice

Though it's a joke, it teaches too! Wanna find more jokes

A very successful investor was ready to pass on his $billion fortune to his three sons. However, he had always feared that his sons would be spoiled and not have any ambition other than party all the time. After much thought he decided he would split his fortune between his sons but not evenly. He devised a competition for them where the winner would be given 75% of his fortune, the second place finisher 20% and the one who finished last would be given only 5%.

The rules were simple. Each son would be given $500,000 and they would have 3 months to invest it and they would be ranked at the end of the competition by how high their portfolio grew. They were also given $200,000 each that they could only use as portfolio expenditures. He wanted them to learn how to make money but learn how one would utilize resources and work with others effectively to achieve goals.

The first son used his $200,000 by hiring the best scholars around. $50,000 for an Economist with a PHD, $50,000 for a mathematician and $100,00 a Business professor from Harvard. The first son's portfolio grew to $750,000.

The second son used his $200,000 to hire some of the brightest minds on Wallstreet. $100,000 for 2 successful Fund managers and a $100,000 for an analyst. The second son's portfolio grew to $1,000,000.

The youngest son began spending the $200,000 throwing weekend parties, taking friends to concerts, and going on trips. His portfolio grew to $10,000,000!!
"Wow son how did you do that?"
"Well dad. I spent $10,000 for the land.$50 for the rocks.$100 for the gold spray paint.$10,000 for the helicopter.$10,000 for the ex-geologist.$100,000 for the shell.
and the rest on parties and concerts for the brokers, analysts and writers.

Sunday, November 5, 2006

Associated Cement Companies Ltd. (ACC)

As part of an attempt to understand the sensex scrips, let's take a look at ACC.

Associated Cement Companies (ACC) is the oldest cement manufacturer in the country. ACC (consolidated) has a total capacity of 18.1 million tonnes (12% of total Indian capacity) and is the second largest player in the Indian market after the Grasim-Ultratech combine (31 MT). With 14 units and a 9,000 strong dealer network, ACC is one of the few cement companies to have a pan India presence. It is particularly strong in the northern and the eastern regions.

The cement industry has over the last decade managed an 8% CAGR and this momentum is sustainable over the next 2 to 3 years. This is on the back of the fact that the housing constructions boom being witnessed in the country currently seems unlikely to subside anytime soon. Further, the developments in Budget 2005-06, which have been maintained in Budget 2006-07, that provide for a possible exemption of Rs 2.5 lakhs (Rs 1.5 lakhs interest and Rs 1 lakh against principle repayment) from the total taxable income is a big factor that would aid the growth of the housing sector. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 75%-80% of the country's cement. Further, as per estimates, there is still a significant amount of unfulfilled demand (19 m) for dwelling units in the country, which would keep the demand for cement ticking.

The industry had an excess capacity of close to 26 MT (FY05), which has been considerably reduced from the near 33 MT in FY02. Further, with the lack of any significant greenfield capacity coming on stream over the next couple of years and the demand expected to grow at 8% per annum, the demand-supply dynamics is set for further improvement. Though 5 to 6 MT per annum of brownfield capacity is a reality, it is not sufficient to upset the demand-supply equation of the industry.

Gujarat Ambuja, in consortium with Holcim, has a 34% stake in ACC and as a result, ACC can benefit from Ambuja's expertise in manufacturing cement at a lower cost.

However, on account of company's poor operating margins (16% in FY05 as compared to 20%-25% achieved by its peers), the company is more susceptible to price fluctuations as compared to its peers in the industry.

The capex with respect to hiking its cement and power capacities is estimated to be about Rs 6-7 bn. The regular maintenance capex would be in the vicinity of about Rs 1 bn per annum. In FY05, the company had incurred a capital expenditure of nearly Rs 6 bn, which includes the purchase of the captive power plant from Tata Power (Rs 2.4 bn)

Cement is essentially a commodity where a mere 1% or 2% fall in demand can have a significant impact on prices. Therefore, it is imperative that the industry has a certain level of consolidation in order to prevent free fall in prices.

How much sense does it make? To buy or to sell??

Investing gyaan

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial learnings are that:
Investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It's easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF,NSC,KVP, Infrastructure bonds, et al....... At times I feel the importance of the proverb: " Ignorance is bliss"

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It's critical to be responsible for your wealth and as I said in the beginning, it's pretty interesting too! Here's a indicative list of what you should know for a start and I promise I'll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc....

More will follow.......

Saturday, November 4, 2006

Strike & Stop loss calculator

I saw this message posted on Smell the Cheese group by YAGNESH N DESAI

I thought of making one study, where in a hypothetical investor
performs the trade using a decision making tool (
Strike & Stop

Here I have defined few things 1. Strike rate : number of profitable decision to total number of decision. 2. Stop Loss : Avg % of investment lost while decision goes wrong (Assumed 5%) 3. Avg Profit : Avg % of profit earned while decision goes right. (Assumed 10%)

I have tried few cases where initial investment is 10000/- strike rate
is 1 of 4, 1 of 3, 1 of 2, 2 of 3 and 3 of 4 and last case is that the investor learns few tricks and then he matures so that his strike rate improves.

The results are as under after 56 trades: 1 of 4 10000 becomes 4404 , 1 of 3 10000 becomes 9167, 1 of 2 10000 becomes 34297, 2 of 3 10000 becomes 128315, 3 of 4 10000 becomes 267069, Maturing investor makes 34297 You can play with attached files to simulate different conditions.

Cool, isn't it!!

Blog Carnivals

Was wondering about what a "Blog Carnivals" is and got a detailed answer from FiveCentNickel. Thanks.

Well a blog carnival could be an exciting way to connect with fellow bloggers. My own blog is right now a collection of introductory articles which is an e-scratch pad for furthering my financial education and evolving my thoughts on Finance. And I'm improving by the day (self belief/claim, again)

While on the subject, I want to share the interesting posts/blogs that I stumbled on.

Ways your personal life can hurt your professional life by It's Just Money

Mastering your Investments means mastering your emotions by IJM, again.

I will teach you to be rich, by Ramit Sethi has a lot of good posts.

Consumerism Commentary reviews 25 ways to grow rich by Money Magazine.

India Uncut by Amit Varma

To each its own by Sakshi Juneja

Digital Inspiration by Amit Agarwal.

Sticky Investment funda book by Deepak Shenoy

While I was starting out with my blog, I read an article in a leading daily trashing bloggers as half wits, failed writers and a lot of nasty things. True, there's a lot of rubbish around. But there are gems too!! Power to bloggers!

Friday, November 3, 2006

Wharton on India

Wharton has launched a rich web site of India Knowledge@Wharton ( -- the latest addition to Knowledge@Wharton's fast growing network.

The new site is free and published in English, and it will include articles that focus on India's increasing importance to the global economy. The first issue features interviews with Indian finance minister P. Chidambaram and Ronojoy Dutta, former CEO of Air Sahara, in addition to a look at Tata Steel's Corus takeover and stories on Indian real estate and the country's burgeoning BPO film industry.

Also, readers may find a special section on Indian financial scene and non-profits webpages.

HDFC Prudence Fund

Yesterday I wrote about my MF decisions and talked about SBI's Magnum Global.

I wanted a hybrid fund which invests largely in stocks but has some fixed income securities which can protects your capital in hostile conditions.

HDFC prudence fitted the bill perfectly with a 23.3 % returns since it's launch in 1994. It's better than some equity funds!!

My purchase price for the fund was Rs 109.325 as against the NAV of Rs 106.919. So I pay Rs 220.12 as the fee to HDFC for handling my money(Rs 10000 p.m.)

Value Research rates HDFC Prudence as a five star fund on the basis of it's consistent performance. Hopefully my trust bears rich fruits. And I'll be happy with a 15% CAGR. Errr..., I remind myself that "Expectations reduce joy", and time to be unemotional....

Sensex Review

Here's the list of 30 scrips which form the Sensex. The purpose of noting them here is to be able to review each stock and learn why they are part of the sensex. And it tells me that one may not profit from the booming sensex if his/her investments are not in the right scrips. Investment bankers may be scoffing at this elementary post, but it's a learning process for me.

SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.
  1. A.C.C.
  4. BHEL
  9. HDFC
  16. ITC LTD.
  20. ONGC
  30. WIPRO LTD.

SENSEX is regarded to be the pulse of the Indian stock market.

Your Investments means mastering your emotions!

Here's an amazing review of Chapter 19 of Boglehead Guide to Investing by It's just Money

We make decisions emotionally and justify them rationally.

But mastering your emotions is easier said than done. Looks fine in theory but very difficult to implement. Maybe the first step would be to watch these emotions and observe their power. But it's a long way to any freedom from these emotions!!

In theory there is no difference between theory and practice, but in practice, there is......!!!

Thursday, November 2, 2006

Stock investing

A post on Smell the Cheese group by Amit and I have his permission to reproduce his thoughts here( regarding buy/hold/sell confusion)

I would suggest you something. I hope you wont mind it, but after reading so many replies, I just thought to share my views:

In Stock Market, Don't be afraid of making mistakes. You can not win 100% of time. Take control of your Trading and be focused.
No Trade is completed without a) Entry Price, b) Stop Loss and c) Prospective Target Level with time duration. Focus only on net-net profits. If your Stop Loss hits, Exit immediately from losing stock and concentrate on next prospective profitable trade. This is the only way to make consistent profits in Stock Market: - Be Focused. Incur mentality of Professional Traders.

If you trade with discipline, there may be some occasions when you make consistent losses in a series and there will be trades where you will make series of profits.

A professional Trader is not afraid of making mistakes and taking losses, they just exit from a losing trade as soon as they identify a losing trade while they stick to profitable trades for months even years until they don't find any reasons for exhaustion of the rally or reversal in trends. They just keep shifting their Trailing Stop Losses up for protection from a sudden rise and fall in market (Like Black Monday) While we do exactly opposite :- We stick to our losing trades till the last penny drown and keep on averaging it in hopes of making it a winner. During this, we miss so many winning opportunities to make money, had we have enough capital to enter into a new trade.

I would say: - This is very very difficult to exit a losing trade, but we have to learn this hard lesson if we want to survive and make profits in Stock Market. Always Go for Value, not for the Price. You can still make money by buying a stock at 2000 and selling at 2400 till the rally is sustained.

Answering my doubts about the time & effort required vis a vis the returns, Amit says that there is no need to spend 2-3 hours a day for trading, anyone can work during weekend and then try to take trades. But afterall, its our money, the more cautious we are, the more profitable it is and lesser risky.

Easier said than done for me atleast!

My Insurance cover

My economic value towards my family can be calculated in a number of ways. Taking my future earning potential and calculating the present value of that comes to Rs 40 lacs approx. However on the basis of the present monthly expenses and the amount required to maintain that lifestyle should come to Rs 25 Lacs approximately.

For a normal endowment insurance policy of Rs 25 lacs, one has to pay more than Rs 100000. But I have a basic cover of Rs 13.5 lacs and accident cover of another 11.50 lacs by paying a premium of roughly Rs 16000 only. And all of them are LIC policies. Surprised? Here's the list of my policies a/w premium and the type of policy.

1. Basic cover Rs 3 lac, Accident cover Rs 3 lac, Bima Kiran: a term assurance plan with premium back plus extended cover after maturity, Prem: Rs 3000

2. Basic cover Rs 4 lac, Accident cover Rs 2 lac, Jeevan Griha: Triple cover insurance, Prem: Rs 4500.

3. Basic cover Rs 5 lac, Accident Rs 5 lac, Anmol Jeevan, Pure term assurance,no maturity value, Prem: Rs 2300.

4. Basic cover Rs 1 lac, Accident Rs 1 lac, Endowment, Prem: Rs 2600.

5. Basic cover Rs 50K, Accident Rs 50K, Money back, Prem: 3600.

Obviously my decision on the policy mentioned in serial 4 & 5 is a wrong one. I could have insure myself for another 10-15 lacs from that amount. However assuming that the only way I'll go away from this world is an accident, a cover of Rs 25 lacs should suffice.

As you age, the premium of the term assurance policies increase drastically. So I don't know how much I've to pay for the same term policy I had taken 5 years back. Hopefully I had my timing right. Ideally the time of taking an Insurance cover would be when you start a family of your own.

But this blog helped me in reviewing my Insurance. I feel that I don't need another insurance advisor. But wait, my mortgage loan is not insured. Maybe time to get a mortgage insurance and an advisor should get a call from me!