Making the decision on what I want to do on this Blog

From Godin's blog: 

Do you know what the difficult part is? It's not the art. Not the talent or the skill. It's the deciding. Making the decision to be an artist instead.

It really rings true for me. I have been blinded with making a name for myself & making money from this blog. Only now I know that all that is not important.

What's important is that I articulate what I know about personal finance in the best manner. Nothing else matters.

---

India's first online weekly on Personal Finance

Financial Crisis Blog Posts of Value

The financial crisis is big news. And the media generally goes on the overdrive on them. Here are some sane voices that I enjoyed reading. I'm sure you'll enjoy too.

1. Surviving the Financial Crisis: Even though you may not be part of the Financial industry, the crisis affects all. Zoho guys relive their experience of the DotCom bubble and share their experience
2. How the financial crisis affect you and me: Lekhni wears many hats. Here she says, "It's not about the investment bankers, it's about you. Their loss, directly or indirectly, affects you.
3. The regulation of Derivatives: Tyler Cowen has a primer on derivatives which is very insightful.

Updates for this post

2nd Anniversary: Apologies & Roadmap ahead for this Blog

I apologize to my readers. For distracting them with advertisements (that I don't beleive in!) and for occasionally writing some crap "personal" posts.

I hide behind the argument that it's my blog and I can write anything & everything. But on the verge of completing two years of blogging, I am realizing that this web space is no longer "personal". In fact, there is a sense of responsibility towards readers to whom I can add some value on the "personal finance" front. 

So, essentially, there is a move from "personal" to personal finance for this blog!

I also thank readers & friends who have encouraged me along this two year journey.

The Roadmap: Having apologized for the distractions by way of ads, you can be sure that the ads are going off today. It shouldn't return and I promise that I'll ask you first before taking a call on the ads.

Also, I will refrain from personal posts that don't add value to the readers that I want to write for in this blog. For personal rants, I have a Twitter handle which you can follow.

I have talked about my manifesto before.  I want to focus my energies in building the modules on personal finance

I have already started practicing them by speaking to a group of employees from my Organization. And the response has been amazing.

I would love to see how we can make financial education available to the masses by using ICT. (Information & Communication Technologies)

According to RBI data, as a percentage of financial savings, mutual funds constituted 7.7% of the financial savings of the household sector while insurance accounted for 17.5% and provident funds and pensions funds made up for 8.2% of the total financial savings during 2007-08. The predominant share fo savings was still parked in banks (55%).

This goes to show how much ground providers of financial products have to cover. Also this distribution is a bit skewed because of lack of financial literacy.

Thank you readers and wish me Godspeed!

India's first online weekly on Personal Finance

Currency Futures: New Financial Product in India

The Finance Minister dedicated to the financial services community, a new product - Currency Futures on 29th August, 2008. It has been set up be the National Stock Exchange (NSE).

Bombay Stock Exchange Limited (BSE) has also received in-principle approval from Securities and Exchange Board of India (SEBI) for setting up of an Exchange Traded Currency Derivatives Segment (CDS). The recommendations for Currency Futures has been laid down in the Report of the RBI-SEBI Standing Technical Committee on Exchange Traded Currency Futures, released by RBI & SEBI on May 29, 2008.

The worldwide average daily turnover in Exchange Traded Currency Derivatives has grown at a CAGR of approximately 23.2% as compared to the CAGR of 10.3% in the OTC Currency Derivatives market (the domestic OTC volume in Currency Derivatives is approximately US $34 billion per day.

The Exchange Traded Currency Futures (ETCF) contracts facilitates easy access, increased transparency, much needed efficient price discovery; enable better counterparty credit risk management, wider participation, trading of a standardised product and reduced transaction costs.

Currently, institutions like Banks, Insurance Companies, Corporates, SEBI Registered Brokers, Mutual Funds, participants in bullion markets and Individuals etc. are among those eligible for trading.

Magic of Compounding

If we could appreciate the “Magic of Compounding” we would understand the benefits of starting early and discipline!

Let us explain the power of compounding with the famous story of the Persian emperor who was so enchanted with a new ‘chess’ game that he wanted to fulfill any wish the inventor of the game had. This inventor, a mathematician, decided to ask for one seed of grain on the first square of the chessboard doubling the amounts on each of the following squares. The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the ‘modest’ wish. The amount needed on the 64th square of the chessboard equals 440 times the yield of grain of the entire planet. Just try converting into money in any currency and you will realize the importance of compounding.

Starting with Rs 1000 and by investing Rs 1000 every month compounded at 10% amounts works out to Rs 78171 after 5 years. In 10 years it more than doubles to Rs 202457. The figures at the end of 15, 20, 25, 30 40, 50 years are Rs 402621, 724986, 1244159, 2080292, 5595607, 1,47,13,428!!

Imagine Rs 100 is invested and it grows at 10% every year. Column 2 is what it will grow to if it was held for the number of years in column 1. So if your great grand father invested Rs 100, 150 years ago, you would have inherited Rs 16 crore.

Are you aware of the Magic of Compounding?

If we could appreciate the “Magic of Compounding” we would understand the benefits of starting early and discipline!

Let us explain the power of compounding with the famous story of the Persian emperor who was so enchanted with a new ‘chess’ game that he wanted to fulfill any wish the inventor of the game had. This inventor, a mathematician, decided to ask for one seed of grain on the first square of the chessboard doubling the amounts on each of the following squares. The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the ‘modest’ wish. The amount needed on the 64th square of the chessboard equals 440 times the yield of grain of the entire planet. Just try converting into money in any currency and you will realize the importance of compounding.

Starting with Rs 1000 and by investing Rs 1000 every month compounded at 10% amounts works out to Rs 78171 after 5 years. In 10 years it more than doubles to Rs 202457. The figures at the end of 15, 20, 25, 30 40, 50 years are Rs 402621, 724986, 1244159, 2080292, 5595607, 1,47,13,428!!

Imagine Rs 100 is invested and it grows at 10% every year. Column 2 is what it will grow to if it was held for the number of years in column 1. So if your great grand father invested Rs 100, 150 years ago, you would have inherited Rs 16 crore.

Personal Finance E-Book

Have you checked out my e-book on personal finance. It's called Monday is Moneyday.

Download link

Needs & Wants: What's the Difference?

Personal Finance is all about spending less than what you earn and maximizing your savings by investing prudently.

When it comes to spending, we have a continuous struggle between what we need and what we want. There is a very thin line separating them. We so badly want to have a smoke that we call it a need!

To take a food example, all we need is दाल रोटी चावल & सब्जी /भाजी । But we want our Chocolates, Pizzas, Noodles, Non veg dishes and consider them our needs.

Have you noticed labourers, daily wagers who survive by fulfilling the needs and still having better health? All our lifestyle diseases are due to what we want!!

My takeaway from this post: Needs simplify. Wants complicates.

Question to self: Do I need link love for this post? Or do I want one?

What is your question?

Equity funds out-perform bellwether indices in August: CRISIL

CRISIL reports that Diversified Equity funds, on an average, out-performed the S&P CNX Nifty and Sensex in the month of August led by the out-performance of midcap stocks vis-à-vis large caps. As most diversified equity funds have a fair exposure to midcap stocks, this has helped them boost their returns in August.

In addition, the out-performance is a result of auto, banking, IT and FMCG stocks doing well in the month. 237 schemes out of 335 schemes in the equity fund category, outperformed the S&P CNX Nifty in August. Top performers in the category belonged to ELSS schemes as well as general equity schemes. Franklin India Taxshield 99, Fidelity India Special Situations Fund and Lotus India Midcap Fund were the top three gainers.

All CRISIL indices posted positive returns in August. Equity based indices lead the charts when analyzed forthe month as a whole. The hybrid CRISIL Fund~bX (which tracks balanced funds) surged the most during the month by 2.83 per cent, benefiting from the good showing of both equities and debt. This was a classic case of benefits being derived from diversification into debt and equity as for some periods in the month positive movements on the debt side cushioned negative movements on the equity side, thus causing balanced funds to out-perform equity funds on an average for the month taken as a whole. The CRISIL Fund~eX (which tracks equity funds) closely followed it with 2.49 per cent returns while the CRISIL MIPEX, (benchmark for monthly income plans) which has a lower equity component, posted a return of 0.79 per cent. Among pure debt indices, CRISIL Fund~ Gilt Index (benchmark for Gilt Funds) rose over 1 per cent while CRISIL Fund~dX (which tracks Long-Term Bond Funds) ended up 0.75 per cent. The CRISIL STBEX (benchmark for Short-Term Bond Funds) rose 0.68 per cent and CRISIL~LX (which tracks liquid funds) gave a monthly return of 0.71 per cent

Auto and Banking Sector stocks provide a kicker in the equity funds category

“Among the key outperforming sectors were interest rate sensitive sectors such as auto and banking which topped the returns chart on hopes of softening interest rates as inflation showed signs of easing.” Availability of stocks at good valuations given the hammering these sectors have taken in the past also contributed to the uptick. Adds Mr. Sitaraman, “Easing of inflation worries also helped the FMCG stocks do well while the depreciating rupee helped ITstocks outperform during the month.”

JM Auto Sector Fund was the top performer in the equity category with 9 per cent return. Lotus India Banking Fund followed it with 7 per cent returns over the past month. Franklin Infotech Fund gained over 6 per cent while UTI-Software Fund returned 5 per cent during the month.

Reliance Industries Ltd. continued to be the most popular stock among fund managers of diversified equity schemes over a 3-month time frame followed by Bharti Televentures Ltd and Larsen & Toubro Ltd. Among industries, the banking sector continued to be the most sought after industry for yet another month followed by Computers - Software, Electrical Equipment and Pharmaceuticals..

Indian mutual fund industry’s average assets under management (AUM) rose by nearly 3 per cent in August, to Rs.5.45 trillion from Rs. 5.31 trillion in July 2008 (including fund of funds). The rise in average AUM can be attributed to the resurgent equity market as well as new fund offerings in Fixed Maturity Plans (FMPs). 25 out of 34 fund houses witnessed rise in their average AUM. Reliance Mutual Fund continued to dominate the asset charts with an average asset base of Rs 886 bn, up by almost 5 per cent from the previous month. HDFC Mutual Fund moved up by one notch to occupy the second spot. Its average assets under management rose by 6 per cent to Rs 539 bn.

India's first online weekly on personal finance

Clear & Smart Steps to Raise Your Financial Intelligence Levels

Steve Pavlina writes on "How to raise your financial vibration" where he lists out clear and smart goals to adopt to raise your financial intelligence levels.

There was one part which I really relate to and touched me is:

If you double your income, it means you’re contributing twice as much value
to others. The money you earn is an IOU from society. If you have a million
dollars in the bank, it means you’ve given at least a million dollars more value
than you received — that’s very generous. If you’re in debt, it means you’re
taking more than you’re giving. The more value you contribute, the more society
owes you in return. If you allow your income to stagnate, it means you’re
holding back on the contribution side. That’s lazy and selfish. Focus on
expanding your contribution, and you’ll find that society gives you a lot more
IOUs.

Read the full post

Blow by Blow Account of Freddie Mac Fannie Mae being Taken Over

In one of the most sweeping government interventions in financial markets in U.S. history, the Government is likely to take over Freddie Mac and Fannie Mae.

The downfall of Fannie and Freddie stems from a series of miscalculations and deferred decisions, both by their executives and government officials, according to company insiders, regulators, auditors and outside analysts. The companies expanded rapidly in recent years, initially playing down the risks posed by a housing bubble. Then, as the housing slump expanded nationwide, they resisted raising enough new capital that might have provided a financial cushion to weather the storm. Lawmakers, paralyzed by partisan infighting, delayed strengthening regulatory oversight of the politically powerful companies.

Read the blow by blow account of the story
Also check what it means (By Deepak Shenoy)

Why can't we handle Personal Finance properly?

Most of us avoid taking financial decisions or generally do a sloppy job with our personal finances. I was wondering why and I could figure out three reasons. 

One, there is an information asymmetry in this industry. That means that the seller of financial products knows more than the buyer and he uses it to his advantage and not the buyers advantage. The lack of transparency puts off people.

Two, the sellers use a lot of jargons and number crunching which makes people uncomfortable. Probably that’s another reason why people avoid personal finance.

The third reason that comes to my mind is of a psychological nature. In Mahabharata, the great Indian epic, there’s a story of a Yaksha who challenges Yudishthira to answer his questions.

What is the most surprising thing in the world was one of the questions. Yudishthira answers that the most amazing thing is that even though every day one sees countless living beings that are old and dying but no one can imagine him/herself as old or taking that last journey!

That’s why people have a natural tendency to avoid financial planning. Do you have any other ideas? Let me know, please.

Currency Futures Trading is Live

Excerpts from the speech of Finance Minister inaugurating the trading of Currency Futures on NSE, India.
It's a proud day today and I stand before you to dedicate to the financial services community, a new product - Currency Futures. May I begin by warmly thanking the Reserve Bank of India and Securities Exchange Board of India for jointly developing this product and I congratulate the National Stock Exchange for having the distinction of being the first exchange to commence its trade. I wish all success to NSE and I am hopeful that the other two exchanges which have received in-principle approval and other exchanges will soon offer this product.

I see before me on the screen the first trades that is being put through. I am not a trader and I can't qualify ever to become a trader, but if it makes any sense and I am sure it does to a large number of you. Someone is buying at 43.8250 and someone is selling at 43.8400, hope one of them at least makes a profit.

In today's globalised and integrated business environment, many entities are impacted by currency risk either directly or indirectly. Exchange traded currency futures market provides an excellent opportunities to hedge currency risk for different kinds of participants.

The electronic nation wide trading facility, with the backbone of efficient clearing mechanism and efficient risk management system, will benefit universal participants including corporates, banks and individual investors.

As Shri. Ravi Narain mentioned, currency futures contract will be allowed, to begin with, only for USD / Rupee. and for participations by Indian residents. The regulations would with experience gained in the functioning market, consider how and when it can further open up for trading in other currencies as well as for permitting participation by foreign institutional investors and non-resident Indians. I see this as an important step towards going forward on financial innovation in the country. History shows that financial innovation has been a critical and persistent part of the economic landscape over the past few centuries.

Financial markets have continued to produce a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and variants of equity. We in India have adopted all these slowly, some of these products but with considerable success. However, I may note that many years after these ideas were mooted we had to wait. For example, stock index futures took 5 years to be offered to investors after it was first conceived; exchange traded funds for Gold took 4 years to become a reality; interest rate derivatives though launched in 2003 have not taken off. These experiences highlight the risky environment that financial innovation faces in this country. This should change.

Galileo I believe said doubt is the father of invention; if I may add, doubting Thomases are impediments to progress.

We need to continue to innovate and improve in the design of financial products, its customer service as well as all India delivery. I hope this will be kept in mind when regulators review the next steps on the exchange traded futures markets. I urge them to move rapidly and with an open mind that are necessary in such situations. After having launched currency Futures we need to revitalize the exchange traded interest rate derivatives market. We need to offer exchange traded credit derivatives and we need to strengthen the corporate bond market.

These three products are high on the priority list of government and I ask the co-operation and support of RBI and SEBI and others to move forward rapidly. These 3 markets are important (Bond, Currency and Derivatives), it is important that these markets develop rapidly in-order to attract domestic and foreign participation have vibrant trading in spot and derivatives, have healthy speculation and arbitrage to ensure liquidity.

As Shri. Bhave cautioned, some of these products are indeed complex. But the complexity of the products should not deter us from making a beginning. Everybody has a responsibility to explain the complexity of the products to the customers, so that the customers can chose the products that he or she desires. We need to draw the right lessons from developments around the world. We need to innovate, while the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take the risk.

India's first online weekly on personal finance

Do's & Don't of Credit Cards

GetRichSlowly has a list of Do's & Don'ts for credit cards and I agree on all of them.

1. Learn to read the fine print. Read the legal stuff when you fill out the application, when you receive the card, and on any future mailings. Credit card terms and conditions can be confusing. If you don’t understand something, ask for help.
2. Similarly, review your statement every month. Due dates, fees, and interest rates are subject to change. Reconcile transactions and keep an eye out for fraud. Many people — and I’m one of them — actually check their statements online several times a month. By paying attention, you can prevent small annoyances from becoming large hassles.
3. As always, don’t be afraid to speak up. If you notice something strange on your bill, call customer service. If you want to dispute a charge, call customer service. If you want a rate reduction, call customer service. It never hurts to ask.
4. Be wary of the special offers your credit card company sends you. Understand the teaser rates. Beware offers to skip a payment. Be suspicious of other products the company tries to push: insurance, fraud protection, etc. Many of these are bad deals for consumers.
5. Finally, pay your bill on time and in full every month. If you are not yet in credit card debt, don’t start. Don’t rely on credit cards to support a lifestyle you cannot afford. Don’t resort to using a credit card because you can’t afford to pay cash for something — use a credit card because you can.

India's first online weekly on personal finance

Investment in stocks, debentures and mutual funds grows by 51%

According to the Reserve Bank of India’s annual report, though net household savings in absolute term went up by 8.18 per cent to 5,26,033 crore in 2007-08, as a percentage of gross domestic product (GDP) it is estimated to have fallen by 50 basis points (100 basis points equals one per cent) to 11.2 per cent during 2007-08.

The reason: a robust growth of about 9 per cent boosting GDP during the year.Investments in shares, debentures and mutual funds have seen a healthy growth last year. It also highlighted growing investor preference for riskier but high-yielding investment instruments compared to bank deposits.

The report said that investments in stocks, debentures and mutual funds grew by nearly 51 per cent to Rs 77,073 crore during 2007-08. In terms of share in the household savings it constitutes 10.5 per cent against 6.6 per cent at the end of previous year.

“The flow of household investments into mutual funds and growth in number of accounts with the industry in 2007-08 reflects this trend,” said AP Kurian, chairman, Association of Mutual Funds of India (AMFI).

However, growth is marginal when pegged to GDP—1.6 per cent against 1.2 per cent in 200607.
This growth is also not phenomenal when compared to global standards. “In the US, mutual fund corpus size is equal to over 70 per cent of the US GDP,” Kurian added.

Among the other components of household financial assets, assets in cash and investments in insurance, provident and pension funds went up by 21 per cent and 1.72 per cent respectively. But deposits (including bank, nonbank and trade debt) fell by about Rs 10,000 crore to Rs 4,15,245 crore, while claims on government became negative at Rs 27,042, against a positive figure of Rs 40,627 for the previous year, the central bank’s report said.