Thursday, February 4, 2010


WARNING: The ideas and schemes discussed in this article have to be understood properly before applied. Short-cuts or alterations can result in heavy financial loses. Applied properly will start you on the path of riches.


Credit Cards are the most misunderstood and misused financial instruments of our times. My attempt is to highlight the positive legal usage of credit cards and through it, the wonderful concept of payment by EMI system.

I was totally thrilled when an idea of mine proved to be right. It all began one day when my credit card company called me up and offered a loan of Rs 1.74 lacs on my card. Since the voice on the other end was very pleasing and pleasant, just for the heck of it I thought of extending the conversation by asking for more details.

It turned out that she was offering an amount of Rs 1.74 lacs for 36 months at 18% rate of interest on reducing balance basis on my card; the EMI would be Rs 6484.21 pm.

I did some quick calculations and was completely surprised by the findings. To be safe I reconfirmed the facts with her and probed for hidden costs if any. Totally satisfied by her response, I decided to take the loan and see what happens. As expected my younger son, who is an MBA, told me "What is the use of asking now? You should have done so before taking the loan".

I had a very sad and disappointed member in the family that day. This happened 2 years back.

Today, on completion of 24 months out of 36months period, my initial calculations are withstanding the test of time, and appear to be correct:

  1. Total to be repaid [36months x Rs 6484.21] = Rs 2,33,432

  2. [Capital] Original loan amount = Rs 1,74,000

  3. Interest paid over 36 months [1-2] = Rs 59,432

The entire loan amount I had invested in 4 mutual funds. These funds over 2 years have appreciated to Rs 2,14,204, thereby giving me a capital appreciation of Rs 39,204, leaving a deficit of Rs 20,000 [item 3 in table] to be covered in the last year of the loan.

The point I am making is that this happened during the period when the Stock Markets around the world had collapsed. In the first year of the loan, I had lost 60% of the original amount, in the second year not only my loss had been recouped, I had recovered 67% of the interest to be paid [item 3 in table above]. This was the time when financial system round the world suddenly went into a spin [2008] and hence things can never be worse than theses.

The so-called 18% rate of interest charged on the loan amount under credit card will be earned back by the loan amount itself, and paid to the card company without any pressure on my finances!

Fouth year onwards, the capital appreciation in these funds is mine to keep. Plus, the loan is all cleared.

AM I NOT RICHER BY Rs 1.74 Lacs (and more...) AT THE END OF 3 YEARS?!!!!

Self discipline to be followed:

1) Never delay in making payment of the amount due on credit card. Better to link credit card for auto payment from bank account. Disputes if any to be resolved separately.

2) Always pay the full amount, never the minimum payable allowed, to avoid the debt trap.

3) Loan amount need not be Rs 1.74 lacs, start with amount you are comfortable with.

4) The first loan should never be for consumption purpose. Always invest it in mutual funds. After completing successfully the first cycle of 36 months, next loan can be used as your personal needs dictate. These mutual funds should not be redeemed as they will be your safety net in the future.

Another area where you can earn sizable amount is when buying a new car. The thumb rule is never pay the cost of the car, or part thereof, from your funds.


Go for maximum loan offered by the Bank and for maximum period. As long as the interest charged by the Bank on car loan is less than 15%, your car will be free of cost to you by the time your car loan EMIs get paid.

Rules are the same as in case of loan on credit card. The entire loan amount or as much as you can comfortably afford, should be invested in equity dominated Mutual Funds. Just like you got your lovely child after 9 months, your mutual fund also needs time to multiply your money.Whatever amount you invest in mutual funds would double in 5 years if not earlier.

This fact is accepted by all financial annalists and commentators and would be the conclusion anybody can draw based on the facts given in my above example on loan on credit card. Do not redeem the mutual funds created as they would make your ‘new car’ then free again. Money you earn from sale of ‘Old car’ should be invested in mutual funds also.

For various other ways to generate wealth from credit cards in small ways, please spend time with my blogs on Financial Planning, especially FINANCIAL PLANNING-SOME TIPS.





Friday, February 6, 2009


Financial planning is an on going process. It can be started at any stage in life. The benefits of course will take their normal time to manifest. Younger one starts, better are the results.

FACT # 17
MFs have specified funds eligible for Income Tax deductions under Sec 80c, these are known as Tax Savers Fund. The amount invested is locked in for 3 years. In these funds the payout option should be taken as some money will keeps coming back as dividend during these 3years also. In the 4th year the same amount can be redeemed and invested back as fresh subscription for tax break.

FACT # 18
Banks have an approved list of MF on which loans can be taken. This category of loans is known as loan against security [LAS]. Under this arrangement 50% of the current NAV is available as loan limit. In an economy when MFs are giving 25% or more annualized returns, this is a very attractive source of money earning money.

FACT # 19
Banks have a provision of getting a loan agreement signed on stamp paper. One can save on the cost of the agreement by opting for Rs 10 lacs limit at the first instance itself. Additional MF units can be pledged as one goes along.

FACT # 20
I missed an opportunity to book profits during the present meltdown as my best earning units were pledged under LAS. My bank does not allow partial redemption of pledged units. My suggestion is to build ones portfolio with equal amount of units as not pledged of the same fund. This will allow selling of units not pledged once the market starts to fall and buying them back again once it stabilizes at a lower level.

FACT # 21
Under LAS just like loan limit goes up, so can it fall also. To safeguard ones interest under such an eventuality, a safety net has to be in place. This safety net should be in form of additional FDs with OD facility. When the LAS limit is falling the difference can be met by withdrawals under OD limits of the FD. Once the markets stabilize amounts should be withdrawn from LAS account and deposited back in the OD account. This additional OD facility should be used only as back up for LAS otherwise the safety net gets weak.

FACT # 22
During ones earning period this amount acts as safety net and after retirement it become a component of savings required for old age [see Financial Planning- Pension Funds]. This holds true for any safety net created as each net is loan specific but later on becomes part of the Pension Fund.


For the complete picture, I recommend you start with the first blog in this series; click here
For previous blog in the series; click here


Financial planning and religions have many similarities. Both are good for mankind but a large number of people have decided to ignore them as a conscious decision. The ultimate goal is the same in both but multiple paths show how to achieve THE GOAL. We have believers, non-believers and fence sitters even though both are good for body and soul.

Fact # 11
Financial planning, like religion, cannot be forced on anyone. It has to be understood and accepted with free will. It can never succeed if followed as a ritual - in fact it can cause tremendous damage.

Fact # 12
For investment in equity, I personally prefer Mutual Funds to investing directly into shares of a company. Gains are comparatively less no doubt but so are the chances of loss. This decision naturally has to be left to individual choice, as being one of the multiple paths for achieving the same goal.

Fact # 13
For those who decide to follow the Mutual funds [MF] route, I recommend only growth funds [MF which invest 80% or more in shares, with balance in debt instruments]. Anyone who wishes to be safe should stay with FD as they are a multi purpose debt instrument and would serve them better.

Fact # 14
Mutual funds offer two options: growth or dividend. The only factor in deciding which to opt for is the age factor of the investor. Senior citizens should opt for 80 to 100% in dividend option, whilst youngsters should opt for just the reverse ratio. Reason- senior citizens need money now whilst youngsters invest for old age.

Fact # 15
Within the dividend option again two options are provided:
• payout
• reinvest.
This depends on individual cash flow requirement. I have payout option in 25% of the funds I have invested in, for the balance funds it is the reinvest option. Reason- dividends are normally announced in clusters like festive seasons or year end. My requirement is spread on monthly basis. By a combination of OD on FD and returns from MF, I can use my funds in the most optimum manner under this arrangement.

FACT # 16
Reinvested dividend can be redeemed when required, till then it continues to grow with changes in NAV like any normal investment. If for any reason the amount is not needed, the reinvested dividend is also entitled for dividend announced subsequently.


For Facts # 17 onwards wait for my next post.
For the complete picture, I recommend you start with the first blog in this series; click here
For previous blog in the series; click here

Do you think this is the time to exit Indian stock markets?