Thursday, July 31, 2008

Credit Cards-Devil within

A friend of mine had a very interesting experience with his credit card. Cards were stolen from bags left outside front door of his flat [this is an interesting story which I may write about one day]. The cards were misused that night itself and the next day. He did not go out for two/three days. The credit card operator telephones him to confirm some transactions which were suspicious according to them. He immediately informed all the concerned Companies about loss of cards.

Now as per requirement of the Company he went to the local Police Station to register the FI R. Police agreed to register the FIR only when told that card was used at an ATM in Pune [ruling out the train] and since the purse was not taken the theft cannot be in the bus[no pickpocket will put the purse back]. The most likely place of theft was outside the flat when the bags were left unattended. The credit cards had been used at various locations for about Rs 40,000. The issue has not been resolved yet, however it made me wonder whether his experience was unique or others are also facing similar problems. I am sure many are.

Problem is who pays for Rs 40,000 for which the cards were used. Everyone I have asked this question without hesitation says it has to be paid by my friend. This does not appear fair to me. In a situation like this there are three main stakeholders

  1. The Bank which issued the credit card.
  2. The credit card holder.
  3. The commercial establishment which accepted the card in lieu of cash.

All three stakeholders are benefiting from the use of the card and hence have an obligation of trust and fair play towards each other. The Agreement which each stakeholder signs have to be within this perimeter. Unfair advantage by any stakeholder will invoke the Consumer Protection Act. Amongest all three stakeholders the commercial establishments have the most crucial role to play. Misuse of credit cards is not possible if laid down procedures are followed by all stakeholders.

This in short means that No 2 should inform No1 the moment the card is stolen. No 1 should block all transactions thereon. The main success would depend on No3. Why? The credit card consist of two parts- the physical part and the signature part. Commercial establishments would check the signature on the charge slip with that on the card and only then accept it as payment.

We know that the level of expertise available at the premises of No3 cannot identify 'good' forgeries. But to expect the expertise of a reasonable prudent person in matching the signatures cannot be faulted. Unfortunately this is not being done. We all must have noticed or can notice now, that normally the credit card is returned to us along with the charge slip for signature. In such situation even a causal glance at the signatures is not possible. No1 expects No2 to pay for all cases irrespective of blatant crude forgeries or still worse, no signatures at all.

The question arises why is No1 reimbursing No3 in such cases and demanding payment from No2. Simple answer would be that two business groups are joining hands to take undue advantage of the helpless unorganised No2. This would become an issue once the proposal to create an all India data-base of all loan takers is in place. No2 would be forced to succumb to the dictates of No1 as otherwise he is likely to be blacklisted by all loan giving agencies. If this is not the reason then what can it be?

Wednesday, July 9, 2008

Can Old Wine find New Bottle ?

The result is the same, but inputs were totally different. Indian way of family relationship is gradually merging into the American model, but for different reasons. With the advent of 'nuclear' family concept, parents and their children prefer to reside separately after their marriages, even when living in the same city/town. Parents are happy as after a long time they can live according to their own likes and style, children likewise have Independence In fact the new wine had comfortably settled in the new bottle.

This comfort zone extends into retired life as both, parents and children, are financially independent. This phase of freedom lasts for around 15 years in which parents can travel, visit places of interest and indulge in all activities which had been postponed due to 'children' considerations. The only limiting factor of this phase should have been the physical health of individuals(for details see The Golden Sunset Resort). Unfortunately sometimes this does not happen and the comfort zone is shaken due to family compulsions.

Children of yesterday decide to be parents of today. Bringing up an infant into babyhood and then to boy/girlhood needs the gentle touch of grandparents. Are today's grandparents willing to give up their new found freedom? If yes in what form. Nobody wants to repeat the pain from breaking of the joint family all over again, Americans are looking eastward and we are looking westward as both are not happy. What form or shape will the new arrangement take is a million dollar question.

My generation, the one before us and the one after us i.e. 3 generations where caught in the turning point of Indian joint family system. We had taken care of our parents, confident that when the time came, our sons will look after us. We never thought of planning for our old age. Suddenly things started to change. Nuclear family become the order of the day due to sheer compulsion, small flats or NRI status. After retirement parents had to decide how to spend/utilise their time. Once everything is in place over a period of time the issue of having issues which requires grandparents presence becomes a tricky issue. It becomes difficult to drop everything and rush to look after the grandchild that too for limited period.

The question is further complicated as parents and new parents have conflicting motives for their actions/thoughts. Having accepted the nuclear family can the children take it for granted that parents have to come to their aid. Similarly parents have to reshedule their plans and also cope with an unknown fear- will they be able to live alone again after coming so close to their grandchild. Likewise how can anyone ignore or overlook the needs of the little one.

In this entire scenario which grandparent do we have in mind? Reflex answer always is ofcourse the boy's parents. This was true during the joint family system, but today an additional option has been added. In reality it is the girl's parent who are called for duty invariably. The reason is very simple in today's circumstances. Girls are more comfortable with their mother than mother-in-law. Mother-in-laws are aware of this hence wonder whether it is worthwhile to drop everything and go to the son's house. This again raises issues.

Both are right in their thinking yet the grandchild is the main sufferer in the end, hence an equitable solution has to be found. Each aspect will have to be examined in depth before a workable solution is arrived at. Can the old wine, which at tremendous cost, converted into new wine revert back into old wine and find a new bottle? Future bloggs will try to look into this very difficult area.

Saturday, July 5, 2008

Equity - Friend or Foe

My friends, especially senior citizens, were very uncomfortable whenever the question of investment in equities was discussed amongst the group. Nobody said no, but they did not invest in equity either. This made me to think why this mind block. I remembered my service days when I was equally scared of putting a larger chunk of my savings in equity. I preferred life insurance. Apparently we all suffered from the fear of the unknown.

We have a pretty good idea about pricing of most of the assets class of investments. Equity is one big black hole where pricing mechanism knowledge is concerned. Major factor in pricing of equity is the intrinsic valuation of the industry it relates to. This part everyone understands and has no problem with. Second and far more influential element in pricing is the perception of future earning possibilities of the particular company/industry. This brings in an element of personal arbitrariness bordering on gambling. Most of us are very uncomfortable with this hence prefer to stay away, which is sad.

One fact cannot be overlooked. Equity is the only liquid investment opportunity to keep pace with and stay ahead of inflation. In short, equity is both Dr Jekyll and Mr Hyde. By controlling our natural greed we no doubt reduce the returns from equity but also drastically bring down the risk of losing the hard earned money. One has to find ways to befriend the good and avoid the evil- something we as it is do every moment of our existence.

Equity for us has to be a long term investment. If we need to encash part of our investment we should do so well in advance as otherwise the market may fall and we suffer avoidable loss. This is the nature of this market hence we have to plan accordingly. When people play the stock market for short term gain, it should not concern us as they win or lose heavily, fully conscious of the risks involved. The fact someone lost heavily should not scare us or keep us away from the market.

Today investment in equity has been made easy for us. Mutual Funds are a recent entry which reduces the risk element and therefore give lower returns. These lower returns are in comparison to direct investment in equity, but still higher than any other return on investment. Mutual Funds are nothing but collective investment in number of companies in small lots. If some company makes a loss another may make profits thereby averaging out the returns for us.

Mutual Funds come in both debt and equity and in various combinations thereof. One can select a fund as per his risk appetite. Mutual Funds allows cumulative growth or annual payment of dividend if one so desires. Dividend again can be reinvested or payouts taken. The dividend option has again two components: long term capital appreciation which is retained and annual profits which are distributed. Mutual Funds allow partial redemption of units for greater flexibility.

My experience shows equity is the best friend anyone can hope for. DO NOT WASTE TIME. For more information on mutual funds see my write-up "The Real Money Plant".

Wednesday, July 2, 2008

The Real Money Plant

I should start with a disclaimer. I do not have any academic qualification in finance or investment subjects. My knowledge is totally street acquired. It has benefited me tremendously hence would like to share it with anyone who would like to listen. It is the most easy thing to make, one should only know how to do it. Yes I am talking MONEY.

Never work for money, always think and plan how money can work for you. Earning from someone else's money is called the POWER OF OVER DRAFT. Without a business/employment one cannot reach within striking distance of money-hence put everything in to get something started. I am saying this so that your priorities are clear and no rash steps are taken.

From whatever you earn, save what you can. Amount saved depends on individual circumstances but the key word is constant conscious effort to save money. Initially do not bother about investments, simply convert your savings in bank fixed deposits. Again how much depends on individual circumstances-any figure between 5 lacs to 10 lacs would be a good beginning. Ask your bank to give you OD facility on your FD. This varies from 70 to 90% of the FD original amount(HDFC and most public sector banks have this facilities as far as I know). Now you are ready to make money work for you.

'Fools buy houses and intelligent people stay in them'- still holds true. Property is a great investment but not as a starting point. Property accretions are locked in till the same is sold. Therefore think of buying only when your investment income can cover the EMI (your salary/business income should not be locked in property). The best investment is in mutual funds. You can try shares if you have the feel for it, I don't have it. It is a wrong time to talk of equity, but for me the India growth story is intact for the next 20 years at least. The present crash is only a short term regularly recurring phenomenon. My experience shows that 30 lacs invested in mutual funds gave 30,000 per month dividend income(apart from capital appreciation) before the January 2008 crash. This figure should help in planning. This is the big picture. One follows this path at his own comfortable pace to reach the desired destination.

At this stage the power of over draft will act as a booster. The 5 lac overdraft limit which you have will earn for you in the following ways:
  • The OD facility should be attached to salary account. Withdraw 1 lac and invest in mutual fund. Salary gets credited thereby reducing the loan on which interest has to be paid to bank. For monthly expenses draw when needed. Payments by credit cards come up at the end of month. Bank charges interest for days of actual OD availed. Interest saved is money earned. Earnings on 1 lac invested extra.
  • We always keep some cash balance in our bank accounts for emergencies and needs in immediate future. This amount is sleeping as it would seldom be eligible for any interest earning. Once the account is overdrawn, money is available when required, but you pay for actual withdrawal. Any payments received in between start earning bank leading rate, from the moment of deposit the same principle applies- interest saved is money earned.
  • Timing the share market is next to impossible. Whenever the market undergoes a major correction, you can use the OD limit to make investment and repay the loan from receivables. In the longer run you will earn a respectable amount from this source.
  • For greater flexibility keep increasing your fixed deposits (with OD limits) as this will also help in balancing the portfolio through investments in debt.

By now it should be apparent that investments in mutual funds is like having an orchid of wonderful fruit trees. The more care you take of it, better the returns. Replace old trees from time to time. Money requirement will keep changing, but the returns from mutual funds will keep flowing in. This would ensure a comfortable old age. Mutual funds are the real money plants in our life.

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