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 Once the markets stabilize amounts should be withdrawn from LAS account and deposited back in the OD account.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

Sunday, February 1, 2009


India’s strength is a strong culture of domestic savings down the ages. This culture took such enduring roots maybe because we were poor and under the rule of foreigners. In today’s changing world we have to revisit our sound ancient values and bring them in line with global realities.

Myth # 4
One component of mother’s milk was discussed as Myth # 3 in FINANCIAL PLANNING- MYTHS AND FACTS. Next important component of the same milk is that taking loans is bad- first save and then buy what you need - says the milk. ‘First save’ advice has stood the test of time. I agree with it totally. India is better off in the present meltdown mainly because of our national saving habit. I don’t agree with ‘loans are bad’ part of the advice which is implied.

In today’s reality, variety of loans is available easily and on attractive terms. One should prefer to buy anything, especially household goods, from where EMI facility is available. Initially till the financial infrastructure is in place one may have to buy cash down but once ones savings [debt-bank fixed deposits (FDs) and /or equity-MFs] give sufficient return to cover the EMI, one should buy only under this facility, of course as far as possible. This applies to all types of purchases-big or small.

The reason is obvious – after the present EMIs has been paid off, the basic pool [fund] will remains intact, this can support the next EMI linked purchase and so on. Simultaneously the pool is also growing as one is adding the monthly expenses as saving plus normal savings into this fund. The day may not be far when one can pay the EMI of the car or even a flat out of the returns from this pool of savings.

The biggest advantage I can think of when EMI is paid from saving occurs when one is in-between jobs. There would be no pressure absolutely for repaying loans as these EMIs are being taken care of by returns from existing savings. Likewise overdraft [OD] on FDs [see my post FINANCIAL PLANNING- SOME TIPS] will be taking care of ones monthly expenses. This should be a tremendous relief. These stress busters should be good enough reason to promote such futuristic concepts. LOANS ARE GOOD NOT BAD.

Myth # 5
In India paying interest is considered as bad financial management. This was true when loans were taken from village money-lenders. In a situation when interest paid on loan is substantially less than returns from use of that loan, what should one do?

Loan against securities [LAS] is a sure-shot method to fast track ones financial status. Banks have a list of approved mutual funds on which loans can be taken. People have suffered because they do not follow the rules of the game and a wonderful instrument of growth gets a bad name in the bargain. 50% of the current NAV is given as loan limit which means that as the value of the fund increases so does ones loan limit. Reverse is also true. This is where the importance of safety net comes in. One should always proceed slowly as speed is invariably injurious to financial health. For more details on LAS please visit my post MONEY PLANT REVISITED.

Myth # 6
One myth which has surprised me the most is that financial planning is for the rich only. The obvious question is what type of planning can poor people do when nothing is left at the end of the month? The truth on the other hand is that financial planning can make poor rich and rich richer. It is all in the mind. Today anybody can open a bank account. Fixed deposits and investment in mutual fund can be started with small amounts. Credit cards with small limits must be available, if not they can be demanded through Consumer Courts. With these same tools in hand the only difference between the rich and the poor would be the size of each transaction. Slowly but steadily the financial status of the poor will start to improve. For actual details on how these tools can be used both by the rich and poor, see post FINANCIAL PLANNING- SOME TIPS.

Myth # 7
Youngsters sincerely believe that it is too early to think of old age. They want to cross the bridge when they come to it. Fine, I can only pray for such people that some old age support schemes are in place by the time they reach this inevitable bridge.


For first blog of this series; click here
For previous blog of this series; click here

Wednesday, January 28, 2009


Time has come to put the body and soul of financial planning together so that a spinal cord can come into existence. This spinal cord, I trust, would be the place of reference whenever any doubt or clarification is required on this subject.

Fact # 1
Financial planning can be done by every one: males and females, young and old, rich and poor, white and black-with all shades in between.

Fact # 2
Financial Planning is no rocket science. It can be understood in simple layman’s language or in highly technical jargon. The number and variety of flavors that can be made of each concept is unlimited. Successful planning can still be done without any flavors. This is its beauty.

Fact # 3
The mantra of financial planning is that since one cannot work hard enough to earn the amount of money one requires- one should find ways to make the money work to earn more and more money. Planning shows the way.

Fact # 4
All infrastructures take time to build-this is also true of financial infrastructures. Excessive speed and / or greed will be disastrous. Once in place these structures will serve generations. Always follow the basic time tested concepts which also provides for shortcuts for risk takers. Those who leave the beaten path should be prepared for meltdowns.

Fact # 5
Investments should be equally distributed between debt [negligible risk] and equity [high risk]. Investments should start with debt [bank fixed deposits (FDs) with over draft (OD) facility]. The safety net should be provided from early stages itself.

Fact # 6
Once the financial infrastructures are in place, the transition to change will begin. Money will start working to earn more and more money.

FACT # 7
Power of OD is stupendous. One has to understand it and then harness it. Same is the case with payment of EMI from returns on savings. Their stress busting qualities will enhance ones performance and make the period between jobs seamless and stress free.

Fact # 8
OD is nothing but creating a negative balance equivalent to little more than a months salary by putting it in FD from ones bank account by using the facility created in Fact # 5. The salary starts earning interest from the day it is credited to the account. Salary amount reduces the negative balance, hence on the principle of interest saved is interest earned ones wealth creation process starts functioning.

Fact # 9
Stop making purchases with cash or debit cards. All purchases should be with credit cards only. This extends the days interest is saved / earned on salary amount by the period of days credit card payments takes in getting debited to ones account or payment cheque is received by the credit card company. In simple language the account has a low negative balance for longer duration.

Fact # 10
By the time this cycle gets completed, hopefully next salary cheque should be on the way. The difference between interests earned on FD and interest paid to bank for OD is the MONEY EARNED BY MONEY.

Enjoy the journey on the path of becoming a HNI.

For full details on all posts written under this series refer here
For previous post in this series; click here

Monday, January 19, 2009


Financial Planning, per se, should be the same world-wide, but it is not so. Local beliefs, traditional practices and the level of economic development determines the type of financial planning a society would adopt. This is very similar to religious beliefs – the goal is the same, only the paths to achieve them differ.

Functions relating to MONEY were divided between genders on an arbitrary basis:
Males are good at earning and managing money; females will spend and save money [gold and jewelry]. The compulsions of urban living have broken these artificial barriers to a great extent. Now females have entered the work place, started to earn money [though all of them are still not very comfortable in managing it] and males are spending and ‘saving’ money.

Elders in India always said one has to work hard to earn money, which is true. But beyond a point one cannot work harder, while the need for more money still remains. At this point the boys get separated from the men. One has to learn how to make money work for you, rather than you work to earn money. Like in a car, maximum effort is required to make the car move. Once it starts moving, the effort gets gradually reduced-as momentum takes over. Gears exist in the financial world also, only one has to recognize them and use them appropriately.

Myth #1
Money/wealth is important only initially. Once you have it, the importance is reduced till it reaches zero. Nothing would be a bigger myth.

The fact is more you have, the harder you have to work. The second richest person on earth is close behind the RICHEST PERSON ON EARTH and so on, down the ladder. Even independent islands of Dubai and elsewhere are becoming cramped. Mukesh Ambani requires a 15 plus storey building to house his family. Importance of money can never be zero.

Popular saying goes ‘make hay while the sun shines’. This is not true in financial matters. The hay made while the sun was shining can go up in smoke, even before one can blink. This actually happened during the global economic meltdown of 2008. Wealth has to be created slowly under all types of conditions, with proper safety nets put in place. Whenever the time to blink comes, the safety nets can be trusted to take care of one's interests.

Myth #3
We have been conditioned, right from the time we fed on mothers milk, that owning PROPERTY must be our first priority. Buying a house was like achieving a major milestone in life and respect in society went up accordingly. Gold and property were considered as saviors in bad times. This was true in the past but today we have better instruments to take care of the bad times. First of all it is cheaper and financially beneficial to stay in a rented premise. Your capital gets blocked in property till the time you sell it, which is like putting all eggs in one basket. Secondly if one has to relocate for employment reasons, the property becomes an avoidable concern.

Buy first property just few years before retirement-- that is when requirements change. Whilst working, one prefer to stay close to work place-it cuts down on commuting time. Bigger accommodation may be needed when children are staying together, but not post retirement. Safety becomes a concern after retirement, but not so when young. The ideal property, even at compelling rates, when you are 30 may become a liability at 60. Property prices are neutralised as one would like to stay in smaller units in a residential areas with better security arrangements, even if they are in the suburbs (far from work zones).


These are some of the myths and facts, others will follow soon. If you do not agree with me please feel free to let me know. The debate will only help us all learn better...

For full details start from first blog in this series; click here
For previous blog in this series; click here

Thursday, January 15, 2009

Financial Planning - Pension Funds

The pension funds which are setup by companies to meet their obligation under the Laws of the Land are not my direct concern. These funds are a result of collective wisdom of the nation. Members of these funds can also work out the pension they would be receiving on retirement and the amount they would be needing to live a comfortable live in old age. The gap can be arranged for on the basis of what we discuss below.

The very nature of pension funds is such that safety is the prime consideration; this makes it a debt based fund. Interest from debt instrument cannot beat / neutralise inflation hence I started to explore other alternatives. I have stated in FINANCIAL PLANNING FOR BEGINNERS that Rs 1.5 Crores in savings would be required by today’s youngster to manage his old age. Let us have a fresh look at the above mentioned post and also at FINANCIAL PLANNING – SOME TIPS to explore whether the answer to pension funds lies therein.

Our target is to build bank fixed deposits [FD] of Rs. 10 Lacs as base and additional FDs to cover all loans that are taken subsequently. These amounts have a specific purpose to serve whilst one is in employment; once we retire these amounts can become part of our PENSION FUND.

Likewise we plan to invest in equity through Mutual Funds [MF]. 80% of this investment is to be in growth option of MFs hence would earn a return of minimum 25% on an annualized basis. Which in other words mean that every 4 years the amount would double? This would become a major foundation of our PENSION FUND.

The likes of present meltdown had last come in 1930s hence it is safe to presume that it would not be repeated in the life span of today’s youngsters. Further the India growth story is secure for another 20 to 25 years if not more. Even when India becomes a fully developed economy, somewhere an emerging economy would take root which Indians can tap for better returns on investments.

Pure Life insurance policies play a vital role in our lives. Once all loans are safely paid, the maturity amount of Pure Life policies become the second major foundation of our PENSION FUND. The maturity amount received from insurance should be invested as FD's (debt) so that the monthly expenses get covered out of interest income of FDs. Additional FDs (from sources like gains in equity [MFs]) should also be maintained with OD facility, to cater for emergencies including medical.

Balance income from other investments including equity [MFs] should be used for holidaying, visit to children, friends, relatives buying properties and meeting similar avoidable (luxury?) expenses.

Pure Life policies are life insurance policies minus the investment, personal accident or any other add-ons. The rate of premium per 1000 rupees sum assured should be the lowest. It is a pure risk policy. Agents/advisors do not prefer to canvass these policies as they get negligible commission. That is sad, because these policies serve our interest the best.

A point of caution is called for at this stage. The premium saved from not investing in pension funds should not go into pubs but to FDs and/or MFs only.

To conclude, I am not against the concept of pension funds. It works well for those who feel that financial planning is too much of a nuisance, too complicated or time consuming. The bottomline is to ensure availability of funds in old age since India does not have a social security system in place.


We will continue this discussion in future posts. Meanwhile, feel free to comment and debate. Your agreements and counter-arguments will help me to revisit my ideas.



Friday, January 9, 2009


I am dropping the words 'FOR BEGINNERS' from the title as anybody who has read my post "FINANCIAL PLANNING FOR BEGINNERS" is no longer a beginner-he has graduated a step already. As I had said in my earlier post I have not studied financial subjects at any point of time. Whatever I know about making money has been picked up on the street. As it has worked for me, my desire is to share it with others so as to give them a head start.

Among the various debt instrument available, I have found the Bank Fixed Deposits[FDs] as the most suited in today's times. Money does not like to be lazy. It is at its best when working, working and more working. To provide this enviorment one has to find a suitable instrument with multi-tasking capabilities. When multi-tasking is the mantra, FDs preform multi-functions like:
  1. FDs can be built at ones own pace. Every FD should have the OD facility attached.
  2. Once a respectable portfolio is built, 'money' can be put to work.
  3. Idealy bank accounts should never have a credit balance. Money goes to sleep in such accounts. Power of OD comes into play when bank accounts have negative balance.
  4. Main role of OD on FDs is to make available funds in an emergency. Rs 50000/- is available like your own money[as per assumptions below Rs 80000-Rs30000].
  5. They act as a safety net for all loans taken.
  6. To demonstrate the power of OD we make some assumptions- Monthly salary Rs 25000/-. OD limit on FD Rs 80000/-. FD rate of interest 9%. Current credit balance Rs 1000/-. Out of the OD limit make a FD of Rs 30000/- at 9%, this will create a negative balance of [Rs 30000-Rs 1000] Rs 29000/-. On Rs 29000/- the bank will start charging you interest of 11.5%[9+2.5].
  7. On salary day the negative balance automatically gets reduced to Rs 4000[Rs29000-Rs25000]. This means the bank now charges 11.5% interest on Rs 4000/-, interest saved is interest earned. Your SB account is in effect earning you 11.5% on the salary amount deposited. All expenses / purchases do not happen on day one nor in one shot, but are spread over a period of days. Your money is happy working hard to earn money[interest] for this period of days. This process gets repeated month after month.
  8. Stop using Debit cards and make all payments by credit cards only. The advantage would be clubbing of all entries and one payment on the due date. This means effectively your salary remains in your account for longer duration thereby keeping the negative balance low [interest saved is interest earned and rewards points on the card are bonus].
  9. All FD interest should be redeemed on quarterly basis and deposited in the account which has OD facility. This interest will also help to keep the negative balance low.
  10. You will be surprised on how fast the negative balance will get wiped out from the small small amounts earned by your 'money'. Repeat the process of creating negative balance by making fresh FDs and once that target is met start investment in equity.
From among the equity instruments available, I prefer Mutual Funds [MF] to direct investment in shares. Of course shares give far higher returns than MF because the risk of loss is far greater. The reason is quite simple- your money is resting on the fortunes of one company say like Satyam, very few would be able to exit at the right time. Your involvement with shares would have to be higher than with MF. In MF a fund manager is taking care of your investment and you can stay invested if you like his results or switch to another fund if you don't.

Personally I prefer equity based fund as my monthly expenses are not coming out of this investment. The 30% annualised returns my investment in MF gave me was more money than I had during my entire service career. I recommend the same to youngsters as they would be needing this money after a few years.

My advice is that property should be purchased only when your returns from investments in MF can pay the EMI of the property. You will reach the target of being a HNI much faster. Even after the EMI gets paid off, returns from this investment continues.

MF can be purchased in lump sum or under SIP [systematic investment plan], for salaried persons SIP would be better. When ever you get bonus or lump sum amount, the same can be invested lump sum in funds which are under SIP or otherwise.

MF are available with growth or dividend options. You should have a mix of both. Senior Citizens should opt for dividend option in 80% of the funds while youngsters 20% [up to a level where the EMI amount, when started, gets paid from dividend income]. It is financially beneficial to pay rent.

Under dividend option again one can take reinvest or payout option. Reinvest option gives you the choice to redeem the dividend reinvested units when the actual need arises, otherwise they add to the units you own in normal course. The advantage is that the NAV keeps growing during the period you did not need the money, hence you get more money when you redeem than you would have got by depositing it in the bank account under payout option in the first place.

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