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?