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 Once the markets stabilize amounts should be withdrawn from LAS account and deposited back in the OD account.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

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