MODERN ALADDIN'S LAMP-CREDIT CARDS

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.

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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.

ALWAYS BUY A CAR ON CAR LOAN. PAYING INTEREST IS GOOD FOR YOUR FINANCIAL HEALTH.

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.

WHAT I HAVE STATED IS FOR ONE CREDIT CARD

YOU CAN HAVE MULTIPLE CARDS PROVIDED

YOU CAN AFFORD THEM

HAPPY JOURNEY

FINANCIAL PLANNING - FACTS 17 TO 22

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.

MONEY WORKING FOR ONES WEALTH CREATION

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 - FACTS 11 TO 16

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.

MONEY EARNING MORE MONEY.

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

FINANCIAL PLANNING-SOME MORE MYTHS AND FACTS

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.

GOD BLESS

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

FINANCIAL PLANNING - FACTS 1 TO 10

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

FINANCIAL PLANNING - MYTHS AND FACTS

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.

Myth#2
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).

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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

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.

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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.

INVEST TIME IN PLANNING AND SAVE MONEY.

SAVE TIME IN PLANNING AND SPEND MONEY.

FINANCIAL PLANNING-SOME TIPS

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.

FINANCIAL PLANNING FOR BEGINNERS

A request came to me for explaining the Basic Principles of Financial Planning for beginners, which can help today's rich youngsters. Financial Planning is no rocket science, its pure common sense- never keep all eggs in one basket. For saving money the common baskets are:-

1. Debt
2. Equity
3. Asset Creation[Property, car,two-wheeler]
   
4. Pure Life Insurance Policy/s maturing at the age of 60 or 65.
5. Gold and other jewellery/precious metals
6. Commodities and Foreign Currencies.

Before understanding the baskets let us understand the special features of the thing called MONEY.

• Money is like a cricket pitch-action takes place at both ends and all round it.
  
• It is a science as well as an art.
  
• Money can be invested or gambled in the name of investment.
  
• Money is the laziest thing created and also a rocket which goes up and down at the craziest of speeds imaginable.
  
• Money can make or break you, it does not respect age, status, power or wealth. YOU RESPECT MONEY AND IT WILL KEEP YOU LIKE A KING.

Let us understand these traits in some detail:

Managing money goes on simultaneously in all areas depending on individual circumstances.
The saying goes "the science of investment" and "art of managing money". Economists and financial wizards realised that higher the risk-greater the return is the science behind money. The risk factor brings in an element of fear which leads to irrational behaviour, hence cannot be science alone. A scared person will not listen to reason and the art of managing is based on perceptions. Mature persons manage money in a scientific manner which is investing, whilst others follow the herd mentality which is gambling. When dealing with money, never be greedy or in a hurry.

This becomes the basis of next trait of money. A very very thin line separates investment from gambling. There is nothing wrong in gambling for fast returns. But here invest only what you can comfortably lose. Do not invest your life savings but create a small corpus separately for sake of excitement and thrill and indulge yourself as long as some money remains in this fund. Once it is wiped out[which it would] you would have hopefully matured and grown up to respect money.

Money is very docile when kept in form of cash or bank saving accounts. Money in fixed deposits of Companies are normally safe but can become dicey, hence gets you a higher return than bank deposits. The risk element keeps increasing when investing in various debt instruments hence better returns. Money comes in its glorious best when invested in equity. The Stock Markets up to January 2008 had given returns beyond widest expectations. The subsequent crash [see my post[GLOBAL MELTDOWN-A LAYMANS VIEW] has wiped away life saving of many even before they could blink.

This meltdown has not affected everyone the same way. I came very close to grief but fortunately the safety net[see post EQUITY- FRIEND OR FOE, THE REAL MONEY PLANT and MONEY PLANT REVISITED] which I had put in place held and all my investments are safe. My respect for power of investing is keeping me like a KING - so far.

Now let us understand the baskets through which financial planning is given shape and body. The amounts mentioned for each baskets would differ from person to person and are my own guesstimates not based on any study. The baskets are arranged in order of my priority.

Investment in debt should be the starting point for anyone. Bank Fixed Deposits is the place to start with. I recommend Rs 10 lakhs as fixed deposit[FD] over a period of time. HDFC and Bank of India allow Over-draft[OD] facility on FDs which should be availed of. This has lots of advantages explained in my post THE REAL MONEY PLANT. Once Rs 2 to 3 lakhs are in place, the next basket can be used. Of course for Income Tax purpose second basket can be availed of first, as deductions upto Rs 1 lakh under Sec 80 C saves tax outgo. This amount should be invested in equity dominated tax saving schemes of Mutual Funds. This process should be repeated year after year till your target of Rs 10 lakhs FD is achieved.

Basket No.3 should be thought of only after meeting the demands of Basket Nos.1 and 2. Two or Four wheeler should always be purchased by availing loan as paying interest works out cheaper in the long run. Property should be thought of only when surplus remains after Auto loan. Before actually investing in property find out the loan amount which would be required. Take a pure life insurance policy for an amount which covers all your loans, including ODs [Basket No.4] and then only finalise the property deal.

In my assessment when today's youngster retires they would be requiring Rs 1.5 crores in saving to survive his/her old age in comfort. Pension schemes are a part of Basket No.1 and should have separate target over and above Rs10 lakhs FD. Personally I prefer Mutual Funds to Pension Funds. The target for life insurance policy should be Rs 50 to 75 lakhs. The purpose of this policy is not investment per se, it is part of the safety net. The logic behind spending this money is that in a worst case scenario the loans would get paid by the insurance money without adding to the miseries of the family, in the best case scenario the maturity amount would help in meeting the target of retirement fund.

By the time I could think of Baskets No.5 and 6 my funds had run out on me. I have no knowledge about these investment baskets. Anyway any beginner who reaches these baskets would be requiring the services of a professional financial advisor who would be knowing about these baskets.

Before closing this post I would repeat the guru mantra which is always balance your investments 50-50 between debt and equity. This gives you the safety net. Those who wish to live on the edge can alter this ratio as per their capacity of absorbing loses.

MONEY PLANT REVISITED

I had written my blog [The real money plant] in the early stages of the present global meltdown. Since then I have become wiser as the southward journey of the share markets continued. It was gratifying to realise that my model for financial planning has passed the litmus test, though it needs a little straightening in the safety net area.

Along with the power of overdraft, one more instrument for improving your investment returns, with somebody Else's money, is to take LOAN AGAINST SECURITIES[LAS]. It works like this:-

Before investing in Mutual Fund check with your Bank which mutual funds are eligible for loans. Out of that list select the funds you like and make the investment. Once a sizable portfolio is ready you can open your account by pledging these units with the bank. After formalities are completed the bank will give you a limit which would be 40/50% of the current value of your units pledged. The limit gets revised as the value of the units change. The limit you get is what you invest again to buy units in any fund of your choice. The circle can be repeated endlessly. One has to decide the amount of loan one is comfortable with. Care should be taken to opt for final limits right at the beginning as it would save duties/expenses applicable whenever limits are increased. The limits sought are not linked to the value of units pledged.

Please remember that money plant is like any other plant. It will take time before giving fruits. Yes if you have sufficient funds in one lot right at the start[like just retired persons or after selling a property], this period can be cut short. Following steps by way of safety net are recommended from personal experience.

• My Bank does not allow part redemption's of the pledged units. After achieving your desired LAS limit, it is adviceable to duplicate your investment in the same funds but do not pledge them. This will provide you with additional liquidity in the form of free units which can be sold for booking profits if the need arises. The free units sold can be purchased again when the market falls.
• Keep atleast 25% of the limit availed in Fixed Deposit. You can link it to the OD account but avoid using these funds even for short or medium term requirement. This arrangement would prove very usefull in a meltdown like in 2008 or at the time of closing the account.
• By experience you will know the level below which your LAS limits will not fall, this amount also becomes part of your safety net.
• As markets grow you will soon reach the LAS limit. A stage will come when the value of the units pledged is higher than the LAS limits opted. This differance also becomes part of your safety net. At this stage review your position and set new targets for debt and equity investments.

Students of economics will recall the concept of deficit financing which they had studied. Liveraging of today is a flavour of this concept. If done in excess it will lead to meltdown and doom, if not done at all you will remain at the present standard of living. The choice is difficult but not impossible to make. Find the right mix you are comfortable with. What is life without some RISK.

Wish you a comfortable journey of making money with somebody Else's money. WIN WIN for all

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?

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".

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.