Thursday, April 30, 2009


We all heard the rumours about ICICI Bank going bust couple of times in the past.That rumour had created a panic among the account holders of ICICI Bank and serpentine queues were seen outside the bank and its ATM. It was very similar to the dreaded "run on bank" for ICICI.This had even forced RBI and Finance minister to come out in the open declaring ICICI Bank as a "safe" bank. So what was the fuss about? Can Indian Banks go bust and can you loose your money? The answer to this is yes. Indian banks ,like any other bank in the world are exposed to certain risks and theoretically can go bust like some of the bigger banks (Wachovia Bank in US)in other parts of the world have.And in that situation you may loose part of your money. No one in India will loose 100% of his money kept in the bank because Reserve Bank Of India insures deposits upto Rs 100000 for every customer in every bank. Any amount beyond Rs 100000 is only exposed to that risk.This scheme is called deposit insurance and credit guarantee corporation (DICGC) Lets understand this is in little more detail.

Q1 Which banks are insured by the DICGC? All Banks.

Q 2 What does the DICGC insure? In the event of a bank failure, DICGC protects bank deposits that are payable in India.The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits.(i) Deposits of foreign Governments; (ii) Deposits of Central/State Governments;(iii)Inter-bank deposits;(iv) Deposits of the State Land Development Banks with the State co-operative bank;(v) Any amount due on account of any deposit received outside India(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.

Q 3 What is the maximum deposit amount insured by the DICGC? Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

Q 4 Can deposit insurance be increased by depositing funds into several different accounts all at the same bank?All funds held in the same type of ownership at the same bank are added together before deposit insurance is determined. If the funds are in different types of ownership or are deposited into separate banks they would then be separately insured.

Q 5 Are deposits in different banks separately insured? Yes. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.
The most important thing here to note is that while RBI insures deposits only till Rs 100000 in a bank for a customer. But if the customer has multiple account in different banks (not branches) then his insurance amount goes up. For example, if you have RS 500000 in your savings account in HDFC Bank, then only RS 100000 out of RS 500000 is insured under this scheme. But if you break this down to deposits of Rs 100000 each in 5 different banks like HDFC,ICICI,SBI,AXIS and BOB,the entire Rs 500000 will be insured under this scheme. Thus you will have no worries of loosing your money in case of bank going belly up.Hence , having multiple accounts in multiple banks is a very good idea especially for deposits.


Till a couple of years back,credit rating agencies were an unknown entity in India.They were predominantly a western country phenomenon where the financial markets are much more developed.But,now things are changing in India as well,and changing pretty fast at that. In India we now have well established credit rating agencies which provide credit related data of individuals to the member banks and financial institutions. These credit rating agencies are now playing an increasingly important role in deciding whether your loan gets approved or rejected by the banks/FIs in India. Hence it makes sense,to know bit more about them.
What are these Credit Rating Agencies? These are agencies which collate information regarding the credit history of an individual having loan/credit card accounts with member banks and financial institutions. They then make available this information to other banks and FIs, in exchange of fee , on request.The other banks /FIS use this information to decide on your loan/credit card application with them. For example, if your credit history has been good in Bank A i.e. you have promptly repaid all your EMIs etc then chances of your loan or credit card application getting approved at Bank B or Bank C is higher. Similarly, an adverse repayment report will adversely affect your chances with all other banks.
Which are the different rating agencies in India?
1.Credit Information Bureau (India) Ltd or Cibil
2.Equifax Credit Information Services
3.Experian Credit Information Company of India
4.Highmark Credit Information Services
Which is the most popular Credit Rating Agency in India?
At present, Cibil is the largest agency, with database on around 135 million customers of 164 banks and non-banking finance companies.
How does CIBIL allocates credit scores?
Cibil provides a credit score of up to 900 based on the borrower’s liabilities and payment history. A delay in the payment of an instalment affects the credit score. Similarly, if a cheque is dishonoured, the credit record is impaired. Cibil provides the score and banks, based on their estimate of risk, decide whether to give a loan or not.
Significance of these credit scores?
CIBIL scores imply your credit worthiness and helps the prospective lender to make a credit call based on this. A higher credit score signifies better credit worthiness than a lower score. For example , a person with credit score of 850 is supposed to have a very good credit history ,while a person with credit history of less than 500 will mean that he is sub prime customer.
How much should be your credit score ?
Well, this depends from bank to bank. Some banks might be willing to lend to a person with credit score of 600 while other may not lend to anyone with credit score of less than 750. It is entirely the bank/FIs call.However, in Indian context a credit score in excess of 800 is supposed to be good and will be approved by all the major bankers/FIs.
Can I know my CIBIL Score ?
As of now , the CIBIL scores are not available to common people. Its only made available to the member banks/FIs. However, there is a proposal to make this information available to everyone via a toll free number or a website . This information when made available in India will be a paid information like in western countries.

Tuesday, April 28, 2009


With the cost of servicing customers going up for banks, the minimum balance amount to be held in savings account is being increased by banks these days.Most of the Indian Private banks now ask customers to maintain an average quarterly balance of Rs 10000 in their accounts ,up from Rs 5000 not so long ago.The foreign banks have much higher minimum balance criteria for all its savings account holders. What does this increase mean to you and how does this affect you ? Lets try and understand this and will also see how best can we deal with this problem.
How does this minimum balance criteria work? The minimum balance criteria stipulates that for every day of the quarter, your savings account should have an average balance of Rs 10000 (in case of banks where the minimum balance is RS 10000,likewise it will change with the minimum balance amount). So for example, if you have an account with ICICI Bank or HDFC Bank, where the bank asks you to maintain Rs 10000 average quarterly balance in your account, it does not mean that you need to have at least Rs 10000 in your account on every possible day in the quarter. Rather , it means that your account must have a credit balance of Rs 10000 for 90 days i.e total Rs 90,000 for 90 days. Now , lets say today you have Rs 20000 in your account and tomorrow you withdraw Rs 15000 form your account, it does not mean that you have violated the minimum balance criteria. In this case your average balance for these 2 days would be Rs 12500 (20000+5000/2)and hence you still have an average balance which is well within the permissible limits set by the bank. In essence for every dip in your balance below Rs 10000 or whatever is the minimum balance required , there has to an equal surplus for equal number of days to meet the criteria.
Why do banks have this minimum balance criteria? Banks have valid reasons for doing so. Banks spend a lot of money towards servicing your account, they send you statements through courier, support ATM networks,staff expenses when you visit the branch etc. All this costs money and hence they ask you to make a commitment of minimum amount in the account so that the banks can recover some of this cost.The money deposited in the savings account attracts a mere 3.5%interest p.a. in India and thus is the cheapest source of money for the banks.
How to deal with it? You may consider following steps:

1. Open a salary account - For all those who are salaried, they may already have a salaried account and hence wont have a problem of having to maintain minimum balance in their savings account. If you don't have one, check with your company admin or HR and get a salary account opened with a bank. Banks in order to attract bulk deposits offer salary accounts to employees of corporates where they normally waive off this criteria.

2.Have a higher balance for few days - One way of dealing with this is to keep higher balance for few days and then remove the money for use. This strategy will ensure that your average balance criteria is met while you also use your money. For example, If your monthly salary is Rs 50000 and if you keep Rs 50000 in your account for 7 days before spending it, you would have met the average balance criteria of Rs 10000 in your account for the whole month. After the week you may use up your money without attracting the penalty from the bank.

3.Get your salary/reimbursement cheque in this account - If you are getting salary cheque in some other account, I suggest get your salary cheque deposited in this account only. Also have all your reimbursements come to this account. This will prop up your average monthly balance.

4.Opting for EMI payments or investment SIPs post 15-20th of the month- Another thing to do is to choose to pay all your regular foxed payments like loan EMIS,mutual fund SIPs, insurance premium etc post 20th of the month. This will ensure that the money is in your account for first 20 days which will keep your average balance up will earn interest too.

Monday, April 27, 2009


I meet lot of people who have bought insurance plans but have no clue if that plan is best suited for them.Most of them tell me that they bought it because the insurance agent recommended them this product as the best one for them.Well insurance agents are trained people on the subject matter of insurance and are supposed to sell you insurance based on your need analysis.Need analysis entails analysing the financial needs and goals of the client and based on that the agent should recommend a product. While there are few good agents out there who do that, the truth is there are plenty more who are out there to sell a product based on their OWN need analysis.and their need is to maximise the commission that they get out of the sale. The result is that lot of unsuspecting and naive clients end up with products/policies which may not be right for them.They keep on paying premiums year after year hoping that they are putting money in the right place and will help them reach the ultimate goal of financial independence. The truth is seldom will you come across situation where ill suited product will get you the desired financial independence.
So whats the solution? All of us cant be experts at insurance. Yes , we cant be experts at insurance but we can be little smart at dealing with our agents. Here I am listing down 10 questions that you must ask your advisor/agent before handing him the premium cheque.
1. I don't have insurance cover. What should I buy, a term plan or an endowment? This is the first question that you must ask your agent even if you have an insurance cover. The reason is that this is sort of a litmus test for all the insurance agent/advisers. A good and professional advisor will tell you that first thing that you must buy, if you don't have any insurance , is a term plan and then he might suggest endowment. The reason for that is that term plans are the cheapest form of insurance. Any agent who tells you otherwise is out to make a killing at your expense. You must not deal with him. You don't have to go further and ask him any more questions. This question is like a qualifier.
2.Who are your clients? Ask him to tell you the names of few of his clients. Ask him especially about his clients in your neighbourhood. This will ensure that he can't give dummy names and also you can check with them about his service delivery levels , if you want. A good advisor will be more than willing to tell you the names of his clients because they do depend a lot on positive references for a bulk of their business. While the cheats will always try and avoid this.
3.What will be the internal rate of return (IRR) on my investment under this plan? I know this is a bit technical for everyone to understand, but ask your agent this nonetheless. IRR is nothing but the effective rate of return that one gets on his investment. Besides, insurance agent is supposed to be a well trained financial adviser and he is expected to know this. A good one will tell you in detail about this. And if he is struggling to tell you this then , you better dump him because it means either he does not consider you intelligent enough to explain you this simple concept or he does not know this himself ,when he is supposed to tell you where to put your hard earned money for next 10-15 years. Either way ,he is not good for you.
4.What has been the performance of this fund/plan/policy since inception? You must ask this question if you are buying a ULIP from him. Since ULIPs are market linked insurance policies, their performance, is not guaranteed and depends on the market. Generally agents try and tell the clients the performance of the fund when the markets were doing well and will conveniently ignore the performance of the plan when the markets were not doing well. To get a better and correct picture about the policy/fund's performance , you must ask him about the performance history since inception. Then you must match the details provided by him to the ones mentioned on the insurance company's website. If there is any disconnect in the data provided, its a signal that you are not dealing with a good advisor/agent.
5.What is the claim settlement ratio of the company? Ask your agent to give you an idea of the claim settlement ratio of the company he belongs to . Also ask him how does that compare with other insurance companies. For example, in India, Life Insurance Corporation (LIC) has the highest claim ratio among all the life insurance companies in India.From a customers point of view, the company with best claim ratio is supposed to be a better choice.
6. What are the exclusions of this policy? Most of the insurance policies have well defined exclusions. These exclusions are supposed to be explained by every agent to his clients , in detail before completing the sale. But normally, none of the agents do this. They don't do it because they believe it reduces their chances of making a sale. While declaration of policy exclusion is vital element of the insurance contract , the agents never tell it. So you must ask your agent about the exclusions of the policy. If he is less than forthcoming on that , then you should know that he is not the guy you should be dealing with.
7. Is the returns in ULIP guaranteed? Its a common practise to sell ULIPS on the premise of a product delivering very high guaranteed returns. Truth is that ULIPS are market linked products and the returns are not fixed or guaranteed ever. They may deliver higher returns but that's not guaranteed and depends totally on the way market behaves. If your agents tells you anything other than this, you are stuck with a bad lemon.
8.What are the charges deductible from my premium under this plan? Insurance plans are known to have very high upfront charges which are deducted from the premium paid by the customers. These charges can be upto 30-40% in case of ULIPs and can upto 60-70% of the first year premium in case of endowment plans. You must ask your agent about this. A good agent will come clean on this while a bad one will try and give you a vague answer.
9.What is your commission in this? Well this might seem little impolite to you , but, trust me there is nothing wrong in asking your agent this question because its common knowledge that they work on commission basis. Agents make about 30% of the first year premium paid by you as commission on sale of endowment plans while for ULIPs and term plan its lesser. They get lowest for term plans .
10. Why should I buy from you? Last but not the least, ask him to list down reasons why you should buy it from him. A good agent might try and differentiate himself on the basis of his impeccable service delivery record etc. Also it will allow him to tell things which he might not have been able to tell you which could be beneficial for you.
So if you ask these 10 questions to your insurance agent, I am sure that chances of him selling you a ill suited product will be very slim. These are simple questions which all us can use easily to avoid being duped by the insurance cheats out there whose only aim is to make big commissions at clients expense.

Sunday, April 26, 2009


When you do a search on google insight on the term credit card complaint, you will see that there are mainly only 3 countries where this term is searched by net users, US, UK and India. And I was surprised to see that the maximum number of searches were from India, more than 4 times of searches in US and UK put together. This is a mere reflection of the bigger problem of mis-selling of credit cards by the companies/agents to the unsuspecting customers.
Almost all of us either have had bad at least one bad experience with credit card companies or at least know someone who has gone through that nightmare. Most of the time there are disputes regarding late payment,bundling of insurance along with the main credit card which the customer never asked for or disbursing loan on credit card to customers by luring him with some marketing gimmicks etc.
We all realise of this when we receive our monthly bills.When we see that bill is loaded with unnecessary charges we all get worried and baffled. Some of us call the call centre while some just don't know what to do. Here I am listing down the various measures that you can take in a step wise manner to ensure that your grievance is addressed by the concerned company.
Step 1- Call the company call centre and lodge and formal complaint
The first step is to call the call centre number of the respective credit card company and let them know about your problem. You can get the call centre number of various credit card companies in India here.They will try and explain their part of the story. if that convinces you , then its fine , otherwise lodge a complaint with officer. They will generally give you a reference number or complaint number. make a note of it.You need to follow up on this after a while.
Step 2- Email them your complaint
As a second step, you may email the respective card company your complaint. You may also mention that you already have called the call centre and nothing has been done as yet. Mention the reference number as well. Have a copy of this email saved for your future reference.
Step 3-Mail them your complaint by courier
If both the above steps don't get you desired result, then you must send them your complaint to the respective bank via courier. Have an acknowledgement of the receipt with you. This will act as a legal evidence against the bank that they have received the communication from you and hence the onus of taking the necessary step will be on them. This is a necessary step before proceeding any further.
Step 4-Approach Banking Ombudsman
If the company still does not resolve your issue to your satisfaction then you may approach RBI's Banking Ombudsman.It is a forum available to bank customers to seek redressal of their most common complaints against banks, including those relating to credit cards, service charges, promises given by the sales agents of banks, but not kept by banks, as also, delays in delivery of bank services. The addresses of various Banking Ombudsman in India is available here.
Step 5-Approach Ministry of Finance
After approaching Banking Ombudsman,chances are that you will have to go no further. But, in case you have to , then the next step should be to approach the Ministry Of Finance, Govt Of India. Write a letter to the ministry explaining your grievance and the steps that you have taken till now and the responses that you have got. Ask them for their interference. They take these things very seriously.
Step 6- Approach Media
If nothing works out, then best way is to go public with your grievance and build public opinion against it. Approach media and let them take up your issue. They will be more than willing to do so. In fact CNBC TV 18 has a program called Pehredar, which is meant for this only.You may contact Pehredar at
Hopefully, after all this you will have your problem resolved fully and effectively by the concerned bank. The biggest thing in this is to not loose hope and be persistent with what you believe is right.
Stay wise n stay wealthy...

Saturday, April 25, 2009


Crisil recently came out with a study which said that NPAs(Non Performing Assets ) of banks in India might see 200% growth in next 12-18 months. The delinquency levels across the banking industry is expected to treble as per Crisil. This coupled with continued job losses and depressing economic activity has led to fear among banks of rising defaults among the retail customers. As a result they are looking to restrict their exposure to retail customers especially in the unsecured loan segment like credit cards. ICICI Bank has sent out letters informing its credit card customers about their new limit which is lower than the earlier one. In most cases the cash limit is lowered to 0. This means they cant withdraw cash from their cards while the credit limit will stay at a much lower level. ICICI Bank is not alone in this. Others banks like HDFC Bank, Axis Bank, Citibank, Deutsche Bank, Standard Chartered Bank, HSBC Bank have also reduced credit limits of their customers , which also include cash limits.
This is done to ensure that the retail customer is not over leveraged in this difficult economic scenario where people are loosing jobs at massive scale. Banks are taking this step to pre empt rising NPAs on their credit card book.
The banks are not going to reduce the limits for every single customer holding their credit card. They will be doing it basis the credit worthiness of the customer. The banks will use the customers track record with them and also his CIBIL score in determining his credit worthiness. In some cases they might also increase the limit if the customer has impeccable credit worthiness. So those of you who have very good credit history with all the financial institutions need not worry. For those whose credit limit is reduced, I think its a blessing in disguise since it will limit the extent of leverage that you can take. Over leveraging is dangerous both for the bank and the customer, hence its a right step.
The moral of the story is that credit is to be used efficiently and diligently. Else banks will be forced to cut the credit supply like they are doing today.

Friday, April 24, 2009


The dramatic fall of over 50% in Indian stock markets since January 2008 has left many retail investors in bad shape. This is true for people who have invested in equities through mutual funds which are supposed to be less risky. But, the market collapse has led to many retail investors seeing their corpus down by a large percentage. Many are now regretting that they did not en cash some of their gains when the market was doing well.But since mutual fund investors could not have booked profits without selling their units, the option of en -cashing some of the gains was mostly untenable for mutual fund investors.
But now ICICI Prudential has launched a mutual fund which aims to address this issue. Their Target Returns Fund is a fund which aims to provide all its investor an option to remove gains from the fund to a stable debt fund at a predetermined trigger,thereby protecting the gains made.
How does this fund work? The fund seeks to generate capital appreciation by investing predominantly in equity shares of large market capitalization companies constituting the BSE 100 Index. It provides investors with an option to switch the appreciation or entire investment with appreciation to pre-selected debt schemes of ICICI Prudential Mutual Fund automatically based on pre-set triggers for their expected target return; as and when these targets are achieved.
How will it benefit the investor?Predetermined triggers are set for investors based on their risk appetite. Based on appreciation in the NAV when investors’ pre-selected targets are achieved, appreciation if any is transferred on behalf of the investors by transferring the appreciation into a debt fund of their choice.This minimises the potential volatility in earnings for the investor.
What are the predetermined triggers?The investor will have the choice to select from a set of 4 triggers viz., 12%, 20%, 50% and 100%. On achieving the pre-set trigger from initial investment level, either the appreciation in NAV per unit or the entire investment (as selected by investor) will be switched into any of the four pre-selected eligible debt schemes .
Why invest in this scheme? The biggest USP of this scheme is the option of transferring one's gains from this fund to a more stable debt fund thereby protecting the gains. If we have had this kind of option in all the equity funds available in the market earlier, the damage in the stock markets would not have affected the retail investors mutual fund portfolio that much , since part of the profits would have been regularly moved to debt fund.
The drawback? Since the fund aims to protect the gains made in by the fund by transferring part of the corpus to a debt fund, the potential for an upside in a stock market is limited as against a traditional equity fund without this option.
My verdict- Its a fund which offers a unique benefit to its investors. The predetermined triggers will enable even a "not- so- active investor" to hold on to his gains made during good times. This is an option whose time has come and I expect most of other funds to offer this option.


Of late there have been numerous incidents of fraud reported involving the misuse of cheque books. The miscreants use the cheque leaf of someone else and then forge the signature of the customer and siphon off the money. In some cases, the cheque leaves are stolen from the drop boxes and then a bogus account is opened in some bank to en cash this cheque thereby defrauding the customer. The point I am making is that cheque books are as good as currency and needs to be guarded like we guard our cash .Besides being careful of the physical security of the cheque book what else can you do to ensure that its not misused against you ? There are certain precautions that you can take in this regard:-
1. A cheque is a written instruction you give to your banker to make payment by debit to your account on demand. Always cross the cheque making it account payee. This will limit the chances of it being misused.
2. Cheque is a valid payment instrument from the date shown on the face of it. By banking practice six months is treated as normal validity of a cheque. So never forget to mention the date while issuing a cheque.
3. A Bearer cheque is payable to the holder. An Order cheque is payable to the person on whose favour it is drawn or subsequent endorsees. So banks seek identification of the person receiving payment of an order cheque. So, issue the relevant cheque depending on the usage.
4. Banks verify the signature on the cheque with your specimen signature on record before making payment. Make sure that your signature is not very simple and also is not known to all and sundry. Best strategy would be to use separate signature for your bank account and separate signature for all your other official works.
5. Take proper care of your cheque book. A signed bearer cheque getting into wrong hands would mean a loss! So stay away from issuing bearer cheques.
6. Report loss of cheque to your bank immediately and give Stop Payment instruction to them.
7. Do not issue cheques without adequate balance in the account or arrangements to pay. Dishonour of cheque for insufficiency of funds or exceeding amount arranged to be paid, is a criminal offence punishable with imprisonment for a period upto one year or with fine which may extend to twice the amount of the cheque.

Wednesday, April 22, 2009


We all invest in mutual funds and get the returns either in the form of dividends or get capital appreciation benefits under growth option. But do we know how is this income taxed in India? What are the tax implications on the income arising out of mutual fund investments? Will try and answer this today.We will look at how income arising from mutual funds are taxed for an individual investor. The income from mutual funds can arise out of dividend received from the fund or from the capital gains (short term or long term).
Let us understand how is the income arising out of dividend and capital gains taxed as per Income Tax Act in India.
a.On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments)
Income in the form of dividend is tax free in the hands of the investor. Moreover such a fund house is exempt from paying Dividend Distribution Tax also.
b.On units of funds other than equity oriented funds
Income in the form of dividends is tax free. However, the fund house needs to pay Dividend Distribution Tax (DDT) at the time of distributing the dividend.The rate of dividend distribution tax depends on who is the recipient of the dividend and is calculated as under- Individual and HUF - 14.025%- Others like corporate - 22.44%
Capital gains is classified into 2 categories i.e. Short term and long term capital gains. Short term capital gains arises out of sale of units held for less than 12 months and long term capital gains arises out of sale of units held for more than 12 months.
a Short Term capital Gains
-On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments)
The income arising out of short term capital gains in mutual funds is to be taxed at the rate of 10% plus applicable surcharges.
-On units of funds other than equity oriented funds
Short term capital gains is added back to your income and then your total income is taxed as per the IT slab i.e. 10% or 20% or 30% for the ones falling in the highest bracket.
b. Long Term capital Gains
-On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments)
Tax free
--On units of funds other than equity oriented funds
There are 2 methods for this.
1. The investor can calculate capital gains taking the benefit of indexation and pay tax at the rate of 20% plus surcharge.or
2. The investor can calculate the capital gains without the benefit of indexation and pay tax at 10%.
What should you do ? I would argue that for wealth building sake one should go in for growth option which will result in long term capital gains for you. This will result in long term wealth building due to the power of compounding in your fund and also is tax efficient as is evident above. Dividend option works fro people who are more concerned about getting some liquidity back at regular intervals.

Tuesday, April 21, 2009


Reserve Bank Of India (RBI) somehow loves the date of 1st April. On this year April 1st 2009, it gave all the customers having ATM cards a unique gift of no transaction fee on cash withdrawals from non member banks ATM. So virtually ATM withdrawals from any ATM became free for the user , irrespective of his principal or mother bank. Come April 1st 2010, RBI has mandated that all the banks will have to calculate the interest on the savings account on a "daily product basis".
This means that you will get interest even if you keep money in the account just for one day in a month.Currently banks give you interest on savings accounts depending on the lowest balance held between the 10th and the last day of the month. If you keep money in your savings account from 1st to the 9th of the month and withdraw it on 10th , then you will not any interest on your deposits even though the bak had your money for 9 days. This helps the bank enormously as most account holders get their salary on 1st of the month and by 10th they generally use up money for paying up EMIs, rent and other fixed expenses. So the banks typically have the highest balance in savings account between 1st and 10th of the month but, due to the current rule, they avoid giving any interest to the account holders.
But, this will change from 1st April 2010. To illustrate how this will work, let us say you deposit SR 100000 in your savings account on April 1st. On April 10th you withdraw all your money. On april 11th you put the money back and then withdraw it again on 31st May.Under the current rule, you would not get any money as interest.
But with new rule coming in force next year, for each of the first 9 days you will be paid an interest of Rs 9.6 (@3.5% pa. which is the savings interest rate mandated by RBI).On the 10th day no interest will be paid since you removed your money.Interest payment will again resume from 11th April and will go on till 30th May. 31st again you will get no interest as your removed your money.So for the entire period , the depositor will be paid Rs 566 (59*9.6).
This is a big development for all of us who keep our money in savings account and we need to thank the RBI for taking this wonderful step. Whats the catch in it? Well none . You only have to wait for your calender to turn to 1st April 2010 to enjoy this benefit.

Monday, April 20, 2009


One of the classic dilemmas haunting lot of people is the issue of buying versus renting the house for accommodation purposes. Some experts feel that buying a house is the better option as it helps you create an asset in the long run, while some believe that renting is better option considering the prohibitive rates realty commands these days. And by renting one can save money by paying rent which will be lower than the home loan EMI and these savings can be invested for long term wealth creation. So both arguments have their own merits and none can be dismissed easily. Both of them have their own benefits and shortcomings. So, before we decide on which way to go ,we need to fully understand the pros and cons of each of these options.

- It creates an asset for you in the long run.

- You don't have to pay for your accommodation after you pay off your loan, which is maximum of 20 years, unlike,in renting where you have to pay monthly rent for every month till you continue to stay in the rented premises.

- You also get income tax benefit. Upto Rs1.5 lakhs of your interest component paid in the year on your home loan is deducted from your taxable income and Rs 100000 principal repayment is also tax free. The same benefit is also available to your spouse in case you decide to go for joint loan for the house.So the total tax able income deduction benefit possible on your home loan could be a high as 5 lakhs for both the spouses.

- House may be used for generating income under reverse mortgage post retirement.

- No hassle of changing house every 11 months,unlike in rented accommodation.

- Fulfills the dream of having roti kapda and makaan.


- The monthly outgo in the form of home loan EMI is generally higher than the rent.

- Demands long commitment towards EMI payment. You have to commit a large portion of your income towards monthly payment of EMI for a relatively long period of time like 10-15 years or even 20 years. This limits your ability to meet exigencies and financial emergencies.

- Once you buy a house , you give up the flexibility of moving to another locality in the same city or to another city. You are stuck with that locality for ever,unless you decide to sell it off ,which is long and cumbersome process.

- Ownership of house also comes with high bills like society maintenance charges etc which have to be paid monthly/quarterly etc. This can feel like paying rent after buying a house and be very annoying for few.



- Lesser financial strain as monthly outflow is lesser.The rent paid for a house is generally much lesser than the home loan EMI paid to buy a similar house.

- Offers flexibility of choosing neighbourhood as and when desired,unlike with self owned house.

- No long term commitment of paying EMI.In case of any financial stress one can always stop paying rent ,if its higher, and move to a smaller place which has lesser rent. This is not possible with self owned house as the EMI is fixed and has to be paid every month .


- The money paid as rent is an expense unlike EMI which builds an asset.

- Lower IT benefit for money paid towards rent as against money paid towards home loan EMI.

- Forced to change house every 11 months and pay brokerage for new house on rent. This has both financial , emotional and practical difficulties. Changing house every now and then can throw off your social life out of gear. Your kids might have to shift to new school etc unless you manage to find another house in the same locality.

- No income possible post retirement, unlike with self owned house which does offer an option of income through reverse mortgage.

SO WHAT SHOULD YOU DO?Well you must decide for yourself depending upon your need . I would say you should go for buying a house as its pros far outweigh its cons. However, you may consider renting as well in case you cant afford to pay the EMI of the house that you want or are not sure of the certainty of future cash flow .for example if your job etc is not stable.

Sunday, April 19, 2009


After having completed almost over 6 years in corporate world earning paychecks and living off it, I decided to do a bit of introspection last week and found out that in last 6 years , I have made some grave financial mistakes.I thought of sharing these mistakes with all my readers so that they can learn from them and don't end up making these mistakes themselves.
MISTAKE 1 - Opting for "No PF Deduction"

After I joined my first company ,I was thrilled at the thought of earning a handsome amount of Rs 12000 p.m.(Struggled to get anything better than that in those days after dot com burst). But I was taken aback when the first pay check that I got was for Rs 9800. I was baffled . I wanted to know what happened to the rest. A quick call to the HR and I was told about the various deductions that had eaten up the rest of my money. Eaten up? Yes that's what I felt then, and hence wanted to reclaim my money. So, I found out that there is an option wherein one can choose not to have his Provident Fund deductions out of his salary. off course you have to give a declaration to that effect to your company. I did so, and started enjoying my full salary from next month onwards. It was good while it lasted because it gave instant gratification on every occasion I splurged that extra cash. But, later on I realised that it was a big mistake. Not for nothing, PF deduction is made mandatory, by the Govt Of India. This PF deduction is kind of forced saving for our retirement. And the fact that I did not opt for it meant that I was left with no saving whatsoever after I quit the job. The money which could have gone in the PF fund, would over a period of next 35 years become a huge amount due to compounding effect.I lost out on that opportunity of starting with my retirement fund really early in my life. But, now I can not go back in time and reclaim that money. So my advice to all of you is to never do this with your PF deductions. Infact, if you can , then increase the percentage of PF deductions from minimum 12% to a higher level which you can afford. The more you save in your initial years , the bigger will be your final retirement corpus.

MISTAKE 2 - Buying an insurance policy just to meet a target and then letting it lapse.

I was working with ICICI Prudential and was involved in insurance sales. ICICI Prudential is known as the most aggressive company in the insurance domain in India and as such being in sales meant that we were always under huge pressure to log in more policies than the others. But insurance being insurance, no one wanted to buy it.Now under pressure, sometimes,the sales people buy policies in their own name just to meet the targets. This was counted under their targets which helped them save their skin from the boss's ire and then later on they used to cancel the policy.Cancellation of the policy in the free look period meant getting back almost the whole money back. So it was tactic used by lot of sales people to manage a difficult month in sales. I was always dead against it and never thought of buying a policy on ones own name just to meet the target as the right option. I always believed that you should buy a policy from your own company only if you really need it. But one one such really tough months when sales were not happening , I too fell for this. I convinced myself that I am not buying this policy to meet the number but because I really need it. So I bought the policy for RS 25000 annual premium. And Since I had somehow convinced myself that its a policy that I need it , I didn't cancel it during free look period. Had I cancelled it during free look period of 15 days , I would have got my money back. I continued with the policy for 5 more months and then stopped paying. I stopped because I knew that it was not the policy I needed. It was not worth paying for a ULIP . Result was that I lost my hard earned money in that policy. Had I put the same money in stock markets then,today I would have been sitting with a neat profit of atleast 400% on that. That taught me that one should never buy own company's product just to meet the numbers for your boss.

MISTAKE 3- Not transferring my PF accumulated from my 2nd and 3rd job.

This mistake is the lesser of the earlier two. You all know that in my first job, I didn't have any PF deductions and hence no hassle of transferring my PF money. However, I had PF deductions in my 2nd and 3rd job . But after I quit those respective jobs, I didn't get the money transferred to my new PF account. I have no reason why I didn't do so. Maybe I didn't think it was important enough or maybe I was just too lazy. But the fact is today after so many years I have not yet got the money transferred to my new account.Worse is that I have forgotten details like My employee ID etc of my earlier jobs. I am really at loss to explain this lack of sense of urgency on my part to deal with something which is so very important.But, the good thing is that , I can still reclaim it and get the money transferred. Hopefully will do so now.
I hope you will stay away from these mistakes that I made. If any of you have some thing similar to say , please do share with the fraternity.

Saturday, April 18, 2009


Anand Chokkavelu from wrote a very interesting article where he has discussed 10 numbers that have a deep impact on the person's wallet. He has talked about things like the minimum contribution in 401k account by Americans, America's saving rates etc.Some of the numbers mentioned there are unique to America and has little relevance for Indians, So I thought of listing down my own list of 10 numbers that affect the financial health of an average Indian.
This is the total charge under New Pension Plan in paisa terms. The total charges that an investor needs to bear in New Pension Plan will be just 9 paisa for every Rs 100. This is the lowest that any investment tool charges in India as on today. The second best cost effective options available in India is mutual funds which charges Rs 2.25 for every Rs 100. This difference in the charges over a period of 25-30 years result in huge difference in savings. NPS is expected to be launched for everyone (till now it was for govt employees only) since 1st May 2009. So you must look at investing in it for your retirement.
This is the proportion of equity you must have in your investment portfolio. Here X is your age in years. for example, for an adult of 35 years, he must have 65% of his investment in equity instruments like shares,equity mutual funds etc. Equity is the best class of investment when it comes to delivering returns over long term. Historically Indian equity markets have delivered returns in excess of 15% compounded yearly in last 30 years. Compared this to any other investment option and you will see equity will come up with trumps.
This is the number of years in which your investment will double. X denotes the rate of return generated from the investment.For example, if your FD gives you an interest rate of 8%, then your money will double in 72/8= 9 years.
This is the amount of investment that is tax exempt under Sec 80C of the IT Act. These investment have to be made in defined instruments like ELSS, FD, NSC, PPF, EPF , NABARD bonds etc.This is available to every person who is earning and is liable to pay tax. One must take full advantage of this benefit to save tax and also build long term wealth in the process.
This is the average rate of interest charged by credit card companies on the outstanding amount you have on your credit card. This is by far the highest rate of interest you will pay for any financial products, discounting the rates money lenders or some micro finance companies charge for lending to sub prime borrowers.You will agree that paying 40% interest rate pa is atrocious and hence the first thing that we must do is to pay off the credit card balances. Revolving outstanding on credit card should be strict no-no.
Reducing Balance Rate=2XFlat Rate
There is a huge difference in the interest rate charged on reducing balance basis and the interest rate charged on a flat rate basis. Under reducing balance interest , the interest is charged only on the amount of your loan that is outstanding at the beginning of the defined period (monthly,quarterly,annual etc). For example, if your initial loan amount is Rs 1000 and your EMI is Rs 100 and the reducing rate of interest is 10%, then, after you pay your first EMI your principal outstanding becomes 900(1000-100). Now the interest will be charged only on RS 900 and your total interest component will be Rs 90. Whereas in the same example, if the rate of interest was flat, then the rate of interest would always be charged at Rs 1000 irrespective of the outstanding amount. This results in a person paying almost double interest under flat rate. Some banks give you the option of reducing balance rate, but, some don't give that option and charge you only at flat rate (Example - Citifinancial Consumer Finance). so in that case how would you know what would be the rate of interest had it been reducing rate? Just multiply the flat rate quoted by 2 and you get the reducing rate. Now go to the other banks and compare their reducing rate on loans with the ones who tell only flat rate. The one offering you the lowest rate is where you should do the deal.
This is the how many number of times of your annual income should be your life cover. Some experts (like Suze Orman of CNBC fame)argue that it should be 20 times. My take is that you must decide basis your liabilities and if you can afford 20 times of your income as life cover, go for it,but, if you cant pay so much premium , then you MUST have life cover which is atleast 10 times your annual income to ensure that your dependents are not faced with any financial stress after you. So check your life cover. If it does not meet this , then call your financial planner or the neighbourhood LIC agent now.
This is the total savings rate of Indians in percentage terms out of their total earnings. On an average , the 33% of India GDP is ploughed back in the economy as savings and investments. This tells you that you must save AT LEAST what fellow Indians are saving. So next time you get your salary cheque, the first thing you must do, is set aside 33% of it as your saving. Anything less than that will mean that you will be falling behind others in the quest to getting financially independent and wealth accumulation.
Your Home loan EMI should not be more than 30% of your pretax monthly income for your financial well being over a long period of time. Since home loan EMIs entail long term commitment , anything more than 30% of your monthly income will mean that too much of your life will be dependent on this one factor alone. Your chances of saving, providing for kids education , own retirement, meeting exigencies etc might be compromised.Hence try and keep your home loan EMI at 30% of your pretax monthly income.
This is the number of endowment policy you should ever buy. Endowment,ULIPs etc are big scam and should not be bought under any circumstances. Why do I say this? Check out Always go for term insurance.
If you manage to keep these 10 numbers in control, then I dare say that financial independence wont be wishful thinking for you anymore.
Stay wise n stay wealthy...

Friday, April 17, 2009


WE all know the importance of having a retirement fund which will take care of our expenses after we retire. Most of us are advised to start early at retirement fund so that with time it gains weight and becomes substantial by the time we retire. But what if someone hasn't been so prudent to start early . What if someone is due to retire soon and does not have any retirement fund so to speak. What are his options.Well I must admit that its a terrible situation to be in. However, there is a ray of hope for all such people ,if, they have a house in their own name. For all those senior citizens , who own a house , reverse mortgage is the solution to their post retirement worries.
What is reverse mortgage ?- Reverse mortgage is the concept of pledging your self owned house to a financial institution who then makes you a loan basis the house value.This is just opposite of mortgage. In mortgage, the lender receives money every month in the form of EMI, whereas under reverse mortgage its the borrower who receives the money from the lender monthly. This is because under reverse mortgage, the bank does not extend the loan amount as a lump sum to the borrower. Rather , it pays the loan amount in the form of annuity.The lender will continue to charge interest rate on this money which is to be repaid by selling the house.
How does it work? -The lender makes a loan basis the house value to the borrower. This is typically 45-60% of the loan value. The loan is then given in the form of fixed monthly payout to the borrower rather than at one go. The borrower need not pay anything back to the lender.Interest as well as the principal keeps on accumulating . The lender will keep on paying the payout for the tenure(15 years in India) after which the house is sold and the lender settles his account.The balance is returned to the heir.For example, if the total outstanding of the bank considering the principal and interest is lets say Rs 50lakhs and the value of the house is Rs 75 lakhs, then the bank will take Rs 50 lakhs out of the sale proceeds and the remaining Rs 25 lakhs will be passed on to the legal heir.
What are the terms and conditions? Following are the basic terms and conditions of reverse mortgage:
- House in own name.
- Minimum age of 60 years.
- Maximum tenure of 15 years
- The interest charged can be fixed or floating .
- LTV (Loan to Value) for loan is 45-60% of house value.
- Assessment of house value if done every 5 years.
Who are the major lenders in India?
In India reverse mortgage is being extended by following banks/institutions as of now
National Housing Bank (NHB)
What are the tax implications of the monthly payout received ? We all know that the pension received in India is taxed, but, in case of reverse mortgage there are no tax liabilities , simply because it is treated as a loan and not as a tax.
What happens after the tenure i.e.15 years is over? The loan tenure is for 15 years after which the payout is stopped. The person can continue to live in the same house till he desires and his house will belong to him. The interest on his loan will keep on accumulating till the time the loan is paid back. The loan is paid back after the death of the person or if he gets some money from other sources by which he can settle the dues.In case of death of the person, the bank will sell the house and recover its outstanding principal and interest due and the balance money will be passed on to legal heirs.
Who should opt for it? Reverse mortgage is meant for every senior citizen having a clear title house but it will be most useful for people who have not been able to build substantial corpus for retirement, or for those who don't have any other source of income. People who don't have kids supporting them will also benefit from this scheme.

Thursday, April 16, 2009


Today , I thought of touching upon the taxation aspect of some of lesser known investments/payments like severance pay,EPF etc. We will examine the taxation aspect of EPF (Employee Pension Fund) VRS (Voluntary Retirement Scheme), Separation pay and Retrenchment proceeds. These days there are lot of people in the workforce who are facing the axe and are either laid off or are retrenched. Most of them do get a lump sum amount as fair compensation towards this. Since this is a one off event , most are unsure about the tax aspect of the money thus received. Lets try and see how money received under these options are treated by the taxman under Indian laws.
1. EPF -
The tax treatment meted out to the proceeds from EPF depends on the tenure of contribution by the concerned person. If the person has contributed for less than 5 years in the fund, then the tax treatment is different , and if its more than 5 years then its different. Lets see both.
A. Withdrawal before 5 years of contribution - Employers contribution to your EPF and the interest accrued on it is fully taxable.- Interest accrued on the employees contribution is taxed as income from other sources.- All PF deductions claimed under Sec 80 C in earlier year stands cancelled.The amount of tax saved due to this will have to be paid now.
B.Withdrawal after 5 years of contribution - The full amount received will be tax free.
The money received by an employee under severance plan form the company will be fully taxed as per his income tax bracket under Indian Income tax laws.
3. VRS -
Here also the treatment depends on the number of years one has completed in job before taking VRS.
1.Before completing 10 years of job - Fully taxable
2.After 10 years of job completion- Upto Rs 5 lakh is tax free.
4. Retrenchment Proceeds-
Upto 5 lakhs received after one gets retrenched is tax free. Beyond that will be taxed.
Hope this gives you sense of tax implication on the money received via these channels.

THE RICHER YOU GET THE LESSER YOU PAY has come up with details of the money made by all the hollywood stars last year. Along with their incomes , it also compares the spending of the stars vis a vis a common man making just $30000 p.a. For example , its states that Brad Pitt Makes $25,000,000 a year and for him to buy a house of $275,000 it will feel like spending just $330. Now imagine,if for you and me buying a house meant just spending $330 (Rs 16500 approx) how many of us would have thought twice before buying house opposite Mannat ( Shahrukh's palace ,for the uninitiated). This explains why celebrities splurge on mansions.

Similarly, extending this to purchase of laptops, for a common man in US, laptops cost $2000 , but, if Brad Pitt were to buy the laptop , he would feel like he paid just $2.4. Now if we get laptops for that much , I will buy 5 at least.

This is the beauty of being rich. It does wonderful things to your spending power.Looking at this , I am reminded of the saying that rich get richer and poor get poorer.

Wednesday, April 15, 2009


Have you ever wondered what happens to all the money in savings account, mutual funds , shares, bonds etc in a person's account , after his demise , in absence of a will? You would assume that it goes to the legal heir. Well it does technically,but not in practical sense. That's because I read somewhere that most of the money in such cases is not passed on immediately to the deceased's wife,children etc due to the legal cases filed from other family members. Everyone wants to claim a piece of the money left behind by the deceased and hence it gets stuck in legal wrangle. In effect , the basic reason of providing for his dependents by the person after his demise is defeated.Certainly, you would not want this to happen to your dependents. So what should you do? Well the answer is simple:Nominate the person whom you want to inherit your investments and savings in all your investments and savings documents.

What is Nomination facility? Nomination facility is an option available to us where we can choose to nominate the person whom we want to inherit our savings and investments in case of our demise.The application forms for every investment or saving option has the column where we can provide the nominee details like his/her name,DOB ,relation with you etc.The bank or the financial institution concerned will refer to this at the time of passing on your money to your dependents comes.

How will it help? Nomination facility seeks to eliminate the chances of legal wrangle after the person's demise and facilitates the access of money by the nominee as stated by the investor/account holder.It helps the nominee to get the money faster.

Who will it help? It helps both the primary investor/account holder and the nominee since it facilitates the transfer of money as per the primary investor/account holder's wishes.

What if its not there? In India, we still find lot of people not using this option. Lack of nomination facility creates a situation of uncertainty and can lead to delays in transfer of money to the person you would have wanted to. This can happen due to the legal cases filed by other family members claiming a part of that money as their rightful part.When that happens the person/s who you would have wanted to inherit your money will be left out in the lurch at the time when they probably need your money the most.

Where all you need to have nomination? Savings account, mutual funds,FDs, PPF, EPF, NSC,shares , bonds . In short wherever you have money invested or saved you must have a nominee . The nominee details need to provided to the bank/financial institutions in writing.

Who to nominate? This is your choice. You may nominate your wife,children etc. whom you would want your money to go to.In some cases like jointly held accounts, you may nominate more than 1 person as your nominee . In case you are nominating more than 1 person as your nominee , you can also specify the ratio in which they will get the money. For example you may want 60% of your money to go to your wife and rest 40% between 2 of your daughters.

Can I change the nominee details ever? Yes , you can change the nominee details as and when you want. The same needs to be intimated to the respective bank/financial institutions in writing.

What's the latest on this ? Recently , RBI has made it mandatory for banks to ask for nomination details from all its customers having saving account with them. The same detail will have to be mentioned on the passbook. You can not leave the nominee details blank, unlike earlier. In case , the customer does not wishes to nominate anyone, he will have to tell the reason for doing so in writing to the bank.This is big change which will hopefully make the whole process of deciding on the legal heir to the money in saving and other accounts much easier.
What about you? Have you nominated your loved ones for your investment and other savings? If no, then you know what should you do first thing tomorrow.
Stay wise n stay wealthy.

Tuesday, April 14, 2009


Mr. Rakesh Kumar is a senior executive with a private firm drawing salary of Rs 25000 per month. He has been working since last 3 years ,but ,hasn't been able to invest much in last 3 years . He says he never had enough money saved which he could invest. There are quite a lot like Rakesh Kumar out there. Almost all of us have felt that our savings are inconsequential and hence investing such a small amount wont make much of a difference. The result is we never invest only. So what is the solution? How can someone with modest income and saving start investing ? The answer to this is Systematic Investment Plan or SIP.
What is SIP? SIP is a method of investing a fixed sum of money every month in a scheme. It is similar to a recurring deposit where a fixed amount is deposited every month in the bank account. Under SIP, fixed money is invested by the investor which in turn is used by the AMC ( Asset Management Company ) to buy units form the same money for the investor.
How does it work? You can start investing through SIP in mutual fund either by giving post dated cheques (PDCs) of the SIP amount to the bank/AMC etc or you may choose to go in with ECS or standing instructions. The minimum amount that is generally allowed for SIP is Rs 500 and the maximum amount under ECS is Rs 25000. This is not to say that you can not invest more than 25000 under ECS . For that you may have to go for multiple ECS mandates.Now the money which is invested by you under SIP will be used by the AMC to buy shares/bonds etc on your behalf from the market at the prevailing rates.SIP option is available to an investor for all the 3 fund types viz equity,debt,balanced.
How does it benefit ? Investing via SIP makes lot of sense for everyone. There are lot of benefits of SIP investing.Some important ones are: -
Benefit of Rupee Cost Averaging - Rupee Cost Averaging means that due to SIP, your overall cost of buying shares/units etc is lesser over a period of time due to variation in the market price of the shares. It happens because , under SIP, one gets to buy more shares/units when the price is lesser . And when the prices is higher, then the units/shares bought are lesser. For example, if you are investing RS 1000 every month in a mutual fund scheme whose NAV lets say is Rs 100. First month with Rs 1000 , you will get 10 units (1000/100). Now if the NAV of the same fund were to fall next month to lets say RS 67, then the units that you will get will be 15(1000/67). So the average price of purchase of units for 2 months would be Rs 80 only. This is how rupee cost averaging helps investor.
- Inculcates habit of savings - The biggest advantage of SIP is that it inculcates a habit of saving. Since under SIP you are required to make payments every month, you become more disciplined in your approach towards saving. It makes saving a habit over a period of time and this is its biggest advantage.- Regular investment ensures no stress on one's finances - Under SIP, one can choose to pay whatever amount he is comfortable with every month without stretching one's finances. The amount can be as low as RS 500. Even RS 500 paid over 12 months will mean you would have invested RS 6000 in a year without stretching yourself at all.
- Gets you the option to buy best companies which you may not have been able to buy otherwise - Lets say you want to buy Reliance Industries shares and the market price of Reliance is Rs 2500. So to buy even 1 Reliance share, you will have to shell out Rs 2500. Now if your budget is only Rs 1000, you cant buy it. But under SIP, you can do so by investing in a mutual fund which invests in Reliance Shares. Here you will get proportional holding in Reliance shares through the unit that's allocated to you on your investment. Thus helps you buy best of the companies as well.
- Makes Market timing irrelevant - If you are investing regularly via SIP, then the issue of market timing becomes irrelevant. Experts have always maintained that its the "time" in the market which is crucial and not the "timing". With SIP investing you are buying always irrespective of the market scenario helping you make wealth over a period of time without bothering to get the timing of the market right. Moreover, no one can time the market consistently. So its better not to try doing that.
Who is it meant for ? Its meant for you , me and our uncle.In other words, its meant for everyone. One misconception is that its meant for poor people only. This is not true. SIP has its unique benefits which works for affluent investors as well. I would also say that it makes more Check Spellingsense for salaried people to go in for SIP because of the nature of cash flow that they get. They get money monthly in the form of salary and hence for them its easier to remove a part of it towards SIP every month.
Any Disadvantage?No major disadvantage. The only minor disadvantage is that for people who can get the market timing right and invest at one go at the bottom of the market might be able to beat the returns from a SIP fund. But, market timing is an art perfected by none.So stick to SIP.
Stay wise n Stay wealthy...

Monday, April 13, 2009


Yesterday I went to meet few of my ex colleagues over lunch at a city restaurant.There I got to know of something which I thought I must share with all of you. There among others, I met Anil Surve. While talking to him , he told us that he had recently bought a house for himself. Everyone congratulated him , but, I was pleasantly surprised.He was asked by someone as to how did he manage it considering that he had started working only 4 years back. While 4 year is a good time to save money , it certainly wasn't enough for most of us. Most of us were still struggling to save anything which could be called sizable by any stretch of imagination.Here he had bought a house for himself. Just buying a house in itself was such a big deal, on top of that what really was most impressive was the fact that he had paid 11 lakhs as down payment out of his own savings for a flat of Rs 30 lakhs. That was quite a sum for most of us.
So how did he do it ? He could do so because of a unique habit or way of life that he had developed . He started his career with one of the PSUs and after working there for a while moved to financial services MNC.He used to get salary from his first job at PSU in a salary account and after joining the new company his salary account changed. After a while he lost the ATM PIN (by chnace or deliberately , no one knows)for the bank account where he used to get his salary from the financial services MNC. Thus all the money from salary and incentives he earned at his new company remained in his new account. he could not withdraw anything out of it because he had lost his PIN number. Off course he could have got a new PIN , but the fact that he didn't get one , is remarkable. In the meanwhile he managed his day to day expenses from his savings from his first job at the PSU(Public Sector Undertaking). Also the fact that he stayed with his parents and was single meant that he didn't have too much to spend every month.
All this resulted in quick and healthy savings for him enabling him to pay off 11 lakhs as down payment for his brand new house where he can move after getting married.Thus he had become a millionaire at such a young age, a feat we all dream of achieving.
This is an inspiring tale and it forced me to think of "saving" being a matter of habit and discipline rather than anything else. I am not advocating that you too should do the same , but, I think sometimes such radical ways can go a long way in inculcating a habit of saving in all of us which is so very important.

If you too have similar stories to tell, please share it with us. Would love to hear from you.

Sunday, April 12, 2009

DEFLATION - Means decrease in prices. So why is everyone scared?

These days one of the most widely discussed topics in business media is the threat of the economy plunging in deflation.Various agencies are forecasting that India will slide into deflation somewhere in April end or May 09 and this has created lot of anxiety among the policymakers. Deflation by definition means lowering of prices of goods and services. Isn't this what we all always dream of ? So then why is everyone scared? Well there are reasons for that and will try and understand all the aspects of deflation and its effect on the broader economy and the common man.

What causes Deflation? Deflation is caused by general slump in prices of goods and services in the economy. The price destruction happens due to overall demand destruction for goods and services in the economy. Lower demand forces the producers of goods and services to lower their prices in a bid to push sales. The consumer on the other hand seeing price cut waits and expects further price cuts. This starts a cycle where prices keep falling.

How does it impact the economy? Deflation can be disastrous for the economy. Since deflation is caused due to demand destruction for goods and services the overall productivity and growth suffers in the economy.Producers loose revenue due to lesser sales and they in turn cut down on production, layoff people and thus people in general suffer due to job losses and lower income . This starts vicious cycle in the economy where lower demand means lower production and lower income for people .

How does it impact you and me? Since deflation causes massive job losses everyone including you and me will get affected. Self employed people suffer due to lower sales of their goods and services which results in lower income/closure of business units for them .

How can it be corrected ?Deflation can be corrected by reviving demand in the economy. Central banks can help prop up demand in the economy through proper monetary measures like lowering lending rates etc. Government too can help the cause by taking corrective fiscal measures like increased spending on infrastructure , social sectors etc.

Is India in Deflation today? India is not in deflation today. We are still inflationary economy . Rate of inflation is still in positive. If it turns negative (which it might) then we will be in deflation. Ideally, the best thing for any economy is to have low level of inflation. Low inflation keeps economy alive and kicking.

Friday, April 10, 2009


Yesterday, the inflation numbers came in at 0.26 as against 0.31 a week ago. This is the lowest rate of inflation in India in last 30 years.Is this a reason to rejoice or regret?What exactly does low inflation mean to a layman. How does this impact our lives and should we really be worried about it? We will try and find out answers to some of these questions here.

What exactly is inflation?As per wikipedia ,inflation is a rise in the general level of prices of goods and services in an economy over a period of time.Simply put it is the rate at which the general prices of goods and services are increasing over the last year prices of the same goods and services. Higher inflation denotes increase in the prices at higher rate while lower inflation means that the prices are rising at a much lower pace. Low inflation does not mean that the prices are decreasing.
Does it represent all the goods and services? Inflation numbers represent the fall in wholesale prices of goods and services comprising the wholesale price index or WPI. It does not represent the price rise of goods and services comprising the Consumer Price Index or CPI. As a consumer CPI index is more relevant for us since most of the goods and services that we use are represented in CPI.So in effect , the inflation numbers does not truly reflect the ground realities from a normal consumers point of view.
Does low inflation mean Lower prices for goods and services? No. Low inflation only means that the rate of price rise has come down. The prices are still rising as compared to the prices last year.So inflation rate of 0.26 means that the prices of goods and services comprising the WPI has gone up by 0.26% as compared to last year. It does not mean that the prices of goods and services have come down for us. For that to happen we need deflation.
Low inflation is good news because:-

It allows RBI to push for lower interest rate regime - Lower inflation numbers indicate that either the demand for goods and services are not rising as much as one would like or there is liquidity crunch in the economy. Both ways, RBI will need to correct the situation by increasing liquidity in the economy. To increase demand , RBI will lower the benchmark lending rates making loans cheaper for common borrowers like you and me. So low inflation helps us by making our mortgage loan, HL, Personal loan , car loan etc cheaper. The trick is when we get to such a situation try and take a loan at fixed rate and not at floating rate so that when the inflation rate goes up , you will still have the loans at lower rate.

- Real interest income on your deposit increases - Do you know whats the real rate of return you are getting on your deposits like FD, PPF, NSC etc? Real rate of return is the rate of return in excess of the inflation rate. So, if your FD rate is 9% and the rate of inflation is 7% , then your real rate of return is 2% only. Similarly , if the inflation rate goes up to 10% your real rate of return on your FD will be negative -1%. So in effect you will be loosing money. That is why high inflation scenario is bad. On the contrary , lower inflation means that your effective returns from your investments go up and that is a great news for all investors.

- Less slide in the purchasing power of the money- Lower inflation number also means that the purchasing power of money is not sliding away rapidly which is the case with higher inflation. So it protects the purchasing power of the currency.
Low inflation presents case for prepayment of loans - When the inflation rate goes down , it means that the value of money is decreasing at slower pace and hence for all those borrowers who have loans to be repaid in future , the money outflow in real terms will be higher. That is because , its assumed that future value of money will be reduced to the extent of inflation and if the inflation is less the value of money will be more. So to counter that , if you can afford to prepay your loan , you must do so.
Which is better - High inflation or low inflation?Low inflation is always better than high inflation since it keeps the economy in good shape. The productive forces in the economy keep working well and the purchasing power of money too doesn't recede too fast.Ideally, Central Banks
world over aim for a situation of low inflation and high growth in the economy , but, seldom do they manage to achieve both for a long period of time because higher growth means more money in the economy fuelling greater demand for goods and services resulting in higher inflation .

Thursday, April 9, 2009


Imagine Alladin (From Arabian Nights) being alive today with his magic lamp. Imagine him being a equity investor. What would have happened with him having the magic lamp willing to fulfill all his wishes? He would have never made a loss , always bought winning stocks and made ton and tons of money, dwarfing the likes Warren Buffett etc. But, alas that happens only in fairytale and not in reality. In reality, there is no magic lamp. But, there are still ways and means of finding winning stocks . There is a definite science to finding a great stock with great earning and capital appreciation potential. Following are the qualities that you must look at before zeroing on any stock:

1. Bargain price on Offer? - The first thing any value investor looks at in a stock is its price. This is because to be able to make money on stock exchanges, one has to buy at low levels and sell at high levels. Hence, one must always look for stocks which are being sold at bargain prices on the exchange. How do we know if the price being quoted for a stock is low enough? There are many factors which will help you decide that like PE multiple,cash on balance sheet,traditional stock price,PEs of rival companies etc. Great companies having good business fundamental trading at multi month lows during bear market phase offer such opportunities. For example , In India , in Oct 2008 the entire banking stocks were beaten down to a level where the stocks of
front line stocks like ICICI, HDFC , SBI were available at very attractive price.

2.PE Less than the PE of the broad market - Price to Earning ratio (PE) indicates the price premium market is willing to pay for the earnings that the stock will deliver. Companies with good performance track record command high PE multiples as compared to the others.In order to find winning stocks , one needs to look at companies which are fundamentally sound and are trading at PE multiple which is less than the broad market PE multiple. For example, If BSE is
trading at PE multiple of lets say 10 and Infosys is trading at PE multiple of 8 , then this makes infosys a great buy , assuming other things being normal. This is because companies which are trading at less than market PE will eventually reach the market PE multiple, driving the stock price up. Here the thing to note is that just PE multiple alone is not to be used a criteria for stock selection as there are other factors too which influence the stocks performance. Also this strategy works well with large cap companies only.

3.Return from stock earnings to be greater than return from FD - Another aspect to look for in a winning stock is its earning per share (EPS). EPS is the return on your investment in the company. For example if the stock price of a SBI is Rs 1000/share and the EPS is Rs150, then the actual return that you will get from your investment in SBI (not accounting for capital appreciation of stock price) will be 15%. Now compared to any FD available in the market, this is
better rate of return and hence makes sense to invest in it.As a thumb rule,Warren Buffett advocates choosing stocks which offer a return of at least 15% compounded annually over along period of time. Anything less than that is not worth it.

4.Current Assets to be 1.5 times the Current Liabilities - Another feature of a good stock is that the current assets exceed the current liabilities of the company by 1.5 times. How does this help the company? Higher current assets mean that the company is financially sound and is in no danger of defaulting on any of its financial obligations. Also it will ensure that the company's functioning will never be affected due to paucity of funds.

5. Good corporate governance record - Post Satyam episode in India, this has become a thing of paramount importance. Corporate governance now is ranked as number one requisite by lot of global investors before they decide to invest their money in any stock. Hence , please look for companies with clean record on this account to ensure you don't land up with another Satyam in your portfolio.

6. Past Growth and return on equity record - Companies which have delivered consistent growth in earnings are much better than companies which have high but erratic earnings record. One must always prefer companies which are growing consistently at a stable rate. It ensures that you make money consistently over a long period of time and this performance will also result in capital appreciation in the stock price in future, resulting in even higher gains.Warren Buffett explains this concept with his holdings in Coca Cola which has deliver consistent growth over last 30 years.

7. Company should be in top 3 in its segment- As a thumb rule, please invest only in companies which are in top 3 in their segment. This is because rarely will you find companies ranked 4,5 etc in any segment making any decent money over a long period of time. Sticking with the leaders means you are with a company which knows a thing or two about this segment and has done well.

8. Management Profile- The importance of this can not be overstated. A company is as good as its management, because, the company is run by them and they take all the major decisions. Hence , you should look to invest in company which has got good managerial talent taking all its critical decisions.Find out about its CEO, Board members etc and their performance track record in the same company and also with other companies that they have been associated in the past.A good company with spectacular management is better than a spectacular company with average management.
So , next time you are about to buy a stock, ask yourself if that stock has all these attributes? If yes, then you have a winner at hand.
Stay wise n stay wealthy..

Wednesday, April 8, 2009


While planning for our insurance needs, the importance of term insurance can never be overstated,however,there is another aspect of our lives which though equally important, does not receive enough attention. That is the threat to one's livelihood due to disability.A disability can be physical (such as paralysis, loss of limb, deafness), mental (such as depression or post-traumatic stress disorder) or intellectual (such as a learning disability). Some people are born disabled; others become disabled as a result of an accident or disease. Consider some statistics from World Bank Report :

- 750 million people in the world are disabled, according to the World Health Organization (WHO)

- 80% of disabled people live in developing countries

-10% of the population in poor countries is disabled

- 1 in every 10 children around the world copes with a disability

- Only 2–3% of disabled children in poor countries go to school
Disability can be a major cause of financial distress , especially if it were to happen to a fit and normal individual who is gainfully employed. So one needs to have an insurance plan which will protect him/her from any such eventuality. The insurance covers available in the market cover the policyholder in case of disability due to accident , disease etc. The premium charged also is not very high. These policies are sold by general as well as life insurance companies. Some of these companies offer standalone disability cover polices and some offer these as a rider on another policy. Either way it is in the interest of the policyholder.United India Insurance , the general insurance company and LIC , the life insurer, do offer such plans for individuals.
Disability insurance is most critical for younger people. The reason for that is very simple. Younger people are generally more fit and healthy and are less prone to death due to disease etc than older people. So, between death and disability, younger people are more likely to face disability due to accident/disease etc than death. Hence , its critical that they get the disability insurance cover for themselves from any good company.Another very important reason for disability insurance is the fact that in case of death the term plan will take care of the financial obligations and also provide for the life's other needs for the policyholder's dependents. But, in case of disability, the policyholder does not get the sum assured from the term plan. Now sample this: he has lost his earning capacity, he is himself dependent on others, his dependents have no one to support them, his medical care costs needs to be paid, and to make it worse he does not get any money from his term plan(because term plan payout happens on death of the policyholder).So in such a situation , if he is not insured for disability he will be in financial, social and psychological ruin.
In the end,one needs to understand that disability can be equally devastating as death. Hence, one needs to take suitable insurance cover to safeguard from any such eventuality. So finally, I recommend that to fully ensure that you stay a peaceful and worry free life buy1. A good and comprehensive term plan.2. A comprehensive disability cover.
Stay wise n stay wealthy....

Tuesday, April 7, 2009


One of the biggest drawbacks of stock trading or investing is the short term loss that one may have out of this. This causes lot of grief and pain to all of us. But, do you know that there are provisions in the accounting principles which allow us to convert these short term losses into profits? Sounds impossible ? Read on ..

According to provisions, you are allowed to offset short-term capital losses against short term or long-term capital gains not just for this financial year, but for up to eight consecutive years.

This means that if you book short-term capital losses before March 31, you can not only reduce tax incidence for the year on capital gains income but also save on capital gains, if any, you acquire over the next eight financial years. For starters, short-term capital assets is one which is held for not more than 36 months immediately prior to the date of transfer.

There are, however, exceptions. In case of shares, securities units of UTI, specified mutual funds and zero coupon bonds, if they are held for not more than 12 months, they would be considered as short-term capital assets.

Whats the logic ?-Logic is simple: you can always buyback these assets at the same price you sold them in the market. And since you bought them again, any gain or loss arising out of these assets would be treated as short-term for 12 or 36 months, depending on the nature of the asset.
For instance, suppose you have Rs 10 lakh as capital gain from the property and you are holding shares/mutual units which are at a loss (short-term ) of Rs 12 lakh on March 30, 2008.
Then, it’s advisable to sell the shares and buyback the same day.
In this process, loss will be booked from the income-tax point of view and capital gains arising out of property will be exempt.

What should you do to use this law? - Your first step should be to ensure that all income, expenses, profits and losses relating to this financial year are appropriately determined and captured by way of documentation in order to be assessed accordingly.Once done, if you have made profits on certain assets (as a result of which you are liable to pay tax), then you must evaluate the performance of your short-term assets .

If these assets are, in any case, not likely to fetch a profit in the foreseeable future, then you must dispose them and book losses to set off such losses against the gains computed from the sale of other capital assets.

Hope this has given you a new perspective towards short term losses.

Stay wise n stay wealthy...