Thursday, 22 May, 2008

Inflation - A Powerful Enemy!

Inflation - A Powerful Enemy!

Dear Friends,

Prudent and traditionally conservative middle class Indians tend to spend within their means - Their typical monthly expenses are less than their monthly income and the balance is saved. Usually, (in over 85% of Indian households,) the amount thus saved is parked in banks, small savings schemes and gold (jewellery).  (The not-so prudent Indians actually live it up and freak out, usually with the help of plastic money - the ever-so-easy-to-get credit cards. This post will not focus on this latter group, but only on the prudent folks).

Saving a part of one's income is smart and wise. However, parking those funds in banks, small savings schemes, gold jewels, etc. is certainly not so wise. The reason: Inflation. Let us understand this in simple terms with a hypothetical example of a household that saves Rs. 5000/= per month and buys jewels worth Rs. 20000/= per annum and invests the balance amount of Rs. 40000/= per annum in bank deposits, postal monthly-income schemes, etc., and see what happens to the savings over a period of time.

The jewellery that's bought is almost never sold in one's life-time. While it gives a certain quantum of pleasure and satisfaction to us when we wear those jewels, beyond a point, most of these jewels only land up in bank lockers (for which we spend some more money). In any case, they certainly do not generate any "current income" nor do they generate "capital gains" unless and until they are sold (which, as we mentioned above, rarely happens in one's life time.

The amount invested in banks, postal savings schemes, etc. fetch, on an average, an income of around 8-9% per annum, which is taxable. Net of taxes, the returns are even lower. However, if one analyses our typical expenses, we just have to look around to see the extent to which prices increase every year. Some examples:

Nature of Expense

Approximate Prices

in rupees

% increase

in 2 years

June 2006

May 2008

Monthly rent of a 2-bedroom flat at a decent location in a metro (other than Mumbai / Delhi)




Branded refined oil (per litre)




Petrol per litre (despite the govt. not raising prices in proportion to increase in international prices)




Tur Dal per KG




Movie ticket (balcony) at a decent theatre




Cost of dinner for two in a mid-range restaurant




Minimum price of peanuts at the beach




Of course, some of these prices will be wrong / overstated in certain cities. However, the general trend is more than visible. For most of us, our income levels are not increasing at the rate at which expenses are increasing. Obviously, we need to do something extra to bridge the gap.

Interestingly, prices of some other items have reduced over the past couple of years (like phone bills, electronic gadgets, etc.). Unfortunately, this has not resulted in any real reduction of expenses. Instead, our frequency of upgrading the gadgets, the number of minutes spent on the phone each day, etc. have increased dramatically, more than offsetting the impact of reduction in prices.

Taking into consideration the above, the returns generated by investing our hard-earned money in banks, postal savings schemes, etc. is far from adequate. Inflation, indeed, is a very powerful enemy.

Obviously, we need to:

  • become aware of the power of inflation to reduce our effective disposable incomes
  • identify better avenues to invest our savings so as to increase the rate of return beyond inflation levels
  • implement any suitable ideas that we come up with.

More on these in later posts!!!



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Beginner's primer on Entry into the Share Market

Beginner's primer on Entry into the Share Market
Part I

Dear friends,

Lots of us who are not already invested in the share market are completely scared about the whole issue. An aunt of mine has been after me to guide her (or better still, invest on her behalf) for quite some time.

Here are some basic fundas for you:

  1. What is a Share (and what do I get by buying shares)?
    • When you put Rs. 1000/= in a bank as a deposit, you only get some interest on the same. However, if you invest Rs. 1000/= to buy a few shares of the same bank, you become an owner of the bank (though you end up owning a very small proportion of the bank). As an owner, you are not entitled to get any interest on the money invested. Instead, you get a proportionate share of the profits and losses of the bank. Part of the profits of the bank is given to you by way of dividends as and when they are declared. Also, depending on how well the bank is performing (from the time you bought its shares) both in absolute terms and vis-a-vis its peers, the share price of the bank keeps going up and down. Whenever you wish, you can sell your shares. The difference between the sale proceeds and the initial Rs. 1000/= that you had originally invested is your profit or loss.
  2. What do I need to buy & sell shares?
    • A bank account
    • An account with a share broker to buy and sell shares
    • A demat account (to hold your shares)
    • A PAN Card (without which you can't open a demat account nor can you buy and sell shares
  3. Is it not too risky to invest in shares?
    • Yes - Indeed shares are risky than most other assets / investments that we are familiar with
      • They are especially if we are buying shares of companies that we don't understand at prices which are too high
    • No - Shares (and equity mutual funds) are often the only option for lower middle class & upper middle class people to beat inflation. Stuff like bank deposits, postal savings, etc. fetch returns that are much lower than the real rate of inflation. (To get an idea of the real rate of inflation, just look at your monthly expenses on a select basket of items (say, groceries, vegetables, dining out, movies, etc.) that you are incurring now, vis-a-vis the corresponding figure a year back.
      • In fact, shares are almost completely low-risk investments if you are buying the shares of the right company (well run, profitable, consistently dividend-paying companies in industries which are growing fast along with the Indian economy) at the right price, with a time horizon of at least a couple of years.
  4. Are mutual funds better than shares?
    • If you don't have the time (or inclination) to study, understand and invest in shares, it is certainly better to invest in mutual funds (look for those funds which are highly rated by folks like CRISIL, Valueresearch Online, Economic Times, etc.)
    • However, if you understand and analyse shares before investing in the same, it is much better to invest in shares
  5. That's theory - What should I do right now - I'm completely new to the share market?
    • Simple - since you are new to the share market, start with mutual funds.
    • However, simultaneously, open your demat account, etc. and start investing a notional sum of money (an amount that you'll consider as a throw-away sum) directly in shares. This will (most likely) result in losses - but will also enable you to learn about the kind of mistakes that one can do while investing in shares. With time and patience, you'll become more confident. After 6-18 months, you're likely to be ready to invest larger amounts of money in shares directly.

Good luck & happy investing!

Watch out for Part II of this series ... ... ... ... ... ...



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Monday, 19 May, 2008

Credit card basics

Credit Card Basics

Hi friends! Lots of us have, use credit cards. Some of us (hopefully none of the readers of this blog) misuse credit cards for a variety reason and get into a debt trap. You must have seen a whole host of articles about the issue - and probably read none of them.

Happened to come across a very simple pictorial representation of the same and thought it worth sharing.

Read the link: Card primer - Most urban Indians find credit cards necessary — a necessary evil though. That need not be if users understand what the plastic money really is and how it works. Money Today magazine explains!



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Saturday, 17 May, 2008

Unpredictability of the Markets

Unpredictability of the Markets

Take a look at this story of the zen master:

In the initial enthusiasm of a bull run, many of the commentators, fund managers and self-styled "experts" start looking, feeling and talking like the next Warren Buffett.

When the market takes a knock, the very same folks talk a different tune. Guess that it pays to be

  1. calm and composed like the typical zen master,
  2. take a long-term view of things
  3. keep learning all the time
  4. try one's best to follow what one learns to the extent one can!



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Monday, 5 May, 2008

Quotable quote from Benjamin Graham

Quotable quote from Benjamin Graham

"The chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions."

Think of some famous examples:

Guys who bought Pentamedia, Silverline, NEPC group shares, etc. will be able to vouch for the veracity of such quotes.

At every level of the BSE Sensex, we'll be able to find such scrips - Just take a look at ET and identify a list of shares which are quoting at a PE of over 100 and you're likely to find a whole host of candidates eminently suited to be part of such a list of securities!



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