Tuesday, 30 November, 2010

Why Credit Cards can be dangerous

Why Credit Cards can be dangerous

Here's a forward that I got from a friend. Subsequently I noticed that it is a cut and paste from a comment posted on Subra's blog (subramoney.com).

I've always known that credit cards are potentially dangerous.

Here's one more anecdotal evidence:


  • Reproduction of the relevant part of the mail that I got:
    • Staying with credit cards, sometimes a disciplined approach but with a small scar can also be lethal.
    • I learnt this accidentally, but for those who have not learnt it yet, this might be something to watch out for.
    • I usually pay off my credit card bills every month without having any due carried forward. Few months back, I noticed something unusual in my credit card statement. There was an interest and subsequent surcharge. The interest was around 3% on my purchase which I did before the earlier month's bill date.
    • But I also remembered that I had paid the complete due amount, so out of curiosity I called up the customer care and asked for clarification. I was told that I had a balance which was carried forward and hence the 3% interest, other charges etc etc.
    • Just to cross check, whether the money which I had paid against my bill was taken into consideration at all, I asked him to explain. He told that the entire amount has been accounted for, but for 50 paise. The interest which was charged was around Rs. 1320 plus other charges. I was surprised about how much a 50 paise debit could cost me 
    • To impress my surprise on the caller on the other side, I asked him a question in exclamation: "If (not allowed in my card, but assuming it did) I made a purchase of 1 Crore and repay 99,99,999.50 immediately, you would still charge me 3% on 1 crore? He did not wait a second to answer me "YES"
    • I thought I was an idiot not knowing this, but when I told my project colleagues about this the next day, OMG :-) I was seeing their faces!! I am sure they would have started checking up their bills from thereon!!
    • Not buying things on credit is a very good habit. But if it happens for certain reasons, paying off the bill at end of every month is a good habit. But every importantly, paying off every penny you owe is a SMART habit :-) I have already started becoming smart these days!! And yes, I have started going through my credit card bills line by line, for which I had no time before :-)



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Monday, 29 November, 2010

Making Financial Inclusion Real

Making Financial Inclusion Real

The FM and different bigwigs of the financial services industry have been singing hosannas about Financial Inclusion.

But what is the action on the ground indicating?

  • A vast majority of banks (especially private sector banks, including those whose Chairmen keep giving lectures on Financial Inclusion) do not see the bottom of the pyramid as an opportunity - At best they view it as a necessary evil.
  • The government talks financial inclusion, but says "I'll deduct loads of TDS from your bank account if you don't have a PAN Card". Since when do the people who actually need financial inclusion even became aware of such a creature called a "PAN Card"? If I'm a poor landless farmer from interior Orissa, the last thing I would be looking forward is to get a PAN Card. Imagine the kind of apprehensions that I would have about the mysterious "Income Tax Officer" coming after me all of a sudden and asking all kinds of questions!!!
  • Microfinance institutions started off with noble intentions (supposedly following in the footsteps of the Grameen Bank of Bangladesh). Soon, the the real motive came out. Use the existence of a strategic gap between the "waive-all-bribery-driven-banks" and "fleece-the-last-drop-of-blood-moneylenders", freak out with huge interest rates, and still get a phenomenal return on capital employed for their shareholders. And, to top it off, try and come out with a public issue at a huge premium to boot!
  • "Farmer Subsidies" enriching the industrialist who is selling stuff like fertilizers, really rich rural landlords, etc. The truly poor remains truly poor.
  • Educational Loans, which are supposed to be available without any guarantees, security, etc. upto a certain limit, are hardly accessible to the genuinely poverty-stricken youth coming from an otherwise totally illiterate family.
  • Mutual Funds, especially equity mutual funds, could be a very useful tool to make the rural poor participate in the world-famous "India Growth Story". Just do a Google search to find out how much a simple SIP of Rs. 100/= per month over the last 5, 10, 20 years in any decent large-cap oriented mutual fund benchmarked to the Sensex. But, can the barely literate rural poor (or, for that matter, even urban poor ) invest in these? "Sorry", say the regulators. "We'd allowed that by mistake in the past, but now we've plugged that loophole by insisting on KYC norms for EVERY mutual fund investor, past, present and future"! The really big sharks have alternative mechanisms including the now notorious Hawala route to take their illegally gotten wealth overseas, only to bring it back to the country as and when needed (by the sharks, not the country) as "Foreign Investment".
  • Trade and commerce
    • The government will allow rats to eat foodgrains, but will refuse to build necessary infrastructure on a priority basis, which could enhance the holding power of the poor farmer. In today's scenario, the farmer is doomed if there is a drought or a flood. And he's doomed if there is a bountiful harvest. In case of scarcity, he has nothing to sell, and starves. In case of plenty, he finds it difficult even to recover the marginal cost. The middlemen, who have holding power, enrich themselves at every stage. The cost of shifting the agri-output is, directly or indirectly, borne by the farmer.
    • But when the farmer wants to buy his TV sets, chocolates, soaps, toothpaste, tractors, etc., he's told that "Market Economy" will apply, and he'll need to pay the right price to get what he wants. And the cost of reaching such goods to him at his village is obviously built into the price.
I'm a staunch capitalist by ideology. But if we need to apply principles of Capitalism and still flourish as a nation, we need to have equal opportunities for all. To begin with, the starting point in the race must be the same for all.

For this, the government needs to ensure:
  • Affordable, high quality education for all - till a certain age
  • Employability for all
  • Security of food for all
  • Reasonably good health care for all
  • High quality transport facilities across the length and breadth of the country
  • Transparency in procedures and processes.

Will we ever get such a government? Only then can we even dream of financial inclusion.



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Sunday, 28 November, 2010

Lesson from Bill Gates

Lesson from Bill Gates

The other day, I was reading a biography of Bill Gates.

While there are several lessons that one could learn from him, I would like to emphasise one key lesson here:
By and large, he never mixed business and charity.

As a businessman, he was a toughie. Ask many of the folks in the industry who actually hate him. There have been enough allegations about his anti-competitive behaviour.

As a philanthropist, he is generosity personified. He has chosen his preferred "causes". He has given tons of money - both his own and from his friends.

I like the above distinction for a very practical reason. Microsoft is a listed entity. Bill Gates is, at best, a part-owner. Charity, if any, should be done from one's own money. If Microsoft were to do charity, that would imply "imposing" the views of a limited few on the vast majority of other shareholders.

Not on. And Bill Gates recognised that.

Hence, what is the lesson for lesser mortals like you and me in the world of investing?

Here are a few thoughts (not for the big fish who invest zillions of dollars, but for ordinary mortals - retail investors like you and me who invest in a few thousands or a couple of lakhs at a time):
  • First, don't confuse investing and personal belief systems.
  • When you're investing in a company, you are doing so SOLELY for making money. For instance, it doesn't matter if you happen to be a non-smoker, it is OK to invest in ITC if you feel that it would increase your wealth. Once you acquire wealth using money generated from investments in ITC, nothing prevents you from using such money to actually contribute to an anti-tobacco campaign
  • Learn to distinguish ethical standards of a company and whether it is "investment-worthy". There are ethical companies which have gone bust. There are unscrupulous companies who have swindled investors funds. There are ethical companies who have lasted for a century. And unethical companies which flourish for decades. So far as your investment decisions are concerned, you should restrict your thoughts to the price that you are paying and the likely value of the company. As long as the price is less than the value according to you, you can go ahead and invest. For instance, when Satyam went from a couple of hundreds to sub-30 levels, the price on the ticker was visibly less than the intrinsic value according to many experts. And those who took the plunge, flourished. On the other hand, Infosys, known to be a highly ethical company, in the peak of the 2000 IT boom, was quoting at a PE ratio of over 100. Anyone who invested in Infosys then is probably still nursing his wounds. Again, several unethical companies use every boom to come out with IPOs at huge valuations, only to disappear with the investors money in due course.

The above points are especially useful to keep in mind in these scam-ridden times.

While I don't wish to take names, some companies which are obviously ethical and "high-performance" ones have been named in one or more of the recent scams.
Obviously, they have fallen like a pack of cards.

You just need to identify the gems among them and put in lots of money in these times of fear. As Warren Buffett would say, now that there's a lot of fear about these companies, it is time for you to be GREEDY about precisely the very same companies.

I've started doing precisely that with some of my surplus funds.


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Why "Experts" fail with their forecasts???

Why "Experts" fail with their forecasts???

Here's an article from moneylife, which is a magazine that I like:
Unfortunately, it is an article which is quite factual, but essentially useless - After all, do we really need such an article to let us know that short term predictions are never easy. (especially about the future, as Mark Twain is supposed to have said).



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Tuesday, 23 November, 2010

Is zero exit load necessarily bad?

Is zero exit load necessarily bad?

Came across this post in one of my favourite blogs - The Parag Parikh blog.

First, read it, before I comment on the same.

From: PPFAS Blog
Sent: Monday, November 22, 2010 6:08 PM
Subject: PPFAS Blog: Zero Exit Load...A boon for speculators

November 22, 2010 4:01 pm
Jayant Pai | jayant@ppfas.com
I saw an advertisement on the Value Research website last week. It showed a family exulting in the fact that their child had secured "Zero" marks in the examination. The father was holding a placard stating that "Zero is the new Hero" and the mother was doing a jig. The ad screamed "Zero exit load on two of our flagship funds".
The ad could be considered hilarious, if it were not so depressing. What is the mutual fund trying to communicate? Equity mutual fund managers espouse the cause of long-term investing and the virtues of "time in the market rather than timing the market". Is such a development in sync with this belief? It will only encourage hot money to enter and exit at zero impact cost. It will also prevent the fund manager from taking a long-term view w.r.t. investments. For instance, in the normal course, a fund manager could have allocated 20-25% of the corpus to promising mid-cap and small-cap stocks which were relatively illiquid. That will now be virtually impossible as the sword of untimely redemptions will always be hanging over his/her head. Consequently the manager will play safe either by keeping aside large amounts of cash or investing in liquid stocks even if they are not the best choices at that mom! ent in time.
This appears to be a clear case of the fund's sales team triumphing over the investment team. Such moves to boost assets will be counter-productive in the longer term. Once a fund house becomes notorious as a channel for "hot money", investors with a longer-term outlook shy away from it, as it is well known that sharp ebbs and flows in assets in any scheme hurts the longer term investor more. When SEBI jettisoned the entry-load concept, most of the major fund houses increased the exit load. More than earning income, the objective was to discourage quick entry and exit. Unfortunately, the battle for survival amongst the smaller funds has induced them to opt for this "100% Free" route.
I hope this does not lead to a competitive free-for-all (no pun intended) amongst such funds, who will be competing against one another on price and not on investment performance. This will be detrimental for the whole industry and this time they will not be able to blame the Regulator for the same….

This is one of those rare occasions where I hesitate to agree whole-heartedly with the views expressed in Parag Parikh's blog.

My own thoughts would be, as usual, "It all depends on the context of the individual investor and the context".
  • Firstly, those investors who are long-term investors, the mere absence of an exit load would certainly not motivate them to redeem early.
  • Secondly, those investors who have a short-term mentality, will, in any case, redeem as and when they're comfortable booking profits. For such investors, "zero exit load" is indeed a boon.
  • Thirdly, we now have a situation where more and more fund houses offer a feature to invest / redeem through the stock exchanges. Here again, zero exit loads becomes an attractive proposition.
  • Periodically, we have huge volatility in the markets. At such times, an exit load would become a "mental block" potentially preventing investors from redeeming / booking profits despite being conscious of live dangers lurking around the corner, which could put significant downward pressure on the indices. In such times, a "zero exit load" adds significant value.

Having said all the above, there is indeed an element of truth that a "zero exit load" would, indeed, motivate people towards having a short-term orientation.

But then, whoever said that investing and building wealth is an easy task!!!



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Sunday, 21 November, 2010

Major drawback of ULIPs

Major drawback of ULIPs

There have been multiple opinions expressed in different magazine articles, interviews, websites, etc. about ULIPs.

A majority of them have been focussing on two issues:

  • Mis-selling (especially due to the commission structure) and
  • High "charges" of different kinds, especially in the initial years.

However, of late, with IRDA tinkering with (or, to be more polite, changing) the rules to "limit the charges" and becoming more strict about mis-selling, lots of "experts" have started giving a more favourable review of ULIPs.

I disagree.

And disagree strongly. Here's why:

  • ULIPs involves combining investment and insurance, which I consider inefficient and hence dislike.
  • ULIPs involves long-term commitment, often practically irrevocable long-term commitment. I dislike such long-term commitments in the world of investments for the following reasons:
    1. New investment products may emerge in future, with much superior features, potential for returns, security, liquidity, etc.
    2. The fund managers managing your ULIPs may change - The new fund managers may or may not be of the same quality
    3. Even if the fund managers don't change, new fund houses may come up with much superior fund managers, thereby adversely impacting the relative performance of your ULIPs
    4. Your income levels may change - upwards (hopefully) or downwards - Your intended allocation to different investment products ought to change accordingly. Unfortunately, ULIPs don't provide the flexibility.
    5. The limitations of exit/entry clauses are "difficult". ULIPs typically involve a "Growth option" (and not a "Dividend Payout" option). This implies that you don't have the opportunity to book profits and/or drastically increase investments to a particular asset class, viz., ULIPs. The allocation to ULIPs remains fixed. At best, you can change the percentage allocated to equity vis-a-vis debt.
Take care. Happy investing!



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Tuesday, 16 November, 2010

Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

  • If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

  • There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
  • The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
  • The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
  • Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
  • People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

  • Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
  • There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

  • Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
  • Keep cash in your kitty.
  • Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
  • And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

  • "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!



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Sunday, 14 November, 2010

Useful Info on ATMs

Useful Info on ATMs

ATMs are a boon. 99% of the time.

The other 1%, we end up facing one or more of the following problems:

  • You have adequate balance in the bank, but you don't get cash
  • Your account is debited, but you don't get cash
  • Your ATM Card is "Swallowed" by the ATM

Here's an interesting article that I came across on the subject:

However, a couple of things that appear to have been missed out in the above referred article are:

  • Do not take the help of strangers / security personnel - especially if they come voluntarily to help you. They could very well be part of a gang of scamsters
  • In case the ATM is part of a bank branch (as against a stand-alone ATM) make it a point to personally inform the officials of the branch - in writing - about your problem (and, if possible, take an acknowledgement). If it is a stand-alone ATM or if the branch is closed, take the trouble of writing a note specifying the exact nature of the problem faced by you (along with your phone number) and put it in the drop box at the ATM. It could possibly help in the ATM care-takers to identify the affected person quickly, and, to that extent, minimise any negative consequence.



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Saturday, 13 November, 2010

Simple thoughts on "How to choose a Mutual Fund"

Simple thoughts on "How to choose a Mutual Fund"

This is often a perplexing question in the minds of investors, especially beginners.

There are just too many mutual funds around. No point in even trying to understand all of them.

First, let's decide about the broad types:

  • Equity Mutual Funds - that invest in shares on your behalf
  • Debt Mutual Funds - that invest in Fixed Income products on your behalf
  • Hybrid Mutual Funds - that invest in both Equity and Fixed Income products
  • Other specialised funds - like those investing in gold, global markets, etc.

The above should give a clue about which ones you wish to consider at this moment in time.

Once you're through with the broad category, how do you choose the specific fund house, scheme, etc.?

Obviously, there are lots of "ranking" websites, magazines, etc. which come up with periodic lists of "top" funds. While many sources are likely to be equally good, ones that I've found useful are ValueResearch Online (valueresearchonline.com) and Economic Times.

Then again, even such "sources" provide only data. How do we find out which ones to choose from among them? I was asked precisely this question by a first-time investor.

Here again, some "don'ts" for the beginners are in order before you decide:

  • Don't go for "Fancy" / "Momentum" funds
  • Don't choose sector funds till you've become comfortable with investing through mutual funds
  • Don't choose a scheme merely because of a fund manager - In India, fund managers come and go and you may not even notice it.
  • Don't go merely / solely by schemes which have done extremely well in the recent past. (Even a reputed source of information like "Economic Times" has published on occasions "Top-5 ELSS Funds based on the last week's performance". Wonder what value that would offer, considering that ELSS funds (Equity Linked Savings Schemes) have a lock-in period of 3 years and one week's performance is of zilch value.
  • Don't choose Fund Houses which have a track record of "Getting caught with SEBI" for all kinds of wrong reasons, Fund Houses which are too new (less than a minimum of 2 years), Fund Houses which are "too small" in terms of "Assets under management", etc.

Now for the actual inputs on how to choose:

  • Identify the top 12-15 funds / schemes in your chosen category from a couple of sources like valueresearchonline, moneycontrol, Economic Times, etc.
  • From these, eliminate those schemes which were launched within the last 2-3 years - You need a track record of reliable performance.
  • Eliminate schemes from fund houses that are "too new" or from fund houses which you don't rely - for whatever reason.
  • Look at the "relative returns vis-a-vis their benchmark indices" over a longer period of 3 years or more in case of equity funds and over a shorter time span of the last 6 months in case of debt funds (especially liquid funds).
  • In case of Equity Funds, a further refinement could be to look at the 3-5 year performance of this scheme from Year 3 or 4 onwards from the date of the initial launch of the scheme. (Logic: In the first couple of years, there could be a positive bias due to "Extra" Fund manager attention. Or there could be a negative bias due to a smaller overall fund size, skewing the returns. By year 3 or 4, the scheme would have become a seasoned war horse and you will know the credentials better.)
  • By this time, you'll typically be left with a maximum of 4-5 schemes.
  • Actually, you can choose virtually any of these 4-5 schemes. Unless you are talking about very large sums of money (as a percentage of your investment portfolio or net worth), it is advisable to invest in a maximm of 2-3 schemes among the 4-5 schemes so identified. If you're investing in equity funds, it is often preferable to park the same in a liquid fund and go in for a "Systematic Transfer Plan" so that you don't end up "Timing the market"

Happy investing!



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Thursday, 4 November, 2010

Tips to Be Debt Free

Tips to Be Debt Free

Author of this guest post: Ryan Smith, a writer associated with Debt Consolidation Care Community (debtconsolidationcare.com). He has written several articles for various financial websites. He is considered to be an expert in the Debt industry and has made significant contribution through his various articles. The article has been edited for brevity, language and relevance for the Indian audience by Mr. N.
In today's fast paced life everyone is running after money. Being financially strong is the ultimate aim of all of us. However many of us face a financial crisis for at various times. And seek the help of a loan to tide over the crisis. The real problem arises when they are unable to pay their debts in time. And the dream to become debt free starts - whether from the clutches of the moneylender or the "friendly" banker. Primary reason for getting stuck: imbalance in income and expenses. Now the question arises - How can I become debt free again? Some tips:
1. Keep a balanced monthly budget: Often, we don't realize the serious consequences of not clearing their debts within time. And continue to "spend-as-usual" with our typical monthly expenses. As a result we miss deadlines for repayment. Keeping a balanced monthly budget is vital to pay off debts in time. During indebtedness one should avoid making unnecessary expenses. And continue with the newly acquired good habit even after becoming debt-free.
2. Take help from debt negotiation services: Nowadays, debt negotiation services have become very popular, due to their value addition in the best possible debt negotiations. Help can be taken from such service providers to become debt free. These companies negotiate with banks and money lenders of the client and persuade them to reduce rates of interest on a loan, restructure the debt repayment period, etc. Debt negotiation companies are held in high esteem in the United States and many European countries, and are increasingly becoming popular even in Asian nations, including India.
3. Save & invest wisely: A rupee saved is a rupee earned. Saved pennies act as a shield against getting caught in debts. The money thus saved - after meeting your routine budget of monthly expenses ought to be invested wisely. Depending on factors such as age, risk profile, etc., you should invest such savings in an appropriate option such as fixed deposits, mutual funds and shares. Obviously, before choosing the option, one should understand the risk and reward of the chosen mode of investment clearly.
Summary: Spending and saving money wisely enables a person to become and remain debt free. Any loans should be for a genuine purpose and an acute financial crisis. Taking loans for unnecessary or trivial expenses is like inviting unwanted tension into one's life.
Additional thoughts of Mr. N:
  • Understand the difference between good debt and bad debt. A loan taken that generates "net income" or creates an "Asset" that eventually will either generate income or save expenses is a "Good Loan". Anything else is a "Bad Loan"
  • Maintain accounts. If you don't, it makes no sense whether or not you have a budget. After all, you can't monitor the budget without accounts.
  • As the saying goes, "When you are stuck in a hole, stop digging" - Make sure that you don't go even deeper into debt.
  • Beware of credit cards. They can be knives in the hands of a surgeon or in the hands of a murderer.

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Monday, 1 November, 2010

BSE Shuts for 90 minutes - Who'll bear the cost involved?

BSE Shuts for 90 minutes - Who'll bear the cost involved?

This was no planned shut-down. This was completely sudden and unexpected.

Let's take the hypothetical position of a person who had an open intra-day position just before the shut-down. Imagine his/her plight if he had to catch a flight around 2.00 PM???

If he was subsequently forced to square off the position and he ended up incurring a loss, who'll bear the same?

Guess that this kind of situation is unacceptable even if the question is hypothetical.

Hope that someone files a PIL on this issue. Or SEBI should take proactive action against BSE - and levy hefty penalities. And heads must roll.



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