Tuesday, 30 October, 2012

World Thrift Day

World Thrift Day

At the cost of repetition, once in a few months, I would like to write about the Power of Compounding.

Here's an ad-verbatim reproduction of one of my earlier posts in this blog (as a special post for a new year a couple of years back). I would like to insist that it would be worth reading even for those of you who have read it earlier. Including for those who happen to know about it already - merely as a matter of reminding yourself about the "whole damn thing" which you can't afford to forget!

Here goes:

Einstein called it the eighth wonder of the world. Financial pundits from around the world have sung paeans in praise of it. I don't think that I can find any new word to praise the truly magical Power of Compounding.
Instead, I've created a simple illustration to demonstrate the power of compounding - First, take a look at it:
I'll strongly urge you to take a printout of the illustration given above and pin it up at a place you'll be able / forced to see almost on a daily basis.
Some observations to note and conclusions that I'd like to draw from my illustration:
  • So-called "risk-free" assets like PPF, Bank Fixed Deposits, etc. become highly risky assets over a period of time. Thanks to inflation.
  • So-called "risky" assets like equity shares, mutual funds, etc. become your dearest friends to beat the demon of inflation in a virtually risk-free manner. This is not automatic. This is achieved thanks to the amazingly powerful, yet simple tool - the Power of Compounding! We need to learn to use the power of compounding to our advantage.
  • The distinction between the returns generated by stuff like PPF, Bank Deposits, etc. vis-a-vis stuff like Mutual Funds and Equity Shares is borne out when you look at the highlighted portions of the illustration.
    • Rs. 5000/= per month invested in PPF for 20 years is literally mauled by just 20%, i.e.., Rs. 1000/= invested per month in shares and mutual funds for 20 years.
    • In fact, even a sum of Rs. 18 lakhs invested over a period of 15 years (at the rate of Rs. 10000/= per month for 15 years) ends up generating a sum that is comparable to the amount generated by a relatively miniscule Rs. 2.4 lakhs invested over a period of 20 years (at the rate of Rs. 1000/= per month for 20 years)
    • If we were to consider the example of a lower middle-class family saving relatively minor sums of Rs. 500/= to Rs. 1000/= per month, the results are similar. A sum of Rs. 2.4 lakhs invested over 20 years in PPF generates less than 40% of what you will get by investing half the sum (Rs. 1.2 lakhs, at the rate of Rs. 500/= per month) in equity shares and mutual funds.
  • Inflation is a monster that is only going to be too real. You don't even need a financial expert to enlighten you. Just try to recall what you paid for a tube of shaving cream, tooth paste, litre of petrol, a cup of coffee, a dinner at a restaurant, etc. around a decade back and around 20 years ago. And compare the same with what you're paying now for the very same items.
  • Life style inflation is a bigger monster that is not even recognised by the usual bunch of financial advisors. If you were going by bus 10 years back, you're probably riding a two-wheeler or driving a car now. A monthly dining out practice has morphed into a weekly affair. 4-6 sets of trousers, shirts, saris and salwars per annum has transformed into 10-12 per annum. A toffee to all classmates on a kid's birthday in yester-years has given way to full-fledged parties. A birthday cards to friends has been replaced by supposedly minor gifts. Akshaya Tritiya was unheard off earlier. Today, you can't avoid picking up some jewellery on that day. Social drinking was almost non-existent earlier. It is increasingly becoming the norm today. A holiday meant a trip to the native place. Today it is to tourist destinations for the middle class and exotic locations for those who are richer. To sum up, Life style inflation is truly unnerving and you can't escape from it. The figure of 6% that I've assumed for inflation is almost a joke. And a cruel one at that. To my mind, the total inflation (the actual inflation plus the life style inflation) figure is likely to be nothing less than 15% per annum for a vast majority of us.
  • If you end up investing your hard-earned savings in stuff like PPF, Fixed Deposits, etc., you're going to be a sitting duck waiting to be butchered by the monster of inflation. Believe me, there is no escape.
  • While income levels are increasing, savings are actually decreasing as a percentage of income and, in many cases, even in absolute terms.
To finally sum up,

This is both a New Year Gift to each of you and a dire warning to each of you.

Use the magical Power of Compounding, or else, be prepared to face all the negative consequences that are bound to follow.

Before it is too late for you.


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Friday, 26 October, 2012

Exploiting Financial Ignorance

Exploiting Financial Ignorance

Out here in India, we're reasonably familiar with the notorious moneylenders exploiting ignorant, impoverished, illiterate people quite liberally. We're also familiar with the kind of usurious rates of interest charged by them.

Apparently, we're not the only ones who have such moneylenders. Out there in the US, the entire process has been institutionalised.

Take a look at:

A key difference that I noticed was that in our case, the moneylenders' loans are comparatively risky. In contrast, the so-called "Payday loans" offered by the US banks appear to be completely secure, linked as they are, to the weekly / monthly salary that's likely to be credited into the very same accounts, with a provision for directly debiting the amount due to the banks from the customers' savings accounts!

Obviously, a Heads-I-win-Tails-you-lose situation for the banks.

I'm sure that a class-action suit is not too far off out there.

But then, I wonder if our banks and NBFCs are having any such interesting products and whether our regulators are keeping a watch to prevent customers from being fleeced???

The only obvious thing that I can think of is the "revolving credit" facility offered by credit card providers to their customers.

I'd welcome feedback on your experiences in this connection. 



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Jaspal Bhatti Dies in Road Accident

Jaspal Bhatti Dies in Road Accident

Just heard the news earlier today about:

Certainly, shocking news indeed. And sad. He was such a delightful provider of endless bouts of laughter to an entire generation of people.

And he was just 57 years of age.

All that is fine, but what is this news item doing in a "financial blog"?

Simple - some basic questions that need to be asked will become relevant when they are asked at the right time (due to the "shock and awe" value):

Did Jaspal Bhatti, while he was still alive, 
  1. Have the faintest clue that he will be no more in a few hours / days / weeks? 
  2. Take an insurance policy for his life? Was the sum assured adequate, considering the kind of income that he was earning?
  3. Nominate different people for all his financial assets like bank accounts, mutual funds, etc.?
  4. Keep all his financial papers, documents, etc. in a well-organised manner and in an easily accessible location?
  5. Write a will clearly mentioning a sufficiently exhaustive list of all his assets (including intangible assets like royalty on his works, for instance) and indicating who should be receiving each of those assets and in what proportion?
And most importantly, has Jaspal Bhatti actually intimated at least two of his near and dear ones about the answers to each of the above questions?

For the sake of his family members, I do hope that the answers are indeed available. A few days / weeks / months later, when they have overcome their grief, they will certainly be seeking answers to all the above questions, and Jaspal Bhatti's soul will rest in peace if and only if his near and dear ones have satisfactory answers for these questions.

Now the critical question for each one of the readers of this blog post is:
  • Do YOUR near and dear ones have satisfactory answers if you disappear from this planet all of a sudden to the very same questions asked above?

For obvious reasons, I would like each of you to live for several decades more, and remain healthy, happy and prosperous. But then, it will be prudent for each of you AND me to ponder, introspect and provide answers for the above crucial questions.

Give it a thought!



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Thursday, 4 October, 2012

Kingfisher Employee's Wife Commits Suicide

Kingfisher Employee's Wife Commits Suicide

The news has been flashing all over TV channels. In case you've missed it, you can see the link here:

She is supposed to have taken this drastic step on account of the "acute" Financial Strain caused by non-payment of salaries for around six months.

Very sad, indeed. For the limited purpose of this blog post, I'm assuming that the news reports are accurate and she did commit suicide due to Financial Strain.

However, some questions arise from the point of view of Financial Planning.

The lady who committed suicide was around 45 years of age. Her husband apparently retired from the Indian Air Force before joining Kingfisher Airlines.

Quite obviously, they must have enjoyed the "benefit" of a regular, steady salary (though perhaps not flashy) for at least a couple of decades. With ENORMOUS savings potential by normal Indian middle class standards.

Further, the pay scale at Kingfisher must have been quite decent (though the salaries apparently have not been paid for the past six months).

The questions that come right off to my mind are:

  1. Did the family never hear about terms such as "regular savings", "Financial Planning", "Investment for Retirement", etc.? If not, why not?
  2. Considering the fact that her husband is an engineer and that her 18-year old son is also an engineering student, chances are bright that their family can be considered to be a "reasonably progressive, educated family". If people belonging to such a background are not aware of the need for fiscal prudence and financial planning, where are we, as a nation, going? What's likely to be the plight of the vast majority of Indians whose financial situation will, in fact, be far worse?
  3. The typical TV debates have been pouncing on the Kingfisher Management and the Government. Why is nobody raising those uncomfortable, politically incorrect questions which lay the blame squarely on the family of the deceased. It may sound cruel and heartless, but it a person who has been enjoying the benefits of a very decent professional life for over two decades has lived the life of a Grasshopper, when winter comes, he should be ready to pay the price. He should not expect the benefits which are presently being enjoyed by the Ant.

If at all we ought to be blaming the Government, it should be to the limited extent of not providing meaningful financial literacy (and hence Financial Independence) to all its citizens after over half a century after obtaining Independence.

Give it a thought!



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