Importance of Insurance - Part 5

Be safe or You'll be sorry! Part 5

Choosing the right Life Insurance Policy

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on Choosing the right Life Insurance Company:

• Be safe, or you'll be sorry - Part 4

By now, you'd be clear about whether you need a Life insurance cover, the quantum required and the company / companies from which it is OK to buy a life insurance policy.

In this post, I propose to talk about how to identify a suitable life insurance policy...

Some points to note:

• As a thumb rule, I dislike combining insurance and investment. Reason is quite simple - Lack of transparency. And in any case, once you decide to make an investment, especially for the long term, you would like to base your decision on factors such as returns, risk, liquidity and flexibility of shifting to better investment options and/or fund managers from time to time. Whereas, life insurance products should be bought primarily (almost exclusively) on the basis of reliability of the actual assurance given by the life insurance company to honour its commitment to cover the risk of your life. To combine two such diverse objectives would lead to certain lack of clarity and perfect confusion.
• Hence, if a life insurance policy promises to return any quantum of money during the life time of the policy holder, be clear in your mind that they are combining insurance and investment. Such policies will usually come under the garb and nomenclature of money-back policies, endowment policies, return of premium policies, Unit-Linked Insurance Policies (ULIPs), etc.
• All such "insurance+investment" policies, in my opinion, have the potential and high likelihood of turning out to be bad choices for a vast majority of people. In all such policies, a part of your premium is used for providing a risk cover. The balance part is used to make investments and provide you the returns. And in most such policies, you don't know the break-up of how much of your premium is going to cover the risk and how much is being invested. The portion which is invested, if invested in "debt products" such as bank deposits, government or quasi-government bonds, etc., the returns you get are sub-optimal vis-a-vis what you will get from making pretty much from the same bank deposits, bonds, etc. The reason: They have to "manage your money" and hence they incur certain administrative costs - Such costs are obviously deducted from the returns generated from your investments. In case of the investment portion being deployed in equity products, you are "stuck" for a really long time with that fund management house. If you were to invest the same directly, you will deploy the same in mutual funds which can be sold off if you find the fund performance inadequate or if other better options are available.
• Hence, in a nutshell, when you are covering your life, make sure that you do just that and nothing more. Go in for a very simple, easy to understand, "no return of money till you die" kind of life insurance policy. They are typically categorised as  "Term Insurance Policies".
• The concept of term insurance policy is very direct and simple: They take your premium and provide a risk cover. During the term of the policy, if something untoward were to happen and if the policy-holder dies, the insured amount as per the policy is paid to the nominee. If the policy holder were to remain alive at the end of the term of the policy, he/she can simply be happy that he/she is still around to crib about all those premium payments "going waste". He/she gets nothing in return. To understand this in a proper context, it is similar to insuring your car / two-wheeler. In case your vehicle gets involved in an accident, you can claim the amount lost from the insurance cover subject to the policy amount. If your vehicle does not get involved in any accident, most rational human beings don't feel sad or disheartened by it. On the contrary!
• Now that you've hopefully decided to go in for a "Pure Term Insurance Policy", you are free to choose virtually any term insurance policy from those that are offered by the life insurance companies that you have shortlisted. A good and sensible option would be to choose the specific term insurance policy where the premium payment is the least. Obviously, it is preferable to have a policy which provides a cover for the maximum duration of time (ideally till the very end of your life on this planet).
• In this context, you must seriously consider the relatively recent development of "Online Term Insurance Policies". These policies often provide an insurance cover at much lower premium vis-a-vis traditional Term Insurance Policies. This is because they are offered directly by the insurance company and a vast majority of the process is being done online and hence at a much lower cost. This elimination of middlemen (the insurance broker, insurance agent, etc.) and the reduction in process costs is passed on to you by way of a lower insurance premium.
• Hence, my vote will be to go in for an appropriate Online Term Insurance Policy. Go for it. Go for it TODAY!

Caveat:

All that I've stated above happens to be quite valid - no conditions apply. However, it is imperative to remember the following:

• Once you decide that you need a life insurance cover, it is better to have ANY LIFE INSURANCE POLICY than to have NO LIFE INSURANCE POLICY.
• Hence, it is actually better to have one of those sub-optimal policies that I've described than to have NO LIFE INSURANCE POLICY.
• The much desired Online Term Insurance Policy that you have identified must obviously be bought. But if you are under compulsion to buy some other policy from a friend / relative / spouse's relative / classmate, etc., it is actually better to buy such a policy from such a source than NOT to have any life insurance cover. If possible, minimise the latter and go in for a good quality term insurance policy over and above the sub-optimal policy.
• In any case, if you already have one or more of those sub-optimal insurance policies (the baggage of history), DO NOT discontinue such policy / policies till at least three months AFTER you have received the policy papers from your carefully chosen Online Term Insurance Policy.

Critical words of wisdom:

• You need to remember that the sole purpose of making premium payments for a life insurance policy is to ensure that you do have a life cover. You do not wish to be in a situation where after the demise of the policy-holder, the nominee fails to get the insured amount due to some fault while filling up the form or due to some intentional/inadvertent false declaration while filling up the form. Hence, while taking such a life insurance policy, make sure that you are very meticulous when it comes to filling up the proposal form. Ideally, you MUST fill it up all by yourself. Even if an agent were to fill it up, you must ensure that every single item in the form is filled up accurately and truthfully.
• Especially, you must be very particular about the spellings of your name and that of your nominee. There must be NO MISTAKE in such basic details such as postal address, contact numbers, email addresses, nominee details, details of the chosen policy (including sub-options that may be applicable), Date of birth, etc.
• And, having a medical check-up done by the insurance company's team of doctors is actually an ideal situation. Once that's done, they will not be in a position to reject a claim later claiming that the policy-holder did not declare his/her true medical condition.

In my next few posts, I plan to write about health insurance policies.

Watch this space!

Regards,

N

Importance of Insurance - Part 4

Be safe or You'll be sorry! Part 4

Choosing the right Life Insurance Company

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on the quantum for which an individual should obtain a life cover:

• Be safe, or you'll be sorry - Part 3

In this post, I propose to talk about how to identify a suitable life insurance company.

How do you choose a life insurance company from which you can buy a life insurance policy? Some points to note:

• The industry has evolved over the years. Despite MoneyLife (magazine, website) and others who claim that our regulators are toothless tigers, IRDA has evolved into a regulator on which I'll personally have quite a lot of confidence and trust.
• Based on the IRDA norms, virtually every single player in the insurance industry has to take care of issues like capital adequacy, sustainability of the policy, basic levels of customer satisfaction, etc. There's always scope for improvement, but then, things are broadly "so okay" now that you can go ahead and rely on any life insurance company - All of them are "reasonably" reliable and trustworthy.
• Having mentioned the above, it is possible that you might be personally uncomfortable with Company X or Management Y - with or without any reason whatsoever. By all means, drop those companies from your list of "suitable life insurance companies" - After all, unlike a few years ago, today you have the luxury of CHOICE - There are quite a few active life insurance companies even if you decide that you don't wish to buy a policy from half a dozen companies.
• Next, look at GEOGRAPHY. It is possible that a couple of specific life insurance companies may be relatively inactive or perhaps even be absent in your city / town / village. While it may still be OK to take a policy from such a life insurance company, it is likely to be that much more difficult to handle issues related to claims processing - Certainly in comparison with another life insurance company which has an active presence in your place of residence.
• Now, you have a bunch of companies which continue to survive in your shortlist of life insurance companies from which you can consider buying a life insurance policy.
• Thanks to the first point above, you can virtually choose ANY of the above life insurance companies that continue to be part of your shortlist.

In my next post, I propose to write about the actual process that you need to follow to try and identify that particular policy that will be suitable for your specific needs.

Watch this space!

Regards,

N

Importance of Insurance - Part 3

Be safe or You'll be sorry! Part 3

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on whether you need Life Insurance in the first place:

• Be safe, or you'll be sorry - Part 2

In this post, I propose to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

At the outset, let's be clear on what should NOT be the amount of coverage that you require:

• It should not be the amount recommended / suggested by your friend, parent, spouse, child, financial advisor, blog author, insurance agent, bank manager.

Clearly, each of the above will have his/her own reasons to suggest varying amounts as "just the right quantum" for you. While some may have your genuine needs in mind, others may have ulterior motives. However, it is unlikely that any of them will have a clear and holistic idea about your current situation and hence, you can't depend on their suggestions.

You need to keep in mind various factors while determining the amount for which you should buy a life insurance policy. Some of these would include:

• Your personal profile - age, academic / professional qualifications, job profile, current income, future prospects
• The number of financial dependents, their ages and the period for which they are likely to remain financially dependent on you
• Your current wealth level
• Your desire to "care for" those who are financially dependent on you (this factor is often ignored by most people including competent financial advisers due to their emphasis on being "politically correct" - As you're aware, I give a damn!)

Each one of the above will influence the amount for which you need to obtain life insurance cover.

The actual amount will obviously vary from person to person. And the only person who can identify it is the person whom you meet every day when you look into the mirror. But it would help to keep in mind the broad (and simple) rules of thumb:

• The more the number of financial dependents whom you care for, the higher you need to buy life insurance
• The better your academic / professional qualifications, the higher your future potential is likely to be. Obviously, when you die, the financial loss would be that much greater. Obviously, you need to think of a higher life insurance amount
• Ditto for higher income / wealth levels, the stability of your job, etc.
• The younger you are, the longer you're likely to live, earn and prosper. This warrants a higher sum assured for your life.
• The number of years for which your dependents will need to survive after your death before they get a meaningful alternative source of sustaining themselves
• Your ability to afford to pay the premium REGULARLY for servicing the policy that you take based on the amount arrived at after taking into account all the above factors

Obviously, you can't have a "one-size-fits-all" formula to calculate the ideal amount for which an individual needs to buy insurance. Every individual needs to identify the amount required on his/her own.

You calculate the amount required by you - By the time you've identified the amount required, I hope that my next post would be ready to help you further in the process to be followed to identify the appropriate life insurance policy for you.

Watch this space!

Regards,

N

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Importance of Insurance - Part 2

Be safe or You'll be sorry! Part 2

You would have read my earlier post on

• Be Safe - Or, You'll be sorry - Part 1

In this post, I propose to talk about insuring the most important risk that any human being faces - His / her life. Life insurance happens to be the most popular but gravely misunderstood insurance product.

A Life insurance policy essentially promises to cover the risk of life and during the tenure of the policy, if the policyholder were to die, the nominee / beneficiary who has been named in the policy would be paid the sum assured. (I'm consciously using the word "die" instead of using the usual euphemism which says "if anything untoward were to happen to the policyholder" - After all, I believe in calling a spade a spade!)

In its simplest form, let's assume the following:

• Ms. X has insured her life for a sum of Rs. 25,00,000/=.
• She's nominated her son Mr. Y as the nominee and beneficiary as per the terms of the policy
• (Unfortunately like all of us including you and me, she also has to die some time or the other). Ms. X dies a couple of years after taking the policy while the policy is very much continuing to remain valid.

In the above example, after the death of Ms. X, Mr. Y will get a sum of Rs. 25,00,000/= from the insurance company, subject to the usual terms and conditions of the insurance policy being complied with to the satisfaction of the insurance company in terms of proper documentation of:

• The validity of the insurance policy
• The death of Ms. X
• Identification of Mr. Y as the nominee & beneficiary as per the policy.

There are, as I've mentioned in my earlier post, a whole range of life insurance products that are available. A vast majority of those products would be completely unsuitable to you. Hence, you must learn to identify the basis on which you will choose a life insurance product that's relevant for you.

Here are some cues for the process:

First, do you need a Life Insurance policy? Well, most of the readers of this blog will require a life insurance policy. Some exceptions:

• If you have no financial dependents, who is going to get the amount of sum assured after you die? Obviously, it doesn't make sense to have any life insurance policy.
• If you're stinking rich like a Bill Gates or Warren Buffett or Azim Premji or Mukesh Ambani, you need to seriously evaluate if your dependents or near and dear ones are likely to be financially at a disadvantage due to your death. An additional million or two dollars may not make any difference to the wealthy heir of such a rich person. If you are truly wealthy, in my opinion, you (and your dependents) do not need a life insurance policy unless there are very strong reasons for the same.
• If you're NOT earning any income or are earning a negligible income, your legal heirs are unlikely to be at any significant financial disadvantage due to your death. Again, a life insurance policy is of no use for you.
• If your legal heirs are  "well-settled" and are financially completely independent, they won't be impacted adversely due to your death - at least financially. Again, in such an instance, you don't need any life insurance coverage.

I'm sure that based on the above, you'll have a better idea as to whether you require Life Insurance cover.

In my next post, I hope to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

Watch this space!

Regards,

N

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Importance of Insurance - Part 1

Be safe or You'll be sorry! Part 1

It is a long time since I wrote anything about the importance of Insurance.

For those of you who are financially literate, the information in this (and perhaps the next few posts) would be a repetition of known stuff. For you, I'd just say: I hope that you have already acted on your knowledge. Review your existing policies and recent developments in the past couple of years by way of new products in the markets. And, if appropriate, go in for mid-course corrections.

For the rest of you, I hope that my thoughts on insurance would come in handy to make a beginning. And in case you've already made a beginning, do a meaningful review.

Having covered the prelims, here's the main course:

Insurance is nothing but a method by which you can make up (or at least mitigate) any financial loss that may arise due to a risk that you have insured against. Among other things, some of the stuff that you can think of insure would include:

• Your life (and that of various members of your family)
• Your home (and perhaps various valuables that are kept therein)
• Your vehicles (Car, Bike, etc.)
• Your health (so that hospitalisation expenses do not come as a shock)

First, I'm sure that there are a whole lot of other things that can be insured - don't bother - Right now, make a beginning with the basics.

Secondly, like in most other financial products (whether it is mutual funds or shares or credit cards), there's a plethora of insurance policies that are available in the market, provided by a host of insurance companies. More than enough to completely confuse you. In fact, even the supposedly financially savvy and financially literate individuals are often prone to choose (or continue with) a policy that may not be suitable to them or have become unsuitable to them since the time they initially went in for the policy.

Some action steps for you before you are ready to actually start evaluating and choosing insurance policies that are suitable for you:

• Identify a list of various types of financial risks that you (and your family) are likely to face in the foreseeable future.
• Among the above, shortlist those financial risks that you are ready, willing and capable of bearing on your own. For these "things", you DO NOT require any insurance policy unless it is mandatory according to law.
• Now, the financial risks that remain are the ones for which you would ideally like to consider buying appropriate insurance policies.
• Do a bit of preliminary reading to identify the different types of policies that are available in the market place to cover those risks. A good starting point would be to identify the web sites of major insurance companies and financial service providers.
• Till you are reasonably clear about what you want (and, better still, till you have read enough and acquired adequate knowledge about what's suitable for your specific needs, DO NOT CONTACT ANY INSURANCE AGENT.  

In my next few posts, I hope to write about covering different types of risks.

Watch this space!

Regards,

N

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Greed for Safety!

Paradoxical Oxymoron: Greed for Safety

Just came across a brief but insightful interview with Seth Masters of Bernstein Global Wealth Management:

• Scary Risks of Safety Bubble

Traditionally, people have been accused of losing their money due to their greed. When I read the above interview, I was able to recall a rather interesting trend that I've consistently observed among the famous Indian Middle Class, which gets accentuated after every scam / bubble (ranging from Harshad Mehta scam to Dot-com bust to Ketan Parikh scam to East Asian currency crisis to the US Sub-prime Mortgage crisis to the Euromess to the Chinese slowdown to the NSEL Scam):

• In the name of running after safety, the middle class Indians tend to focus too much on the risks associated with equity shares and too little with a rather critical risk.
  
  
• Interestingly, this risk aversion that prevents the middle class Indians from investing in equity shares is at its highest when the indices are at their lowest valuations due to one scam or burst bubble or whatever. Hence, they tend to completely stay away from investing in shares when the BSE Sensex is at 9000-10000 in 2008, but much more willing to get tempted to invest in equity shares when the share prices have gone up consistently for 3-4 years, as it happened between 2003 and 2007. But then, this post is not about the foolish behaviour of investors when it comes to investing in shares.
  
  
• Instead, I'd like to highlight the foolish behaviour of the very same investors in an entirely different arena - their Greed for Safety!

Many middle class Indians tend to look for SAFETY and LIQUIDITY when it comes to investing their "hard-earned money". This often means that they look to focus almost exclusively on bank fixed deposits.

Let's look what kind of risks gets ignored in this process:

• Risk of Inflation - The government publishes an inflation figure - unfortunately, that happens to be the "wholesale inflation", which is of no consequence to you and me. What matters to us is the inflation at the retail level. In the past few years, the retail inflation index would have been going up easily at a rate upwards of 10% per annum. The actual figures, equally unfortunately, are unknown to me. What's worse, however, is that the inflation applicable to an individual hosehold is often likely to be driven by their ACTUAL standard of living and not based on the AVERAGE standard of living of the whole Indian population.
  
  
• Translated in layman's terms, what does this imply? Take a look:
  
  
  • A "normal" middle class city-dwelling urban Indian has a much higher ACTUAL standard of living compared to the AVERAGE standard of living of the whole Indian population
    
    
  • The typical monthly rent / housing loan EMI is often at least thrice higher than the national average
    
    
  • The typical monthly grocery basket consists of a whole range of things which are NOT bought at all by the "Average Indian"
    
    
  • The typical school fees, medical bills, dining out, entertainment expenses, fruits and vegetable expenses, fuel expenses, etc. of a REAL middle class Indian is much higher than that of the AVERAGE INDIAN.
    
    
  • Naturally, the typical retail inflation for the Middle Class Indian is likely to be much higher than what would be the "Average" retail inflation figure.
    
    
• If the Average retail inflation is upwards of 10% per annum, on a very conservative estimate, the ACTUAL retail inflation for the middle class Indian is likely to be upwards of at least 12.5-13% per annum.
• Considering the fact that typical non-equity investment options of middle class Indians are often restricted to Bank Fixed Deposits, the present rate of return (pre-tax) happens to be around 8-10% per annum. This is woefully inadequate even to cover the inflation figure applicable to you and me, and certainly not enough to generate any meaningful real returns. 

My simple question: If you're so GREEDY about ensuring the SAFETY of your investments, you're ignoring the RISK OF INFLATION. Can you afford it?

I think not.

Start thinking of alternatives. And quickly!

Regards,

N

Rural Opportunity

Rural India - The emerging boom

I was listening to Aditya Puri of HDFC Bank a couple of days back on Bloomberg. One of the things he mentioned was the rural emphasis for his bank. The points he elaborated were broadly:

• 1300-1400 branches opened in the past 3 years, most of them in rural areas. (I can corroborate the same with anecdotal experience that I've observed in interior AP & TN.)
  
  
• A vast majority of the accounts being opened in these new branches have a much greater focus on deposits than on loans - Presently.
  
  
• With banking comes greater financial awareness, and soon the trend of taking loans, credit cards and consuming other financial products will explode in rural India.

Natural corollary of the above (my interpretation):

• Consumption is likely to explode to unimaginable levels in the next 5-10 years in rural India.
  
  
• FMCG companies, consumer durables, service providers like banks, hospitals, educational institutions, restaurants, etc. are likely to see an entire new market in rural India in the next few years.
  
  
• With increasing rural prosperity will come a demand for better quality infrastructure - both physical and social
  
  
• This will result in enormous growth in diverse sectors like roads, farm equipment, power generation, healthcare, insurance, automobiles, shopping malls, entertainment, education, commodities, housing, telecom, etc.
  
  
• Multiplier effect on GDP is going to be immense. Imagine a scenario where the whole of Rural India (or at least a vast portion of it) becomes like Kerala. With the difference being that it is going to be driven by domestic prosperity instead of Gulf money. The result is likely to be a huge growth in GDP numbers.

All the above, would, without any doubt, result in a virtuous cycle which will:

• Increase per capita income
  
  
• Reduce pressures on our major metros by creating employment opportunities closer to the native place of every villager
  
  
• Massive real estate boom
  
  
• Enormous increase in the market capitalisation of listed companies with a focus on the rural markets

My only question is: Who is going to benefit from all of this?

Unfortunately, my hunch is that the rich promoters of all these companies and the foreign investors who are investing heavily in our markets will take the major share of the emerging cake.

Very sadly, we Indians do not invest sufficiently in equity markets. As per publicly available information, just 3% of the savings of the entire Indian population goes into investing in the equity markets - both directly and through mutual funds. What's even worse is that in the nineties (prior to the Harshad Mehta scam), the figure had reached almost 13% of the savings.

We must correct this situation. Obviously the government has a major role to play in ensuring this anomaly is rectified at the earliest by encouraging people to enter the equity markets. However, this cannot be left only to the government. Financial service providers - especially banks - must develop an attitude to motivate their customers to enter the equity markets. The must, for instance, facilitate passive index-fund investing through attractively designed SIP offerings. This will certainly result in a win-win situation for all concerned.

Will our bankers raise to the occasion?

Regards,

N

Welcome, Raghuram Rajan!

Raghuram Rajan takes over as RBI Governor

Raghuram Rajan has just taken charge as the latest RBI Governor.

As he's mentioned in his first press conference, he's taking over at a rather challenging time.

He's made a whole lot of "right noises" and "action-oriented announcements" addressing areas pertaining to:

• New Bank Licences (Committee headed by Bimal Jalan, ex-RBI Governor to give recommendations)
• NPA problem (to be analysed by group headed by Dy Governor KV Chakraborty) - He categorically says that "Promoters don't have a divine right to remain in charge"
• Financial Inclusion (Initiatives to be suggested by panel headed by Nachiket Mor, a rare banker with a large human heart of Gold who gave up a surefire successful banking career at ICICI to get involved in social service)
• Liberalising Bank Branch Expansion
• Encouraging Foreign Banks to form subsidiaries (rather than remain branches of their global owners) - This will certainly enable RBI to have a better degree of control over possibilities of Systemic Risks
• Mobilising NRI Deposits
• Transparency (Well, his first press conference shows his intentions rather transparently!)
• Team Spirit - He's categorically made it clear that all his announcements are NOT his own ideas but a combined result of team work by his able team at RBI -This obviously ensures that he will start with an advantage of his team being open to working with him rather than "against him". Likewise, he's talked about cooperating with other agencies like the SEBI and Government of India to hasten efforts at liberalisation of our markets
• Using Technology (Spoke about panel to study mobile payment mechanisms, for instance)

WOW! That's a rather long list (and only a partial one based on my own memory) for a first day show! Hats off to the new RBI Boss. We're in safe hands, I must say.

Towards the end, Raghuram Rajan summed up things beautifully with these words:

"Change is risky, but not changing is riskier!" 

He's off to a great start. As the old adage goes, "Well-begun is half the battle won". Now, we'll wait for actual action. We're in for interesting times...

Watch this space!

Regards,

N

Inequity of Income and Wealth ...

Rich get richer, Poor get poorer & its impact on us ...

Some time back, I'd written a post on:

• Changing Spending Patterns and what it means for Investors

As I had emphasized right at the outset of the above post, the optimistic side of things. In this post, I'll elaborate my thoughts about the negative side of things.

• There is, most certainly, an India where things are hunky dory.
  
  
• An India where luxury products are selling like hot cakes.
  
  
• An India where the malls are crowded, the theatres are crowded, IPL Cricket match venues are crowded, jewellery shops are crowded.
  
  
• Every "middle-class person" is planning to go abroad either for higher education or on a juicy assignment or wants to send his/her children to the US / Europe for similar reasons. Preferably, never to come back.

In the midst of all this reality, there exists another reality. That reality is NOT palatable. That reality is something that we detest, we wish to bury under the carpet, ignore like an ostrich, conveniently bypass in our personal lives to the extent we can.

Let me quote a few examples of the negative sides of the stark reality of India that is as true as all the positives that we used to be proud about:

• The infrastructure of ALL our major cities is pathetic, to say the least. Even the major roads, the arterial roads, are often filled up with potholes. Violation of traffic rules by EVERYONE is the norm, leading to chaotic traffic. Encroachments ensure that pavements are either non-existent or unavailable for pedestrians, pushing them on to the roads. All this results in
  • Air Pollution
  • Noise pollution
  • Road Rage
  • All kinds of health hazards ranging from respiratory ailments, blood pressure, heart attacks, etc. And an ever-increasing rate of accidents, including fatal accidents.
• I'm yet to see any signs of any of the above changing any time soon.
  
  
• The inequity in income and wealth levels is incredible. Irrespective of the actual figures, even if we were to go by government statistics, not less than 35-40 crore Indians (That's 350-400 million) will be well below the official poverty line, just about making both ends meet. Poverty is a reality in urban AND rural India.
• Some of us will say that the MGNREGA scheme has made things a bit easy. But that's for 100 days in a year. For one person in the household. What about the rest of the year?
• Even among those who are above the poverty line at least another 10 crores (100 million) will be in such dire financial condition that a single medical emergency in the family or a failed crop or the loss of a job will push them below the poverty line.
• NGOs with a focus on Poverty and school principals actually want double the usual quantity of food stuff allocated for midday meals for schools on Mondays - Because the kids often starve during the weekends. And we're talking about just those kids who have not dropped out of schools!
• Child labour is a reality. Just go to any neighbourhood kirana store, restaurant, mechanic shop to see for yourself.
• The percentage of the working age Indians who are enjoying the "safety and security" of an organised sector job is laughable.
• I'm yet to see any signs of any of the above changing any time soon.

  
  
• Slowdown, recession, joblessness, pink slips - All these are words with which an increasingly large number of middle class Indians are becoming personally familiar from first hand experience.
• Inflation, especially at the retail level, is running well above 10% (I'm talking about the real rate of inflation that you and I face when we go to the market and not the government figures). Just look at the prices of tooth paste, soaps, edible oils, petrol, medicines, vegetables, fruits, rice, wheat, eating out at restaurants, etc. And compare the prices with what was prevailing even a year ago. You'll know what I'm talking about.
  
  
• I'm yet to see any signs of any of the above changing any time soon.
• Crime and lawlessness is a constant presence. And I'm not merely talking about rapes. And people are scared to go to courts in a vast majority of cases, as they're sure about the duration of the eventual trial. And often either grin and bear the consequences of a minor theft or assault, or, worse, take law into their own hands. Both are counter-productive for the nation. In the short term as well as the long run.
• Value systems that used to prevail are gone for good, along with the gradual demise of the joint family system and the competitive pressures due to liberalisation. While I'm not against liberalisation, so-called liberalisation accompanied by endemic corruption is a sure recipe for disaster. And that's precisely where we are headed.
• An increasing number of youths are willing to consider crime as a career option. Some take to petty crimes, others are even open to consider joining the naxal movement. When incompetent or corrupt (or perhaps both) cops end up arresting a few youths from the nearby slum for every crime that is reported without necessarily backing up their actions with proper evidence, and when they go on to torture such arrested youngsters, it becomes easy for converting such youngsters into a vulnerable lot who will fall into the hands of criminal elements.
• Government statistics talks about entire districts across several states which are under the de-facto control of naxalites. Alienation of Indians in many parts such as Jammu & Kashmir and the North East is a reality.
  
  
• I'm yet to see any signs of any of the above changing any time soon.
• The demographic dividend is fast turning into a demographic nightmare. I'm given to understand that around 17 lakhs (1.7 million) engineers pass out of our Engineering Colleges - EVERY YEAR. Out of these, just around 2.5 to 3 lakhs (less than 15%) land up meaningful jobs in the organised sector. The rest of them? God knows what is happening to them??? And, to top it off, these engineering graduates are considered to be the better off among the youth. Wonder what is the plight of those who end up giving up their education after schooling (or drop out even earlier from schools)???
• I'm sure that the condition of the vast majority of Indian youth will be sub-optimal, to say the least.
• In the midst of all this, we import virtually everything from crude oil to electronic gadgets to gold to even Ganesha Idols! And all our major home-grown industrialists are increasingly investing overseas. Think of Tatas, Birlas, Ambanis, Videocon's Dhoots, etc. Obviously, they find the grass much greener outside India.
• If we don't come up with policies to encourage investments in India, obviously our youth will continue to suffer without jobs and our industrialists will continue to go abroad.
• The brain drain may soon be back. If it had ever reduced in the first place.
• I'm yet to see any signs of any of the above changing any time soon.

Enough of the above rambling. 

What all the above points mean is that investors need to keep a very close watch on what's happening around them in the country, and not just in the companies where they are investing.

If India does not do well, the companies cannot continue to be islands of excellence. Even if we don't have a revolution or anarchy, it is easy to fall into a trap of severe recession leading to a depression. Accompanied by inflation, this will be a disaster for the Indian economy.

We may end up having a couple of "lost decades", the way Japan suffered.

If, God forbid, India goes into a depression due to all that we discussed above, what should the investors do?

My own suggestion will be along the following lines:

• Those of you who can afford (financially, socially and mentally), either shift abroad to greener pastures. Or at least try to diversify across geographies by allocating a part of your overall portfolio to invest in global mutual funds, for instance.
  
  
• Without bothering about what the experts and our Finance Minister may say, allocate a portion of your portfolio to invest in Gold (both jewellery for enjoyment and Gold ETFs). That's a hard asset, and while the prices can be volatile, in times of recession and depression, the fall in gold is likely to be much less and it can be encashed easily in case of emergencies.
  
  
• Invest strategically in real estate. Your own home for living can be a convenient priority. While a second flat may appear to be a good investment presently, if there is a massive depression in real estate, apartment prices can fall. Especially in prime locations in the city. Just look at the US experience subsequent to the sub-prime crisis. Instead, consider investing in land. Agricultural land within 30-50 KM from major towns and cities can be a good idea. While the agricultural land can generate marginal income by way of agri-products, the proximity to towns and cities will increase the probability of that area becoming a part of the city over the next few years.
  
  
• Develop the ability to think like a trader even while investing for the long term in equity - Whenever you see profits, keep taking part of the money off the table. Become an opportunistic investor who will keep a part of one's equity portfolio in cash to utilise periodic crashes in the market. Don't hesitate to take cash calls.
  
  
• Stick to either blue chips or high quality mutual funds
  
  
• Keep sufficient sums of money in cash or cash equivalents (like bank deposits and liquid mutual funds) to handle emergencies.
  
  
• Make sure that you have enough insurance coverage by way of term insurance and health insurance.

More important than all the above, ensure that you keep upgrading your skills. This and only this will ensure that you continue to remain employable. You'll notice that even in the worst of the recessions, some individuals in your circle of friends and relatives not only continue to retain their jobs, but also continue to get more than their share of promotions, increments and incentives. Their secret is continuous upgradation of their knowledge and skills not only in their own areas of operation but also in terms of soft skills.

As the old adage goes, conmen and thieves can take your money or physical wealth. They can't steal your knowledge. Keep learning.

Most importantly,

• Enjoy life. Be happy. You only live once.

Regards,

N

Do you know the implications of being a Guarantor of a Loan?

Be a guarantor at your own peril!

Your own Credit Score may be adversely impacted... Beware!

Take a quick look at the following excerpts from Economic Times, August 26, 2013:

___________________________________________

If the borrower defaults, the lender can ask the guarantor to repay the loan. 

When a friend or relative asks you to stand guarantee for his loan, don’t treat it as a simple formality. The Supreme Court has ruled that the responsibilities and liabilities of a guarantor are no different from that of the borrower. In this particular case in the apex court, Ganga Kishun had acted as guarantor for a loan taken by his friend, Ganga Prasad, who died before the loan was fully repaid. When the bank tried to recover the loan by selling Kishun’s land, he challenged the move in court. However, after a lengthy legal battle, which reached the Supreme Court, it was held that the bank had the right to recover the dues from the guarantor if the borrower had failed to pay.

Apart from repaying a loan that someone else has taken, the proceedings can negatively impact your loan eligibility. If the borrower defaults, the banks would turn to you for its dues. If you are unable to pay, your credit score will be impacted. Worse, banks consider the loans for which you are acting as guarantor to assess your repayment capacity before issuing you a fresh loan. Hence, ideally you should act as guarantor for loans with shorter tenures so that your responsibility ends sooner. If you are not confident about the debtor’s capacity to repay, avoid becoming a guarantor. 

___________________________________________

Even those of us who are reasonably financially aware and financially literate are not consciously aware about the above aspects, especially when a close friend or relative comes along with a form requesting you to be a "guarantor" for a loan that he/she is taking.

Obviously, each of us ought to think a zillion times before signing on the dotted line as a "guarantor" and ask basic questions like:

1. Are we willing to make the commitment?
2. Is the borrower likely to be able AND willing to repay on time?
3. What will be the quid-pro-quo? (It need not be monetary!)
4. If the roles are reversed, will the other party be willing to be a guarantor?
5. What will be the consequence if we say "NO"?

Regards,

N

So what if you are a Wharton Graduate? You can still get cheated!

Smart, well-educated & rich?

You can still get cheated!

Beware of Phishing attacks. If you're reading my blogs, I'm sure that you're quite familiar with phishing attacks. And familiar with scams of all kinds. Or so you think.

However, are you indeed sure that some conman will not cheat you?

And even if he can't cheat you, are you sure that he can't cheat your spouse / parent / child?

I'm not so sure.

Take a look at this moneylife article:

• Smart, well-educated and rich? You can still get cheated!

The above article talks about how a Wharton graduate (and a successful businessman operating in India) got cheated. An eye-opener for me. I hope that all my folks (and I) make it a point to be extra-careful while taking financial decisions.

Regards,

N

Organising your Finances after the Bread Winner is suddenly No More

Do you love your folks? 

Make their financial life simple after you are gone!

All of us are sure to die. Some will do so today. A few more will follow suit in the coming week, month or year. Others will follow suit. In due course of time. That's a certainty.

As Yudishtir pointed out in Mahabharat, it is indeed surprising that a good chunk of us tend to think that the first person singular will happen to live on forever. At least when it comes to organising one's financial assets so as to make things easy for the survivors as and when we kick the bucket.

From time to time, we do come across exceptions. Here's a wonderful story of a senior citizen who actually did a whole lot of things to make life simpler for his heirs after he passed away.

Read on:

• Organising your Finances after the Bread Winner is suddenly No More

Now that you've read the above article, do act.

Your turn may come sooner than you would imagine. Sorry for being blunt, but that's a fact.

Regards,

N

Housing for those at the bottom of the Pyramid

Low Cost Housing

IIT Madras has apparently built a nice 2-storeyed apartment at a TOTAL construction cost of just Rs. 650,000/=. Yes, you heard that right. It comprises of a built up area of 1981 square feet. The structure was built within a span of just a single month.

Most important, the experts who came up with this building are confident that the same technology can be used to build buildings upto 7-8 floors. And they assure us about the durability and safety factors.

Do read on:

• How IIT Madras built a 2-storeyed apartment for 6.5 lakh rupees

Am sure that this can be a splendid option for low cost housing. And can bring the real estate prices come down to earth. Will our builders take note?

Regards,

N

Changing Spending Patterns ...

India getting richer, and what it means for us ...

I read a couple of news items on a single day:

• Swift D'zire overtakes Alto as the largest selling car in the Indian automobile market in the month of May
• Three brands of Hindustan Unilever, including the "Premium" brands of Dove and Ponds become 1000 crore brands!

What struck me was a clear case of "Premiumisation", if I may coin such a word..., that's going on in India. 

Obviously, more and more people are willing and keen to buy costlier brands and enjoy the good things in life. And are able to do so. This implies that despite the apparent gloom and doom scenario that we see in the newspapers both at a global level and in India, the ground reality in India is different. A rather large number of people are able to buy what was once upon a time considered either luxury items or conspicuous consumption.

When we go out anywhere, we'll see anecdotal evidence of the above trend. In the past couple of years, I've seen huge crowds at a wide variety of places, the only common thread being that all these places involve spending significant sums of money:

• Malls and shopping complexes
• Theatres and Entertainment theme parks
• Corporate hospitals like Apollo, Fortis, etc.
• Gyms
• Music concerts
• Airports
• Five & Three star hotels
• Jewellery shops
• Private Educational Institutions which charge a ton of money
• Bank branches of private sector banks like HDFC Bank, ICICI Bank, etc. (which insist on a huge minimum balance and target richer customers)
• Shops selling electronic gadgets like mobiles, tablets, laptops, etc.
• Air-conditioned Compartments of trains

Well, at one plane, all the above is actually great news for Indians. On the other hand, it can have a potentially disastrous implication for India as well. In this post, I'll focus on the positive side:

• With all that money being spent, it is obvious that the economy is recovering and recovering fast. This is irrespective of what the doomsayers may claim at the top of their voices.
• Corporates who are providing all those goods and services are expanding rapidly and will not do so unless they are either profitable or hope to become profitable very soon. My own hunch is that they are ALL hugely profitable and will continue to see an enormous growth in their profitability figures.
• This implies that their EPS (Earnings per share) has gone up significantly or will go up rapidly in the next few quarters.
• The corollary is that the Sensex of 20000 and Nifty of 6000 in 2013 implies a much lower valuation compared to the same Sensex and Nifty levels in 2008.
• Having had a de-facto bear market for the past few years, even in terms of the principle of reversion to mean, we're poised to take off in a big way. While the timing in uncertain as to whether it will happen in 2013 or 2014, an emerging bull market in the next several quarters is almost axiomatic.

If there is a bull market ahead, my own suggestion will be:

• Review your asset allocation
• Develop a positive bias towards investing in equity (ideally through mutual funds)
• Don't sell in a hurry
• Select either blue chips or high quality mutual funds and invest systematically each month
• Watch out for scamsters who will be eagerly waiting to lure you in their traps. Avoid penny stocks. Watch out for corporate developments (especially negative ones). Review your portfolio at least once in 6 months but never daily or weekly.

Enjoy life. Enjoy the returns from safe and sound investing. Be happy.

Regards,

N

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How to Slow Down - and still Relax ... ... ...

Practical Tips to Slow Down, and Relax :

The HOW??? Explained!

You would have read my earlier blog post on the importance of slowing down:

• Slow down and Relax!

While a few of you would perhaps have "sort-of-agreed" that the pace of life has become unacceptable, almost all of you would have wondered as to "How?" The problem may be well-recognised, but most of us have tended to think that there is no practical solution.

In this post, I hope to share a few of my thoughts on how to actually Slow down and Relax!

First and foremost, while income/wealth maximisation may appear to be a laudable goal, I would insist that we need to re-define the goal slightly.

Let's just take the issue of one's income to elaborate my point. In the Indian context, I would like to classify the Monthly Income Levels of people into the following broad slabs:

• Zero to Rs. 10,000/= p.m.
• Rs. 10,000 to Rs. 50,000/= p.m.
• Rs. 50,000 to Rs. 250,000/= p.m.
• Rs. 250,000 to Rs. 1,000,000/= p.m.
• Over Rs. 1,000,000/= p.m.

Your perception of the above slabs may vary to a certain extent, based on your context. However, my point is that unless a person moves from one slab to the next higher/lower slab, his/her quality of life, standard of living, pressures faced, etc. remain more or less of the same order.

Hence, a person whose income increases from, say, Rs. 100,000/= p.m. to Rs. 120,000/= p.m. will find that her income has shot up by a considerable 20%. While this would appear to be quite significant at a superficial level, the level of satisfaction, the standard of living, etc. will remain what it used to be thus far. At best, you'll get a kick for a few days/weeks. Beyond that period, you'll get used to the new equilibrium and that will become your new "normal". 

As long as you are within the same slab of income/wealth combination, you will not be:

• Driving a significantly superior/inferior vehicle
• Living in a vastly different location in terms of social infrastructure (or even a vastly different home in terms of size, comfort levels, etc.)
• Enjoying significantly different holidays, entertainment options, jewellery, etc.

Hence, unless one moves from one level to the next lower / higher slab, there is no material change in one's quality of life.

At the beginning of one's career, one may not be too sure of which slab one wishes to seek out and achieve. However, after a couple of years into your career, you'll be in a position to broadly estimate the efforts required as well as the competence required to stand  a realistic chance of reaching different levels of income.

Based on your efforts at introspection (along with a consultation with your immediate family), you ought to identify the income/wealth slabs that you wish to achieve, say, by the age of 30, 40, 50 and 60. Obviously, people are likely to be interested in moving to the next higher slab and not to the next lower slab.

All your efforts should have a structured and sharp focus on achieving the above goal. This would ensure that you do not put in "wasted efforts". Of course, you need to remember that if you wish to move from level "A" to "B" over the medium/long term, you need to put in the necessary planning and efforts in that direction.

Far too often, we end up putting in efforts without having a clue as to whether we really desire the fruits of our efforts. For instance, an aeronautical engineer who is passionate about research may, by sheer dint of performance, keep getting promotions after joining an organisation like, say, Hindustan Aeronauticals. At some stage, he'll find himself/herself heading a section or department or division. Sooner than he realises, the person will find that the time spent on meetings, administrative tasks, etc. is far greater than the time spent on actual research. If the quality of performance continues to be good, as years roll by, the person will find himself in general management, perhaps heading 3-4 different functions / divisions.

The person will now be asking Research? What is that???

What's more, as and when the person realises the situation, it will be way too late to do any mid-course correction.

The reason?

• Money 

Any effort to get back to an assignment involving hard core research activities would now involve sacrificing the pay packet. And the mental construct (as well as societal pressure) would not easily allow that.

And now, we have a perfect example of an intellectually great professional who is, in all probability, an unhappy human being.

Is there a solution to this dangerous situation? I think that there is a rather conceptually simple (but extremely difficult to implement) solution:

Just Slow Down and Relax!

At every available opportunity (at least once in 3-4 months),

• Indulge in introspection
• Ask questions
• Review your priorities
• Identify your passion
• Specifically, find out the number of hours that you spend every day on activities you are passionate about
• If you feel that you need to change, identify actionable steps as to what needs to change
• Fix a time limit by which you will change
• Identify a review date for a status update

After all, being happy is far more important than most other things in life.

In simple terms,

Living is more important than earning your livelihood!

Just Slow Down and Relax!

Regards,

N