Welcome to the real world: Get mislead!

Lies, Damned Lies, Statistics & Media Reports

Take a look at this amazing graph that I culled out from a not too old issue of Economic Times, a newspaper that I normally like (and even respect, as a matter of fact):

 





 

Needless to add, they certainly have the usual disclaimer at the bottom. But then, how many folks would normally bother to take a look at a disclaimer, especially when the alternative is to just “look at the big picture” and move on!

If we choose to listen to the logic of the above picture, here are a few thoughts that come to my mind:

·        Kamarajar hardly went to school, but went on to become a hugely popular and successful Chief Minister of Tamil Nadu.

o   Hence, don’t bother with such mundane things like attending school. You’re likely to become a Chief Minister without all the effort that goes into passing out of a good school.

·        Bill Gates dropped out of college and went on to become the riches man on the planet.

o   Just dump college if you’re dumb enough to be there still..

·        Dhirubhai Ambani started life as a Petrol bunk attendant. And the rest is history.

o   Quit your job and seek a “nice little assignment” at the nearest petrol bunk.

·        Narendra Modi started life as a Tea Stall employee.

o   Don’t waste your time with dreams about IIT & IIM. Learn to serve tea instead.

·        You all know about the academic qualifications of Sachin Tendulkar.

o   Just bunk school (or better still, quit school altogether) and start playing Cricket!

 

Regards,

N

 

 

Being Disciplined

Being Disciplined

When it comes to personal finance, people tend to assume that they need to do a whole host of things and consult a zillion “experts” before they can get on to their “Path to phenomenal wealth”. They are completely off the mark and totally wrong.

While things are not altogether simple and absolutely easy so as to be trivialized, they are very much within the realm of possibility and can be accomplished by virtually each of you.

 

The trick is to

1. Start early
2. Be disciplined and
3. Stay put

Of the above three steps, I would personally regard the second one to be the most critical: Be Disciplined!

Here are some easy-to-execute tips for being disciplined on the financial front:

• Today, identify a time-slot when you will actually sit and start your basic planning process.
• At the outset, jot down ALL your sources of regular income
• Similarly, identify ALL your regular expenses that are completely unavoidable (Like Rent, Taxes, Electricity bills, Monthly groceries, etc.)
• Identify a percentage of your regular income which SHALL be saved each month. In the initial years of your career, when financial commitments are typically lower, the percentage can be much higher than, say, when you’re married, have a couple of kids and a couple of loans.
• Convert this percentage into a nice, round figure, say, to the nearest thousand or nearest hundred.
• Each month, shift this amount AUTOMATICALLY to a separate bank account which will be a “One-way bank account” – This bank account will NEVER be used for routine withdrawals for regular expenses 

 

What you should do with this “One-way bank account” is the subject matter of a separate blog post, and will be dealt with in the days and weeks ahead.

 

For the moment, start off with the aforementioned “baby steps” to become financially disciplined. Those of you who are familiar with the Power of Compounding would know the likely positive impact due to these “baby steps”. The rest of you may wish to do a Google search to find out about what Einstein famously referred to as the “Eighth wonder of the world”. Or, if you so desire, refer to my own blog post on the Power of Compounding a few years back (Using the Power of Compounding).

 

Regards,

 

N

 

Maximizing Employee's Contribution to PF - To do or Not to do?

Maximizing Employee's Contribution to PF

To do or Not to do?

A couple of days back, a friend told me about his young IITian son’s first job. In the course of his conversation, he mentioned that he had advised his son to go in for “maximizing” the “Employee’s contribution to Provident Fund” so as to build an “automatic savings corpus” right away.

 

I did proffer my opinion about the same in brief – that it may not necessarily be a great idea if the individual concerned happens to be a thrifty individual and has adequate self-discipline, especially in matters pertaining to personal finances. During the course of the weekend that followed, I thought further about it. And here are a few of my thoughts: 

Considering the temptation to blow up one’s “newly acquired monthly inflows”, it is indeed a good idea to send away a part of the money “automatically” into the savings pool before it reaches one’s hand. This is certainly true for the vast majority of youth today. Even more so if the young kid satisfies one (or both) of the following two conditions:

• The monthly income is just about sufficient for maintaining the chosen life-style of the concerned individual and / or,

 

• The individual concerned is likely to yield to the temptation of blowing up all his/her money as soon as it lands up in the bank!

From anecdotal evidence, I would guess that at least one of the above two conditions will apply to well over 95% of people entering the corporate world today. My mom (and people of her generation) would be tempted to say that the figure ought to be 99.99% J!

What about the folks who don’t satisfy even one of the above two conditions? They will be under immense pressure from their parents, friends, colleagues and perhaps even some so-called financial experts to maximize the “Employee’s contribution to PF”. The logic would broadly be as follows:

 

• “You’re earning quite a bit considering your life-style – Obviously you will be able to save this sum without even noticing it”
• “The power of compounding works like magic – Before you realize, this contribution would have grown immensely”
• “If you don’t save this money, you will spend it or lend it or give it or otherwise fritter it away”

At a superficial level, the logic is quite appealing. But I’m not convinced. In fact, I would strongly urge such an individual to ignore the logic and contribute the MINIMUM possible amount to the “Employee’s quota” of PF Contributions.

Here are a few reasons:

• Being self-disciplined and financially thrifty, he will in any case save enough of his money on his own – He doesn’t HAVE TO maximize his contribution to PF.
• In any case, the Provident Fund fetches a ridiculous sub-10% returns on the savings. This doesn’t in any way cover the real inflation rate that will be applicable to an upper middle class individual.
• More importantly, considering the long-term horizon for this individual’s savings, he ought to look at maximizing returns, rather than safety. In fact, the past track record of the past 10, 20, 30, 40 and 50 years would confirm that returns of systematic monthly recurring investments equity shares / equity mutual funds have consistently and significantly outperformed any fixed income products like Bank deposits, Provident fund, NSC, etc. Hence, risk becomes almost a non-issue.
• The same logic would perhaps hold true for investments in real estate as well.

Hence, I re-emphasize my initial point:

• “If you’re a disciplined individual, thrifty by nature, you must MINIMISE your contribution to the Provident Fund”.

Instead, you MUST do the following:

1. Shift any surplus funds over and above your typical monthly expenditure into a highly rated liquid mutual fund.
2. From the balance in this liquid fund, build a corpus of perhaps 3-6 months of monthly expenses (not monthly income) and park it in a carefully chosen short term debt fund.
3. Identify your real insurance requirements (Typically you will require a Term Insurance Plan to cover your life, a health insurance plan and perhaps an Accident Insurance plan) – Explore the possibility of taking adequate insurance cover for all these requirements.
4. Once this “Emergency Fund” corpus as well as your Insurance needs are both “ready and done”, identify 3-5 high quality equity oriented mutual funds and start a Systematic Investment Plan to invest your routine monthly surplus to these equity oriented mutual funds.
5. Stay on the look out to buy your own home For Living – As and when you identify a suitable property, you may wish to consider taking a suitable housing loan and buying that property.
6. Watch out for the launch of high quality Real Estate Investment Trust products (REITS). SEBI and the FM have just approved the concept. I’m sure that reliable and trustworthy players like HDFC, Tatas, Birlas, TVS Group, SBI, L & T, etc. will very soon come up with their own REITS. Considering the fact that under the proposal, long term capital gains from REITs (units which are held for over 12 months) are likely to be completely exempt from Income Tax, REITs are bound to be hugely popular investment avenues for those who wish to park their funds in Real Estate for investment purposes. (To put things in perspective, if you sell a house that you have been living in for the past few years, your capital gains will be completely taxable, whereas, a corresponding investment in REITs would be tax-free).  

In a nutshell, remember that unlike your spendthrift friends who blow up their money, you are disciplined and thrifty. Hence, make the most of it and kill the monster of inflation with your hard-earned savings. Saving money is just the first step. The next key step is to convert your savings into investments.

 

This, I’m sure, will not only make you immensely wealthy over the next couple of decades, but will also ensure that you will be able to become financially free by the time you hit 40.

 

Don’t waste your money by maximizing your contribution to PF!

Regards,

N

 

Significance of the Financial Sector

Why you MUST be overweight in the Financial Sector while investing ...

Came across a rather interesting article on how the Financial sector enjoys an undue and highly exaggerated status, certainly disproportionate to their true contribution to society (some would be tempted to add - "If any"):

• Elevated position of the Financial Sector

The above article, which is set in a global context, is a bit "high-funda" and more relevant for those who have a predisposition to read such esoteric stuff. For the large majority of you, I would recommend that you simply take a quick and brief glance just enough to get the general drift of what the article is all about.

What's relevant for us is that

• For the same quantum of capital deployed the financial sector generates much greater revenues vis-a-vis most other sectors- due to leverage
• For the same quantum of capital deployed / revenues generated, the financial sector generates greater profits than a good chunk of other sectors
• Ditto for the rate of growth of the firms in the financial sector - For instance, banks which started around a decade back like Kotak are far bigger today than similar-sized firms which started off around the same time in other sectors.
• Due to systemic risks, more often than not, the governments around the world will NOT allow financial sector firms to go bust. They may allow a steel manufacturer or a real estate player or an automaker to go under - but not banks.
• Due to all the above, the ever increasing proifts of banks accrue to the shareholders, but the downside risks due to issues like leverage are "sort-of" protected by the governments around the world.

Hence, while investing in shares, it may be a good idea to keep a keen eye on financial sector players and be willing to be significantly overweight in players in the financial sector vis-a-vis the market as a whole.

The gains will belong to you but not the losses.

Caveat: The last line above will obviously depend on your prudence, your entry levels, your fear and greed levels. But then, that's always true while investing in shares!

Regards,

N

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

---

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

---

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

---

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