The Wealth Architects

After the normal ULIPs, which have lost favour since the markets crashed, we now have the so-called Guaranteed  highest NAV Plans from insurance companies. Again the sales pitch is highly misleading; playing upon the fears of the investors.

It is but common sense that all these insurance companies may have to close shop if the markets are down at the time of maturity. Now, no company will launch a scheme where it can go bust. Besides, even the regulator will not approve any such scheme. So are they telling a lie? No, naturally they aren’t. But they aren’t telling the whole truth too! So where’s the catch?

The catch is that these schemes will be more or less debt schemes. They will have little or no equity in it. Since returns from debt are steady, it is quite feasible to give guaranteed highest NAV returns without the risk of going bankrupt.

The sales pitch, however, does not clarify this point. People are being misled into believing that they will get equity-kind of returns WITH NO DOWNSIDE, which is simply impossible.

And debt, as you all know, will give single digit returns. Further ULIPs have a higher cost element vis-à-vis normal investment products. In addition, to have this guarantee aspect, these schemes have an extra guarantee cost too. So it will not be realistic to assume any great returns from these plans.

Moreover, you are stuck with a debt product for 10 years.

Therefore, all in all, these are highly avoidable schemes. One can make more returns from the normal PPF, NSC, KVP and debt MF types of schemes. In fact, given that these are around 10-year products, MFs’ MIP schemes will possibly deliver much better returns (as investment period increase, the probability of making loss in equity reduces) and with full liquidity.

Unfortunately, however, given the low level of financial literacy in India, lakhs of people will put crores of rupees in these schemes and then regret later.

Sanjay Matai

www.wealtharchitects.in

The dress we bought on credit card is probably already worn out and discarded, while we are still struggling with the bill. The foreign junket is history, but the debt continues to haunt us for months to come.

Is it all really worth it? Think about it!!

Taking debt to finance our ever-increasing desires and aspirations, has turned into a one big nightmare. This has not only affected our financial health, but badly hurt our personal lives too. Therefore, it would be wise to take appropriate steps before the lender seizes our car or house; before we have to face any public embarrassment; before the problem becomes too serious.

Step 1 – No new debt
To start with, no new debt – PLEASE! No more purchases on credit. If you have the cash – buy; else simply forget it. Debt is like a cancer. First stop it from spreading. Only then you can take further steps to eliminate it completely.

Step 2 – Work out a repayment strategy
Credit card and personal loans are usually the most expensive. Therefore, they should be the first to go. Moreover, these loans are not very large and one can manage to pay them off pretty quickly. Vehicle loans could be the next target and then the loans against investments. Thereafter, you can look at repaying loans from your friends and relatives.

Repaying housing loans could come at the end as one needs a place to stay and the alternative i.e. renting would also mean some cash-flow.

Step 3 – Get serious with the budgets
Don’t think that living within one’s means is down-market. It is nothing to be ashamed of. Don’t think life is all about showing-off to your neighbors & colleagues. That’s all media hype created by the banks and the product manufacturers to trap you. Therefore, be proud and flaunt your budgeted lifestyle.

Use all your ingenuity to cut costs. This will save you some money to start paying off the debts. And as your debts go down so will your interest costs and month after month you will be pleasantly surprised at the amount of cash you have in hand.

Step 4 – Take your lenders into confidence
Have an honest dialogue with your lenders. Seek additional time for repayment, seek lower interest rates; seek refinance; seek relaxation in other terms & conditions – every little bit will be a big help.

No lender likes a defaulter on his books. If the problem is genuine and if the solution is workable, there’s no reason why your lender won’t accommodate you.

Step 5 – Take professional help
Of course, it is difficult to cut down on the standard of living. It is a big dent on one’s ego. Therefore, one may need a psychologist to talk us into it.

A financial advisor may help you to with your budgets – to judiciously manage the incomes & expenses; investments – to earn better returns from your assets; and debts – to suitably restructure them.

A career advisor may help you with some part-time assignment.

No doubt becoming debt-free is going to be tough ride. But it is a short-term pain to long term peace and prosperity (To cure any disease, we have to suffer the pain). We owe it to our family and children. The earlier we start the better it is.

www.wealtharchitects.in

Today the world is facing three major crises. These include Financial Crisis, Global Warming and Terrorism. To solve these problems, we need to understand and attack the root cause rather than trying to just cure the symptoms superficially.

If one were to give some thought to these issues, one would realise that the root cause to all three of them is one – yes one simple factor has created such a disastrous situation, which is destroying millions of lives across the world. And that factor is – Wasteful Living.

a) It is because of the Wasteful Living that many of us living way beyond our means. We have no money, but want to get more and more of everything. It is a ‘grab this, acquire that’ mentality. To meet these unbridled wants and desires, we have leveraged and leveraged and leveraged. And now when the bubble has burst – we have an unprecedented Financial Crisis on our hands.

b) It is the Wasteful Living that has made us use the natural resources indiscriminately. We have thus slowly but surely destroyed our environment. Temperatures are rising, glaciers are melting, sea levels are going up, summers are getting hotter, weathers are getting fickle, and what not. In short, if this reckless overuse and destruction of environment continues, humanity would soon be history.

c) It is the Wasteful Living which has made people live ostentatiously (and that too on borrowed money). And to achieve this end, we have exploited every possible means; we have bent/broken rules; we have created wars; and what not. This exploitation and shameless lifestyle has naturally evoked hatred. Terrorism is nothing but the manifestation of that hatred.

So the simple answer to all problems is Simple Living.

1. Thru’ Simple Living we will use our finances judiciously and hence avoid money-related problems
2. Thru’ Simple Living we will use our the natural resources more sparingly and thus avert climatic disasters
3. Thru’ Simple Living we will give up exploitation and thus remove the very basis of Terrorism.

I hope people realise the virtues of Simple Living – and soon enough too – before the so-called Doomsday is inevitably upon us. We owe it to our future generation. Or else there simply may not be any future generation.

www.wealtharchitects.in

A few days back I got a call from a bank offering me loan at 8% flat interest rate. Well, being a skeptical type, I naturally started looking for the hidden devils. And sure enough I found one.

What got me wondering was the fact that banks were taking deposits at 8-9%. So if they lent me at 8%, they would be incurring a loss. How would they even cover their fixed costs like salaries, rent, electricity, etc. Now would a sensible looking bank deliberately make a loss? No, definitely not!!

Let’s understand the gimmick employed here with an example.

Say we have a loan of Rs.2 lakhs @8% ‘flat’ interest rate, which is repayable in 2 years i.e. 24 monthly installments. [Notice the word "flat"? This is the devil].

At @8% flat interest rate, the total interest payable works out to

Total interest = Loan amount * Interest Rate * No. of years
=  2,00,000 * 8% * 2
=  32,000

Total repayment = Loan amount + Interest
=  2,00,000 + 32,000
=  2,32,000

No. of installments =  24 monthly payments

Equated monthly installment =  Total payment / No. of installments
=   2,32,000/24
=   9,666.67 per month

Simple? Yes.
Cheap? Well, not exactly.

So where’s the catch?

The catch is that you are paying EMI every month. A part of this amount is the interest portion and the balance the principal portion. So month after month, as you keep paying the EMIs, your principal amount is reducing, till it finally become zero in the end. Technically one should pay interest only on the outstanding loan balance. But, as we have seen earlier, the interest has been calculated on flat basis i.e. on the ‘full loan amount’ for the ‘entire 2 years’.

In a ‘flat interest’ scenario you do not get the benefit of the reducing principal amount month after month. The result is that the effective interest cost or the IRR to you works out to 14.68%. Yes, I repeat 14.68%.

So now it makes sense. They borrow at 8-9% and lend at 14-15%. But we as a consumer should beware of the so-called cheap flat interest rates.

www.wealtharchitects.in

1. Don’t be lured into shady investments
One of the biggest reasons for the repeated success of swindlers has been Human Greed. As long as we have a get-rich-quick mentality, we have a good chance of becoming a victim to some kind of a financial fraud. There is no short-cut to becoming rich.

No one can give you returns which are not in line with the market reality. If for some reason such an opportunity does exist, why would someone tell you about it? Won’t he himself beg, borrow or steal to invest in the so-called ‘golden’ opportunity? Why should someone hand over to you the formula to becoming rich, while he himself is happy with measly commission? Think!!

2. Don’t believe in verbal promises
Always remember – ‘If it’s not written, it’s not true’. This mantra will save you a lot of trouble not only in your investments but also in many other things in life.

If a person or a company is unwilling to put any of its’ promises on paper, there is high probability that it has no intention to honour it. Of course this doesn’t mean that the opposite is true – that a person/company will not go back on his written word. But the chances are lower as he can then be legally held responsible and face punishment in the court of law.

3. Budgets are not meant to ‘tie’ you down.
Having a budget is something like kite flying. The purpose of the thread is not to prevent the kite from flying, but to make the kite to fly with some direction and within some limits. In fact, without the thread the kite cannot fly far or fly high or fly for too long.

Budgets give you a defined economic freedom; it is not a financial restriction.

4. Avoid getting debt-trapped
The dress you bought on credit card is probably already worn out and discarded, while you are still paying the debt. Your foreign junket is history, but the debt remains with you to haunt you for years to come. Think about it! Is it worth it?

Therefore, make a commitment today to work towards becoming debt-free. It’s going to be tough ride. But it is a short-term pain to long term peace and prosperity. We owe it to our family and children. The earlier we start the better it is.

Instead of keeping up with the Jones’ in your neighbourhood, why not become an example for those Jones’ to keep up with your debt-free status. Believe me it will more fun.

5. Always keep some cash handy
These are highly uncertain times. Job loss, accident, natural disaster, medical emergency, car/computer breakdown and many such events can happen to anyone, anytime. And such unfortunate incidents, which may require a fairly large amount of money, can upset our financial balance.

Having adequate money handy for meeting such unforeseen, irregular and unexpected expenses
- spares us the mental agony of arranging money at a very short notice
- protects our long-term investment corpus from such shocks and
- gives us time to realign the long-term finances in line with the new financial realities, if need be.

www.wealtharchitects.in

Price/Earnings ratio (PE ratio) is a commonly used metric to ascertain whether a particular stock is under-valued or over-valued.

However, the problem with PE Ratio is that, by itself, it makes no sense. What is a good PE? 5, 7, 15, 20,..?

Mathematically speaking, the lower PE stock appears under-valued than a higher PE stock. But is it really so?

Why do we buy a stock? Simple, we buy it so that when its’ prices goes up, we will sell and make profit.

But why should the price of the share go up? Again simple, the price would go up if the company makes higher profits i.e. higher earnings per share. In other words, it is the growth in the earnings, which gets reflected in the share price.

And since we are buying a share in anticipation that its’ price will go up in future, we must look at the expected growth rate of its’ earnings, especially over the next 2-3 years.

Comparing the two i.e. the PE Ratio and the EPS Growth, of a company gives a more meaningful picture. PEG ratio or the Price Earning Growth Ratio is defined as :

PEG Ratio =  PE Ratio / EPS Growth Rate

PEG Ratio = 1 :  This means that the share price is fully reflecting the company’s future growth potential i.e. the share at today’s prices is fairly valued.

PEG Ratio > 1 : This indicates that the share price is higher than the expected growth in the company’s profits i.e. the share is possibly over-valued.

PEG Ratio < 1 : This indicates that the share price is lower than the expected growth in the company’s profits i.e. the share is possibly under-valued.

However, as usual, there is a word of caution. While, PEG ratio is a useful indicator, it cannot be looked at in isolation. One must
a) look at other numbers such as P/B value, operating margins, return on equity etc.
b) compare it with the peer group
c) consider other non-financial factors too such as brand value, management quality, barriers to entry etc.

This is so because we are only estimating the EPS Growth. If our expectations of growth do not materialise the share prices can fall.

Therefore, to get the best out of this PEG Ratio, it may be prudent to follow investment guru Peter Lynch’s advice -  first find the companies whose long term prospects look good and have good management quality and then check whether their share price is under-valued using the PEG Ratio.

www.wealtharchitects.in

Frankly speaking, no one likes to budget his/her finances. It is quite a boring and unpleasant task.

Some try to put it off for tomorrow; but the tomorrow never comes.
Some do a half-hearted attempt; it serves no real purpose.
Some start enthusiastically; but within a few months are back to square one.
Some don’t fool themselves; they never even start.

Budgets, however, can be very rewarding. A good budget

1.    Makes you ‘control’ the money, instead of money controlling you
2.    Makes you ‘enjoy’ money, not ‘worry’ about money
3.    Doesn’t mean ‘curbing’ your spending, but making it more ‘purposeful’
4.    Protects you from getting into financial problems

Therefore, make your budgeting cool & enjoyable.

Make it a Family affair
There is no reason why as a money-earner, only you should be making the budget, which the others have to follow. Get everyone in the family to work on the budget. Once everyone is involved in budgeting, it does not remain just a job to be completed. Besides, everyone becomes more committed to it.

Have some targets
Rather than making it just an exercise of adding up your incomes and expenses, make budgets something to look forward to with expectation.

Planning to buy the new model of mobile phone? For once, don’t use your credit card or opt for EMI payments. This is the easy way out; it upsets the budgets of the next few months; and you also end-up paying ‘heavy’ interest charges. Instead, keep aside some amount from your budgets for next 5-6 months and then buy the mobile phone out of the money you saved. This time mobile phone is the goal, next one can plan for playstation and an iPod thereafter and so on.

Surprise yourself
Don’t make budgeting a predictable affair. Try to bring in some novelty factor to it. For example, you don’t have to always do your budgeting on the dinner table or the living room. Maybe you can go on a picnic and do your budgets there. The whole mindset is different, when you are a picnic. As such you will enjoy it more.

Or once in a while you could ask you kids to make the budget!

Dare to do more
There will always be times in your lives, when you are running short of cash. Instead of getting worried or resorting to borrowing, dare to do more.

Think how you can ‘save’ more money: No expenses are fixed. If you think divergently, you can always finds ways to spend less, without cutting down on any items.

Think how you can ‘earn’ more money: Sometimes, you could take-up a part-time job in the evenings or weekends and supplement your main income. The economic growth today has opened up lot of avenues for moonlighting.

Challenges bring excitement to budgeting. And when you achieve success in your ventures, the feeling it brings with it is simply great.

Think beyond Money
This may, at first, sound contradictory as budgeting is all about managing your money efficiently. But that is the moot point. No one needs money just to increase one’s bank balance. Ultimately you need money to buy things you desire – a new car, a new house, a new dress, diamond jewellery, vacation in foreign locales etc.

Therefore, think what you ‘value’ before you commit to any purchase, rather than trying to imitate your neigbours. Change you perception and thinking from ‘materialistic’ to ‘meaningful’. Not only will this bring more peace and contentment to you, but also improve your relations with your family members and the society at large.

It is not the test of your mathematical skills
One of the main reasons why budgets become boring is because we try to work to the last paise. Keep in mind that you are not appearing for some test, where you will get marks for the 100% right answer.

The idea of the budget is to broadly plan for living within your means. A few hundred spent here is or there is not going to make any significant difference to your budget. But trying to account for every penny can become mentally very taxing and you & your family will soon lose all interest in budgeting.

Don’t be too rigid
And last but not the least, be open-minded and flexible with your budgets. As mentioned in the beginning, budgets are not meant to ‘tie’ you down.

It is something like kite flying. The purpose of the thread is not to prevent the kite from flying, but to make the kite to fly with some direction and within some limits. In fact, without the thread the kite cannot fly far or fly high or fly for too long.

Budgets give you a defined economic freedom; it is not a financial restriction.

www.wealtharchitects.in

Step 1 : Get a good financial advisor
To start with, we need a good financial advisor. As the investment opportunities multiply – mutual funds, equity, insurance, post office, commodities, banks, etc. – each with its’ own complexities & no ‘assured’ return concept, we may need an expert to guide us. Therefore, just as we look for good doctors, we should look for a good financial advisor.

This, I understand is a difficult task. One could either go by reference; or look at the educational qualifications and experience; or the company reputation. The experience should preferably be not in months or years but in decades. Further, one should see if the advisor is committed to his job for long term or not. It is a bit of a trial and error till we find the right person.

Also, one must keep in mind that good advice does not come free. Therefore, we should be willing to pay for it or at least not ask the advisor to share some of his commission with us.

Step 2 : Define your financial goals
Define clear-cut financial targets. Don’t say I want to become rich or I want maximum returns with minimum risk. This is nothing but aimless driving, where you will merely end-up burning lots of petrol without reaching anywhere. Instead have goals such as I want Rs.20 lakhs for my child’s higher education 7 years hence; or I want Rs.2.5 crores for my retirement 18 years’ hence. This will enable you to decide exactly where you want to go.

Step 3 : Select the most appropriate option(s)
Having decided where you want to go, the next step would be to decide how you propose to travel. This would depend on the goal, the time available, the savings budget and the risk one could take.

The idea would be to match ones’ financial profile with the available opportunities. Select the most suitable options amongst the different asset classes. Study the same. Do extensive research and then make your investment decisions. We spend so much time selecting the right dress, right make-up and right accessories while going for a party, but for investments we hardly do any preparation.

And if you are traveling to an unknown place, you stop from time to time and check whether you are going in the right direction. Similarly, you need to check if your investments are moving towards the desired goals. This could generally be done on quarterly/half-yearly basis and corrective action taken, if required. This will ensure that you maintain the right track and don’t get lost midway.

Step 4 : Be patient
And last, but what I believe to be the most important aspect – patience.

Remember a tree does not start bearing fruits immediately on planting. We need to nurture it for months (sometimes years) to ensure its proper growth. Only then we can start reaping the fruits. We all envy Aamir’s body in Ghajni, but do not appreciate the long months of exercises & sweat. There are innumerable such examples. This is the law of nature.

Start saving Rs.1.83 lakhs every year in a judicious mix of equity and debt. Assuming you earn 15% p.a. returns, you end-up as crorepati in 15 years. Save Rs 3 lakh and you achieve your objective in just 12 years.

Or say you are risk averse and would be happy earning safer but lower returns of say 8%. Then you would need to invest about Rs.2.03 lakh for 20 years to be a crorepati.

Decide on your investible resources and risk appetite and you know when you can turn crorepati.

Unfortunately, people are not willing to wait. They want to get rich overnight.

www.wealtharchitects.in

Well, to be very frank, this question does not have a simple and straightforward answer.

Suppose you were to go to a restaurant you will have a menu offering all kinds of food. Assuming you are vegetarian, you will not prefer a non-veg item even though it might be the best dish. Or even even in the non-veg category, some people may like chicken, some mutton and some seafood.

Similarly, MFs also offer a whole bouquet of products ranging from 100% debt funds to 100% equity funds to mixed funds. Even within each of these broad categories there are many sub-categories. All schemes have a specific objective, meeting a specific need. Further, they also have a specific risk level.

Therefore, to choose the appropriate fund(s) one must know the investor’s financial profile in terms of what is the objective, how long one wants to invest, how much risk one can take, what are the present investments, whether the investment is regular or one-time, what are his/her assets & liabilities etc.

A general formula would be extremely dangerous to the financial health.

For example, mid-cap funds have a higher growth potential than large-caps. But they are also riskier and need more time to show performance than large-caps. So even if mid-caps may be the best performing funds, they may not be suitable for a low-risk / less time-horizon investor.

Or in terms of returns equity, is a good product. But that doesn’t mean everyone should invest his every penny in equity. While equity would be a ‘right’ option for a young working professional, the same would be a ‘wrong’ option for a retired person looking for regular income.

Or bank FD would be the ‘right option’ for a person in the nil/low tax bracket, while the same FD would be a ‘wrong’ option for a person in the highest tax bracket.

I usually give an analogy here. Asking for advice without telling your financial profile, is like asking a doctor which are the best selling medicines, without telling your symptoms. The result, you would appreciate, can be disastrous.

Therefore, it is not prudent to take such general purpose advice. There are many who won’t bother about understanding your needs and give you a very general advice. This may or may not be suitable for you. My experience shows that most people lose money not because of markets conditions but because of wrong investment choices and poor planning.

www.wealtharchitects.in

India’s love for Gold is, of course, known to one and all. Most people prefer Gold, besides FDs, to save their money as against equity, mutual funds, etc.

So far buying physical gold – either as jewellery or coins/bars – was the only option available to invest in Gold. But now we can also invest in Gold in the demat form thru’ the Gold Exchange Traded Funds.

Whether one should invest in gold or not is a separate issue for discussion. But, having decided to invest in Gold, let’s see whether buying physical gold is better or buying Gold ETF.

Surely, if you have to buy gold for your wife, it has to be in jewellery form. However, in case it is purely for investment purposes, then Gold ETF scores over Physical gold.

a) Low cost: When you buy Gold ETF you have to pay only the brokerage charges, which is usually around 0.5%. Vis-à-vis this, you may have to shell out anything between 10 to 20% as premium and/or making charges if you buy physical gold.

b) Transparency: For ETFs, the rates are quite transparent as they are linked to the international prices. But there is no commonality in prices of gold across various jewellers/banks even within the same city.

c) Purity: You need not be concerned about the purity of gold in Gold ETF.

d) Security: No one can steal your Gold ETF units.

e) Capital Gains Tax: In case of physical gold the LTCG tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.

f) Wealth Tax: Physical gold attracts Wealth Tax whereas Gold ETF is exempt from Wealth Tax

g) Convenience: Just call up your broker and your job is done. You don’t need to visit the nearest jeweller with loads of cash.

Thus Gold ETF offers a convenient, safe and hassle-free way of investing in gold besides lower expenses as compared to buying Physical gold. However, if the gold has to be used as jewellery also, then of course there is no choice.

As regards choosing between a jeweller and a bank for physical gold, the next-door jeweller is usually a better option as presently the banks can only sell gold but cannot buy it back and the premium charged by bank is also usually much higher.

www.wealtharchitects.in