Are You a Lender?

A study revealed that only 47% of Indian households had bank account. In addition every 3 out of 4 households had a quarterly bank balance of only Rs.5000. With the recent savings bank account de-regulation many banks have raised their interest rate by 1%. But households would not benefit much, as banks could charge increased transaction fees to offset increased cost, and also the additional interest income from savings account is negligible.

A further study has revealed many other interesting facts. Most Indians prefer to be lenders and not owners that have enterprise.

We tend to play safe and prefer to be lenders by investing in fixed deposits and debentures of banks and companies. Investing in fixed deposit or debentures gives us a fixed interest. The bank in turn lends money to others for interest and makes a profit on the difference between the borrowing rate and lending rate.

Do you want to be an owner?

You can be a lender by investing in fixed deposits of SBI. Also you can be a part owner of SBI by investing in its shares.

As a part owner you would not get a fixed return in the form of interest. Since you own the company partly, you would share in profits or losses. You would get a part of the profits in proportion of the shares owned by you. Owning means risk-taking with the chance to get higher returns than lending to the bank or companies by making fixed deposit with them.

Suppose, Tomorrow Tata motors comes out with 12%interest paying debenture, what will be the response? There will be a huge response. It will definitely be oversubscribed. All investors will not get the allotment.

For a moment, just think. If TATA motors was to pay 12% interest to debenture holders, then it need make more than 12% with the borrowed money. Will you benefit more by being a lender (debentureholder) or part owner (Shareholder) of TATA Motors?

Lending or owning?

We as Indians should be proud to be a part of a developing country. Owning would give us an opportunity for long term capital appreciation and growth. However it is best to understand that the Sensex may fluctuate, but an increase is definite over a period of time.

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

So the coming decade post 2011 is the golden period for owning. This period would help the so called middle-class people to build wealth. With the middleclass aspiring for quality education for children,   quality healthcare for their family and a decent lifestyle after retirement, owning equity is the only time-tested means to get a decent inflation adjusted returns. So we need to get our long term perspective right and start owning equities.

Asset allocation:

Owning and investing in shares means creating wealth with a long term perspective. But balancing the way we invest matters.

First, we need to allocate some amount of money for risk coverage. This could include money set aside for insurance, medical insurance and critical illness coverage. Next we all need to set aside money in liquid sources as savings accounts / bank deposit / liquid funds that would come handy in contingencies like loss of job and sudden illness. Then money required for short and medium term needs has to be set aside in debt investments.

Once this is done you are free to buy equities and build wealth. Equities can beat out all other investment categories in the long run. Equity is one of the few investments which can give you a positive return after adjusting for inflation.

 Last but most important, feeling motivated that you are an owner would make a significant impact on the way you multiply your wealth. It would also give you the positive spirit and affirmation to stand by your decisions during the downs of the economic market.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Financial plumbing

Many have a tendency to complain about inflation, taxes and EMI’s as deterrents to saving and investments. But the question is are we making a conscious effort to save and control spending? Do we have any financial leak and are we ignoring them?

My intention is not to confuse, but to emphasize that you need to fix these leaks. So that you can create and build wealth that can last for a lifetime.

Arun, a marketing professional earning Rs. 24lacs per annum post tax was surprised how his friend Girish who earned just Rs. 18lakh per annum and having similar family conditions could save and invest. Taking Girish into confidence he explained his problems. Girish gave him a patient and empathic hearing. Girish explained where Arun spent unnecessarily or created financial leaks and how these leaks could be plumbed. This could make Arun feel financiallt fulfilled in his life.          

The financial leaks:

 In addition to his necessary expenses, Arun spent a lot on things that were unnecessary and unhealthy. Some of the financial leaks or avoidable expenses included his smoking and drinking expenses. Since he belonged to the upper status of society Arun believed that drinking and entertaining his friends and colleagues with foreign liquor at least once a month was essential. This even took up about Rs.1.5laks to 2lakhs of his annual income.

In addition Arun dined in star hotels at least once a month, with dining out in other restaurants at least twice a week. This took up about Rs.1.5laks annually. The family believed in shopping in expensive malls and watching movies in multiplex that cost him about Rs.300000 per annum. In addition there was the yearly recreation and other lifestyle expenses.

Method of financial plumbing:

Girish emphasized to Arun to cut down on his cigarettes and alcohol to not only save money and invest, but also to care for his health. In addition Girish suggested that he find other healthy ways to relax like doing deep breathing, meditation and relaxation exercises daily. Next he suggested that he entertained his friends in more healthy ways and minimized his visits to star hotels and restaurants for a meal.

He told Arun that dining at home, experimenting on their new favorite recipes. Cooking together as a family provided the togetherness and helped to get the family’s cooperation in meeting the savings goals. Shopping just for essential needs, with entertainment in theaters or watching videos at home instead of visiting multiplex theaters saved money on tickets and in travelling to these theaters that were on the outskirts of the city.

I am sure we all could relate and find some that could identify with our spending habit patterns.  

Your excellent life balance sheet:

Just have a look at how fixing financial leaks could help:

v  Your monthly unhealthy expenditure of Rs10000 on alcohol, if invested at 12% would give you a corpus of Rs. 23, 00, 386 in 10 years and Rs. 98,92,553,  in 20 years.  

v  Next your unhealthy monthly expenditure of Rs.2000 on cigarettes will grow to

Rs.4, 60, 077 in 10years and Rs. 19, 78, 511 in 20 years at the same rate of growth!

v  Similarly, your extra unwarranted expenditure of watching movies at multiplex and shopping in malls of Rs.5000 each month would grow to Rs.11,50,193, in 10 years and to get Rs. 49,46,277 in 20 years at the same growth rate!

v  Cutting on extra dining out expenses of just Rs.5000 per month could accumulate Rs. 11, 50,193 and Rs. 49, 46, 277 in 10 years and 20 years at the same interest rate!

v  Aren’t you surprised this amounts to 50 lakhs in 10 years and 2.17crores in 20 years with a mere cutting Rs.22,000 a month? You are more healthy and financially sufficient all your life!

v  Plumbing some other financial leaks switching off fans, heaters, air-conditioners and other electric and electronic appliances when not in use would help make savings and the energy crisis!

v  Avoiding financial leaks with avoiding the use of credit card unless very necessary would help avoid payment of high interest. Detesting the idea of just making payment of minimum amount on credit card outstanding balances is one of the worst financial leaks. This applies also to giving priority to paying off low interest loans in favor of high interest loans.

v  Next avoiding the financial leak of paying high interests paid on loans, with earning lower interests in savings accounts and fixed deposits is important.

Conclusion:

Hope you are set ready to fix your financial leaks and to channellise the extra savings in a fruitful investment option. Here’s the road map to riches. Fix your financial leaks; get extra savings; invest the extra savings properly; become wealthier.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Independence Day

India obtained its independence from British Rule on 15^th August 1947. India became independent and wants to develop and prosper with its own decisions.

Constitution

Though we are independent, we were not having our own constitution. Without constitution it is difficult to take the right decisions for growth.  So we needed our own constitution which will be the principles and guidelines, based on which we will be able to take the right decisions at the right time. Constitution also deals with the procedures and methodology of taking decisions.

Republic Day

The Constitution of India came into effect on 26^th Jan 1950 which we call it as Republic Day. Since 1950 we were able to continuously grow with the guidance from our Constitution. Without an effective constitution, this exponential growth could have become impossible.

Amendments

So far we have made 96 amendments in our constitution in the last 62 years. Amendments make the constitution more dynamic and implementable in the changing times.

Financially Independent

You will be financially dependent on your parents till you complete education. Once you get a job you will become financially independent. You can take your own financial and investment decisions. You may want to financially grow and achieve financial goals like buying a car, buying a property, children education and marriage, and having a comfortable retirement.

Financial Constitution

Do you have your own financial constitution? That is you need to have a set of financial principles guiding you to take the right financial and investment decisions.  Without these guiding principles it is difficult for one to financially grow and achieve financial goals.  This financial constitution or financial plan details the step by step procedures and methodologies of taking sound financial and investment decisions.

Illustrating a case:

Rahul would like to retire in 25 years. He would like to have (when retiring) investments which can generate lifelong, the equivalent of Rs.50000 per month and additional Rs. 2 lacs per annum at today’s costs.

A Mediocre Approach:

Rahul may choose invest now and then. He may contribute Rs.3000 in one month, Rs.15000 in another month. He may skip investments at times. So his financial picture will not be very clear. He will not know how much he will be accumulating when retiring. He will have insecurity throughout.

Financial Planning Approach:

Financial planning approach has got some principles and guidelines. These principles and guidelines are like a light house for a ship. They give you the right direction at any point in time.

Investment Principles and Guidelines in Financial Planning Approach:

1)      A good investment need to generate a decent inflation adjusted return.

2)      Not investing in risky avenues like stock market is also riskier.

3)      When doing trading, you are not investing.

4)      Asset allocation is a proven strategy to reduce the overall risk of the portfolio. Periodically rebalancing the assets will enhance the potential of wealth creation.

In the financial planning approach, the situation will be detailed with more facts. As you have well established procedures and methodologies in financial planning, you will be able to do a sound plan and course of action to be taken to achieve the financial goals.

If Rahul is able to invest Rs.49738 per month, he will be able to accumulate the retirement corpus easily.

Alternatively Rahul can start with Rs.22000.per month, and increase the contribution every year by 10%. Even in this method he will be able to accumulate enough towards his retirement.

Amendments Vs Review:

Financial planning reviews are what amendments to a constitution. When there is a change or deviation from our original plan, we need to do a review to control the change. The reviews of financial plan accommodate the changes and deviations and make the whole plan achievable.

When celebrating the Republic Day of our country, why don’t you create your own financial constitution /financial plan for a better prosperity?

Long live Republic.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Whenever people have surplus money, they want to invest. When they invest, they just want to act or execute. They don’t want to spend time on understanding the product and various investment strategies. They would like to take investment decisions without doing any homework. There is no plan of action. Their attitude is “I have surplus money; just tell me where to invest”.

Misselling:

These kinds of investment decision making will make you fall prey for misselling. As you are not interested in doing the homework and if someone comes with a long chart and calculations for 20 years, then you may find it interesting and end up buying products like ULIPs.  When you realize that you have invested in a mediocre product, you will blame the agent or broker and not yourself and your wrong decision making approach.

Market Moods:

When you just want to act, your investment decisions will swing based on the market moods. If the stock markets are highly volatile and it is comes down day by day then you may think that instead of investing in stock market investing in debt funds are fixed deposits are safe and wise. If the stock market goes up and everyone is investing in the market including your driver, then you may think it is opt to invest in shares or equity funds. So in this case you will never buy low and sell high. In fact you end up buying at peak and avoiding the market when the share prices are low.

Aggressive Trading:

Blindly, some investors believe that by doing aggressive trades in shares and derivatives are the quick way to make money in the stock market. They enjoy their higher degree of involvement with the stock market. They feel very happy about the few successes in the stock market which give them comfort in accepting many losses. They don’t go back and calculate how much they have made or lost in a trade; what is the total profit or loss they have made in a particular year. These investors will learn very old lessons of investment after losing a huge amount of their hard earned money.

Wealth Creation Secret:

The mistake investors do is they don’t understand the basic investment principles. They simply try to make some investment decisions. How can these investment decisions be right? Very difficult. As an investor, you need to understand the investment principles. Then based on the investment principles, you need to take the investment decisions. These investment decisions will be right for sure. Without right investment principles, right investment decisions become impossible. Without right investment decisions, long term wealth creation is just a day dream.

Sound Investment Principles:

Asset Allocation:

Depending upon your financial goals, you need to arrive at the required rate of return from your investments. You need to decide what kind of allocation needs to be given to different kind of investment avenues (like Fd, Debt funds, Equity Funds, Gold ETF..) in order to achieve the required rate of return. Once decided, don’t change this asset allocation ratio depending upon the market movement.

Risk Vs Safety:

Whatever the long term savings you have got you can invest in risky assets like equity funds. You will be adequately rewarded for taking risk in the long run. Whatever the short term savings you have got you can park it in FDs or debt funds.

Investing your long term money in safe avenues will be a destruction to create long term wealth. You will not be able to beat inflation. Similarly investing your short term money in risky investments is also dangerous.

Fundamental Factors:

The returns an investment generates will be based on its fundamental factors. Analysing fundamental factors only will lead to a long term success. There is a lot of difference between taking one right investment decision by fluke and taking right investment decisions regularly by analyzing the fundamental factors.

These investment principles are very simple and straight forward. At the same time these principles are very authentic and profound. The magic formula for creating long term wealth is “Sound Investment Principles + Right Investment Decisions = Long Term Wealth”.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in