Thursday, September 07, 2006

How to get financially organised - A practical way for today's lifestyle

I saw this article on Rediff about getting your records in shape and how you can manage your life better --- [Via rediff: Getahead Money]

Honestly, this article is a bit of a disappointment. The ideas present here is obviously important ie. the very act of keeping records and managing them better but hey cant we actually think a little better and manage our information clutter better if we apply technology to it better (don't tell me you hate technology - what are you doing reading blogs on the internet anyway :-) ?)

So what is really a more improved way of managing better - well let us start with some of the key needs and find a solution that fits the model.

I am a guy who is on the road all the time - I travel both nationally and internationally all the time and just like the average Joe (or Rama/krishna - take your pick), I get my regular set of bank statements, taxes and all the wonderful things that this article talks about.

So how do you figure out what is your advance tax payment on the Sept 15th (you knew that was the due date right?) if you are sitting in a hotel room in wisconsin? All those statements are safely filed away in your home in India while you are on a critical 2 week business trip that falls on the advance tax date!

Also we do keep getting wonderful notices about providing PAN details since we spent over 1 lakh in a year on credit card statements from the tax departments. If you have to pay for hotel rooms in Bangalore with your credit card as frequently as I do, guess what - 1 lakh per annum is not a big number that you think it is. The only good part is that my employer picks up the bill eventually but the credit card is in my name! So we are off scrambling to track down all those old credit card statements by asking our spouses on the phone to dig up from all those files around the house! Where did we file them anyway - or did we?

So here is the bunch of tricks that I have adopted that serves me well.

Step 1 : Get a tax accountant who can actually communicate via email : Yes this is important folks - they know their Form 2Ds but when it comes to email, there is a real challenge for you. Talk to them, test them out with a few emails and make sure they do check on a regular basis and respond back to you. If you cross that first hurdle, you have got a great start.

Step 2 : Get a good image scanner or a digital camera : When I am vaulting around the world, nothing beats the advantage of my wife sending me an e-mail with a couple of JPEG attachments saying - "hey I got these in the mail today from the dept. of tax - they look important - what do you want me to do ?" instead of "I received some letter from the tax department about your credit card. I just put it in your file! You can look at it when you get back". If you combine the Step 1 with this, I just forward the scanned attachment to my tax consultant with a note asking him deal with it while I am stuck wherever I am!

Step 3 : Tell all the banks to send you monthly electronic statements. Download them into a directory and let the Google desktop loose on them. When the tax department asks you about that Rs. 113485.33 transaction that you did, Google desktop will find it for you in milliseconds!

Step 4 : Get truecrypt Its a wonderful piece of encryption software that I have trusted my financial life to! No.. I am not associated with it in any way (I am just jealous that I didn't invent it ..) its open source, very stable , haven't lost data on me so far. Read the documentation carefully, set it up and keep all your statements inside it. You would be dumb to keep it on your harddisk without protection. So you have been warned

Step 5 : Digitize all your key documents - PAN cards, tax filing from last year etc.. etc., - You know what is important to you and even if you don't think it is not so important, go ahead and do it anyway, harddisk is cheap and Google desktop can do magic on large data sets! Also now if you ever need that "Xerox copy" the nearest printer is your best friend!

Step 6 : Prepare a good spreadsheet on key large transactions (when did you do it, which account, which cheque number, why did you do it etc.,) and keep it in the truecrypt volume. Or better yet, download your electornic bank statement and load it into an Excel spreadsheet. write a detailed comment against some of the large transactions (> 50K is a good metric) and save it away. Next index by Google will catch it.

step 7 : Keep another spreadsheet on the stock transactions that you did - helps to deal with those pesky tax returns quickly! Send it to your accountant by email and tell him to figure out the taxes!

step 8 : Backup the truecrypt volume REGULARLY in multiple locations - Home PC, your pen drive, your spouse's pen drive and a monthly backup CD burned and placed in a safety locker - trust me hard disks crash ALL THE TIME.

Thats all folks - you are ready and better organized than most financial institutions!

If you really look what I have preached here, the trick of the trade is to go electronic and combine it with a good search and you can get answers faster than tax man comes asking you questions! Not that you should not keep the hard copies but just don't depend on being able to quickly find out the details!

Good luck and get organized!

Wednesday, April 05, 2006

Welcome Indian banking customer and BTW scr...w you

I want to let off some steam here on the current SBI strike. I have my home loan through SBI while I do all my regular banking through ICICI. For all their wrinkles, there is one thing about ICICI that I like the most - the ability to transfer money to any bank account in India electronically for free. Most other banks hit you with charges in one form or another but ICICI is a true blue customer friendly service for free. So anyway, coming back to my rant, I have scheduled my home loan payment from my ICICI to my SBI loan account to automatically happen on the first of the month. This month, the scheduled transfer was rejected by SBI. This is an EFT (electronic fund transfer) that is routed via RBI to a computer system within SBI. I would imagine that there is really no manual operation involved here since a bank that is as large as SBI cannot possibly be doing this manually.

So who decided to shut down the automated computer systems that process these transactions? What if this was not a home loan but a financial payment to pay a college tution or a payment for a hospitalization service ie. a critical need for the customer? Why did they decide to play Gods? I suppose such things are not a big deal for them anyway. They are after all a publicly traded company and they have shareholders who can be taken for a ride while they are busy messing with their customer's money.

Morale of the story - Private banks will potentially run away with your money while the nationalized ones will simply sit on it and torment you. So dont keep all your eggs in one basket.


Friday, March 31, 2006

How do you protect your house if you die

Now that I got your attention with that title, I wanted to talk a little bit about the conventional wisdom of having an insurance plan that will cover the home loan. I wanted to talk about this when I saw an article on which is the best option for insurance in such an circumstance on the Should I pay off my insurance if I die

The article seems to explore the various insurance options available in the US for such an eventuality scenario - mortgage insurance vs. term insurance. In India I have not heard of mortgage insurance as an option. I know that Banks - to protect their loans from Natural calamity, make all borrowers sign up for a property insurance that will take care of any acts of God. I think the borrower - to protect the investment he/she has made over time should obtain varying covers to ensure that he/she can ensure that the property remains with loved ones if there is a sudden demise.

The problem is that home loans decrease over time since we tend to pay off the loan over time. How do we create an insurance plan whose sum assured also drops off over time? The solution is to take multiple insurance plans each with different timeframes. For example if your loan liability is 10Lakhs, your monthly EMI would be about 10,000 PM of which about 20% would be towards the principal and the rest towards the interest in the early years. Thus you can at best pay off about 2L at the end of five years, another 2 L after another 5 years and so on.

So the best bet is to take on multiple TERM insurance plans, each of 2L in value such that the first one expires after 5 years, the second after 10 and so on while the last one is for a period of your total loan. This will ensure that

  1. Your insurance payment liability drops off as your loan amount decreases

  2. You insure for the highest amount when you are young - when the premium tends to be lower

I didnt have this level of clarity when I took a term insurance for myself when I bought my home so today I have a large term insurance but my home liability has dropped over time. Hopefully you can plan your purchases better.

Monday, February 06, 2006

Sensex hitting 10K - should we be happy?

Sensex hit 10K today - the magic number that seems to be on all financial information channels in India. There is only one word to describe the various financial companies (stock brokers, investment firms, the friendly neighborhood advisor etc., etc.) - Euphoric state of righteousness. Sounds strange? Let me explain - many a financial firm seems to think that 10K is a given and that we as a country rightfully deserve it. Exactly what does that mean? I ask them and the answer is always a macro economic in nature - country is going great guns - our growth in infrastructure is going to be fantastic. We will beat Economy X or Economy Y within a few years etc.,

I am not able to share this conviction with the professionals. As a retail investor I am not comfortable with our growth story for various reasons. Maybe they are right and maybe I am naive - let me explain my stand on this based on what I have learnt by burning my fingers many a time on markets due to my naivete. One of the realities of today's financial markets around the world is this - no country is an island. A change in Japanese foreign policy will have an effect on US markets and similarly a floods in South America will affect coffee prices throughout the world. So let us for a minute look at the events world over -

  1. Oil prices have been on the raise we seem to be at $65 / barrel - there is no way it is going back to the $40 / barrel prices in near future unless there is a major collapse in a major oil consuming economy like the US

  2. We will have a stable government for the next few years - there is already rumblings in the government with the left and their constant bickering about various financial changes that the government today is bringing about does have its fair share of opposition

  3. There seems to be no bad news worth stopping this market - We had one of the worst floods hit various parts of our country this year and when the entire city including where I live was floating on water, the market also kept floating without even a blink. A country where the agrarian economy still rules supreme, how can such news be discounted so easily?

I guess I can keep giving more broad market examples but I want to complete this post with a simple example that really scared me - I read this article on - They rank various equity funds on their annual performance. They rank 106 equity mutual funds and guess what was the return of the 106th fund? - well it was 26% for last financial year! Guess what folks - that sounds too good to be true.

Good luck to you - In my world today, cash is the king! Post your comments on what you think about the market and my thoughts

Sunday, February 05, 2006

The FIFO algorithm for selling Shares

I have been trying to find out which is the exact FIFO algorithm that should be applied if you are trying to sell shares in your account purchased at various points in time. I never got a satisfactory answer until I saw the following article in a old issue of Hindu, which I am quoting here. Hopefully this information is also useful you if you are looking for clarity.

The CBDT's Circular No. 768 of June 24, 1998, has clarified the method of working the period of holding. In such cases the circular envisages three situations:

When an investor holds part of his holding in dematerialised form, the FIFO method will be applicable only in respect of the dematerialised holding. This is so because in such a case, sale of dematerialised shares cannot be mixed with sale of shares held in physical form

When an investor holds dematerialised shares in more than one account or depository, the FIFO method will be applied account-wise as securities lying in another account of the same investor cannot be construed to have been sold as they continue to remain in that account

Where there is an existing account of dematerialised stock, old physical stock is dematerialised and entered at a later date, the securities first credited to the account, will be deemed to have been sold. The date from which this is held will, however, be reckoned, not from the date of dematerialisation, but from the date of purchase.

Friday, January 06, 2006

Rediff Personal Finance, ELSS and everything else

I seem to be gravitating heavily towards Rediff recently. I discovered that their articles, especially the ones from, seems to be direct, to the point and very common sensical. Good work guys keep it up. I do have a few rejoinders to their articles and my blog helps me post those ideas pretty easily.

Today I found an article on ELSS, how does it help the common man due to the 80C tax savings rule but goes even further to understand how to pick out of the whole bunch of ELSS funds that is currently available in the market and makes specific suggestions on how to go about doing it.

Do not put all your funds into a single scheme; have a mix of fund houses as well as schemes.

[Via rediff: Personal Finance]

Now I have some amount of personal experience with ELSS that I wanted to share with all of you. I have been a regular investor in ELSS schemes from 2002 and so come 2005, I had the ability to actually pull my money out since the three year lockin was complete.

Now here is the interesting part - I had actually chosen 3 years ago to use the dividend option with dividend reinvestment so over the three years the fund had reinvested all the earned dividends back into the fund. The only problem is that when I tried to sell all my holding, I was told that I cannot do it since the dividends were invested at a later point in time and those units cannot be withdrawn now and that they need to go through the three year lock in period. That does make sense when we look at it but 3 years ago when ELSS was a blip in investor's radar, the people who were selling it didn't think up of this problem and neither did I.

The flip side is that I did withdraw a significant portion of the money at the beginning of 2005 and now the remaining money has grown a lot better than the money I withdrew thanks to the spectacular performance of the ELSS funds over the one year boom in the Indian stock market.

So the moral of the story folks is that opt for the "GROWTH" option if you don't want to keep track of all the pesky dividends which will pay dividends which will pay dividends etc., for ever (hopefully)

Thursday, January 05, 2006

RE: Art, now a big investment option

Rediff has an interesting article on art becoming a new Asset class. Here is a small snippet and a link to the article.
With stock markets being a gamble and savings fetching low returns, those with the extra moolah are adding art to their portfolio, in order to make more profits with less risk.

[Via rediff: Personal Finance]

This got me thinking about what are the choices that a retail investor has in terms of asset class in India. I am able to count the traditional choices today.

  1. The stock market : Today it is the hottest thing and also reached some dizzy heights.

  2. The bond market : Currently in a squalor due to escalating oil prices and falling US $.

  3. Real estate : Another poorly regulated asset class in India with lots of opportunity. Here information (or rather the lack of it) is hindering good growth.

  4. Jewellery: Long considered the key to savings by traditional Indian middle class, I think this sector stil shines bright in this country. The current escalating global gold prices is also helping the case.

There are other non-traditional investment classes that have caught the investor's fancy in recent times. They are

  1. art : The Rediff article says it all

  2. wine : This is another interesting asset class where there is a potential to capitalize on rare and specialized wines. In the US markets, there are actually Wine funds that can help this cause.

So there you folks, options and more options. Decide what works best for you.