Getting things done - my current savior

Warning : This really isn't a personal finance blog entry but sort of related ...

I have recently been adopting David Allen's - Getting thing done a philosophy of how to do work in a productive manner, it has been quite an interesting journey and really been helpful. It has also helped me get in control of various aspects of my life including my personal finance management. Google around, you will definitely find a lot of material about GTD as it is called.

This post was created by Vivek Venugopalan at http://desimoney.blogspot.com

Public provident fund in India - the rules of the game

I have been on and off asked questions about PPF account and all the details behind it. Here are a quick summary of the rules for Public Provident fund (PPF) in India - hope this helps you folks out.

Eligibility

1. Non Resident Indians are not eligible to open an account under the Public Provident Fund Scheme.
   
2. If a resident who subsequently becomes Non Resident Indian during the currency of the maturity period prescribed under Public Provident fund Scheme, may continue to subscribe to the Fund till its maturity on a Non Repatriation Basis
3. Minimum amount that should be deposited in a year is Rs 500
4. You can’t transfer money from your EPF account to your PPF account
   

Transactions

1. Investment per year should range between Rs. 500 and not more than Rs. 70,000 in a year.
2. You cannot do more than 12 transactions in a year in a PPF account.
   
3. You can transfer the account from one "office" to another "office" (never tried this one. Can someone let me know their experiences here?)
   
4. If you don't pay the minimum Rs. 500 in a given year, you will have to reinstate the account for a fees of Rs. 50.
   

Duration

1. The account should be held for 15 years.
   
2. Any time after the expiry of 15 years, you can extend the account for another 5 more years, to a total of 20 years maximum.
   

Opening an account

According to the RBI website, the list is given below. Obviously your luck will be in the fate of the employee who is going to deal with you when you walk in to one of these banks :).

1. State Bank of India and its Associates
   
2. Allahabad Bank
   
3. Bank of
   Baroda
   
4. Bank of India
   
5. Bank of Maharashtra
   
6. Canara Bank
   
7. Central Bank of
   India
   
8. Corporation Bank
   
9. Dena Bank
   
10. Indian Bank
    
11. Indian Overseas
    Bank
    
12. Punjab National Bank
    
13. Syndicate Bank
    
14. UCO Bank
    
15. Union Bank of
    India
    
16. United Bank of India
    
17. Vijaya Bank
    
    
18. ICICI Bank Ltd
    

Returns

1. Currently the interest is 8% tax free. This would equate to 12% roughly on the highest tax bracket.
   
2. Interest is credited on the lowest balance on the account on the 5th of each month. It makes sense to deposit the whole Rs. 70,000 on or before April 5th of
   each year so that your money earns interest over the full year.

Loans

1. You can avail a loan anytime after one year after opening the account and upto five years from the year of opening the account. The loan amount cannot be greater than twenty five percent of the balance on the account at the end of the second year immediately preceding the year in which the loan is applied
2. After 5 years, you can withdraw upto 50% from the balance in the account at the end of the 4th year.

This post was created by Vivek on http://desimoney.blogspot.com

Funds during an emergency - how do we get it?

We all need emergency funds in our life. We never know when we need it but we all know that we need it some time or other. There was a detailed post on CNN some time back on how to get hold of emergency funds when we need them. I have adapted it to the Indian context since a lot of avenues that we have a are very specific to personal financing in India. So without much ado here is my list.

1. Tap emergency funds : You did save for the rainy day somewhere didn't you? This would be the right time to start using it. If you have not started doing this as a habit. It might be worth doing something like this after you get out of this crisis. So what is next, let us look forward.
   
2. Sell long term equity investments : Long term equity investments are investments over a year's timeframe. They have most probably given you handsome returns given that stock market has done well for quite some time now. So far the sources of emergency funds that we have looked at were
3. Ask parents for a gift : If your parents were planning to give you a gift in cash / money, this would be a good time to do it. Gifts from parents wont be taxable and would help you tide over the current crisis.
   
4. break into a FD : Fixed deposits can provide the next level of quick access to money that comes with some penal interest for early withdrawal. You probably wont lose the principal but definitely a large portion of the interest when you do this one.
   
5. Take a loan on Jewels : Jewel loans are not a pawn broker domain anymore. Many banks will help you with a jewel loan. All that jewelery you have lying around in a locker can actually come in handy. Talk to your bank and close the transaction right there from your locker to the banker's locker. Gold has in recent times appreciated well so this option makes it even more worthwhile.
   
6. Borrow on your PPF : Your public provident fund could be a good source of income from the third year onwards of establishing the account. The loan amount
   should not exceed 25 per cent of the balance in your PPF account at the end
   of the preceding financial year.
7. Loan against shares : This is an option that comes with specific risks. If the stock under lien goes down in value, the institution providing the loan will automatically liquidate it and you will be responsible for tax implications on the same. This option also has a higher cost associated with it as compared to some of the previous options.
   
8. Loan against property : If you hold property that is not in lien already , then you can go for a loan against property. This is low on our options list since this option is probably going to take some time to work and not exactly going to help in an emergency situation.
   
9. Personal loan : The ubiquitous personal loans with their so called low rates are your next best option if you have reached down so far in selecting a source for your funds. There are quite a few options available but none of them can be qualified as cheap. The costs are just "structured" well so you can never find them :)
   
10. Cash advance on your credit card : You got to be kidding right? This is really not a real option given the cost of this loan.
    

Hope this helped you in coming to an easy conclusion on what are your sources of money. Good luck.

Lump sum vs SIP in ELSS

Every fund house has been touting the benefit of SIPs for quite some time now and how it is relevant for long term asset building. I firmly believe that is the right direction in terms of building an asset. One thing that does stand out is the fact that we have a concept called as ELSS in India. ie. Equity linked savings scheme. Essentially this is a equity based mutual fund that allows for tax saving.

So what is the implications of doing a SIP on an ELSS. Well here are the gotchas

1. ELSS has a 3 year lock-in. So that if you do a SIP on this, each installment will have a lock in for 3 years. So your SIP will become your SWP :)
2. If you pick a dividend reinvestment option, each time a dividend is issued by the fund house, that would get invested on that day back into the ELSS which will result in a 3 year lock-in of that dividend.
3. All your gains will be taxfree (considering today's tax rules) since this will qualify for long term capital gains tax on equity which is currently 0%

Hope this information helps you make the right decision on SIP with ELSS.



This post was written by Vivek Venugopalan on the blog Personal Finance in India - The not so obvious stuff

Technorati :

ELSS, SIP, Mutual Fund

The new Rage in safe investing : FMP vs Bank deposits

Its the talk of the town folks - to FMP or to FD is the question. The stock market showing signs of behaving what it always does in the long run, i.e. being rational and correcting the exuberance of the past 5 years of heady growth, Every retail investor is looking to run and hide with safer avenues and that has traditionally been bank fixed deposits.

I have always had my reservations on bank fixed deposits and this has been from years ago even when fixed maturity plans (FMP expanded just so you know ) were an unknown entity, Finally mutual fund institutions have found a new way to lay their hands on your money and provide "safe and secure" returns to you. Welcome to the world of Fixed maturity plans or FMPs. Think of this as a mutual fund equivalent of an FD (is it really an equivalent? we will talk about that soon) where the returns nowadays match a fixed deposit.

What are they

These instruments are essentially debt mutual funds which are typically close-ended with a maturity period ranging from one month to five years. FMPs are typically setup by the fund manager by purchasing debt instruments that align with the fund's maturity period so that they can protect the returns and meet market expectations

Why are they touted to be better

The key to FMP's fame is the tax treatment viz a fixed deposit. Since these are debt mutual funds, they enjoy all the benefits that a debt fund gets, ie.

Short-term capital gains

Short-term capital gains on debt-oriented funds are added to income and taxed as income tax.

Long-term capital gains

Long-term capital gains on debt-oriented funds are taxed at higher of the two i.e.10% without indexation and 20 per cent with indexation. To help understand the benefits, the following table below illustrates the comparison between Bank deposits, FMPs both dividend plan and growth plan.



The last row shows the returns for various options

The detailed spreadsheet that shows the calculations is found here on google docs

Essentially three things stand out here

1. FMPs are far superior to bank deposits in terms of net returns
2. When buying FMPs less than one year always prefer the dividend option
3. When buying FMPs greater than one year, always pick the growth option
4. If possible try to get double indexation benefit by buying FMPs at the very end of a financial year that redeems at the very beginning of a future financial year

Given that FMPs are superior and everybody is rooting for it (if you looked at the recent spam that you have received from your favorite financial institutions, its FMP galore. So what are the key problems?

What are the pitfalls

There are a few underlying assumptions in the spreadsheet above that I want to call out so that you can understand the key issues with FMP.

1. Returns: The above sheet assumed that banks and FMPs return the same returns. While that is helpful to compare apples to apples, the real truth is that returns in an FMP is neither guaranteed nor secure. The Hindu carried a dated but detailed article on how FMPs fare with respect to bank deposits and they concluded that short term FMPs really do fare badly. I had personally tried out one FMP for 4 months and received a fabulous 7.7% returns in 4 months which is > 20% annualized.
2. Risk : FMPs typically invest in commercial paper of many businesses. Commercial papers have various CRISIL/ICRA ratings and FMPs announce their intent on investment spread across various ratings in their prospectus. An aggressive FMP can put your capital at risk in a bad economic situation where the business can default on payments thereby putting principal at risk.

In conclusion, not to sound as an alarmist, FMPs obviously if chosen well, can be a superior tool as compared to a debt fund. As in all investments, caveat emptor or "Let the buyer beware". Ensure that you read the FMP offer document to understand their investment strategy.

Back after a long Haitus

Well folks, I thought I will resume my posting after a long haitus. Thanks for being patient with me and also sending me feedback, comments and encouragement during these days of absense. will keep you posted :)

Using my blog to launch your Blog!

This is an offtopic rant - you have been warned. For the past few weeks I have been trying to delete comments posted by a lot of bloggers who have been simply trying to get a link spam going from my blog to theirs. Looks like they are hoping that Google will improve their page ranks. Honestly, I would not have minded doing something like that if they have been polite enough to ask me in the first place. Instead they pose as commenters and just say things like "nice blog" and post a big URL of their blog along with it.

Well my dear fellow blogger, I am glad you have learnt your google 101 lesson but you are stupid enough to not read between the lines. In any case, I am not in the mood to entertain you using my blog as your beta test area for Google lessons. I am going to delete your comments and treat you the way I treat spam.

The elegant investment advice

Some of the great advices on personal finance is as simple as it can be. Take the case of Dilbert on personal finance This is a very concise 120 odd words of advice on how to manage your personal finance and to be perfectly honest with you, I think it is really great advice! It lets you not worry about the little things like market fluctuations and general policy decisions that happen from time to time. Maybe we also need to start looking at simple (and not simplistic) ways of managing our own money.

Oops! I have a long term capital loss

I just figured out that one of the scrips I hold is in the red and I have crossed one year period of holding it. The scrip over the year had only reached a modest 10% gain which was quickly wiped out by the recent market downturn and add to that we just celebrated one year of ownership! So I was contemplating selling it off and to my dismay I found that I cannot write the loss off against any other gain.

The way I see it, short term losses can be written off against short term gains but long term losses cannot be set off against long term gains since they are not taxable anyway! So it seems I need to just sell it and swallow my loss (and pride :-) )

Advance tax date is approaching

Well folks the individual advance tax due date is approaching soon. March 15th 2007 is the big day before you pay the last installment of advance tax. Please do so to avoid additional penalty later.

Update : You can pay advance tax online at NSDL website

Tracking NSE IPOs

The stock market in India is booming like nobody's business and so many companies are looking at going public by offering an initial public offering (IPO). The whole IPO scene has become an easy way to make money. Just subscribe to an IPO offerng during the offer period and then once the stock lists, dump the sucker in the market and make an easy 10-25% returns. The key to success is obviously picking the right IPO. So how do you do that? I use the classic herd behaviour approach to do it since I dont have the time to sit and analyze each company and its fundamental merits. Let me explain in detail...

The NSE website lists all the currently running IPOs and when you click on any one of them it actually gives you near realtime data on how much of subscription that the particular IPO has undergone during the offer period. If I see a large (1000 - 4000%) oversubscription especially in the institutional buyer's market, I figure that the big guys with their advanced research teams have figured out something interesting in this stock so I might as well buy it.

Mind you this works most of the time especially if you are planning to sell short term. There have been spectacular failures in this approach for me in the past but hey - this isnt exactly research you know! I am OK with the results that I have seen so far.

As far as getting an allocation goes, let us not even go there....!!!

I decided to start tracking the current NSE IPOs so I can plan this game better (of course it is a game - a gambling game - don't be dumb and think we have anything that is scientific here!). To make the IPO dates public, I initially added it to Google calendar. I am adding a link to the same on the right. If you use google calendars to track any of your dates, just clicking on the button will add my calendar to your list of available calendars.

What is your asset allocation

I am sure all of you have heard about asset allocation in standard textbooks and other investment books/periodicals but I am curious as to what your real asset allocation is ? i.e. how far is reality away from textbooks. So my loyal readers, if you can leave a comment to this post, indicating your percentage of investment in each of the following asset classes and whether you are happy with the returns. I will consolidate the results and publish what is reality based on what I see from you folks.

F&O Market investments
Stocks (Shares/IPO)
Bonds (RBI, ICICI, REC etc.,)
Fixed deposits (Banks , third parties)
Equity Mutual funds
Debt mutual funds
Post office (POMIS)
Real estate (Apartments, vacant land)


Please dont post the actual amounts just the % distribution.

Must read for global Indians

RBI has a fascinating FAQ on foreign currency rules for resident indians. Do take a look at

http://www.rbi.org.in/scripts/FAQForex.aspx

Mutual funds - Growth vs Dividend - What should we choose?

Some time back I had posted an entry where I had recommended that in mutual fund world, choosing the 'Growth' option is the way to go and the 'dividend' option whether you take the cash out or you reinvest it, is really a pain from a management perspective. I have been thinking about this choice further and I want to refine my recommendation a little bit more considering the current tax laws prevalent in India.

Indian tax laws for equity mutual funds (funds that invest > 65% of their corpus on common stock) specify that

1. Short term ( less than one year) capital gains tax is 10%
2. Long term capital gains is 0%
3. Dividends paid are non-taxable
4. Security transaction tax (STT) of 0.1% has to be paid on all SELL transactions

Indian tax laws for debt mutual funds specify

1. Short term capital gains is treated as income (basically added to salary and taxed at the tax bracket you belong to)
2. Long term capital gains is 10%
3. Dividends paid are non-taxable in the hands of the investor but they undergo a tax called dividend distribution tax (DDT) (12.5% + surcharge + education cess) that the fund has to pay before declaring dividend. This effectively reduces the quantum of the dividend in your hands
4. There is no STT.

So if you are in the highest tax bracket, it might make sense to opt for the dividend option when you are buying debt mutual funds since effectively you pay onl 13.xx% as tax on the dividend as DDT as compared to growth option.

For equity mutual funds, the verdict is very clear folks - growth is the direction in which you should be going.

Gold Funds - an update

Deciding to dig deeper into Gold funds, I read the offer document for the benchmark AMC offering called the Gold BeES (pdf file) and here are some of the key points that understood by reading this document. Again, I am exploring here and not speaking from experience or expertise

1. Their offering is an ETF meaning - it will be traded on the stock exchange (NSE) after the new fund offer (NFO) period (between February 15 and 23rd, 2007) like any other stock.
2. The "face value" is Rs. 100/- for 1 gram of gold and today's market price (say Rs 860/gm) would mean that the units are sold at a "premium" over the FV of Rs 760/-
3. You can buy and sell the units of the MF on the exchange and you can also choose to get physical delivery of the gold or decide to deposit gold to obtain units (no details on how the logistics will work here)
4. Fees:Investment management fees is 1.25% p.a. of the weekly average net assets outstanding for amounts up to Rs.100 Crores and 1.00% p.a. of the weekly average net assets outstanding for amounts above Rs. 100 Crores. There is no entry/exit load post listing for the fund but you will end up paying brokerage since these transactions are treated as stock. During NFO, the entry load is 1.5% upto 50L of investment
5. The custodian (person responsible for managing the physical gold) is The Bank of Nova Scotia
6. The scheme will have 90%-100% of their portfolio in physical gold and 0%-10% in Money Market instruments, Securitised Debts, Bonds and cash
7. NAV : NAV will be calculated like any other mutual fund and will include all the expenses of the AMC. But they have the concept of a "creation unit" which represents 1000 units plus some cash component which is equivalent to apparently 1KG of gold. This creation unit applies only when you exchange physical gold for the Bees units. This is a facility available only to authorized participants (how are they determined? I dont have a clue!). So when an authorized participant reedems one creation unit he receives 1 KG of gold. I did'nt quite understand their example of buying creation units by depositing gold on Pg 26 (why did the assumption of price of gold drop to 850 from 860?). If someone can figure it out, let me know.
8. You can pledge these units similar to the loan against shares schemes.
9. Tax : This fund will be treated as a mutual fund other than equity which means that it will not get the benefit of short term (10%) and long term (0%) tax rates.

Well thats all for now folks. Please add your comments if you found more information.

Gold funds in India - Unanswered questions

With the Indian government appoving gold based mutual fund schemes, there is obviously a rush by various mutual fund companies to start Gold funds and Gold ETFs in India. Knowing Indian and their love for gold, this could be a huge success story for the fund houses. There are still a few questions that I don't have an answer for today but it would be good to know.

1. What is the tax implication for buying gold? Do we get tax rebates for buying a gold MF?
2. Would a gold MF be treated as an equity MF or a debt MF with associated tax implications?
3. When I sell my holding in the fund, do I have any extra exit loads because of liquidity risks?
4. Will the price of the fund ever differ from the gold price? Considering this is more liquid than physical gold and traded mostly electronically, I would imagine that such advantages should allow the price of the fund to be at a premium to actual gold. Would this be the case?

So many unaswered questions in my mind. Any prudent reader would point out that we never asked such questions when we bought and sold gold so why now? The answer is that by bringing a structured investment tool, I would like to peg my risk level to that of buying and holding gold while leveraging the capabilities that a financial instrument can give me. Hence the questions.

You can always buy gold in T.Nagar... that institution would exist as long as Indians abound!

A new year resolution - Write more blog

Having gone silent from September of 2006, I thought atleast this year I would try to write more. Its not the writer's block but sheer laziness that has kept me away. So let me try to get back to more serious blogging on an ongoing basis

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!

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.

Amen!

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.

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 valueresearchonline.com - 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

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.

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 Personalfn.com, 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)

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.

Cost of labour in India

I have been noticing this interesting trend on cost of labour in India. I am not referring to the usual information technology cost of labor arbitrage that is now a norm for any IT organization. I am talking about regular labour costs for administrator / janitorial labour. Let me illustrate with an example, we bought a car about a year ago and we are paying a monthly outgo of Rs 5000.00 for the car. During that time we hired a driver for the car and we paid him Rs 3500 per month. That in itself represents about 70% of the cost of the car. Well that was the going rate for drivers at that time. A year passes and its time for a raise and we end up paying him Rs 4000 Per month now. This is now 80% of the cost of the car. At this rate, we will be paying him the cost of the car in two years from now plus other additional 'bata' that we pay him for over time.

This came as a revelation to me since I have seen the cost of labour being extremely high in developed nations leading to economic models where buying a new product is cheaper than getting an existing one fixed due to the cost of labour required to fix it. It looks like we are also moving in the same direction. How would the middle class indian society adopt to this kind of change? I am not sure. Maybe they will become more self reliant and move away from the hired help model? That I am afraid would actually reduce the number of available job opportunity which could mean a bad thing.

Whatever be our evolution path, I think that labour costs are going to raise to very high levels in the future and we need to learn to cope with it in new ways than what we have done before. Maybe the world of kaamvalis will be gone for good.