How to do charity?

Either my clients are getting more charitable, or they are asking me for more advice on how to do charity! Recently a friend wanted to invest “so much money, so as to create a Rs. 3.6L income for a charitable organisation” - can you tell me how to go about doing that?

My advice is simple - be invested about 45% in large cap equities, 10% in mid and small cap equities, about 15% in Real estate mutual funds (going forward this is likely to be easier), and the balance in debt funds - including Liquid and FMPs. This of course assuming that the clients have patience!

For some clients “absolute safety” is very important immaterial of the inflation - such people should be in liquid funds, debt funds and rbi bonds.

If you cannot take gyrations in the market, you should not be in equities. Simple.

Mutual funds - simplified report from an international player

I recently read a small (about 80 pages) report on the Indian mutual fund industry. Most of the facts were well known, but still some were surprising.

Here is a small summary of what I found interesting (the whole report is):

This was a market survey of 750 investors, 850 Independent Financial Advisors, and 40 0rganisations - asset management companies, Registrars, distributors and corporates.

The Amc industry has grown at a scorching pace of 47% y-o-y from 2003 to 2007, but most of the growth has come from NFO collection and appreciation - the older schemes which are now cheaper not collecting any monies!

The Indian amc business is most profitable at 32 bps compared to 12 in UK and 18 in US. This is quite stunning because the costing structures in the UK and US is higher. So in case you are wondering whether the foreign firms will stay in India or run away, the answer is clear- they may leave their parent country but Indian profitability is mouthwatering.

Penetration in non-urban India is almost non-existent. Most of the action is in the TOP 8 cities. So if you are a distributor in the top 30 cities go and push, the world there is waiting!

The IFA is highly unorganised (heard of www.faaida.com I presume). And in a survey IFAs have said the following:

69% of them want better training

57% of them want better branding / advertising

there is actually no feed back on saying they want higher commission! But when you read the whole report and realize that most of the monies are coming from NFOs, you realize that the distributor knows how to get a greater commission!

Write down your financial plan…like this

Make that first investment; waiting is costing you a bomb!

After every lecture on financial planning, I get many requests for information from, young people just starting out in life. Regardless of their age, people do realize that a little upfront planning and action can put them ahead of the game. Therefore, here is what I would call a lesson 101 for you to do something. For those parents who have approached me with “how do I teach my children financial responsibility” kind of questions please pass it on to them!

Let us start at the very beginning…a very good place to start

The first steps have to be A, B, C or Do Re Mi…..if that sounds better!

Set your goals. So what are the steps?

1. Think where you want to be in five years: How much will you have invested? Will you own a home? Where? What size? Will you have kids who will go to college someday? What kind of car do you see yourself driving? Will you take time off from work to study? To have a baby? To pursue a different career? What else is important to you financially?

2. Think about the roadblocks and the potholes along the way - you do not want to fall, do you? Write down your financial worries. Being late on credit card payments, delaying the student loan repayment, borrowing from your parents (anybody), increasing housing EMIs, ..could be endless, so please be truthful. Make a list of your financial worries

Set Your Goals, NOW!

Let us put some numbers and dates in place to see if it helps to explain what I have said. Use this timeline to sketch out what you hope to accomplish year by year:

Saving Goals by Time Horizon

Goals for 2007:
1.
2.

Goals for 2008:
1.
2.

Goals for 2009:
1.
2.

Goals for 2010:
1.
2.

Goals for 2011:
1.
2.

Khyati and John are in their late 20s. She has a MBA in finance and he a doctor. They were married last year. She owes Rs.500, 000 in educational loans. He has just started his practice and has a student loan – Rs. 800,000. She makes Rs.800, 000 a year and he makes Rs.200, 000. They live in a rented house. John has just started his practice after quitting his job in a big hospital. He wants to buy a clinic before he commits to a house. They think they want to start a family in about four years. They have been using credit cards since their college days and now owe Rs.6, 000 on three cards. Like all 26 year olds, they want a house, a better car, a vacation in Europe, a couple of babies, but they were quick to realize one thing. There is too much of conflict of what they wish to do with their money, and too little money!

Here is how they prioritized their goals over the next five years:

Khyati and John’s Goals
Goals for 2009:
1. Pay off Rs.100, 000 of school loans.
2. Pay off remaining credit card balances and resolve to pay bills in full each month.
3. Start contributing Rs. 50,000 to a unit linked insurance plan.

Goals for 2010:
1. Pay off Rs. 300,000 of student loans. Khyati feels this will be possible because some of her National savings certificates are maturing (worth Rs. 50,000) and her employer is creating a scheme by which she will get a matching grant to pay off an educational loan.
2. John to start a SIP of Rs. 5000 per month to build a “clinic buying corpus” – in 5 years they hope to have enough money to make a down payment.
3. Increase Unit linked plan contributions to Rs. 60,000 – including a Rs. 10k top up.

Goals for 2011:
1. Pay off all educational loans! Now fully debt free.
2. Buy a car. Downsized EMI from Rs. 11,000 to Rs. 4340 p.m.
3. Think about a house and start looking. Alternatively, start looking for buying a clinic.
4. Increase SIP amount to Rs. 15000 per month. Continue the unit linked plan at Rs. 65,000

Goals for 2012:
1. Make a down payment – for a clinic or house, whichever is first!
2. John to accept full responsibility for the mutual fund SIP, unit linked premium, and the car EMIs. Since his income has gone up vertically, he is comfortable doing this.

3. Planning to have a baby!

Goals for 2013:
1. First child is born. Take out term life insurance to cover the clinic mortgage and the child’s education if something should happen to either parent.
3. Have a will drawn up by appointing a friend as a guardian for the baby.
4. Save 500,000 per annum in unit-linked plans, mutual funds, and plan to buy a house.

You can see from this example that if you have competing goals, it may call for a multiyear approach. Try to make some progress on each goal every year. Also Khyati was very happy to have been able to make this plan, postpone their car purchase, shelving the second car, downsize her car EMI, downsizing the “vacation goals” to what could be covered by her LTA, realizing that since theirs was a love marriage and parental support was missing, they had to be far more frugal than some friends. John was happy to have his clinic – he never thought it possible. He was happy to give up his personal expenses to save for a goal. They were happy to be free of debt so soon.

It is your life and you need to make the choices – in this case Jointly.

You can see from the example that in order to meet your financial objectives, you have to have some discretionary cash to put aside. The only way to do that is to take a close look at the money coming in and the money going out. You should also make sure to budget money to invest. Ideally, that will be about 10% of take-home pay. Otherwise, you may need to work up to that goal over a couple years.

Set Aside an Emergency Fund
Your first investment goal should be to set up an emergency fund–money you can tap in case you lose your job or are hit with an emergency bill, such as medical expenses. I cannot emphasize enough how important it is to set aside some emergency cash: It gives you peace of mind, and it gives you a cushion so you do not fall into a vicious cycle with credit card debt. Typically, you will need enough in your emergency fund to cover three to six months’ worth of living expenses. This money should be invested in a money market or savings account.

Start Building Your Core Portfolio

Once you have taken care of the emergency fund, it is time to choose the building blocks for your portfolio. This does not have to be difficult. Index funds–either conventional funds or exchange-traded funds–fit the bill nicely. An index fund buys enough stocks or bonds to mimic the benchmark it covers. An exchange-traded fund is an index fund that trades like a stock. With regular mutual funds, (that is what an index fund is), all movement in and out of the fund happens at the end of a day.

If you are going to be adding to your investments monthly, use a conventional mutual fund Systematic Investment Plan. If you are in your 20s or 30s and are investing money for the long term (you do not plan to touch it for at a long time), you can use an allocation something like this:

• 10% Money market mutual fund (emergency reserves being built up)

• 25% Unit linked life insurance plan – for 40 years and willing to pay premia for longish period of say 30 years plus. This should be in funds with very low asset management charges – sub 1% if possible. It does not matter if the upfront load is high.

· 65% - SIP in a multi-cap mutual fund as an SIP route. This should be in a flexi- cap fund (also called Dynamic asset allocation)

Regardless of which fund or Unit linked plan you use, make sure the expense ratio is low. For example, try not to pay more than 0.9% for a unit-linked plan and 2% in a managed mutual fund. Expenses hurt! Check the costs of a fund!

Summing Up

To start your life with a good financial base, you need to understand your assets and liabilities (net worth), set priorities for your goals, create a realistic spending plan, set up an emergency fund, and put the core pieces of your investment plan in place.

If you have been academically successful, socially successful, you surely can be financially successful. To start, you need not be successful, but to be successful you need to start!

an invite for an Investment event

June 7 and 8 Nehru Centre, Worli, Mumbai, India will see an unique event for the retail investor. Many fund managers - (Nilesh Shah, S Nagnath, Madhu Kela, Prashant Jain, Rakesh Jhunjhunwala - an investor, Sanjoy Bhattacharyya, are all people who have spoken in the past), along with many company managements will come under one roof and give gyan on what to buy, when to buy, should you sell, etc.

It is a fantastic intellectual event happening for the 4th time, and the best part is it is free to the retail investor.

The title sponsor is Icici Direct and the silver sponsor for mutual funds is Mirae.

for registration www.myiris.com

Look for a company that is a franchise - Buffet

Some businesses are franchises. They have high walls and deep moats around them. Such businesses usually do well in the long run. Some of course create an addiction - ITC is a case in point.

Other companies which come to mind are say Wriggley’s gum. When you are spending say Rs. 5 (or Rs. 20) on a packet, seriously you do not consider too much about competition! You do not want to pop something into your mouth just because it is a buck cheaper, do you?

Another company which fits into this Buffet definition is of course his own favorite - Gillette. Even in the Indian context Gillette has a monopoly at a class level. It caters to the middle and upper classes of population. This category of people do not really think too hard before paying for a shaving blade, gel or after shave - giving the company a huge moat.

Mis-selling or Mis-buying?

When the guy/ girl selling “financial planning solutions” comes to your house and you happily part with the cheque is it her fault for asking or your fault for giving?

This is a question I would like to ask all people who complain “I have been mis-sold to”. It is ridiculous that suddenly a retired petroleum engineer and his spouse (a home maker) have suddenly understood endowment, unit linked plans, mutual funds, real estate PMS, equity PMS, hidden charges, surrender charges, upfront load, bid-ask spread, and have then bought the product. Most of the people who sell do not know some of these terms, so the buyer knowing these terms is surely out of question.

So why do people buy?

Ego. Their ego does not allow them to admit that they do not understand the product, the suitability of the products, the structuring, etc. Also they convince themselves if a nice big organisation is selling it and the product is “approved” by SEBI/ IRDA (btw sebi does not approve any product) it must be a good product.

The other reason is “If I can decide to buy a Rs. 1 crore house, a Rs. 20 Lakh car etc. WITHOUT any advisor, why should I need an advisor for Rs. 50k a month SIP in a unit linked plan?” kind of attitude.

The third reason is they do not know whom to ask.

So God bless the uneducated (hurts?) buyer. Let him not crib about mis-selling. It is all about mis-buying.

Real estate investment is only for the involved

this article has been written by a friend who is a little shy of writing so he writes nuggets and sends it to me for asking whether it is good. Since he does not use it, i am using it in my blog….

Leveraging Real Estate –to your benefit

With the Equity markets touching new highs, then new mids, then new lows, the Real Estate markets are also rising in tandem.

There used to be a belief till recently that when Equity Markets rise, Real Estate markets fall (like a See-Saw). Events of the last 2 years in India have however turned this belief onon its head. Even as experts opined that a correction was around the corner, the road to Real Estate has turned into a freeway paved with riches. But obviously look for the caveats.

How can we or most of us benefit from this? As with all forms of investment, there are easy ways and there is the road less traveled. The easy way would be that of investing in a Real Estate Fund.

These avenues would open up very soon. The pedigree of the Sponsors would be a very good way of deciding on the investment. Investors would get good returns especially as funds would be eager to establish “Performance “.

Evidence from the performance of these funds in the United States of America suggests that good Real Estate funds have outperformed Equity Funds over certain periods of time. This would seem to have more to do with the intrinsic strength of the Real Estate market than with Fund Management skills. Without getting into the semantics of Equity Vs Real Estate, it could be said that an investment in a good Real Estate fund is definitely recommended as an instrument to provide diversity and depth to an individual’s investment portfolio. The other advantage would be that we can invest smaller sums of money.

Moving on:

Just as the big screen makes for the best viewing, investments in Real Estate pay off when we begin to play for bigger stakes. Notwithstanding the huge media hype surrounding Real Estate; it is only a miniscule fraction of the population that benefits from Real Estate.

People who have the time do not have the money and those who have the money, claim not to have the time. In comparison to equity, Real Estate is a high involvement activity. On the highway of property investments, there is a need to study projects, understand the dynamics, know ideal entry and exit points and then be clinical about executing the action plan. A good plan executed well can propel an individual to phenomenal growth. Seeding of investments is a very important part of the strategy… A good strategy involves diversification to de-risk as well as to grow the real estate portfolio.

Just as equities have Penny Stocks, Midcaps, et al, Real Estate has enormous variety. We can list them for understanding the opportunities in each of these segments

1. Commercial
2. Residential

Leaving Commercial aside for the time being, Residential would have the following categories:

1. Low Cost- Private
2. Low Cost-constructed by development authorities like MHADA, CIDCO , DDA, JDA etc
3. High Cost Private
4. High Cost-Development authorities.

Whilst investment in Category 1 (Low Cost-Private) is risky because of Legal Problems, Investment in Category 2 has tremendous scope especially in the current environment.

For instance in Navi Mumbai there are apartments constructed by CIDCO, Many of these are in a condition that makes it inevitable that they will have to be reconstructed. What makes these a treasure trove is that they are located in places which are now considered to be prime locations. When you buy these apartments, you have to make a choice that flies in the face of congenital logic. The more dilapidated the structure, the more likely it is that it will be redeveloped faster, thus turning your investment around quickly.

For high cost investments, the returns are good. If lack of capital is a hurdle, availing of housing finance is a good alternative. As you become more adept in handling real estate investments, you could create your own pool of funds, i.e. pooling the funds of people in your circle with congruent investment goals.

This entire process can be considerably simplified if one avails of the services of a good estate agent. Estate Agents have considerable experience and knowledge. They can narrow down your search, once you provide the parameters.

Consider investments in Real Estate seriously. It truly can set you free.

Unit linked insurance salesman’s Jokes

the flow just continues…

A friend called me to say he is buying a new life insurance policy. Luckily he called me before he signed the cheque. I asked him why did he have to buy a policy - his son and daughter have just completed good top class education and are in nice jobs.

Well the whole thing started because his manager called him and sought a meeting. He had all the print outs of all the policies that he had bought from one particular life insurance company. My friend flipped and asked him “How come you have all my statements, when I actually bought these from somebody else”

Without a convincing answer…they went ahead.

The RM told him “Sir your endowment plans have both MATURED” - as you have paid for 3 years. Moreover the NAV of the units is also attractive at about 67, so please surrender it” and then you can use the same money to buy a new policy which is available at a nav of 7 (you see markets have fallen, and will soon go up)..blah, blah…

My friend has a pretty high IQ in pharma, training, retail, and almost an apologetic IQ in finance.

Luckily unlike other friends, HE called before signing the chek!

I asked him to chill out. Like in most circumstances, for this guy also inaction was far, far, more profitable than such stupid action as suggested!

ROI on charities….!

What is the return on investment in a poor feeding charity program? Can we put it in Rupees and paisa or do we look at the soft side too?

What about - a kid saying “I can feel my skin”, “I do not have to beg for food” “I now feel like studying” etc. are such statements good enough?

Governments are not known to do logical things. Even if they do it, it would be at a wrong time.

Most of the poor feeding programs are necessary because of the alcohol consumption of the father (sometimes parents), money spent on tobacco, and the related medicine expenses because of these 2 expenses! What does the government do?

Well,

1. they subsidize TOBACCO cultivation (do not look like that, that is what they do)
2. they encourage bidi, cigarette, raw tobacco sales
3. they SELL liquor (Oh God, please)
4. they set up hospitals for cancer…and other diseases
5. they make noises about MID-DAY MEALS…..!!

However, we are here to see the ROI on charitable activities…..so let us see what is akshayapatra upto these days? Look at the feedback….

Several students have offered testimonies of the benefit they have derived from this program:

“I used to think of leaving school and may be wash vessels in someone’s house where I could also get food. I was so hungry. Now I am very happy. I can touch my skin and feel how well nourished I am.” - Lakshmi Devi,

“I would be so hungry all day and not be interested in reading or writing. I would walk home and just go to sleep. Now I come running to the school. I am also studying well.” - Kshama Nurinnisa,

“Along with my sister we eagerly look forward to the AP food every day. We are disappointed when festival holidays, Sundays or vacations come as we do not get Akshaya Patra food.” - Suma, Standard

Lakshmi studying in seventh standard is one of four children another brother is studying in first standard. Her father has deserted them. She stays in her uncle’s house, who works as a barber. Their eating needs are met by his daily earnings and that too after deducting his liquor expenses. She and her brother mainly depend on the Akshaya Patra food for their survival. One of her teachers says that, “On many days this is the only meal she gets.”

Mr N.T. Ibrahimpur, Head Master says this school had a very high drop-out rate. After the Akshaya Patra programme started the strength has risen to 150 children and is steadily increasing since Sept. 2004. The students are more regular in attending school; their weight has increased. Most of the students are children of beggars.

Mutual fund vs. Unit linked plan

Which is a good product to take? Mutual fund + term insurance or unit linked insurance plans?

Well it depends on the knowledge level of the buyer, and the smartness of the salesman (in India calling people who sell also financial planner is a regrettable fashion statement).

Well, let us take a case of you wanting to take a 23 year old kid who wants to take a Rs. 25L life insurance to cover a home loan. Most “honorable” advisers would suggest a term insurance of Rs. 25L.

However, it can be also structured as a Unit linked endowment plan with a much lower (yes you read right) TOTAL RISK COST.

Wov, how is this possible:

Pay a premium of Rs. 50k and get a sum assured of Rs. 25L (50 times the premium). Pay the premia for 5 years at least and then decide whether you wish to continue the same. In the meanwhile the amount of money in the policy would be building up. On death of the person, the amount payable should be SUM ASSURED OR policy value which ever is higher. (Be careful the operating word is OR).

How does a ul get cheaper than a term policy?

Ask your mutual fund advisor to tell you the TOTAL CHARGES (load + amc charges) on a fund growing @ 22%, monthly contribution of Rs. 100,000 for 30 years. (entry load 2%, amc charges 2.5%)

Compare this with a ulip plan with a 30 year run, growing at 22%, monthly contribution of Rs. 100,000 for 30 years (for a 23 yr old) (first year entry load 60%, amc charges 0.8%, and a TOP UP of Rs. 300,000 every year for the first 5 years.

If your consultant cannot …do the calculation, learn it yourself. You will be doubly blessed. The learning will pay for itself in the 3rd call from your RM.