Invite for a short seminar on Financial planning….

Posted August 30, 2008 by subra1221
Categories: 1, Financial Education and Seminars, Personal Finance, Your money


I will be doing a series of short “Why Management should be interested in Personal Financial Well-being of their employees – an Introduction to financial planning” seminars in the following locations on the following dates. This is being sponsored by myiris plus – a revolutionary personal finance software.

This is open only to Head of HR, Head of Finance or CEOs of mid to large corporates. Typical corporates we are looking for will have at least 200 employees.

For attending these in your town please send a mail to:

1) Hyderabad 10th September 2008

2) Delhi 25th September 2008

3) Mumbai 15th October 2008

4) Bangalore 12th November 2008

5) Kochi 26th November 2008

6) Ahmedabad 7th January 2009

7) Chandigarh 11th Febuary 2009

8) Pune 25th Febuary 2009

Only online registration. Limited seats, and your invitation will have the details of venue, timing, etc.


Types of Mutual Funds

Posted August 30, 2008 by subra1221
Categories: Mutual fund tutorial

Once we have reviewed the fund classes, we are ready to discuss more specific fund types.

Funds are generally distinguished from each other by their investment objectives and types of securities they invest in.

Broad Fund Types by Nature of Investments

Mutual funds may invest in equities, bonds or other fixed income securities, or short-term money market securities.

So we have Equity, Bonds and Money Market Funds. All of them invest in financial assets. But there are funds that invest in physical assets. For example, we may have Gold or other Precious Metal Funds, or Real Estate Funds.

b. Broad Fund Types by Investment Objective

Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth Funds invest for medium to long term capital appreciation. Income Funds invest to generate regular income, and less for capital appreciation. Value Funds invest in equities that are considered under-valued today, whose value will be unlocked in the future.

c. Broad Fund Types by Risk Profile

The nature of a fund’s portfolio and its investment objective imply different levels of risk undertaken. Funds are therefore often grouped in order of risk. Thus, Equity Funds have a greater risk of capital loss than a Debt Fund that seeks to protect the capital while looking for income. Money Market Funds are exposed to less (volatility) risk than even the Bond Funds, since they invest in short-term fixed income securities, as compared to longer-term portfolios of Bond Funds. However, it surely takes some guts to put money required 30 years later in a bond investment…..

Insurance : What if something goes wrong?

Posted August 28, 2008 by subra1221
Categories: Life insurance

Tags: , , , , , , , , , ,

Insurance – Life or General is largely about answering some questions like “What if….goes wrong”?

The fundamental objective of insurance is to provide a means to offset the burden of financial loss. Think of insurance as a premium paid for “transfer of risk” premium. An alternative method of dealing with risk. You are paying an insurance premium (small cost) to avoid paying the total cost for a catastrophic loss (such as your house burning down). So it is fairly obvious that you will not insure your mobile phone (you can afford to carry the risk on your own self) but will insure your house (the burden of this risk is too heavy to carry). So the house risk you transfer, by paying a premium. Mobile loss risk you keep on your own self. As simple as that.

A sound insurance program should answer the “what ifs” in your life. For example:

What if you were faced with a major medical expense? (health & illness insurance)

What happens if you were unable to work for a long period of time due to a severe illness or accident? (disability insurance and/ or critical illness insurance)

What if your most important employee dropped dead? (Keyman Insurance)

What if a fire destroyed many of your personal possessions? (home owner’s insurance)

What if an employee stole data from your company (D&O insurance)

What if you were involved in an automobile accident? (auto insurance)

What if you were to die tomorrow? Who will protect your income flow? (life insurance)

So if there are some more “What if” kind of questions….just see whether the risk can be measured. If it can be measured, it can be transferred. Transfer costs money (premium) and the benefits are – the insurer will pay all genuine claims. That is all.

Real estate: More pain ahead?

Posted August 27, 2008 by subra1221
Categories: Real Estate

Tags: , , , , , , , ,

The Housing Market… Why the Price-to-Rent Ratio is Signaling More Pain Ahead

Whether you’re investing in real estate, stocks, bonds, or gold coins, you are rewarded primarily for your exposure to one thing – risk. After all, markets are only risk transferring mechanism.

In the summer of 2007, I warned friends that if they were “speculating” in the current housing market, the time had come to cash in their chips and get out of the game. I listed a number of reasons, but the biggest one was that ordinarily sensible people were talking and acting as if highly-leveraged home purchases were “risk-free” transactions. After all, they kept telling me, “real estate always goes up.” I think this is pure BS. Real estate is as much a commodity as cement or steel (oops, it is that?) so the supply and demand will determine price. So real estate does not keep going up.

It doesn’t, of course. And now everybody knows it. Now!

Unfortunately there is no “real estate index” in India. There is no scientific measurement of real estate price movement – and the press is not credible enough in its reporting.

I would love to tell you that the worst is over. (After all, I own a home myself.) But the reality is we may be only in the beginning! Real estate has much further to fall and you should govern yourself accordingly. Here’s why…

Residential Housing Market

Last year was the most painful in decades for the residential housing market in the US of A. Home prices fell, home ownership dropped, foreclosures soared, and the housing market emerged as perhaps the weakest part of the entire U.S. economy.

But in Indian conditions housing prices maybe set to slide considerably further. Banks and mortgage lenders are raising their lending standards. That means credit will remain tight, boxing out many potential buyers. Interest rates on many mortgages are about to reset, increasing the pain on many borrowers and triggering more defaults. Home inventory is still growing and must be worked off before the market gains some kind of equilibrium.

My take on the Indian Housing market however, is a little different. When the rents do not go up as fast as housing prices, it creates panic in me.

An Accurate Gauge Of Home Value: Price-to-Rent Ratio

Economists feel the price-to-rent ratio is perhaps the most accurate gauge of fair home value. Most human beings are rational animals (assumption, sorry!):

  • If home prices get too high, many will choose to rent. If rents get too high, many will choose to buy.
  • Unfortunately, no detailed studies in India is available regarding the relationship between rents and base price of a house.

So let us go the US of A and see what a Federal Study on Housing has to say. Here I quote from the study:

  • “The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995.

But starting in 1996 – the birth of the housing bubble – home prices soared much more rapidly than rents. In fact, by the end of 2006 they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%, a third below its long-term average.

The study concludes that to reach equilibrium, housing prices need to fall 3% a year for a decade, even if rents grow in line with their average 4% annual increase. (Of course, if home prices fall faster – and harder – equilibrium could be reached sooner.)”

How does this translate in Indian conditions?

The Current Housing Market Has Yet To Hit Bottom

In other words, we’re still a long way from the bottom of the current housing market. And there may be some further anecdotal evidence to prove it.

Most homebuilders know the score, of course. But friends who are out looking for homes right now tell me that many sellers remain deluded.

I find the lack of good proper information in the real estate market a big killer of liquidity. If real estate could be listed like equity shares you would know the price of your house (you may not want to buy or sell). Now you are completely at the mercy of a few “informed” people in the business. And you can only guess whether they are lying or just hoping. I have met mid level employees holding on to a living house, a second house and an investment house – hugely leveraged. These would be the first guys to get lynched. Of course when you believe your area sells for Rs. 7000 psf and your neighbour sells for Rs. 4800 psf, you get into denial mode. Like my friend Prakash Natrajan says “My house has a green window, so it will fetch 7000 unlike my neighbor who had a red window” is Denial mode!

No one has a crystal ball, of course. Even the experts on TV only have a teleprompter…

Retirement Planning simple steps

Posted August 26, 2008 by subra1221
Categories: Retirement Planning

Tags: , , , , , ,

In every financial planning class I need to do a post lunch session. To keep them awake I ask them to do a simple exercise – calculating how much money they require for retirement.

Unless they are at least 32-33 years of age, they have no clue as to how much they need for retirement. Once they see the figure (let us say Rs. 4 crores) they get into a DENIAL mode. Immediate reaction is to say “my father did not need this much amount” or “my expenses will reduce after retirement” or “my children will take care of me”.

Once they cool down, they sit and work out how it can be put together.

What most people do not realise is that the figure looks very big because we are seeing it from a very long tunnel. If I were to tell you that YES you do require Rs. 4 crores to retire, 30 years from now. HOWEVER if you were to invest just Rs. 100 a day for 30 years in a SIP which gave a SENSEX rate of return, you will have Rs. 4 crores in your retirement kitty.

So the important lessons in retirement planning are simple – make an estimate of your needs, adjust them for time value, compute the amount that you need to invest on a monthly basis, THEN START TODAY. Do not let the power of compounding go away – harness it when you can. Simple.

Jim Rogers says Bernanke should resign!

Posted August 25, 2008 by subra1221
Categories: Investing tips

Tags: , , ,

Jim Rogers (famous for: Biker and Quantum fund) in a free wheeling interview to says some fearful things. Jim is too famous and has some

Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, said Rogers.

The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.” During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:

  • U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.

  • That the U.S. national debt – the roughly $5 trillion held by the public- essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.

  • That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn’t raise borrowing costs, market forces will make that happen.

  • And that the average American has no idea just how bad this financial crisis is going to get.

“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

When Jim Rogers speaks…you listen!

Life insurance premium: If you cannot pay?

Posted August 24, 2008 by subra1221
Categories: Life insurance

Tags: , , , , , , , ,

When an insurance adviser approaches us, we are normally not in too much of a mood to buy life insurance! However, his persuasion (perhaps our awakening!) make us buy a life insurance policy. This is not a great product – we hardly get any “personal satisfaction” buying this product. We are now motivated enough to make the payment. Sometimes the motivation lags! Or we are not convinced that the life insurance was a necessity…so we become lax.

Unexpected expenses can catch you short at times. There comes a day when the kids need braces, the car needs a new transmission, the wife needs a new car (oops sorry!), the floating rate EMI has increased, the college bills come due or there’s a medical emergency. Sometimes it is the Options trading which has cleaned out your account. Sometimes it is the marginal call from your broker! Out-of-the-ordinary expenses can tip the budget out of balance and leave you searching for ways to keep your income and outgo in sync.

Then your life insurance premium notice arrives. What do you do?

It’s good to know the possible consequences of not making a premium payment on your life insurance policy. The effect depends on the type of policy and coverage you have and the policy terms and conditions. With a term policy, if you stop paying premiums, your coverage lapses.

With endowment policies, many types of contracts allow you to decide to allocate cash value to pay premiums. Depending on the policy and amount of cash value, the result could be a significant reduction in cash value over time, decrease in death benefit and, finally, policy lapse.

Some policies (like Unit linked endowment plans) are designed with flexible premiums, so that policy owners have the option to pay more or less than the recommended premium or to skip premiums from time to time. Even with these policies, however, policy owners should check with their agents before suspending premium payments for extended periods because there must be enough cash value to pay the monthly charges to prevent a policy lapse. Sadly thanks to some aggressive companies and their agents many of us believe that a Unit Linked Endowment policy will be permanently available to you even if you pay premium only for 3 years. This is wrong.

The biggest concern: If you stop paying premiums and let your policy lapse, you would lose valuable protection, possibly leaving your family at financial risk.

Very often, life insurance is the link that can complete your estate if you die prematurely. Death benefit proceeds from a life insurance policy can provide the liquidity to settle final expenses, pay the college fees, pay off debts and — at the very minimum — give surviving family members “breathing room” to adjust. (It takes a long time to adjust to the cash flow suspension)

Other concerns: If you want to obtain new coverage later…

  • You will likely pay more for the same coverage. A key factor in premium rates is your age. The older you are at the time of issue, the higher your rate will be. In short, if you need to buy coverage later, letting your policy lapse now could cost you more money in the long run.
  • You may not be able to get coverage again …at any price. If you experience health problems, you could become uninsurable. Under your existing coverage, changes in your health do not affect your premium. However, if you let your policy lapse and then apply for new coverage later, your health changes can mean the coverage would cost more (if you are rated as a substandard risk) …or you could be denied altogether.
  • There could be tax implications if you actually cancel coverage and take the cash value. That’s because any cash value in your policy has accumulated on a tax-deferred basis. However, if you terminate your policy and take the cash value (not the same as policy loans, which are generally not taxable), a portion of the cash value could be considered ordinary income and be taxed at your current tax rate.

Before you decide to skip premiums or let your policy lapse, ask yourself these questions:

  • Why did I purchase this policy? Was it to help protect my family’s future by replacing my income if I died prematurely? Make sure education funds are available for my children? Retire the mortgage or pay off other debts? If these goals still exist, do you want to jeopardize your life insurance?
  • Have my needs or situation changed? Have I added to my assets by borrowing more money? Has my spouse quit his / her job? Do I need less coverage? More? If so, you should consider adjusting your coverage. Let your agent know. There are a number of viable options you can pursue that will enable you to keep your protection in force without putting your current finances under undue stress.
  • What are my alternatives? You have a number. For example, if you are paying an annual premium, perhaps you would find it easier to budget for a quarterly or monthly premium. Or you might consider a monthly bank deduction. The point is that you do have options. Exercise it.

No other financial product delivers the value and advantages of life insurance in the same exact way. If you are unsure about being able to pay a premium, be aware that there are many alternatives to help you keep your life insurance coverage intact, even during demanding financial times.