Huddling from the DANGER

Young stock investors, used to triple-digit returns from stocks, are now scared and hopeless. Here’s some wisdom from those who have decades of experience
Madhu T TNN
Baby bulls are feeling cheated. Fed on the caviar of triple-digit stockmarket returns in the past four years, they are now suffering heartburn, as they watch indices plumbing new depths week after week with a wrenching feeling in their gut. It seems as though nothing is going right, nor going to be right, for them. Some are cursing the day they let themselves be lured into Dalal Street. Others are blaming just anyone—friends, relatives, colleagues, financial advisors—for their misery. The baby bulls just can’t stomach the thought of bears taking over their stomping ground. “I was so happy when I finally invested in stocks. Everything looked great even six months ago. But now, suddenly, the mood has changed,” says Savita, who entered the stock market two years ago. She blames her mutual fund agent for her heartburn. “He told me that the scheme had yielded over 100% returns in the past few years, and that is why I invested in stocks for the first time. Now, I think I’m going to lose all my money,” she says in a dejected tone. People like her, used only to a bull market, are feeling the pinch. “It’s depressing to see the prices of the stocks in my portfolio crashing with every fall in the market. Then, when I hear the so-called experts on TV, I really curse myself,” says Kartik, whose bullish streak vanished soon after the BSE Sensex showed the first few signs of weakness. But those are the new bulls, who have known only heady days, and are now feeling down. What about seasoned stock investors who have decades of experience? What did they do when the market crashed after the shenanigans of Harshad Mehta and Ketan Parikh were exposed? How did they face the IT meltdown in the nineties? “Whenever the market goes through a long period of correction, there is inevitably a sinking feeling among many investors,” says Gul Tekchandani, an investment expert who started trading in stocks decades ago, during the days of his chartered accountant articleship. “The doomsday preachers in the media create fear among investors, especially investors who are new to the market.” Doesn’t the gloom affect him, too? Tekchandani counters our question with one of his own: “How come these people are giving all these reasons for the fall now? Why couldn’t they predict it sooner?” Our glance falls on a small framed quote on his office table: “This is the only business in the world you do alone.” Mukesh Dedhia, director, Ghalla & Bhansali, also seems unperturbed by the gloomy forecasts. He has almost two decades’ experience in the stockmarket, spanning a wide range of Sensex levels at different points in time. Few understand better than him that all the predictions have proved wrong, and that those who stayed the course made money from the market. Says Dedhia, “I didn’t have any strategy when the market fell steeply in the past. That is why I believe that you should have a firm strategy in place, if you want to make money from the market,” he says. He compares Sensex levels at various critical moments, such as the Gulf War, the Harshad Mehta scam, and the dotcom bust, to show that the current fall is not the steepest one, and that there’s no reason to feel hopeless. “When you have been around for a long time, you can clearly see that the reactions are always the same. People are unreasonably optimistic when there is a rally, and start panicking the moment they sense trouble,” says a seasoned mutual fund manager. “That’s why individual investors typically get into the market when it is at its peak, and lose money by getting out when the market starts showing signs of weakness.” Perhaps baby bulls need to go the whole circle to attain wisdom and equanimity in the stock market. But are there any practical tips that could help allay their fears on spotting a few bears in Dalal Street? Tekchandani has some simple advice: “When the market is falling and the so-called experts are predicting doom, it is time to take a close look and start buying quality stocks,” he says. “Every such correction is a great opportunity for intelligent investors with a long-term stake.” Chetan Parikh, director, Jeetay Investments, says his habit of always carrying cash in his portfolio has helped him stay on course. He credits the wisdom to Benjamin Graham, the author of the evergreen Intelligent Investor. “According to Ben Graham, during a prolonged bull run when the valuations become very high, the proportion of stocks in your portfolio should come down, not go up.” He also uses the opportunity to hunt for “better quality” stocks with attractive valuations. Another habit that has often proved useful is to carry defensive stocks in his portfolio. He gives the example of the FMCG (fast-moving consumer goods) sector, ideally defensive in the current scenario. Dedhia keeps it simple: stick to your original asset allocation plan. “Whenever the market scenario changes, you should take a second look at your asset allocation, and take remedial measures. Also, focus on diversifying your investments across various asset classes,” he says. He also recommends that investors diversify even within an asset class. These simple approaches to investing have helped many people maximise their returns and maintain their equanimity. Seasoned investing strongly recommend them for easing the dyspepsia and keeping the blood pressure down during bear markets.

Time to amend plans

How to tweak your budget and investments in these days of high inflation and lower returns
Dipta Joshi
As Indian investors were getting used to the benefits of a growing economy, global oil prices decided to play spoilsport. Inflation, fuelled by high oil and commodity prices, is slowing down our economic growth. Attempts to control inflation are pinching consumers’ pockets. Avoiding high interest rates on loans and reducing monthly household budgets looks impossible. Stock markets, which usually give good returns, are down, too. Still, with strategic investments, you can tide over a tough period. And prudent investments can cushion the rise in equated monthly instalments (EMIs) on loans. Here’s how. Fixed deposits: Better returns on bank fixed deposits is the positive fallout of Reserve Bank of India’s (RBI) recent rate hikes. Most FDs will now yield 10% to 11% a year. But that’s little comfort to investors, as inflation is expected to touch 12% and eat into returns. Your strategy should be to encash at least part of your FDs and pay off loans, or make part prepayments, if their interest rates are being hiked. Topping your list should be expensive debt, like consumer durable loans and credit cards. Shares: A likely economic slowdown is worrying our markets. Rising crude prices and political uncertainty over the Indo-US nuclear deal have made markets jittery. Mutual funds’ net asset values (NAVs) have plunged, as have the number of corporates announcing dividends and bonuses for the first half of 2008. Experts are not ruling out a further fall in stock markets. The most strategic stock investments now would be in sectors which would suffer the least from an interest rate hike. Sectors like pharmaceuticals and information technology (IT) benefit from rupee depreciation (due to rising oil prices and the weakening domestic fiscal situation). Using the same logic, interest-sensitive sectors like banking, real estate, automobiles, and infrastructure are expected to underperform in the near term. On the flip side of the stock market decline are the bargains: good stocks may not be available at current prices in the future. For instance, despite the interest rate hike and the bleak outlook for the banking sector in the near term, several stocks are still being recommended. “Although banks will remain under tremendous pressure for the next six months, interest rates will eventually come down in the medium term. Valuations of some of these interest rate-sensitive stocks are attractive now. These stocks can be expected to give above average returns in the next two to three years,” says Hitesh Agarwal, Head, Research, Angel Broking. If you can study the fundamentals of individual stocks, investing directly is better than investing in mutual funds whose NAVs are falling. If you must invest in mutual funds, go for diversified rather than thematic schemes. A fund manager dealing with diversified funds can switch sectors if one is underperforming. In thematic funds, performance depends on a particular sector. Also, with falling NAVs, you’d need to keep revisiting your investments and switch schemes if necessary. Gold has long been touted as a hedge against inflation. But neither gold nor any other commodity have been able to beat stocks where returns are concerned. This is in keeping with the logic that higher risks means higher returns. If you still believe that commodity markets are the place to be in, heed the experts. “Timing will be crucial here,” says Prasad Baji, commodity analyst at Edelweiss Capital. “Investors would have to watch inflation and interest rates closely, as any cooling off could lead to a switch from commodities to equities. So, they’d have to exit commodities before equity prices firm up.” Whatever strategies you use, don’t expect to make a quick buck. Get into stocks only if you’re willing to take a long-term and vigilant view. Home loans: Since RBI hiked interest rates, banks have raised rates by 50 to 75 basis points for existing and new home loan customers. Borrowers have three options. One, encash investments or use savings to pay off some of the principal loan. Two, opt for a higher EMI if you have the disposable income. And three, extend the loan tenure. Paying off part of the principal is the best option, if you have enough money, as your EMI could remain the same. If you can’t pay a large amount immediately, but are sure of maintaining a higher disposable income each month, you can get your loan restructured and pay a higher EMI each month (this is in addition to what the interest rate hike has added). By managing to pay an extra amount now you can avoid the option of increasing the loan tenure. Though prepayment looks tempting, using a personal loan or credit card loan to prepay a home loan can be expensive. Home loans will always be cheaper than other loans. An often repeated advice is to avoid increasing the tenure of a long-term home loan (15 years and above). But if you have already used your savings, this may be the only option left to keep your monthly expenses within the limit. An extension in the tenure period will ensure a lower or at least the same EMI being paid each month. Also, hope the government works out means to ease the inflationary and interest rate pressures. Budgeting: Drawing up a monthly budget that maintains a fine balance between savings and expenses was never an easy task. With inflation climbing this task has become even more difficult. Your strategy should be to add some amount to the savings pool. After this, if you still have surplus money for investments, go for schemes that give compounded growth. Brace yourself to cut expenses on all fronts. While buying essentials, pay cash and avoid credit cards. This will help you get a better deal. RBI Governor YV Reddy is confident that inflation will stabilise by September-October 2008. Until that happens, Indian consumers and investors have no option but to match the rising costs with their budgets. Prudent fiscal management can help you get through these tough times.

Retiring in comfort

A couple after retirement want to ensure they have enough funds to maintain their high standard of living and meet future needs
D Sundararajan
Venkataraman came to us to consult his post retirement investment planning and overall financial planning. “I have been working in a very senior position with a “nav ratna” public sector company. I am used to a very high standard of living thanks to my very good working conditions. I have opted to retire two years before my actual date of retirement so that I can relax and enjoy the fruits of my long years of labour—both my sons are well educated and settled comfortably in their respective lives. I want you to help me finalise a plan that will ensure that I would not have to compromise my standard of living post my retirement and also ensure that our resources will take care of me and my wife for the rest of our lives,” he said. Venkataraman also added that his wife was very conservative and so my investment plan should not be too aggressive. Besides these financial assets the couple own two houses. They moved out of the company flat to the Navi Mumbai house after retirement. The other house, a two bedroom, hall, kitchen flat in Mumbai’s western suburbs, has been rented out. Venkataraman’s cash flow position consisted of pension of Rs 21,000 and rent from the second house, net of taxes, of Rs 25,000. Thus, the total income per month came to Rs 46,000. Venkataraman said this income would be sufficient for the couple to meet their routine expenditure. He also expressed that he may need additional Rs 3 lakh every year, which can be generated on a yearly basis, for payment of taxes, visiting his children staying abroad etc. He added that since his company provided full medical cover for the couple, there was no need for any health insurance cover. Venkataraman’s major concern was inflation and whether the couple could cope up and maintain the current standard of living with their capital for a long term. We explained to the couple the need to invest some portion of their overall financial assets in equity/equity oriented mutual funds as this is the only asset class that has managed to deliver returns higher than inflation consistently over a long period of time. However, in view of the rising interest rates in the economy and the possible slowdown in overall economic growth rate and corporate earnings growth rate, we suggested a gradual increased exposure to equities through the Systematic Transfer Plan (STP) route rather than direct lump sum investments now. In view of the conservative profile of the couple, we also recommended that some amounts be invested in a gold exchange traded fund (gold ETF). Since the prices of commodities like crude and gold have been rising, it could be a good idea to invest in gold. We explained the concept of ETFs and how a gold ETF is different from stocks—even though it is listed and traded on the stock exchange and how it is different from conventional gold from taxation angle. Fixed term plans, or FMPs, of mutual funds of a duration of more than one year with indicative yield of 9.5% to about 10% per annum offered the best investment choice for a high net worth individual like Venkataraman due to the lower rate of taxation. We explained how he can manage to earn more than 9% per annum net of tax returns on a short-term fixed income option by investing in FMPs. We also explained the concept of taxation on long-term capital gains on non equity oriented funds on which Securities Transaction Tax (STT) is charged at 10% of long-term capital gians, or 20% after applying the inflation index to the cost of acquisition. This route will ensure an annual income to Venkataraman and Vasumathi, which can also serve the purpose of paying their overseas trips and taxes, if any. As regards the additional investments in bank fixed deposits, we recommended that it would be a good idea to commit these funds for a long term of say five years. Currently, the interest rates are high compared to the last few years due to the high inflation. Interest rates may come down over the next six months to one year. After considering the above factors, we suggested Venkataraman invest in a gold ETF and a mutual fund FMP (see table titled “Investing plan”). We explained the inherent re i nve s t - ment risk in committing a huge amount of Rs 25 lakh to one-year FMP at a time when the longer term interest rates are also higher. The couple understood the concept and agreed to go ahead with the plan because they would like to increase their exposure to equity gradually, especially if the interest rates on fixed income options were to come down over the next year or so. They agreed that this was indeed a very conservative plan and shall look at increasing the exposure to equity as they gain more confidence over the next few years after assessing the performance of their portfolio. MEET THE FAMILY A V Venkataraman, aged 58 years, recently retired after more than 30 years from a very senior position in a public sector company. His wife, Vasumathi, aged 52 years, took voluntary retirement from a public sector bank after working for more than 20 years. They have two sons, both married and well settled and are staying abroad. The couple has no dependants

Who is the fairest of them all?

Closed-ended schemes are often seen as better performers. But open-ended ones have several advantages, too
HEMANT RUSTAGI
There’s a common perception that closed-ended funds (CEFs) have the potential to do better than their open-ended counterparts, as fund managers have more time at their disposal in the former case, and don’t face redemption pressure. As a result, many investors invest in CEFs without considering carefully enough what these funds offer, and whether they suit their risk profile. But the mere fact of being a closed-ended fund is no guarantee of better performance. If it were, openended funds (OEFs) wouldn’t be dominating the mutual fund scene the world over. In India, too, despite being older than their more popular open-ended counterparts, closed-ended funds are insignificant in terms of assets under management. A case in point is equity-linked savings schemes (ELSS). Despite their three-year lock-in, these funds have not been able to beat openended diversified funds for most time periods. There are many other examples where closedended funds have lagged behind open-ended ones. Let’s consider the history of the Indian mutual fund industry. Most funds it offered until 1994 were closed-ended. But the popularity of these suffered, as they lacked some basic features. Investors could exit only through stock exchanges during the life of the scheme. The heavy discount to NAV in market price, and illiquidity due to a lack of buyers in the secondary market, were other disincentives. In response to investors’ concerns, mutual funds began to focus on open-ended schemes. In fact, as equity funds were being shunned by investors in the late 1990s, the industry relied on open-ended income schemes to attract investors back into its fold. The market regulator, Sebi, allowed closed-ended funds to provide a redemption facility. Initially, even OEFs evoked a mixed response from investors. They, too, suffered like closed-ended ones, since NAVs for most were below face value when they opened for sale and redemption. Hardly surprising, then, that investors started wondering whether OEFs were really just CEFs in a new bottle. To counter this, the industry launched noload funds. Before we discuss the utility of openand closed-ended funds, let us understand the basics. In a CEF, you can invest only during the new fund offering (NFO) period. You have to compromise on liquidity, your exit options are restricted to a pre-determined interval of, say, every six months and that, too, after steep exit loads. On the other hand, open-ended funds let you invest or exit at any time, at NAV-based prices. The open-ended structure also allows you to invest through systematic investment plans (SIPs). This is especially useful if you intend to build capital over time through small contributions. SIPs also let you benefit from cost averaging. Besides, you’re spared the worry of catching market highs and lows. OEFs also offer a systematic withdrawal plan (SWP), which lets you make withdrawals at pre-determined intervals, if you want a regular income. OEFs let you switch your holdings to another scheme in the same fund family at any time, if you want to rebalance your portfolio or get rid of a poor performer. Clearly, open-ended funds score over closedended ones in many respects—liquidity, flexibility, tax efficiency, and transparency with regard to portfolio disclosure and NAV declaration. No wonder, then, that CEFs were edged out over the years. The only exceptions were ELSS and products like fixed maturity plans (FMPs). ELSS, being a tax-saving fund, has a three-year lock-in. FMPs are debt funds that invest in securities maturing in line with the time profile of the respective plans. In other words, FMPs provide you, the investor, the opportunity to invest for various fixed maturities. They normally offer monthly, quarterly, half-yearly and yearly plans. They generate predictable returns and protect you from interest rate volatility. Structurally, they are similar to fixed deposits, but their tax efficiency makes them a superior option. In recent years, however, closed-ended equity schemes have made a comeback of sorts. Many mutual funds pitched them as a potentially better bet than open-ended funds. Sebi’s decision to scrap amortisation of initial issue expenses considerably reduced the frequency of such launches. As is evident, open-ended funds have a lot more to offer than their closed-ended counterparts. Some types of funds, like FMPs and capital guaranteed funds, require the structure to be closed-ended. Besides, funds like ELSS must have a lock-in period to comply with government guidelines. Barring these, one would be better off with open-ended funds. After all, we should maintain the freedom to do what we want with our hard-earned money at all times.

Thirteen may turn out LUCKY

With the Sensex and the price of gold both hovering above 13,000, how to decide where to invest? Simple: stick to your asset allocation plan
Shilpa Nayak
The mood is sombre. Dark clouds have gathered on the horizon. The future looks bleak. No, this is not a new novel, just your typical market analyst commentary. The experts are concurring these days that the scenario is one of gloom and doom. In fact, there is wide choice of options to worry about, so pick the one you want to start with: inflation, fiscal deficit, oil prices, elections, industrial growth, corporate earnings, restrictive government policies, and many more. All the homilies—buy when the market dips, buy good companies, buy value, buy growth—have disappeared from analyst verbiage. Warren Buffett is forgotten. Is this “gloom and doom” scenario for real? The recent performances of all portfolios seem to reinforce this outlook. Stock prices have been battered in recent weeks, reflecting this new perception of reality. Some of India’s largest companies have been battered by the recent fall—Reliance and Bharati Airtel are down 25% over the last two months, L&T is down 35%, ICICI Bank is down 40%, and SBI is down by a whopping 45%. Even mutual funds have not been spared, with most funds falling faster than the indices. Analysts have been revising Sensex targets to 12,500 or even as low as 10,500. What’s an investor to do? Run for cover, or brave the tide? Buying in this market would be a brave decision indeed. Or perhaps it would be foolish? Let us try to make sense of the current worries. Are they as overwhelming as feared, or will they just be footnotes on the pages of history within a year or two? Most of the current worries are short-term in nature. Worries about a global slowdown have already started to weigh on commodity prices. And as infrastructure bottlenecks are resolved and additional supplies flow into the market, commodity prices look set to head downward. Most commodity stocks have already corrected sharply from their respective peaks. Countries dependent on commodities have also seen a sharp drop in their markets over the last two months, due to worries about global growth rates. Brazil's Bovespa is down 20% and Australia's All Ordinaries down 15% in just two months. Any cooling off of commodity prices will put India back on the growth track. This time around, India is likely to be one of the few markets offering growth opportunities as credit-induced growth seizes up in most other economies. The domestic growth potential and attractive valuations should put India back on the buy list over the next few months. But isn't that a long time? The analysts are predicting the worst, and it could happen immediately, they say? What should you do? Investors should forget about analysts’ commentary, projections and targets. Their accuracy leaves much to be desired. Don’t forget, these were the same fellows foretelling index targets of 20,000 to 25,000 just six months ago. There are worries galore, of course. But they only explain why the Sensex is at 13,000, and not at 23,000. They tell us very little about where the markets will be next year. So what advice should investors follow? Don’t try to outguess the market. It has always been futile to try and guess market movements. And it’s impossible to pick the bottom or the top. Then, how does one invest? Or (a common question nowadays) should one invest at all? Equity remains the best asset for long-term capital growth. Despite current worries, returns from the stock market will be linked to long-term growth in corporate profits, which will in turn depend on the growth and prospects of the Indian economy. If you believe that India will do well over the long term, then the corporate sector will follow suit and so will the stock prices. Though indices have fallen by 40% from the peak, the long-term prospects of the Indian economy and the corporate sector are unlikely to have deteriorated to that extent. The demographic profile and infrastructure investment that analysts were raving about just six months ago are still in place. This decline thus gives long-term investors an excellent entry point. Perhaps, like many investors, you are asking: should I buy now? If so, how much? Do not decide on the quantum of investments based on current market sentiment. Draw up an asset allocation that is appropriate for your age and risk profile. Decide your equity investments based on your asset allocation model, not on levels of the Sensex or targets bandied about by your friends or analysts. Don’t let optimistic targets based on mantras like “India Shining” tempt you into increasing your allocation to equity. Conversely, don’t let “India Sinking” fears scare you into opting out of your equity investments or allocation. Let your asset allocation decide your equity exposure, and stick with that allocation plan through bull and bear markets. That’s the smart way to invest. It will help you filter out the “noise” on TV, and focus your investments on your long-term goals.

It pays to do your homework well

The patient and diligent investor’s guide to spotting hidden gems and finding value in a tough market
You’ve probably heard the adage, “One person’s food is another’s poison.” It’s as true for the gourmet as it is for the stock investor. Investors relish the idea of making a quick buck in a rising market. In a market which falls, there are other canny ones who short-sell and make money. Then there’s the bewildered investor who doesn’t know which stock to buy, when to buy and when to sell. This bewildered investor is the one see through the dust raised by stampeding bulls, standing on the sidelines in miserable indecision. He decides to join in the last lap. Then, when the stampede is suddenly called off, and the bulls have vanished into thin air, this poor guy discovers he’s stuck with a lemon. Think he’s going to make lemonade? Not him. He’ll just have a distress sale, and then stay far away from the stock market. So, is there a way for investors to identify good companies and time their decision right? Fortunately, yes, for those who have patience and diligence. The equity value of a company is the present value of future cashflows. It’s a truism that value lies in the eye of the beholder. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it,” said the legendary Warren Buffett. He bought businesses that were high on growth, high on return on capital employed...and look where he is today. When he bought Coca-Cola, many thought he had made a mistake. But he bought it because it had the capacity to do better than the stock market, due to its high returns potential. Buffett advises investors to seek value. Let us look at it another way. One metric by which equity value is determined is the P/E ratio. How can you, as an investor, use it to spot hidden gems? Suppose you invested Rs 100 in a bank, at an annual return of 9%. You get Rs 9 on your Rs 100. So the invested-to-return ratio is 100/9, or 11.1. It’s the same way with stocks. You put in Rs 100, and the company has an earnings per share of, say, Rs 7. So its P/E is 100/7 or 14.29. In the bank FD, your risk is minimal and the payout is 9%. But in the case of equity, the payoff is the dividend plus the potential for share price appreciation. Equity is risky, hence the potential payoff must be significantly higher to make investing sense. So for companies that grow their profits significantly, the stock price is higher, and dividend earnings lower. The latter is made up for in terms of greater appreciation in the stock price. Another good guide is to identify fair valuation in equity. This is referred to as the PEG ratio. It’s the P/E divided by the growth potential of the company. If that number is 1 or less, the company is said to be fairly valued, and if it is more, it is said to be overvalued. Let’s pick a company and check it out. Birla Corporation has a market capitalisation of over Rs 1,296 crore. The latest sales and net profit figures (year ended March 2008) are Rs 1,996.78 crore and Rs 393.57 crore respectively, and have grown more than 11.27% and 20.64% over the previous year. EPS stands at Rs 51.1, and the estimate for FY09 is Rs 58.7, which represents 14.85% growth over the current EPS. The P/E for this company is 3.24. The PEG ratio is 3.24/14.85 or 0.22. That means you pay Rs 167 (current market price) for a share in Birla Corporation, and get an EPS of Rs 51.1. This is a return of 30.86%—much better than bank FDs! And that’s not counting possible appreciation in the price of the stock! Of course, the company is not going to pay out the entire profit as dividend. But the intrinsic value remains, which makes it a good stock to own. Now, if the company is doing so well, why is the share price so low? There could be many reasons. Perhaps the company is heading for slower growth in future. Perhaps it’s in an industry whose fortunes are cyclical. Competition could erode the margins or growth of the company. Indeed, brokers agree in their estimate that the EPS will come down in FY2010 to Rs 52. Besides, the company has a troubled past, and has faced industrial relations issues throughout its history. This is where patience and diligence count. If one studies companies carefully, one can identify good value buys. Always look beyond the numbers and then decide. That brings us to the next issue: time. Is this the right time to buy? What’s important is not timing, but time in the market. If you find a good company at a good valuation, the time is right. A time like this additionally presents an excellent opportunity to those who have the courage of conviction to buy now and hold on for later. So now could be the right time to buy good value stocks. The value proposition is important. If you’re convinced the company you’re buying is good, it should not bother you where the stock market is going. For, once you’ve bought a good stock, its value does not diminish with the stock ticker’s oscillations. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years”—again, the wisdom of Warren Buffett. Now there’s food for thought!

Monitor your FINANCIAL HEALTH

Natty, well-travelled, social—Ashok has a great lifestyle, but not very great savings. A medical epiphany makes him take a critical look at his financial health, and he decides to change his lifestyle for the sake of his family and future
Amit Trivedi
Ashok had a long day at the office, and was driving home to Santa Cruz from his office in Andheri East. It was a day like any other—hectic at work, busy Mumbai traffic, humid weather. But the way Ashok was feeling wasn’t normal at all. He felt dizzy, and was sweating profusely. His pulse was racing. He knew he needed to see a doctor. So instead of heading home, he went to his family doctor. At the clinic, he learned that his blood pressure was very high. The doctor warned him that a heart attack could follow if the blood pressure didn’t drop soon. The doctor prescribed a few days’ rest, and also a change in lifestyle and food habits. Ashok would have to stay away from alcohol and cigarettes. The doctor also asked him to consult a dietician. The visit concluded with a long list of medicines that Ashok had to take. As you can imagine, this was a rude shock. At 43, Ashok was rather young for a serious illness. Hard-working as Ashok was, he was no drudge. Mumbai-born and - bred, he loved to throw parties, and his friends loved going to them. His soirees were so grand that they were the subject of discussion weeks later. The dapper Ashok was among the best-dressed people in his workplace. He loved gadgets. He took a vacation abroad every other year. In short, his lifestyle was luxurious. Diagnosis Ashok maintained that investment in relationships yields the maximum interest. His philosophy was reflected in his parties and his lifestyle. He had his forced savings in the Provident Fund, but had never given much thought to additional financial investment. However, like any normal human being, he also hated paying taxes, and had therefore made some investments in tax-saving instruments. But the total value of these investments, accumulated over a few years, was less than Rs 5 lakh. This was not enough to support his lifestyle for even a year. At least his aversion to paying tax had spurred him to buy life and health insurance. The cover was adequate for his basic needs. But his life insurance cover would likely be insufficient for his family to sustain their current lifestyle. The problem would be especially severe because his wife, Rajani, was a homemaker, and it would be many years before Varun, their 12-year-old, could earn anything. Ashok’s bank had rewarded his loyalty by offering him a platinum card, which had a very high credit limit. He had used this limit liberally, with the result that he had revolving credit of Rs 1.15 lakh on the card. Varun’s higher education is about five years away. Ashok’s retirement is around 15 years away. He lived in a house he inherited from his father, so there is no home loan for him to worry about. Recommendation As it turned out, some of our recommendations ran parallel to Ashok’s doctor’s advice. The doctor had asked him to change his food habits; we asked him to change his spending habits. Both changes required reducing unhealthy excesses. The doctor advised him to cut back on the parties, and we advised him to cut up his credit card and surrender it to the bank. The changes were bitter medicine to swallow, not just for Ashok but also for his family. But his medical condition was perhaps a timely warning, and a blessing in disguise. It helped his family appreciate the good sense in a lifestyle change, and freed up some money for savings. We suggested starting a systematic investment plan (SIP) in a balanced fund, to save for Varun’s higher education. We suggested he increase the SIP amount over time, as his income grows. We chose a balanced fund, since it was Ashok’s first investment, and since the the time horizon was five years.We recommended a second SIP in a diversified equity fund, for retirement savings. This would be in addition to the money he accumulated in his PF account. The money that Ashok had invested in tax-saving instruments would be invested in equity as and when the tax-saving schemes matured. The investment options for this would be decided when the money came in. For the moment, Ashok need not invest anything to claim benefits under Section 80C of the Income Tax Act, as he already exceeds the limit through his PF deduction and insurance premiums. Travelling abroad is a passion for Ashok, and he said he would like to continue his vacations if the doctor permitted. We asked him to allocate a small sum every year towards the vacations he took every alternate year. We advised him to utilise fully the Leave Travel Allowance offered by his employer. We also recommended he do regular portfolio check-ups, just as he did medical check-ups. At that time, we would review the portfolio’s progress, as well as the family situation. These reviews would help us fine-tune the investment portfolio, if required. A family decision The biggest change we made in the investment process was to include Ashok’s wife Rajni in all the discussions. We ensured she understood financial planning generally, and in particular, the Guptas’ plan. This is important, because in many Indian families it is the men who are in charge of finances, especially investments and insurance, although women, many of whom manage the household, are equally affected by all decisions. Amit Trivedi runs Karmayog Academy MEET THE FAMILY Ashok Kumar Gupta, 43, lives with his wife Rajni, a homemaker, and their 12-year-old son Varun, in Santa Cruz, in a flat inherited from Ashok’s father. Ashok earns well, but spends well, too. His savings amount to Rs 5 lakh, which would not sustain the family’s lifestyle for even a year. The Guptas need to plan for Varun’s education and Ashok’s retirement

Tool For Swimming Against The Tide

Apart from a good deal of courage and conviction, contra investing requires knowledge and research of the sectors
V Ramesh
Afriend of mine was telling me recently the way his portfolio was bleeding. The thought, he says, gives him sleepless nights. While on the one hand there are people who suggest that the market is at an attractive level, there are others who still fear the doom. It’s true. One must remember that the very basis for a stock market to function is such diverse views. At any point when someone thinks that a share is priced enough and sells, another person thinks that there is steam left. If all think that the price will go down, then who will buy? Likewise, if everyone thinks that the price will rise, who will sell? Thus, both the views are needed. The question now is how will one decide the right time to buy? The saying goes “once bitten twice shy”. So, those who have lost money will swear not to invest again or to wait till the market finds the “bottom”. But in a bear market, finding and knowing the bottom is an art in itself. You continue to get negative news one after the other. Predicting the market’s direction itself will become difficult. Am I talking something familiar? Yes. That is the situation now and many of you would have experienced it. Just when the market gets into positive mode, you have the inflation number, IIP number or other things staring hard and we are again in the red. I would, therefore, believe that it’s time to do some contra investing. You must have heard the maxim “Buy low sell high”. It is easier said than done. But such a philosophy works very well in conjunction with a philosophy of contra investing. One may ask what is contra investing? It is an approach of investing where one takes investment calls contrary to the current trend. For example, when the rupee was appreciating, stocks of information technology (IT) companies were not favoured by investors. A contra investor would buy IT stocks at such point in time. The benefit here would have been that when the rupee depreciates, the stock’s flavour will come back. That is what actually happened in the last twothree months when the whole market was crashing, with sectors like real estate falling by 40-50%, the IT stocks were generally falling by only around 3-5%. Coming to the current situation, one could say that banks and financial services is a good sector for contra investing. With inflation on the rise and carrying with it the interest rate, nothing seems right for the banks. There won’t be much credit offtake, deposit rates will have to be raised and the margins will get squeezed among other things. There seems to be only bad news for this sector. Banking, being an essential part of the economy and having an established business model, probably provides a great chance for contra investing. With interest rate and inflation currently standing at record high levels, one can visualise them stabilising some time. After this, the banking sector would benefit. For those who do not want to invest in bank stocks, ICICI Prudential has launched the ICICI Prudential Bank and Financial Services Fund. Besides, there are some existing funds from others like Reliance, UTI, Sundaram and JM. You can allocate a part of your funds into this sector. You can also look at investing in a few contra schemes like SBI Magnum Sector Umbrella-Contra and Kotak Contra. To conclude, I must say that contra investing is not easy. It needs careful consideration and understanding of those sectors. It needs substantial amount of research, coupled with loads of conviction and courage. Besides, it is also important to take bets on sectors that have an established and good business model. As you know, going the contrary way is not easy in any aspect of life. This includes investing.

To invest in equities or not is the question

Equity fund investors are in a dilemma. They are watching their schemes plunging into the negative category. For example, according to Valueresearch, an independent mutual fund tracking firm, barely six schemes posted returns in the positive territory. And the top performer is offering—hold you breath—a princely return of 4.40%. The rest of them—and that is a long list—were giving negative returns to investors. “If you look at Sensex’s performance over the past one year, you will find that it is actually giving a negative return of around 13%. So, it is only natural that diversified equity schemes would also offer negative returns,” says a fund manager. “But investors shouldn’t panic and try to exit those schemes. Give some time and you will find that they would recoup their losses as the market recovers.” But that is something many investors are not mentally prepared to accept. Sheeba, for example, can’t think of continuing her systematic investment plan with a scheme, which has been languishing in the negative territory for a long time. “I understand the logic why my scheme is not performing, but I just can’t bring myself to invest more in the scheme,” she says. She wants to stop the SIP in the scheme. Does she plan to stay out of the market, too? Well, she wouldn’t come back at least until there is some semblance of sanity in the market, she says. Well, again a bad strategy, say investment advisors. According to them, you shouldn’t change your investment strategy depending on the mood swings of the market. Once you have made an investment plan, you should stick to it without fail. That is, if you want to realise your goal. “Your asset allocation plan is what matters. If you have taken the equity route to achieve a long-term goal, you better stick to it. If you abandon it halfway through because of a bear phase in the market, you would have to start all over again,” says an advisor. He also adds it’s a common mistake by individuals who are new to the market. “Most people get into the market when it had gone through a bull phase for a year or two. When they see that suddenly there is a reversal of trend, they tend to sell their stocks and get out. This often means that they would incur a loss as they are buying at the higher level and selling at lower levels.” The same applies to your mutual fund schemes also. You just can’t abandon them just because they are underperforming their peers or benchmark for a short period of time.

WILL SENSEX HIT ROCK BOTTOM?

Foreign financial institutions are in focus for bringing the market down. But it’s also pertinent to introduce new regulations to bring more domestic funds which can act as a positive trigger

Stock markets took a deep dive in 2008. After peaking at around 21,000, the markets are down by almost 35% this year. One of the prime reasons quoted by some experts is the selling by foreign institutional investors (FIIs). And how much have they sold in 2008? Almost $7 billion—that’s around Rs 29,000 crore. But why are they selling now when the price earnings ratio (on FY09 earnings) of companies that constitute the Sensex is just under 12, which is lower by almost 40% since its peak in January 2008? Negative global cues and global risk aversion were some of the reasons quoted. None of them are even closely related to the fundamentals of the Indian economy. In 2008, FIIs have till now sold around $7 billion, which is less than 0.6% of the average market capitalisation during the year. That low? So, roughly each $1 billion of sale by FIIs has brought the market down by 1,000 points from its peak in January 2008. At this rate, if the FIIs sell $13 billion more, will the Sensex go to zero? Thus, an assumed $20 billion sale by FIIs in 2008 would wipe out the market capitalisation of a $1 trillion plus economy, which is growing at an average rate of 6.5% for the last 35 years and will continue to grow at this rate for the next decade—this may be lower than the 9% plus growth rate in the last few years. Nevertheless, the figure of 6.5% is one which some of the developed economies would now envy as it’s at least three times their growth rate. But FIIs are selling. The earnings growth rate of Indian corporates would not be as high as 30% recently, but a 10-15% growth over a longer term is achievable. This rate is attractive when compared to the negative earnings rate in some developed countries that would like to achieve it. But FIIs are selling. Domestic consumption and investment demand continue to be strong in India. Investment to GDP figure is now at 36%, one of the highest in the world today. Consumption in the US is contracting every hour. India’s savings rate continues to be higher at around 32%, while the savings rate in some of the developed countries are negative. There are no major job losses and people continue to spend on mobiles, TVs, refrigerators and other things. The wage growth in India is one of the highest in Asia. But FIIs are selling. And when they sell, for generating liquidity or to cut risk, probably good stocks get sold off with the low performing ones. For instance, financial stocks are battered globally as the problems are mostly US-centric. The problem goes back to 1991 when India was starving for foreign exchange and to tide over the problem it opened the doors to foreign portfolio investments—money which does not necessarily stay in the country for long. Some of it came from hedge funds through the participatory notes route. Such funds chase absolute returns and are managed on 2:20 basis (2% management fees and 20% performance linked fees). Hot money moves in and out of the country quickly at the first signs of global trouble, which is often unrelated to the fundamentals of a country. Unfortunately, the Sensex’s rise has become an index to measure policy makers’ success. But longterm investors like pension and endowment funds from the US and other countries will continue to find India attractive as their investment horizon is for two decades. The talk now is on FIIs “Quitting India” movement on the back of liquidity crunch faced abroad. But a recent data released shows that 244 new FIIs have registered with the Securities and Exchange Board of India (Sebi) in the last 32 days. The total FIIs now registered are 1,400 with sub-accounts breaching the 4,000-mark. So, not every FII is part of the “Quitting India” movement. What about the domestic money to counter FII outflows? No talk about this in the markets. Regulatory norms have prevented long-term money to be routed into stock markets. Banks, pension funds and other institutions should have more freedom to invest in stocks. Policies and tax laws should be conducive to encourage long-term domestic investment in stocks as their potential is very high. Domestic mutual funds have been net buyers to the tune of $2.5 billion in 2008 and insurance companies have bought too. So, for each US dollar the mutual funds bought, FIIs have sold at $2.5. The reason being that mutual funds’ equity holdings are less than 4% of the market capitalisation and the retail investors exposure to markets directly and through the mutual funds route is less than 5% of the total retail investments in 2006-07. These figures show the potential for retail investors’ money that can be routed into stock markets with the right policy. The way mutual funds are sold in India can at times result in a situation where investors erode their wealth. For instance, the markets are lower by around 35% in 2008. We analysed the monthly gross inflows into equity funds in 2008 against the Sensex levels (monthly average). And the results are not very surprising. Investors put the highest amount of money in equity mutual funds in January when the market was at its peak. As the markets started falling, the gross inflows started dwindling. And by June, when the markets were lower by almost 35%, the gross inflows were at the lowest at Rs 3,998 crore. Redemptions as a percentage of gross inflows were at the highest as markets started falling. The average of the April-June period was as high as 77%. So, the magic words were Buy High and Sell Low, which should have been exactly the opposite. This shows that the need of the hour is rational decision-making by retail investors with a longterm perspective and not to get misguided by shortterm volatility. Stock markets and equity mutual funds are vehicles for long-term wealth creation. Retail investors have to invest regularly in a disciplined manner and be patient for the results. As the Indian economy’s fundamentals continue to be in a reasonably good shape, irrespective of the high oil prices and inflation, India is certainly not heading for an economic recession which is different from an economic slowdown from higher historical levels. And the two quarters in the year 2008 has moderated many of the unrealistic expectations from India’s stock markets and its economy. So, keep investing and remember the most elusive factor for the market now is finding a bottom.

Herd mentality in the field of market investment can have disastrous consequences

Heights always scare us. Suppose you are riding a giant wheel. When do you fear more? When you are at the top? Or when you down? At the top, right? However, when it comes to investing in equity, people adopt a different attitude. For example, most people are confident of investing in stocks when the sensex is at 21,000, compared to when it was at 14,000 level. Legendary investor Benjamin Graham in his book The Intelligent Investor writes that “the Intelligent Investor realises that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale”. We all know what is stated above is true. But if we behave otherwise—feel bullish when markets rise and feel bearish when markets fall—then we should place ourselves in the category of “Less Intelligent Investor”. In real life, most of us feel confident to invest at 21,000 and fear equity markets at 14,000. Most important reason for the above mentioned behavior is the anchoring effect. We tend to link our decision to previously demonstrated number. Suppose the market has moved from 8,000 to 21,000 to 14,000. Firstly, at 21,000 levels, we will have 8,000 levels in mind and hence we will feel euphoric. At 14,000 levels, we would have 21,000 levels in mind and hence will feel dejected. At 14,000 levels we tend to forget about 8,000 levels. Having anchoring effect is like driving the car only by watching the rear view mirror. If we keep driving the car by only by what is in the rear view, we can only see what has gone by. This way we are surely going to bang the car somewhere. To move ahead, we must look what is ahead. Rear view mirror only acts as guiding post. Further in life it is always prudent to buy required goods and services at the least possible cost. When equity markets fall, it gives us opportunity buy stocks at lower prices. However, we sell our stocks when the prices are falling (low) and we feel safe when the prices are rising. As Anthony M Gallea aptly put, “Investing is a strange business. It’s the only one we know of where the more expensive the products get, the more customers want to buy them.” Since most investors buy at higher levels and sell at lower levels, The intelligent investor will have to behave contrary to the herd. It is better to remember Sir John Templeton’s words: It takes patience, discipline and courage to follow the contrarian route to investment success: to buy when others are despondently selling, to sell when others are avidly buying. Lastly in words of Benjamin Graham, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Don’t rely on advisors, do your homework

When the markets are bullish, most financial gurus think they will never go wrong. Bears shatter that delusion
Madhu T TNN
Kamala and Sunil are in a serious fix. Their investment advisor has abandoned them. Or rather, the advisor has decided to quit his profession, after making huge losses in the market recently. The couple, working in a private firm in administrative section, never had lots of money to invest in the stock market. That is why they were elated when their neighbour took it upon himself to make them rich through investing in the stock market. He was updated about the happenings in the market; always had time to chat up about the market and the possible returns one can expect; he never ran out of investment ideas. Or at least it seemed to Kamala at that time. The last two years have been good, but reality caught up with them a few months ago. First, the advisor seemed a little disoriented. Then he stopped dropping in on the evenings to chat up and update about the market. Finally, it was his wife who broke the news to the couple. The advisor has lost a few lakhs and his family has persuaded him to pull out the entire money from the market. They also warned him not to advice others about investing in stocks. In short, the wife told Kamala that she is on her own from now on. The couple really felt sorry for their advisor, but they were equally concerned about their investments. All they have done in the last two years was to follow the advice of their neighbour; they didn’t understand stocks or never followed the market. Now what to do? Have they checked their portfolio to find out how they have fared? No, replies Sunil. It is not out of lethargy. He simply doesn’t know how to do it. Can’t he look for the prices of the stocks he holds to check whether he has made any money on them? He said that was not the problem, the problem was what to do after that. “Suppose we made a loss, what are we supposed to do?” asks Sunil. That is definitely a possibility. If their advisor has made losses, chances are that they would also have lost some money in the market. But pulling out the money from the market without checking the prospects of the stocks would be stupid. After all, market goes through phases when you find your investments making losses. But that doesn’t mean you should cash out. “This is a common phenomenon when markets are in a correcting mode. A lot of self-appointed advisors tend to run away from market, leaving their unsuspecting clients in the lurch,” says a certified financial planner. “The sad part is most of these duped clients are so clueless about the market that they can’t even take a decision.” It seems, everybody is a Warren Buffett when the market is on a bull phase. At least that is what professional financial experts say. They say relentless bull run inspires so much confidence in ordinary folks that they start to believe they would never go wrong in their stock selection. Well, needless to say they find themselves completely on the wrong foot when the market come into the grips of bears. The point is you may come across a friend or neighbour who would fit in this category. They will offer you free advise, but what you are saving on the fee won’t cover up for your losses in the future. “At least what investors can do is to educate themselves about the market. They shouldn’t follow their frineds’ advice blindly, they should make an effort to understand where they are putting in their hard earned money and what could be implications if things go wrong,” says the CFP. In short, it is always better to seek advice from a professional. And even then follow his advice only if you are convinced. Relying on friends and neighbours for investment advice will look easy, but it can have disastrous consequences.

ULIPS VS MUTUAL FUNDS

High costs and few benefits
Sameer Kamdar
GONE are the days when an insurance company focused solely on insuring your life, health and assets. Nowadays, insurance companies are more eager to manage your investments through unit-linked insurance plans (ULIPs). Indeed, almost 60% of new insurance sales are in ULIPs (the figure is even higher for some new private insurance companies), suggesting that things are topsy-turvy in the insurance world. So much so that a couple of insurance companies offer only ULIP plans, and no traditional insurance products. Time was when insurance companies insured your life, health and assets, while mutual funds managed your investments. But today, insurance companies’ profitability depends largely on attracting investments in the garb of life cover. It’s a common complaint that insurance applications for health or vehicle protection are often rejected on flimsy grounds. If your application were accepted, chances are the premium would send you in a tizzy. It appears as if most insurance companies are strangely uninterested in the business of providing insurance these days. Many retail investors believe insurance is a part of one’s investment portfolio. Insurers capitalise on this common misconception and push investment products like ULIPs over traditional insurance products like a term policy or whole life policy. Insurance is primarily a product for protection, whereas mutual funds are ideal conduits for managing investments. So insurance should be used to insure and protect, and mutual funds should be used to create wealth over the long term. Mixing the two, as ULIPs do, can be injurious to your long-term wealth. ULIPs bundle insurance cover with an investment benefit, in a single contract. They are similar to mutual funds in terms of structure and functioning. The insurer allots units to ULIP investors in the same way as a mutual fund, and the net asset value (NAV) is declared on a daily basis. So, of the total premium you pay on a ULIP, part goes into an investment portfolio, and the rest is used to offer life cover. ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure—usually in the first three years when your money is locked in. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure—say, 15 or 20 years—thus defraying initial costs. A better alternative to a ULIP is a combination of low-cost term insurance and a good equity mutual fund. Term insurance provides coverage for a specified period, and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with an equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher. Let’s analyse a few aspects of investing in ULIPs versus mutual funds. Liquidity ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum lockin of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years. Mutual fund investments, on the other hand, can be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if applicable, are generally for six months to a year in equity funds. So mutual funds score substantially higher on liquidity. Tax efficiency ULIPs are often pitched as tax-efficient, because your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in ELSS schemes of mutual funds are also eligible for exemption under the same section.Besides the premium, the maturity amount in ULIPs is also tax-free, irrespective of whether the investment was in a balanced or debt plan. So they do have an edge on mutual funds, as debt funds are taxed at 10% without indexation benefits, and 20% with indexation benefits. The point, though, is that if you invest in a debt plan through a ULIP, despite its tax-efficiency your post-tax returns will be low, because of high front-end costs. Debt mutual funds don’t charge such costs. Expenses Insurance agents get high commissions for ULIPs, and they get them in the initial years, not staggered over the term. So the insurer recovers most charges from you in the initial years, as it risks a loss if the policy lapses. Typically, insurers levy enormous selling charges, averaging more than 20% of the first year’s premium, and dropping to 10% and 7.5% in subsequent years. (And this is after investors balked when charges were as high as 65%!) Compare this with mutual funds’ fees of 2.25% on entry, uniform for all schemes. Different ULIPs have varying charges, often not made clear to investors. For instance, an agent who sells you a ULIP may get 25% of your first year’s premium, 10% in the second year, 7.5% in the third and fourth year and 5% thereafter. If your annual premium is Rs 10,000 and the agent’s commission in the first year is 25%, it means only Rs 7,500 of your money is invested in the first year. So even if the NAV of the fund rises, say 20%, that year, your portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a 2.25% entry load, Rs 225 is deducted, and the rest is invested. If the scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how ULIPs work out expensive for investors. Deduct the cost of a term policy from the mutual fund returns, and you’re still left with a sizeable difference.

IT’S THE SPENDING, STUPID!

A fat income is all very well. But how you spend could make or break your fortune
Dipta Joshi
HAVING a high-paying job is no guarantee for a lifetime of financial stability. There are scores of stories of the rich and famous who went bankrupt living a flamboyant life, splurging all the wealth they earned. There’s a lesson in their mistakes for even the humblest of us: how you spend matters more than what you earn. If you’re in your thirties and forties now, chances are that you work overtime so you can live a little better. Many of our generation are thus breaking away from the conservative financial practices of our parents. However, it’s easy to go overboard in trying to do so. Here are a few suggestions to help ensure a good balance. Getting value for our money should become a way of life for Indians who are earning more than their parents could ever have dreamed of. Buy a house This is the first step towards a better lifestyle for any earning adult. Most people would like to buy a house as close to their place of work as possible. However, this makes sense only if the job requires us to be at the office each day. Besides, in the initial years of one’s career, one may need to experiment with different companies before settling down for a long innings. If you are willing to take a loan and buy a house, go for something centrally located, which will cater to the longterm needs of your family. With IT-related jobs growing in number, an emerging trend is for people to work from home. Companies increasingly consider this to be acceptable. If your work situation is like this, your criterion for choosing a home, too, will change. Refinance your mortgage Your investment portfolio is not the only aspect of your finances that my require adjustment—your home loan could stand to benefit from one, too. If a reshuffle can reduce your interest outgo, then it’s certainly worth the trouble. But take a careful look at what the “trouble” entails. If transaction costs and fees charged by the refinancing institution nullify the benefits of the lower interest cost, refinancing is not worth the “trouble”. Also, consider whether reshuffling now would be better than at some other time. The most appropriate reasons would be a job relocation, or the need for bigger house in the next couple of years. Make investment plans work One should draw up a savings and investment plan as early as possible in one’s earning career. Some of the things financial experts emphasise are: putting money in growth options that offer compound interest, building up a comfortable retirement kitty, and having adequate insurance for yourself and your dependents. Keeping your short- and long-term financial needs in mind, chalk out your financial plan. Figure out what percentage of your earnings you want to put into equity markets, and through what route. T he array of options, each with its pros and cons, may seem confusing, but remember that you are the best judge of your own needs. It may be worth paying consultation fees to a financial planner to gain clarity on how to meet your needs. Learning on your own, through trial and error, could prove expensive, and difficult to undo. But, of course, you’d need to find a financial planner you can trust. Not everybody who seems to have a financial opinion is the right financial advisor for you. Make sure the planner you hire is not an agent for a particular company, as this would prompt him or her to recommend only that company’s products, even if they are not the best match for your needs. A rule of thumb is to stay away from schemes whose investment plans you cannot understand. Have an emergency fund The older generation may recommend keeping a minimum of three months worth of expenses in a bank savings account. However, perhaps you prefer keeping the money in an option that earns higher interest. Be sure, though, that it’s in an instrument that assures instant repayment options. Should an emergency come along, you don’t want to be kept waiting. If you have kids, or rely on a single income, double the emergency fund recommended above. Don’t pinch pennies with your car A car figures quite high on the priority lists of many people today. May we suggest a little change here: put the car lower on your list than all the essentials discussed above. Although the market for used cars is doing more brisk business than ever before, it’s best to buy new, especially if it’s your first car. A new car’s insurance and warranty could stand you in good stead. And, despite all the homework you put in before buying a used car, you could still end up with a lemon—particularly avoidable if you’re a relatively inexperienced driver. Resist temptation Resist technological temptations until you can really afford them. Smart spenders are not to be found in queues outside shops, waiting to grab the first piece of some new gadget. They would rather wait for the reviews to come in, and for the hoopla over the new technology to cool off. Only then will they go and buy that object of desire—after the price drops. Careful with those credit cards Getting a credit card is easy these days. Using it with restraint is becoming increasingly difficult, given the change in our lifestyles. While one cannot deny the convenience provided by credit cards, let’s not forget that credit card companies charge extremely high interest rates. When we limit our credit card expenses, and pay off the bills completely each month, we are making the best use of our credit cards.

Saving is the result of sound financial understanding and is different from miserliness

We are passing through financially turbulent times. The food shortage and crude crisis are likely to deepen further. This may impact the world economies the way we have perhaps not imagined. Incomes may fall. Savings in all times are desirable, but in such turbulent times savings may assume more importance. Saving is a sound habit and should be differentiated from miserliness. Miserliness is a state of mind and may not be responsive to situation. Saving, on the other hand, is the product of sound financial understanding and is responsive to situation that demands it. Prevention of any waste is saving. What do we mean by the term ‘waste’? In our daily life we see many instances of waste but do not notice them as ‘waste’. For example, a man with a four-seater car drives the vehicle leaving the other seats vacant. Now, you will appreciate that the consumption of petrol would be the same whether one person is travelling or four people are travelling. We never think the vacant seats as waste of petrol. If the person had the opportunity of taking along others in the car and missed the opportunity, he should be deemed to have wasted petrol. Another instance of waste is that we often leave lights in a room switched on when there is no one in the room. Do we notice a pattern in the above instances of waste? It is that in both the cases the potential of the resources consumed is not fully utilized. In the first instance, the potential of petrol to carry four people is not fully utilized. In the second instance, the potential of electricity to be useful to you is not utilized. Thus, we can say that every time we do not utilize the full potential of a resource we should be deemed to have wasted the resource. This begets the further question: what is a resource? Anything that has the potential of making our life better is a resource. May be some resources, like the feeling of compassion, have no economic value; nevertheless, all such things may make our life better are resources. And we must learn to preserve economic resources and use them in such a manner that we utilize their full potential. In the times of abundance we do not realize importance of what a resource is and what its waste amounts to. But in the times of economic slow down—such as we are facing now— we necessarily will have to learn the concepts and put them in practice. However, we must understand that though we realize the importance of these concepts, only in such times as the present, one understands them. Their importance is no less significant in good times. In fact, it is in good times that the concepts are more relevant. It is our foolhardiness that we learn them in bad times and then we do it with great pains. We always start digging a well when there is a fire. But then it is as usual always too late.

Hopping in and out of MFs would eat into your corpus

These are trying times for mutual fund investors. Many traditionally strong fund houses are starting to falter, or so it seems. Their position has been taken by upstarts, sometimes with dubious distinctions. No wonder, many people are confused about dumping their underperforming schemes and migrate to better performing schemes. “It is amazing that the schemes which were consistently doing well in the past are in the bottom heap suddenly. One really doesn’t understand what is happening,’’ says a mutual fund advisor who is confronted by people who have invested in some of the past star performers. “I tell them the new toppers don’t have a track record that their schemes have, still they want to know the reason for the severe underperformance.’’ “One of the main reasons why some of the traditional performers are losing the plot is because they have gained in size. Or in other words, people like us have invested a lot of money in these schemes. However, because of their size their agility is hampered and they are not able to dance around in the market like they are used to,’’ says a mutual fund analyst. However, he is quick to add that some of these schemes are still safer than those upstarts with scorching performance, as the downside risk in them may be limited. “You shouldn’t base your decision to quit a scheme on the basis of severe underperformance in the past one year. Give it at least six months before taking a final decision.’’ This is especially true of schemes which have delivered in the last five years or so. Investment advisors also point out that getting in and out of the scheme in the long run would rob you of a chance to make extra money. Remember, there is mostly an exit load of around 2.5% every time you have to pay if you decide to get out of a scheme. Also, most fund houses charge entry load of a similar quantum on fresh investments. That means your hopping in and out of mutual fund schemes would eat into your corpus.

Financial health check-up to know your investments

Most people who file tax returns with the help of CAs are clueless and don’t have a balance sheet of their assets
Madhu T TNN
Ganesh is a veteran of sorts when it comes to investing. He has been investing in stocks and mutual funds in the last seven years. However, ask him how his portfolio is faring and you would get a blank stare in return. Actually, he is not being rude; in fact, he would confess later, has been making a mental note to make neat file of all his investments in the next few days. “Stocks, I have some vague ideas, but when it comes to mutual fund schemes I am really clueless. I must have invested in more than 20 mutual fund schemes, including tax-saving schemes, the other equity schemes and debt schemes, in the last six or seven years. It is very difficult to remember all of them,’’ he says. But then how does he track the performance of these schemes? In other words, has he ever sold any of those schemes based on their performance? “That is the trouble. I have been thinking about getting my papers in order ever since the market has started going through a rough patch recently. Otherwise, almost every scheme was performing well in the past few years,’’ he says. Well, good luck. Financial advisors say Ganesh has a large company of people out there. “It is a common thing among a majority of them. When they come for a financial plan, we normally give them forms to fill, which would require them to fill up their investments, insurance, and so on,’’ says Mukesh Dedhia, director, Ghalla & Bhansali, an investment advisory firm. “Some people fare okay when it comes to investment, but most people go completely wrong on insurance. When you ask them how much cover they have, they would reply that they have five or six policies or that they pay a premium of Rs 50,000. They have absolutely no clue about the cover,’’ he adds. Another financial advisor who doesn’t want to be identified adds that the lack of details as one of the reasons why many clients fail to show up again with the filled up form. “They think it is embarrassing. So, they decide to give up their attempt to get financial plan drawn and go their own way. My only advice to such people would be don’t make that mistake again, just go back with whatever you have. Let us just start the process,’’ she says. Are you wondering why are we making such a big fuss about some forgetful people and their lack of filing papers? Well, there are many reasons. One, losing track of your investment is as good as not having any investment. Two, you may be actually losing money in some of your investments, but have no clue about that. “I have come across people earning around Rs 5 lakh per annum, but have a portfolio of a few crores they didn’t have any clue about,’’ says Dedhia. He says only if they knew it, they could have used the portfolio to generate additional income or restructure in a way that would suit their future financial goals. But why do people fail to keep a record of their investment. Dedhia blames it on the lack of financial education in the country. “From the level of 3,000 in 2003, the sensex has climbed to 21,000. But how many people made money from it? Mostly it was the FIIs which made money from it,’’ he says. The way out of the mess? Well, just like you go for a health check up once or twice a year, do a financial health check-up as well. “Most people who file tax returns with the help of chartered accountants also don’t have a balance sheet of their finances. So, the first thing for them to do is to draw up a balance sheet of their financial assets and liabilities,’’ says Dedhia. Don’t let the phrase balance sheet scare you. It is just a simple process of listing all your financial assets on the one side of the paper and liabilities on the other. Once you finish the process, you have all your investments (they will be on the asset aside) for your ready reference. You would also come to know about your liabilities like housing loans or personal loans. Financial planners claim that once their clients get to know about their investments and liabilities and begin to understand the process financial planning, they really get involved in the process. “Just get the ball rolling. Everything will happen after that,’’ says Dedhia. “I have clients who started enjoying finances, more that they have even enrolled themselves for the certified financial planners programme,’’ he claims.

SYSTEMATIC TRANSFER PLANS

EARLIER in this series, we discussed the investment and redemption strategies of systematic investment plans (SIPs) and systematic withdrawal plans (SWPs). SIPs let you invest a specified sum of money at specified intervals—generally weekly, fortnightly, monthly or quarterly—irrespective of market conditions. SWPs let you withdraw money systematically from funds, as opposed to lump sum withdrawals. This week, we look at a plan that combines the best of systematic withdrawal and investing—the systematic transfer plan (STP). An STP withdraws a pre-specified sum of your money from one scheme, and invests it another within the same fund house, at regular intervals. It thus lets you re-allocate your from a liquid fund (a money market debt fund with low risk, but much higher returns than a bank savings account) to one or more equity schemes of the same fund house. As there is no exit load on a liquid fund, nothing is deducted for the transfer from the liquid fund. However, investment in the equity fund may be subject to entry and exit load. So an STP squeezes the maximum juice out of your regular investments, so that the money sits in a liquid fund account while waiting to be invested, instead of in a bank account that yields a lower interim return. STPs are a systematic investing tool. The key to astute financial planning is to start early and invest on a regular basis. Such disciplined investing lets you fulfill financial obligations and long-term goals. STPs are best for retail investors who have surplus liquidity to invest in equity, but who lack the expertise and knowledge of market dynamics. STPs enhance returns on the surplus liquidity by keeping it in a liquid fund, instead of letting it idle in a savings account. Your money earns only around 0.50% a year in a savings account, but a liquid fund gives you 7% or more a year. Thus, an STP optimises your returns while performing a similar function to an SIP. Let’s take an illustration to understand how an STP can make a difference. Suppose an investor wants to invest Rs 75,000 in equity mutual funds. Rather than put all her money in an equity fund at one go, she can park the entire amount in a liquid fund relatively more safely. She can then opt for a monthly STP that will transfer Rs 5,000 each month to the equity fund, for the next 15 months. This helps ensure her money is invested in a systematic manner, over a period of time, no matter what the condition of the market. As long as there is a balance in the liquid fund, it will continue to earn returns. If you invest through a SIP, you probably have liquid money idling in your bank account. Consider transferring it to a liquid fund, and earning twice the returns that your savings account is giving you. This higher return rate will apply to the balance in your liquid account, until all of the money is transferred to the equity fund account. It is well known that timing the market is a tricky task, even for seasoned investing experts. Often, what drives stock prices is sentiments, not fundamentals. Timing the markets requires a high degree of expertise and skill—generally not the forte of most retail investors. A poor understanding of market dynamics can lead to heavy losses to investors. Thus, the volatility of equity markets often puts investors off. But STPs ensure disciplined investing, regardless of whether the market is going up or down. It thus mitigates the risk arising from volatility. Systematic regular investment irrespective of the state of the markets leads brings down the average purchase cost over time. This phenomenon is known as “rupee cost averaging”. When you invest a fixed amount at regular intervals, you end up buying more units when their NAVs are down, and fewer when they are costlier. A lower purchase price, of course, translates into higher returns. And an STP facilitates cost averaging while also allowing your money to earn better returns while it’s in waiting mode. Now, you may ask, “Why opt for an STP instead of a SIP?” A SIP is an ideal way to invest, if there are regular cash flows and you can match these with the intended investments into mutual funds. In a SIP, typically, a salaried investor deposits a monthly pay cheque into his savings account, and out of this a certain pre-determined amount is transferred at a regular interval the savings account into a specified equity fund. But if there are already some accumulated savings in his bank account—money in excess of his requirements—then he can transfer it to a liquid fund account out, of which his equity investments will get deducted at specified intervals. Thus the investor takes advantage of higher returns accruing in a liquid fund. One fear many investors expressed is that mutual funds might constrain their liquidity. But liquid funds are designed—as the name suggests—to offer very high liquidity. Your money is generally available at a day’s notice—not too different from the degree of liquidity in a bank’s savings account. When you need the money from your liquid fund account, you can have it credited to your bank account the next day. So why not keep it in a liquid fund, then, and opt for an STP, if you’re not really compromising on liquidity? The only drawback of an STP is that you can’t invest your money from one fund house’s liquid fund to another fund house’s equity fund. You would be constrained, if investing through an STP, to choose a liquid fund from the same fund house. But it’s not a significant limitation when you consider that there’s little difference in returns delivered by various liquid funds. So STPs are quite a viable option. Systematic long-term investing through an STP enables you to reap the benefits of compounding. Essentially, compounding enables you to earn interest on interest. As time passes, compounding makes your investment grow increasingly rapidly. With inflation breaching the 7% mark, it has become imperative to regularly invest your money, to protect the erosion of your savings. By investing through an STP, you can get the same benefits as from a SIP, but with higher holding period returns. So you can get optimal returns on your investments.

When you retire, will you stop buying potatoes?

For Indians in their 20s and 30s, the accumulation phase—when they earn and save—is of great import for retirement. And insurance products can help
Gary Bennett
THIRTY years ago, a kilo of potatoes sold for less than a rupee in Bombay. Since then, not only has the city changed its name to Mumbai, it but nowhere will you find potatoes selling for less than Rs 10 a kilo. The price of onions has risen more than five times; beans sell for ten times what they cost in 1985. Local transport costs have increased more than 1,000%. Electricity costs almost four times what it did just ten years ago. Even water charges have doubled. Rising salaries help people cope with the increasing cost of living. But what happens when income from regular sources stops, and costs keep rising? A national survey of more than 63,000 households, equally divided between rural and urban areas, conducted by the National Council for Applied Economic Research (NCAER), found that only 4% of the people could survive on their savings for more than a year if their current income were to dry up. Where have the savings gone? The recently released report of the survey, How India Earns, Spends and Saves: A Max New York Life-NCAER India Financial Protection Survey, found that about 81% of Indian households save, but as many as 36% keep their savings as cash at home. Over 50% keep their savings in banks, 5% in post office accounts, and 3% in cooperative societies. A large number—58% of labourers and as much as 20% of salary earners—said their first choice for depositing savings would be to keep them at home. So that;s where Indians’ savings go—into non-remunerative channels. Thus, when income dries up, the future spells dependency, anxiety and attendant pain. India is becoming increasingly young—more than 40% of its population is below 30. Three decades from now this group will be ready to retire. They will be retiring from jobs that have allowed comfortable lives, regular holidays, eating out, mobile phones and other gadgets, and graduating to lives that may well involve more expenses, with healthy special diets and more expensive modes of transport, with loss of income, not to mention increased health insurance costs. How will today’s 20-and 30-year-olds cope with this, unless they have planned to substitute their current income with an equivalent or higher income from other sources? This is necessary to avoid dependency, ensure security, and avert anxiety. Retirement planning is a growing area of financial planning today, as the joint family system disintegrates, and even nuclear families grow more independent and widely dispersed. India does not have a social welfare system, offering state-supported retirement homes and other facilities, leaving senior citizens to fend for themselves. Thus, retirement planning has become an imperative. The Max New York Life-NCAER India Financial Protection Survey pointed out that although 69% of Indian households save for their old age, they deposit their money in low-return instruments. Thus, even though there is a growing awareness of the need for retirement planning, there’s very little awareness of the range of instruments available in the market for such purpose. For the young Indian population, the accumulation phase—when they earn and save for their retired days—is of great importance and interest. They need to understand the instruments available in the market which enable them to maintain the discipline to invest for the long term. Life Insurance offers such products both in traditional and unit-linked designs. Retirement planning is always a long-term affair, and one should look at such investments from that perspective. The asset management capabilities of life insurance companies are tuned to manage long-term investments and reap better returns over a longer period of time, as compared to other investment instruments, which have a comparatively shorter term perspective. The world over, the basic nature of life insurance companies makes them an ideal investment avenue as far as retirement planning goes, while financial instruments like mutual funds can be considered for short- to medium-term investments. For instance, the unit-linked platform offered by some products gives the customer the flexibility to invest more in equity in the early accumulation phase, to gain from high returns. As retirement age comes closer, one may opt for debt funds. The dynamic allocation facility, in fact, takes care of this fund allocation need as per life stages automatically. Other products that can also be used for retirement planning offer features such as annuities guaranteed for a period ranging from five to 20 years, accident and disability benefits, including riders for “dread diseases” and so on. To keep the investments within the manageable limits to enjoy a carefree old age, the earlier you start planning, the better. In-built flexibility allows customised packages that depend on individual needs...characteristic of the flexibility that retirement demands! So, when potatoes sell for, say, Rs 50 a kilo 30 years from now, you might leave them off your shopping list because the doctor—and not your wallet—said so!

Mutual funds’ AUMs rise 7.7% in April

THE assets under management (AUM) of equity mutual funds stood at Rs 1,99,712 crore in April 2008, up by 7.7% from March 2008. On adjusting for the net inflows, the increase was only 7.5%. This was less than the market rise of approximately 10.5%. The AUM of the equity-diversified funds rose by 11.4%, whereas that of the sector funds and tax planning funds advanced by 3.4% and 16.7% respectively. On the other hand, the AUM of index funds fell by 8.6%. Reliance Mutual Fund saw the largest increase of Rs 2,866 crore in its AUM, followed by SBI Mutual Fund and UTI Mutual Fund. Reliance Mutual Fund, the number one mutual fund in the country in terms of assets under management (AUM), has become the first mutual fund house in India whose AUM has topped the Rs 1 lakh crore-mark. On the other hand, ING Mutual Fund recorded a marginal decline in its AUM. Fund flows into equity MFs fell by a sharp 96% to Rs 251 crore in April 2008. The fall in the overall fund flow was due to the 81% reduction in the amounts mobilised through the NFOs coupled with a 51% reduction in the money flowing into the existing schemes. The amount mobilised through the NFOs stood at only Rs 825 crore in April 2008 (as compared with Rs 4,331 crore in March 2008). The NFO collections include the amounts raised by DSP Merrill Lynch Natural Resources and New Energy Fund, Mirae Asset India Opportunities Fund, Morgan Stanley ACE Fund, Tata Growing Economies Infrastructure Fund and UTI Long Term Lotus India Mid and Small Cap Fund, which was launched in April 2008 but did not close in the month (as the allotment of units has not been completed). The collections made by these funds will be reflected in the next month’s fund flow figures. Cash levels continued their upward trend in April 2008 as MFs shored their cash levels in the midst of global uncertainties, domestic concerns such as high inflation and low IIP numbers, and negative sentiments. The absolute cash levels for all the existing equity funds rose by 25% to Rs 23,978 crore in April 2008 from Rs 19,214 crore in March 2008. Even the cash as a percentage of the total corpus increased to 12.4% in April 2008 from 11.1% in March 2008. Further, the total cash sitting with the MFs, including the cash mobilised through the recently launched NFOs (Rs 825 crore), stands at a healthy Rs 24,803 crore. Flush with cash, MFs are well placed to maintain the buying interest and propel the market forward. The cash level for all funds more than three months old also showed a similar trend, rising to 12.1% of the total corpus in April 2008 (from 11.1% of the total corpus in March 2008). This once again reflects the cautious stance adopted by MFs. In line with the upward movement in the equity markets, most sector funds charted into the positive territory during April 2008, erasing much of the losses seen in March 2008. Pharmaceutical funds outperformed the Sensex whereas funds in the automobile, banking, FMCG and technology sectors underperformed the Sensex. Additionally, while FMCG funds outperformed the BSE FMCG Index, auto and technology funds underperformed the BSE Auto and the BSE IT Index respectively and banking and pharmaceutical funds performed in line with their respective benchmark indices (the BSE Bankex and the BSE Healthcare). Pharmaceutical funds gave the highest returns in April 2008, followed by technology and FMCG funds.

RETIRE EARLY

Financial experts say anyone can do this by making retirement a high priority, and developing a sound financial strategy as early as possible
Madhu T
SOME would rather head for the mountains. Others, the sea. Given a choice, who wouldn’t like to hang up their boots sooner than the customary retirement age of 60? Quit the rat race and do one’s own thing at one’s own pace? Early retirement is that little piece of paradise we can hope for in this life. Sharath grumbles to himself every morning as he drives in to work in town, from his suburban home. He and his wife Nita keep discussing their plans to open a little restaurant in Goa, and live happily ever after. Many of their friends have similar plans. But nobody has made much headway towards realising the dream. “At times you wonder if it is going to remain just that—a dream. What with job, kids, social obligations... there never seems to be enough time to plan for anything,” says Sharath, who is a mid-level marketing executive. His wife Nita adds, “We discuss our plan in minute detail only when we go on vacation, but once we are back to work we just keep it on the backburner.” People crave a peaceful life today, perhaps more than ever before. Maybe it’s the high-pressure jobs, higher stress levels, and growing number of health issues. Whatever it is, a growing number of relatively young couples wants to drop out of their stressful life and lead a retired life in peace, perhaps in a place other than the city where they work. Goodbye to cities increasingly seems to be the mantra of India’s middle-class thirty-somethings. “It is true that retirement tops the agenda of many young professionals. And more people are open to idea of leading a quiet retired life, than back in the old days,” says a certified financial planner, who asked not to be quoted. “Most of these people are in their thirties, and don’t want to work until retirement age. The earlier generation was particular about working until sixty, promotions, and stuff like that. But the new generation seems to have had enough of that attitude.” But having a dream doesn’t automatically translate into a solitary walk on a misty mountain path. Is it practically feasible for those in their thirties to retire in their midforties? “Of course, it is possible,” says Kartik Jhaveri, director, Transcend Consulting. “A lot of our clients have managed to do that. In fact, some have succeeded in retiring before their target date.” That sounds promising. In fact, Sharath got the idea from someone he knew in real life—a former boss, who quit and took up organic farming outside Pune. “I have seen how he planned meticulously for it. That’s what inspired me. Earlier, I believed only people with oodles of money could dream of retiring early,” he says. “But my former boss came from a regular middle-class family, and he told me that he and his wife started planning for their retirement when they were in their early thirties.” We spoke to financial experts, and also a few smart people who actually managed to retire early from their active careers, and asked them for tips on how to retire early. Everyone was unanimous about the first step: make sure retirement stays at the top of your priority list. “Often people have numerous financial goals like, say, their child’s education. However, these days, you can get loans easily for higher education. But you can’t get loans to fund your retirement,” says Jhaveri. “That is why it important to make retirement a priority.” Says Neha, a banker who wanted to quit her job so she could watch her daughter grow up, “I was very clear that I should have a good retirement corpus that will give me a steady income after I quit my job. The day I decided that I was going to quit early, I started saving earnestly.” It’s quite simple, really: start at the earliest. “The first step is to make a concrete plan at the earliest. Just dreaming will not make things happen,” says a senior mutual fund manager. “Only if you work with real numbers and have reasonable return expectations will you be able to achieve your goal. And the more time you have on your side, the easier it is to achieve your goal,”he adds. Jhaveri says one of the best ways to fund an early retirement is to take the equity route. “Most people, when they come in, have at least five to ten years to go. We advise them to choose aggressive investments like stocks,” he says. Says the fund manager, “If you start early in life, you can, in fact, retire much ahead of time. This is because equity gives superior returns in the long term.” He points out that the BSE Sensex has returned around 15% historical returns, which is far higher than what you would get from conventional investments like fixed deposits, the Public Provident Fund, and so on. Jhaveri concurs: “For example, we have clients who invested in 2005, and they have already made adequate profits in the last three years. They are closer to their retirement, and now we have made the necessary changes in their asset allocation plans to ensure that they retire on their target date,” he says. Another valuable tip from Jhaveri is to have a contingency fund in place. This is because, according to him, people tend to dip into their retirement savings for emergencies. “If you set aside a contingency fund, you can prevent an emergency from upsetting your retirement planning.” Financial experts also underscore the importance of having adequate insurance cover—for health, accident, and other risks—to make sure that your retirement plan stays intact even if you suffer some unforeseen emergency.

Value of money changes depending upon the effort taken to acquire it

Sandeep just got married to Smita. Both of them had good jobs. Sandeep was very interested in the stock market and decided to quit his job and pursue a career in investing in stocks. Much against the wishes of his wife, he decided to put at stake their measly savings of Rs 1 lakh in the stock market. The first year, he tripled that money to Rs 3 lakh. Brimming with confidence, he became more aggressive. His portfolio stood at Rs 12 lakh in the second year. This led him to trade more and his portfolio was valued at Rs 22 lakh in the third year. With the renewed optimism, he became very confident of his abilities and he started trading more and took bigger bets. One day, as it always happens, the markets crashed. And Sandeep lost all the Rs 22 lakh he had made from the market. Soon after, he quit the market and again took up a job. When Smita asked about the quantum of his losses, he meekly replied that he had lost all their savings of Rs 1 lakh. How much did he lose really? Rs 1 lakh or Rs 22 lakh? Actually, he lost Rs 22 lakh, but he considered that the winnings were not his money. For him, Rs 1 lakh was his money and the rest was his winnings. This is what the Behavioural economists call the concept of “Mental Accounting’’, which is nothing but the tendency to value some rupees less than the others. Money is fungible, that is the notion that one rupee is capable of being used in place of another rupee. However, when individual behaviour is studied, money can become less than completely fungible. Mental accounting is the tendency to give different values to the same amount of money, depending upon how it is acquired, when it is acquired and the amount of effort taken to acquire it. This is very apparent in the stock markets. Those, who are on a winning spree become very aggressive and start trading more, as they consider it as free money. When a stock depreciates in value and investors start making a loss, they are reluctant to accept the loss. They will not sell their losing investments. They hold on to the losses thinking that if they sell, they will take a loss. In reality, the loss has already happened but they feel that they will incur the loss only if they sell. Whether they hold on to the stock or sell, there is no change in the quantum of loss. The other day I was surprised to find the senior director of a leading bank also falling prey to mental accounting. The bank had provided for some losses on their overseas investments. The stock price has started falling. To allay the fears of the investors, the director made an appearance on TV channels and told the investors not to worry about the loss. The bank had not sold the securities and the loss was not booked. Only if they sold the securities the loss could be thought of as real. Other common mistakes of mental accounting are investors maintaining fixed deposit accounts earning an interest of 9% and then having a margin trading account with their brokers paying an interest of over 20%. Faulty mental accounting makes them believe that their fixed deposit account is for safety and the margin trading is for business.