Here are the details for the ones who are mathematically inclined. My insurance premium was Rs. 8000 per month (approximately Rs. 1L a year) and the sum assured was Rs. 20 lakhs (even if it was Rs. 5 lakhs it would have been tax free).

In the first month I paid Rs. 8000 and immediately topped it up with Rs. 3 lakhs. I did this for 2004, 05, 06, skipped 07, topped up again in 08, 09 and 2010. The administrative cost is Rs. 15 per month, the asset management charges are 0.8% (there is no cheaper amc product in the country today – other than ETF).

The risk charges have disappeared (the value of the fund is more than the sum assured). It is a decently well managed fund and thanks to the charges (including mortality charges) this fund of mine has done as well as some of the top mutual fund schemes.

I have no regrets, yes the life cover is over..but I have a 24 year contract which started in 2004 at amc charges of 0.8%. Yes it had a high entry load – I think about 40%, but I overcame that by topping up every year from the first year. For those of you who are good in excel try doing this:

Premium Rs. 100,000. Sum assured Rs. 20 lakhs. Top up (99% is invested – and has a cap of 20% of sum assured minus the regular premium) administration charges of Rs.15 per month, asset mgt. charges 0.8% – and a CAGR of 15% over 25 years. Assume top ups only till you reach the sum assured in the accumulated value.

The unit linked endowment plan of Hdfc Standard life bought in 2004, will beat the Hdfc Top 200 – not because it has superior fund managers, but the charging structure allows it to charge less, much less.

Learning:

The only protection against bad financial products is SELF learning. Nobody is here to teach you for free. You want a free lunch? Go to a langar or a temple. No banker, adviser, blogger, author is here to customize ‘gyan’. What you get free is some general pointers like:

‘Ulips are bad’ : some joker like subramoney then gives you articles that prove it wrong.

‘Equity is good in the long run’: Look at Japan, and it will be proved wrong.

‘A company that good service is good for the shareholder’: Look at Jet Airways.

‘A company which damages society is bad for the shareholder’: Look at Mcdonalds, Coke, Pepsi, ITC, Citibank..

‘Obama will save the economy’: see under jokes column. Annual PR budget of the financial service industry in the US is $ 5 billion – spent equally between the R and the Democrats. So laugh when Obama says ‘change’. In India only bhikari’s ask for so much change. Others know to really matter you need notes, not loose change.

Blogs like mine are run for fun, for poking you, for poking at the whole world, for selling my book (please buy it from flipcart – there is a link here), – if you learn something here, I am thrilled. This is meant to entertain, poke, …and accidentally educate.

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“I have a client who invests 5 a month in a mutual fund regularly. However I am under tremendous pressure to sell him a unit linked plan with a premium of at least 60 NOW. How do I handle this?” – if you are a unit manager, financial consultant, financial adviser, business development manager, sales manager, – generally anybody interested in life insurance sales you can indentify with this question. I have said 5 – you can add ’000s as per your convenience!

My answer is simple: In this market if you have a client who is giving you a regular business on a monthly basis – surely he believes in (and has perhaps benefitted by) SIP as a process. You should be happy for him, for your organisation, and thank him. You should seek his blessings for your career and some leads for further business.

The participants are not happy – they grumble – and say (almost audibly) trainers do not have to sell, so it is all right for ‘you’ to say this. The more sensitive guys (and gals too) say “We know this, but our superiors force us to do this….”

I am normally amused – the fact that I can afford to be in training comes from my sales background!

It reminds me of a story – the Monkey and the crocodile.

On the banks of a river there is nice huge tree – with lovely mangoes and a lot of monkeys. In the river is a big crocodile – who befriends one of the monkeys. The monkey gives the crocodile one mango a day. The crocodile shares this mango with its wife and is very happy.

One day however Mrs. crocodile tells Mr. Crocodile “if the monkey eats this fruit every day, his stomach and liver must be really sweet, let us eat him”. Mr. Crocodile protests – and says the monkey is my friend – how can you even say this? However under tremendous pressure Mr. Crocodile relents and decides to get Mr. Monkey to the Croc house.

Initially the monkey is also sceptical – and gives the normal excuses. “I cant swim”, “We are natural enemies, are we not” …but Mr. Croc who has been trained in “How to make a No to a Yes” and “Persuasion skills” and other ‘communication skills’ convinces Mr. Monkey to sit on Mr. Crocs back and is planning to take Mr. Monkey to his house.

On the way Mr. Croc (perhaps over ridden by guilt) tells Mr. Monkey – the real purpose of the visit. Mr. Monkey (usually true) who is much smarter than Mr. Croc says “I have not brought my kidney and stomach – I left it on the tree” (people say cheque book, Pan card, photograph…) – so the croc brings him back to the tree – to collect the stomach and liver. Mr. Monkey goes up the tree and thumbs his nose at Mr. Croc.

In real life however many monkeys end up in Croc stomachs.

Please remember even though we live in a democracy real incidents can only be written as stories. Like Shankar Sharma found out – we live in a political democracy and in an economic dictatorship. Like they say when in the water, you do not cross swords with a croc! Best of luck Shankar Sharma, if Mayawati becomes Prime Minister you will surely benefit!

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If you need bypass surgery, you should find the most qualified surgeon available. If you’re getting sued, you should hire the best defense lawyer in town.These 2 are fairly obvious and I do not think you can do your own root canal surgery, brain surgery or heart surgery. Come to think of it, it is so inconvenient, is it not! Imagine lying on a bed watching a ceiling mirror and cutting up your heart. Really tough.

Likewise, some people argue that if you’re planning to live well in retirement, you should hire the most expensive financial advisor you can find.

To me this causes a twitch! Especially when some of these people do not even know what to expect from a financial planner (alpha, did I hear?). If that is what you said, you are better off going to a casino or a horse race – the odds are just the same

I do sessions on financial planning and some of these sessions are well attended. Mostly at the end of the session the participants are unable to decide whether they can do their own financial planning or they need an outsider.And while people ask me questions on everything from momentum investing, auditor integrity, mutual fund loads, broker integrity, insider buying, role of SEBI and IRDA, etc. one question uppermost on people’s mind is

Can I do my own financial planning?

And

Can I do my own investing?

Similarly I do get a lot of emails asking me – do I need an advisor?

If you’re an investor who is seeking long-term capital gains, it’s crazy to pay a lot of money for a high-priced financial advisor who gives you an economic outlook and short-term market forecast with all sorts of commission-based solutions attached. To the best of my knowledge there are only a few (so few you cannot spot them) pure financial planners.Nor do investors generally need a “personal investment plan” based on their individual circumstances…

There’s Only One Objective for Long-Term Investors

A growth portfolio is designed to keep you from outliving your money. It should give satisfactory returns for a 25-year-old just beginning an investment plan, as well as a 55-year-old who may live three decades or more.

To quote Sir John Templeton, “For all long-term investors, there is only one objective – maximum total return after taxes.”

Of course, some advisors take generic advice and selling it as customized plans. For that reason, whenever I hear an investment advisor tell a client that he is drawing up a long-term growth portfolio based on that client’s “unique profile,” I’m invariably reminded of the Head of HR who tells his audience, “Never forget that you’re special… just like everyone else” to all the 284,000 employees of his company.

But, as is fondly said, “It’s 97% of investment advisors that give the other 3% of us a bad name.”

In the Indian context the commission structure is too badly designed – it is a design fault rather than a sales fault. But there is no body who really wishes to complain. After all in a bull run the manufacturer (called Mutual funds, Life insurance companies, PMS providers) need sales guys who go and get them money from the “client” for these guys to manage.So if it is a 70% upfront commission in a unit linked plan or the 6% asset management charges or the 2.4% amc in a debt fund, well there is no one to protest!

So you may need a financial planner (whose functions are so comprehensive) that I shudder to think why would somebody want to be a financial planner on a just fee basis. A financial planner with guts to give a simple plan – 2 good equity funds, perhaps one etf, an open architecture in life insurance and be wiling to charge (and get) Rs. 30,000 for this plan may not exist.

Frankly if you wish to create wealth in the long term put your money in the cheapest index fund, buy the cheapest term life insurance, and go fishing.

Leave your mobile, TV, broker…in the city and play with nature. You will return fresher and richer.

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One was the head of a big life insurance company, one was the head of a brokerage firm, and one was the head of a big mutual fund. To me the biggest kick in life is when people contradict themselves or make claims which are fantastic sounding, but miles away from reality. Thankfully all 3 of them obliged.

The head of the life insurance company said “people are not shifting from unit linked plans, but the shift is from long term committment to short term committment”. Thus people are shifting from long products like unit linked plans to bank deposits. Now these are difficult to argue against unless you have numbers on your side. The growth of the life insurance business has just changed hands – LIC and Max New York life have imporved their market share at the cost of some of the other players.

The other thing he said was ’2010 will see the importance of the ‘adviser’ and all life insurance companies will spend more on that direction. I find it amusing – the better that an advisor gets, or the more informed a customer gets he moves away from unit linked plans to term insurance. This is not good for the manufacturer or for the distributor. Think of conflict between advising and selling – it is at its peak here. In the same breath he said that the ‘other’ sales channels – like bancassurance, mall insurance, tele insurance, etc. will be very imortant. LOL. Advising is the role of the advisor, pushing products is done by these other channels….sorry sir, did not understand what you said.

The other person was from a brokerage house – equity share broking is one area that the current SEBI chief has not yet touched (of course he has no clue what to do with the media, so like his predecessors he is ignoring the media). He said how the end customer benefits by ‘E-broking’. To the best of my knowledge difference between knowing the broker and dealing with him was a far superior way of investing. E-broking has widened, and deepened the market, but wealth creation stories are from holding, not from trading. The beneficiary of E-broking has been the brokerage houses, banks, nsdl, demat service providers, and perhaps the end user. If he has benefitted, I have not been able to see it . Then he spoke about buying mutual funds through a brokerage house. This is another amazing feature – and am surprised that nobody has yet come out with the total cost of hold and buy strategy of a mf through a brokerage house. Oops it hurts

The third CEO was from a mutual fund – this fund could have been described as a NFO factory, but Dhiren of Valuresearchonline.com used this apt title for Tata Mutual fund, so i will not re-christen this fund house. He said the last decade has seen the top 5 schemes giving 20% returns over the last 10 years, but investors may not have participated. This brings us back to ‘Investment returns vs. Investor returns’. The question is not whether these fund schemes gave such a return, but whether a customer would have invested only in those schemes! The fund houses have bombarded people with new schemes. One of my senior customers whose money I had ‘advised’ to be kept in Icici Prudential Discovery fund was ‘re-advised’ to keep in a infrastructure fund of the same house . More interestingly this CEO also said since these funds have given 20% return over 10 years a clients investment of Rs. 100,000 would have become Rs. 25 to 30 lakhs in 10 years. My excel sheet says it would have become Rs. 515,978.

So for me the year 2010 has started on a humorous note, except that I was watching a personal finance show!

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Aghast because he had come to me a week earlier to share his portfolio and seek remedies to that. He and Sunita were employees of Air India. He was a pilot who earned quite well – Rs. 36 lakhs a year. His wife had a well paying ground job in the cargo section and she was earning about Rs. 12 lakhs a year. At the age of 52 years for a couple like this one hopes to see at least a couple of crores in assets apart from the house in which they live.

I was shocked to see the Athalyes had about Rs. 4 lakhs in mutual funds and about 2 lakhs in public provident fund, national savings certificates, etc. Of course he had Rs. 17 lakhs in provident fund and his wife too had about Rs. 12 lakhs in her provident fund account.

If this was the case where did the money go?

Well it went to fund the education of his children. He had spent Rs. 24 lakhs on making his son an MBA (from Australia) – this is after he graduated with honors. His daughter wanted to become a Commercial Pilot and that set him back by Rs. 35 lakhs. His flat had cost him about Rs. 20 lakhs and now had a market price of Rs. 1 crore. He wanted to know whether he could retire in 8 years time and Sunita retire in 12 years time.

Their monthly expense was Rs. 1 lakh a month. This included both the children (the son could not find a job of his liking in this slow down so he was contemplating studying further in India) and his daughter was doing a Computer course with NIIT (commercial pilot jobs were not available at all, that is all). Of course they had  2 maids, one cook and one driver. They were really revenue rich. What they did not realise was that they were balance sheet paupers!

Now the great captain wanted to buy a commercial space in a new place and was wondering how to fund it.

Some people do not ever fail to stun me. Athalyes are surely one among them. I asked him if he had seen Baghban – the movie starring Amitabh Bachhan, Hema Malini, Salman Khan, Paresh Rawal. There was a lot of similarity, they had one parrot, 2 dogs, and a fish tank.

Like a doctor I told them the following:

Watch television, you may actually have lost your job.
Your children are your pride, glory and joy. However they have cost you more than anything else in life, so they better start repaying and repaying fast.
You have no life insurance, and your accumulated money will last exactly 24 months from the date of separation from the company.
Be prepared to die at age 62 if you retire at 60 years, and at 54 if you are fired today.

Of course he did not like one bit of what I said. He countered by saying he could borrow against his existing house (Loan Against Property) and fund the new commercial property. He would then give the commercial property for rent –and the rent would be able to pay the EMI.

And in a worst case if he lost his job he could always get a Reverse Mortgage.

I was appalled. Luckily excel came to my rescue – the EMI on the LAP was about Rs. 100,000 per month for 8 years. The rent he could get was Rs. 14,000 for the property. There was a slight mis-match.

He did not realize that reverse mortgage was available only after the age of 62 years, so he was about 10 years away from that. Moreover his flat would be about 26 years by the time he was 62. This meant his flat would not be eligible for reverse mortgage.

Last I heard of, they were looking for a new Advisor. After all, who wants to hear the truth?

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THERE are some word pairs that go hand in hand. When you say one you cant help but think of the other – eg. chicken and egg, carrot and stick, and so on. When it comes to investment, the only word that pops up is return.

No doubt, everyone invests for returns. That magic figure governs the fate of all investment products. The logic in people’s minds is simple: The better the returns, the more money you will end up with.

But it’s not that simple in reality. Returns are not the sole deciding factor of how much money you are going to make from your investments. Three more factors determine how much money you will end up with:

a. The amount you put into your savings and investments

b. The amount of time you keep it there.

c. Do you let it remain there and let it grow TAX SHELTERED.

These factors will have a greater impact on how much money you will end up with, rather than mundane things such as investment returns.

Here’s an example:

a. Let us suppose you need to cobble together Rs 5 crore over 40 years. With an investment return of 12 per cent per year you realise that you have to save a paltry Rs 3,980 per month.

b. If you deduct ten years from this horizon the figure automatically changes to a difficult Rs 14,000 savings per month – over 300% of the monthly amount today, although you have only taken 25% off from your time period.

c. Now you argue: What if you aim for a higher investment return? Surely then you can amass Rs 5 crore even in 20 years! You would need a fantastic return of 21% per year to turn Rs 14,000 into Rs 5 crore in 20 years.

Is that realistic? Consider this:

The stock market today is perhaps the only way you can reach your goal since it can give anywhere between 12% to 44%, depending on time period and how enterprising your fund adviser is.

Now, the charges of investing vary between 1% per annum to 2.5%, depending on the nature of fund management. So any expectation number you hear above 16% is almost a fraud if suggested by your advisor and foolish thinking if you expect it.

And in fact for an efficient indexing strategy, you should use a figure of 9 per cent to 15%. So, that 12% I was using is, if anything, fairly ambitious. It would certainly be easier to argue for a figure of 9% per year than 12% per year.

And hold on! Taking into account inflation and taxation, from gifts and cash which is generally quoted as a little below 2 per cent, So, you are now left with a paltry 10% return!

So now plug in the numbers!

You now have an investment return to aim for, an amount of money that you need to reach and if you put in a realistic guess at how many years you have till retirement – hey presto! The calculator will tell you how much you need to save.

But remember:

i. It is important to know that these calculations only tell you what to do, given certain assumptions. These are guesses at best and change regularly.

ii. This is good enough to make a start. The investment return you get might be different from what was predicted, and the date of your retirement might get closer or further away.

iii. Most important, since you are saving money in today’s world, you have to keep increasing the amount you save to take into account inflation and average earnings growth.

Fast Forward 2012:

Let’s fast-forward to the year 2012 with our original numbers of Rs. 5 crores in 40 years with 12% rate of return and look at two possible scenarios: one good and one not so good.

Scenario I: Life is Rocking!

You manage an excellent investment return of 22% per year. That gives us a pot of investments worth Rs 450,000. The investment return is all the more impressive because we have only had inflation of 6 per cent.

Plugging the numbers in (a final value of Rs 5 crore which takes 35 years and Rs 4.5 lakh already invested at a 12% annual return), you need to save Rs 3,500 per month to get there. That is a paltry fall of Rs 480 per month.

In spite of the fact that we have a cracking 22% per annum, the amount we should be investing falls by such a small sum. You are just providing for a goal. So, till the goal is near, changes are not recommended.

Scenario II: Life is not all that rocking

You have actually managed an investment return of 10% per year. That gives us a pot of investments worth Rs 325,000. Again, inflation and earnings growth have amounted to 6%. Plugging in the numbers for this scenario (a final pot value of Rs 5 crore, 35 years to get there, Rs 3.25 lakh already available and a 12% annual return), we find that we need to put Rs 4,800, again just a little more than what we have been investing so far.

So, have things really got harder for us because of the poor investment return that we managed? No. Our income has gone up much more, so paying this extra Rs 820 is now a breeze. Should you increase the investment? Yes, absolutely.

Either way, it’s better than doing nothing.

In conclusion, the gap between 22% and 10% is not small, is it? But the impact is subdued because of the time frame that we are looking at — and the impact is marginal. So the rate of return, though important, is not the be all and end all of investing.

By repeating the sums on a regular basis, you can adjust your rate of investing to account for changing circumstances and how well your investments have actually done.

What you can see from both the above scenarios is the importance of getting started early to minimize impact.
a. If all goes well in the first five years, you will want to invest Rs 3,500 per month.
b. If things go wrong, you would be left saving Rs 4,800.
c. However, if you hadn’t started saving at all, you would be left needing to save an unlikely looking Rs 7,650 per month.

So, remember now remember that Investment goes hand in hand with not just Return but also Time!

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Client: How much will it give?

Advisor: Sir it will give at least 15% return over the next 5 years

Client: That is not exciting. May I have something better…

This is such a normal conversation, that I cannot even believe what is being missed. For me this is not a normal conversation.

Instead I get to see the situation like this.

One Sunday morning sitting with a client and his wife, she comes out with “I found this document, see if it is of some use…” and I find that it is a IDBI Bond matured in 2006, not claimed till 2009.

Bounced cheques – deposited in the wrong account – and now stale.

2 Life Insurance policies taken paid for 2 years…and then FORGOTTEN to pay the premium. Amount lost Rs. 23,000 in 1997 (paid for ’96 and ’97)

Shares bought, NOT transferred kept in a box in a cupboard. Cupboard cleaned up after Dad’s death – shares were bought in 1992. Shares of Century and Wipro. Benefits missed out worth lakhs in Wipro alone!

To me these are clearly not ‘investment’ mistakes, but INVESTMENT disasters waiting to happen.

Why does this happen?

1. Buying products without knowing what has been bought

2. Paying too high a premium (so policy lapses because you cannot afford it) or paying too little as premium (so you do not care about the lapsation).

3. Not keeping track of investments

4. Not buying products according to a financial goal / plan – so not missing the asset!

I Just opened my old cupboard…and found another….Oh my God! Not once again I said….

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You have just joined the 500,000 people who have lost their jobs in INDIA since September ’08.

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

It’s good to know the possible consequences of not making a premium payment on your life insurance policy. The effect depends on the type of policy and coverage you have and the policy terms and conditions. With a term policy, if you stop paying premiums, your coverage lapses! With endowment policies, many types of contracts allow you to decide to allocate cash value to pay premiums. Depending on the policy and amount of cash value, the result could be a significant reduction in cash value over time, decrease in death benefit and, finally, policy lapse.

There are largely the following types of policies that a person could (did I say should?!) have:

Home Insurance: Normally a low premium policy meant to reimburse you if there is some robbery, fire, etc. in you house. Just continue this policy – the cash implication cannot be much.

Medical Insurance: An absolute must. In case you were dependant on the company’s ‘group medical insurance’ the first thing you SHOULD do if you have lost your job is to get yourself a MEDICAL insurance.

Critical Care Insurance: Very useful to have. If you do not have it already do not buy it if you are under 35 years of age. It is slightly different from medical insurance – it pays a lump-sum on the occurrence of an event – like contracting cancer or having a heart attack.

Term life insurance: If you took a term life insurance so that your child will be educated, your wife choose what to do with her time, your loans would get paid off, – and none of these conditions have changed, continue paying the premium! If your policy lapses because of non-payment, you will bear the tough consequences.

Classic Endowment Policy: If you have an old classic endowment (traditional or non-ulip) policy, you could borrow money against the policy and use that amount to pay the premium apart from using the money for other things.

Unit linked Policy: If you have a unit linked endowment policy and have already paid the premium for 4-5 years (minimum 3 years) you could allow the cash value in the policy to fund the ‘risk charges’.
Thus not paying the premium is all right only in case you have a fairly old (say at least 5 years) ENDOWMENT plan.
Some policies are designed with flexible premiums, so that policy owners have the option to pay more or less than the recommended premium or to skip premiums from time to time. Even with these policies, however, policy owners should check with their agents before suspending premium payments for extended periods because there must be enough cash value to pay the monthly charges to prevent a policy lapse. Sadly thanks to some aggressive companies and their agents many of us believe that a Unit Linked Endowment policy will be permanently available to you even if you pay premium only for 3 years. This could be wrong.

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

Life insurance can automatically complete your goals if you die prematurely. Death benefit proceeds from a life insurance policy can provide the liquidity to settle final expenses, pay off debts and — at the very minimum — give surviving family members time to adjust.

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

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

Let us take an example. A 40 year old had taken term insurance of Rs. 10 lakhs at an annual premium of Rs. 5300 – 7 years back. Now he loses his job and lets his policy lapse. The new policy will be available from the same company at a price of Rs. 10,200. Now this is actually a simple problem.

The worse problem is he could be denied Term insurance because a) he is unemployed or b) he has developed some medical complications!
Assuming that the term life insurance will be reinstated at the same original terms is utopian!

Before you decide to skip premiums or let your policy lapse, ask yourself these questions:
•    Why did I purchase this policy? Was it to help protect my family’s future by replacing my income if I died prematurely? Make sure education funds are available for my children? Retire the mortgage or pay off other debts? If these goals still exist, do you want to jeopardize your life insurance?
•    Have my needs or situation changed? Have I added to my assets by borrowing more money? Has my spouse quit his / her job? Do I need less coverage? More? If so, you should consider adjusting your coverage.
•    What are my alternatives? If you are paying an annual premium, perhaps you would find it easier to budget for a quarterly or monthly premium. Or you might consider a monthly bank deduction. You may consider reducing the sum assured (some providers provide for that). Ask. That is the only way to get an answer!

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Very many people do not think it is really material as to whether you select a good quality agent or a friendly neighborhood agent. Risk cover and wealth management are both things that you need to plan for much, much in advance before the event. Imagine thinking you have cover for medical emergencies….but realizing that it is not renewed AFTER you have had an accident. Imagine getting up on your 55th birthday and realizing your retirement target amount is 15 years away. It will be too late to react. So choose an agent carefully. He / she can make your sunset years golden or red!  Lets’ look at reasons for NOT selecting a person as an agent:

1.      He is a neighbor. This can mean he is available for you, not that he is best. Typically if he has meandered in his career and at last (?) decided that selling insurance or mutual fund is his calling that may not be sufficient.

2.      The brother-in-law, sister-in-law, father-in-law syndrome. Same as above. If they have built a business over a long period of time that is a good basis for selection. Not otherwise.

3.      length of being in the business – normally this is an excellent reason to buy from a person. However in some cases it might mean that these are not enough reasons. Check if he / she is unbiased. Normally such people get stuck to one company and so many years brainwashing has lulled them into believing all good things happen only in that company and other companies are bad.

4.      Its’ the bosses’ wife: I have absolutely no excuses to offer! Play it by the ear, or get your CV ready!

5.      It is a customer’s wife: keep the premium to the diwali gift level!

6.      Its your bank: They know the exact amount of money in the bank, they know where you eat, how you travel, what school your kids go to, which credit card you have, but if they cannot plan your finances, be careful.

7.      The guy who does not talk about term insurance at all. It is not to say that TERM insurance is the best, or it is most suitable, but he should offer it to you. He should tell you that there is something called top up in an unit linked plan.

8.      The agent / bank / advisor who sold you a plan which somebody knowledgeable called a lemon! If you have been had once, that is enough. Do not repeat it.

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Immaterial of whether you are in your 20′s or in your 50′s and you are looking at an investment you should know some of the basics of investing, so here it is.

By and large at some stage you must have been approached by some investment advisor. He (increasingly she) must have offered you mutual funds, ppf, unit linked plans, and thrown a lot of jargon.

Throwing jargon is one of the easiest (and impressive) ways of getting the fees that the advisor earns. ALL industries do that. Take a simple English word and give it a different meaning, and then go about explaining it. Take a mouse, for example!

But what is an investment, shorn of all its jargon?

It is a sum of money that you outlay hoping to get a higher amount back. This can take two forms:

1. Investment like a lender
2. Investment like an owner

1. Investment like a lender means you are giving your money to an organisation for them to use so that they can grow their business. As a compensation for using the money, they pay you interest. If you invest in PPF, NSC, Kisan vikas patra, RBI bonds, etc. you are lending money to the government of India. However, if you keep money in a fixed deposit in, say HDFC, you are lending to a private sector body. Bank deposits also fall in the category of `investing like a lender.` What are the advantages and shortcomings of such an investment?

- Certainty of interest, when it will be paid and when the capital will come back
- Convenient to handle
- Simple to understand ? the only thing you need to know is the amount of interest, and will the original amount that you put in comeback.

Shortcomings:

- Inflation may erode the amount, substantially. For e.g. if the inflation rate is 6%, the value falls by 44% in 10 years time. So if you get the SAME amount (back) that you put 10 years ago, inflation has eroded its value.

` Default risk ` the person taking the money does not repay. Many co-operative banks, some nbfcs, some small business owners, may fall in this category.

` Delay risk ` if the government of India decides to postpone your PPF payment by 10 years what will you do? Looks odd, but remember some politicians may decide that all amounts above Rs 0.5 milllion should be paid in installments you may have to grin and bear it.

- You take the risk, but if the company does well your rewards do not increase.

- Debt is not risky in the short run, but it is risky in the LONG RUN.

2a. To invest like an owner means you are joining a company as its partner. This obviously means you get a portion of the company, you get the accounts of the company, they report to you on a quarterly basis, they allow you to participate in the well being of the company, ….all the perks of ownership.

Advantages:

1. You get to participate in the well being and in the ill being of the company.
2. When the company does well, you get a fantastic hedge against inflation
3. You get dividends and price appreciation as rewards for holding shares

Shortcomings:

- Stock picking is not just watching TV and buying the `hottest stocks.` It takes a lot of effort to pick a good stock, to structure a portfolio and keep allocating resources to the correct companies.

- It is very risky in the short run
- You require a good head, and a greater stomach to make money with shares

2b. Not enough attention is paid by people to investment in real estate (I mean actual, active investing, not buying a house and hope it will appreciate). If you can keep buying properties, rent it out, sell when appropriate, real estate will also give you an excellent inflation adjusted return. The advantages are that in a worst case scenario, you can use the assets, however it requires a lot of expertise. Also individual real estate calls are complicated (Real estate mutual funds – we have been hearing about it for long, hope it happens fast). A very unstructured, unsupervised market. If you find a good advisor, you are blessed. My real estate portfolio is with a veteran who gives me stunning returns.

2c. Starting / Partnering a small business! Small business is big business. Most of the world economy is supported by the small business owner. Most of the jobs are created by them. Their media share is much less than the market share that the small guys have!

I hope I kept is simple. My wealth creation has some formulae. One of them is to do all four:

- Invest in a good portfolio (mutual fund or unit linked insurance with a small recurring charge)
- Select a good fund manager (I mean fund house)
- Do an SIP
- Think long term ? I mean 10+ years

If you do all four, I daresay you can look at Warren Buffet and say, “Sir I listened to your rule number 1. I have not made losses.“ That is great!

P V Subramanyam is a financial trainer and can be contacted at pvsubramanyam@gmail.com

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