Can you believe this…if you are a middle class Indian?

I found it a little amusing…but not difficult to believe. When I spoke to him, I just heard some of his expenses – Rs. 3000 for a gift for a colleague’s wedding, EMI on a car, and EMI on a motorcycle. Rented house – supporting his parents so paying Rs. 23,000 as rent.

These were too adhoc, so I did not want to be judgmental. So I asked him to maintain accounts for at least a couple of months before I could comment….and here are the expenses:

i was not as stunned to see this. This guy is about 28 years of age – works as an accountant – and as he himself admits, he is well paid. He is still a bachelor, says he is not a big spender – and has ZERO savings – except for some mutual funds (80C), nsc, and ppf.

I said my life style is very different, cannot comment on yours.

However readers are welcome to comment. He reads my blog….:-)

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All the advise that you get must be saying ‘Look you jerk you do not know how to handle your money..give it to a mutual fund, life insurance company, brokerage house…and they will manage it for you’ …correct?

Well most of the financial media, the people who write, the people who appear on the TV have a vested interest in the Managed Money Industry. Hence there seems to be a bias against managing your own money without the help of fund managers.

Let us look at some of the solutions that I have seen people use effectively:

1. Buy a house and give it on rent: No planner will give you this advise – unless he is a builder or at least an agent! I am not even saying this is a good idea or a bad idea, but such ideas are rarely considered as feasible!

2. Build your own portfolio: I am dead against direct investing by the ‘retail guy’ . However I have seen many very successful investors too. One such person is now a very senior person in a big group. He has created a Rs. 10 crore corpus – apart from his real estate holdings and his ESOPs. Alas he has very little investment in debt products – except the customary PPF, nsc, etc.

3. Invest in Equities in their ’70s: My father is an investor beyond the age of 82…simply because he has a full equity portfolio and his dividend income is far greater than his total expenses…giving him a surplus. Debt instruments and debt  mutual funds have accumulated enough for him and my mother…..

4. Buy a house in a place where older people are treated reasonably well and servants are available. In a worst case scenario the house can be sold, along with the furniture -and you can shift to a smaller place. Makes sense to downsize the house..as you get older.

5. Create your own pension like buying National Savings certificates – every quarter and knowing that 7 years from now it will mature every quarter.

Unfortunately none of these ideas make money for the distributor…and some are so tightly priced that you will not see any money being made by any of the customers…

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Unless your parents have set the Thames, Ganges, Kosi, Nile on fire, chances are they have not managed their investments well. They may have done well, but it may not have been their strategy – could be luck!

So here are somethings that your parents / elders / teachers may tell you…and you should…ignore! Let me list 10 of them first:

1. Do something, do not just sit there: at least my mom has told me this a million times! In investing as in playing a sport – leisure/ recovery time  is just as important. Like a war – you prepare for 361 days and fight for 4. While investing you invest and then sit tight for long periods of time. You do not ‘have’ to do something. If you do something it has to be as a part of the overall strategy.

2. PPF, LIC, National savings certificate, etc. are safe investments: Well they are the best way for the government to get an unending source of money, nothing else. Post inflation and post tax all these investments WILL SURELY yield a NEGATIVE return. Remember it is the borrower who can decide the rates. Extremely unfair, but that is the truth! These are at best SAVINGS products, not investment products.

3. Maximise your PPF: If you have Rs. 70,000 to invest in a year, only about Rs. 1000 should go to PPF. However if you are investing about Rs. 5-6L a year, max your PPF.

4. If your funds are not doing well, churn: Yes winners rotate, but losers stay at the bottom! …but if there is a well managed fund and it is not performing, do not churn. Look at the fund manager, see if there is a change. Check whether there is a cultural change in the organisation. See the portfolio composition. If there is no change here, stay on in the fund. See why did you like it in the first place. Sadly investment monitoring is a process monitoring not a result monitoring.

5. Read the newspapers, be well informed, and act: The new theory is be well informed, but think for yourself! The media is not a place where you can learn. The standards are not exactly the highest in terms of quality. Also there is too much sensationalism even in the financial news. The best thing is to perhaps not read the pink papers…many have turned yellow.

6. Good things are expensive. The more expensive they are the better the thing. Perhaps true for all products OTHER than funds. The only thing within your control are the expenses that the fund manager charges. Also the way Sebi has structured the charges, as the size of the fund increases costs REDUCE. So a fund with a bigger corpus (say Rs. 9000 crores) equity fund will charge you less than a fund with a smaller corpus of say Rs. 3000 crores.

7. See your funds returns, if it is not good churn: Not to be confused with point no. 4: If your fund is not performing well, learn with what to compare. In a year where the Sensex has given you a return of -4.5% p.a. if your fund has fallen by only 1% – your fund is doing well. People compare previous year return to current year’s return. Learn how to compare, then compare, and then decide what to do.

8. See the fund ratings and invest in 5 star rated funds: The stupidest move! Star ratings are sold for getting ads. Not for the retail investor to use. As the total number of funds increase, the total number of 5* rated funds will keep increasing! Raters say ‘past is not an indicator of the future’ but anchors keep saying ‘buy it, it is a 5* rated fund’. The rating is one of the most cruel jokes on the investor. It means, nothing for investing. Just ignore the ratings. I am seriously considering starting a rating agency – and my lowest rating would be 5…then keep going up to 10! So my WORST fund would be 5* and best would be 10*. How does it matter? So be careful about the rater!!

9. Indexing works in developed markets, not India: If you do not want to worry and make mistakes, stick to an index funds like Templeton India fund (Sensex). It will not give you sleepless nights. Indexing will work in India over the next 10 years for sure.

10. Active management of a fund will help you compete with the best (please buy my news magazine is what they mean!). They also help you beat a recession, etc. Complete bull. Markets are a baby of ups and downs. The best fund managers can and do add value, but it does not mean they can beat the index consistently and avoid a bear run. Normally their performance is compared to the benchmark.

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Let us take a typical ‘media’ answer to a query which is generic:

Sir, I am 45 years old and my portfolio consists of the following schemes what should I do: I do 10 SIPs of Rs. 1000 each in Kotak K 30, Reliance Natural Resources, SBI Contra, Prudential Icici Discovery, Hdfc Equity, Sundaram Paribas Midcap, Reliance vision, Templeton Equity Income fund, Quantum Equity, Franklin Prima, and Escorts Growth fund. What should I do?

Media answer:

You have a very good portfolio spread across a lot of fund houses, a full range of schemes, and really you need to do nothing. Continue them all. However since you are 15 years near retirement you should convert some of these schemes to balanced schemes. So please invest in Principal Balanced fund, Tata Balanced fund and a Birla balanced scheme. That will give your portfolio a nice balance.

A bad financial planner: Sir, take a ULIP instead of so many schemes!

A good financial planner: Sir- Where are your other investments?

Client: My take home salary is about Rs. 82,000 – and I invest in own pf, ppf, nsc, and bank fixed deposits. I have no equity other than the SIPs that I am doing. I have about Rs. 40 lakhs in debt instruments, Rs. 12 lakhs in gold and a house.

FP: Sir you have too many SIPs. Just concentrate on 3 funds sir – Hdfc Top 200, Franklin India Bluechip and Prudential Icici Discovery. Please make the amounts Rs. 5000 each – you need to have much more equity than what you currently have. Your debt instruments will not protect you from inflation – you are likely to live for another 30 years (at least) from today onwards!

Sir  the only instrument that protects you from inflation is equity. So please do this. I am not suggesting any balanced funds for you because you already have so many debt instruments. As you increase your allocation to equities, we will increase some more schemes, but currently 3 schemes are what you need. Take a term insurance to protect your wife and child – just in case. You can buy the policy from wherever you want – choose the cheapest one. Only reason why I am not suggesting an index fund is that all these schemes beat the index pretty regularly and by a wide margin.

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If you are wondering what this means for doctors, read on!

Very rarely do doctors seek advice on investing in their own ‘profession’ – and try to make it a business. They seek outside investments. Clearly wealth creation from your own ‘profession’ – being converted into a business is a great thing to do. Is it possible for a doctor to do so? I think yes. Ask Dr. Prathap Reddy – the founder of Apollo Hospitals.

If you are a doctor earning well it is time you tried converting the profession into a business. This means you are earning not only on your skills as a doctor, but also on the ability to leverage the skills as a doctor-cum-businessman. What are the steps required for this metamorphosis from a larvae to a butterfly?

Well the following steps would be nice:

1.    Decide on how to grow the business – geographically (chain of small clinics with your brand name?) or by creating a hospital.

2.    Once you decide to set up a hospital – look for a good location where you can one day grow to be a really big hospital.

3.    Make a business plan – make your strategy, invest in resources, work the strategy and just do it!

4.    Be ready to let go of non medical functions to a partner with good management skills. Such a

person should be brought in early in life so that the business can grow.

5.    Spend time on good systems, people, marketing, brand building, etc.

6.    Keep in mind funding sources – angel investors, venture capital and then listing. It is clearly the best way to create big wealth.

7.    Creating a big business has to start with a nice idea, perhaps a couple of like minded people to team up with you and the guts to launch the business.

stop listening to people who ask doctors to do SIP, ULIP, PPF,…..that is for employees. You have a choice of where to invest – make that choice wisely. Stop buying properties and some stupid shares just because you got some advise. The adviser needs to be changed, that is all.

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One major (I mean MAJOR) DRAWBACK is you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage.

Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be invested BACK in an annuity. Let us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…looks good? Well depends on what you are capable of doing with your own money!

My suggestion is very simple. If a person has accumulated money in N P S, he should be allowed to withdraw HALF and the other half HE/SHE should be allowed to transfer to

- Senior Citizen Yojana or PPF. This will ensure that my corpus runs only the risk of inflation – from the age of say 70.

If certainty is brought to the end use of the NPS, I guess more people will be willing to save / invest in the NPS.

WANT YOUR FEEDBACK please…wish to forward the views of the people to the current powers that be in the NPS. Government will be more than happy to make this work….any other ideas?

Based on the feedback that I have got for this post (I did the original post on April 25) I need to clarify (this is dated 7th May, 2010) that what happens to the bulk of your money is more or less the same in any pension plan. So whether it is a Lic pension plan, a sbi pension plan, a Kotak pension plan, a Hdfc pension plan, a Max New York Life pension plan, a sbi life pension plan, a icici prudential pension plan, it does not matter.

Also the end use of the pension amount is the same immaterial of whether it is a traditional / classic pension plan or a unit linked pension plan. So whether it is a sbi ulip, Kotak ulip, Birla ulip, a Hdfc ulip or a lic ulip, reliance ulip, icici prudential ulip – if it is BOUGHT AS A PENSION plan, the end result is the same.

The Pension accumulator and ‘payer’ gets to keep A BIG CHUNK OF THE CORPUS and pay you a pension – and it may be very different from what a pension calculator said you need to live! So please be careful about ANY PENSION plan – not just the NPS!

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· Too many people I meet are Income rich and balance sheet poor: If you earn Rs.1, 500,000 a year, but spend Rs.1.503, 000, you are broke, worse off than the person who earns Rs.500, 000 but spends only Rs.450, 000. You may be income-statement rich, but you are asset poor. Not enough people are able to realize that the amount of money in the retirement or pension kitty and the amount of life insurance is a function of your CURRENT life style, not the lifestyle you had 5 years back. Financial security comes from being able to live off your assets – and not need the job by the time you are 45.

· Start learning about money – it is not a difficult task. Start taking interest in how credit cards work, how to live within a budget, mutual funds, unit linked plans, financial goal setting, making a will, etc. Managing money is not in any academic syllabus at any academic institution, but you still need to know it. So go ahead, and learn. More importantly, for the women who are reading this article please ensure that you learn about money and encourage your friends, colleagues, daughters, daughters in law, etc. to learn about money. Money is not a “man” thing as much as “cooking” is not a “woman” thing.

· Don’t confuse debt with wealth. If you buy a Rs.8 million house with a Rs.7.75 million mortgage, you are not worth Rs.8 million. You are Rs.7.75 million in debt. Last week when my broker bought a car, he did not borrow any portion of the Rs. 14 lakhs that he needed to buy it. His logic was simple; many of the investments that he had made would yield him less than 15% p.a return – including his PPF. His logic was why should you borrow at a rate higher than the rate at which you lend? Most rich people do not borrow because they do not have money. They borrow because their assets are capable of earning much more than the rate at which they borrow. And as Robert Kiyosaki says in his book the rich buy the boring (my terminology) assets first and then use the income from these assets to buy the “luxuries” that we cannot live without.

· Get good advice: And then listen to them. A great portfolio manager manages my equity portfolio – and he keeps giving good results in all kinds of markets. My role in the good performance of my portfolio is simple – I let him be. Financial advisors like doctors are busy and they like involved and non-interfering clients. You may need a financial planner, a portfolio manager, and a banker. Or a simple mutual fund distributor. Once you have found a good advisor, trust her to perform.

· Retire gracefully: Plan for your retirement. Retirement is an amount of money, not an age. If you are a business owner, for instance, don’t assume you will be able to sell it for the “right” price when you are ready to retire. Keep shifting some money from “business” to the “personal” bucket of finances. Rather than put all your eggs in one basket, set aside a percentage of all earnings in conservative assets to help guarantee a secure retirement, no matter what happens to your other assets.

· Protect with life insurance. is the item that people pay attention to only when approached by an agent. Life insurance is a tremendous tool to help achieve distribution goals, all generally income-tax-free. It puts tremendous amount of liquidity and gives peace of mind. I know men who have constantly told their wives “use the life insurance money to pay off the mortgage if I were not around”. I would rather have guys telling their wives “I have a life insurance policy and Saki is our financial planner. I trust her, and so can you. Ask her how to collect the insurance money and consultatively chose an investment option. Use the notes we made at the financial planning seminar we attended”. Ha, that will be the day. If you do all this, will your wealth give you security? Well there are no “assured return” schemes any more. You need to keep learning and trying. However, by addressing the above issues, you can dramatically increase the potential for turning the wealth you’ve achieved into long-term financial security for yourself and for your loved ones.

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Secondly in a growing economy inflation is a real danger – and most people do not appreciate this risk. Why people do not appreciate this risk is of course innumeracy. It takes a complicated mind to understand simple things like compounding (inflation is negative compounding).

Though strictly speaking there is not too much to worry about a soverign default, there is a serious risk that an ambitious finance minister will delay the return of your money. Let us say the then finance minister decides to pay you in 10 instalments – yes alongwith interest, but…you know what I mean. Pushing PPF as a great ‘investment’ is a part of the ‘Conspiracy of the Rich’ theory by Robert Kiyosaki. If the government does not keep pushing articles showing how value is created in PPF (using power of compounding and nominal returns) how will they get money @ 8% in such large numbers? So a great con game is created, do not fall for it. Do politicians keep their moneys in PPF? Of course but it is a miniscule part of their wealth. Most of their wealth is kept in cash / kisan vikas patra / …etc. You guessed right, they can keep cash, you see!

So sorry for being a party pooper. If you have a 16 year view (or 20) put your money in a plan with say 85% of the money in equities and 15% in a floater fund. Rebalance every 3-4 years. Surely you will outperform a PPf.

Let me share what I did with my wife’s money. She changed jobs – and her earlier job started paying her a pension. I invested that in Templeton India Pension Plan. Over the last 7-8 years that has become a SIP – and the returns are in the region of 14-20% p.a. Surely if it does under perform over the next few years, it would surely have outperformed ppf’s 8%.

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Investor: He is supposed to be the biggest beneficiary. Most of them will not know about it. A few handful of people (who had the option even earlier) can go direct. However to the best of my knowledge the reluctance to download the form, print, fill and courier it to the fund house is something they will not do. So some of them will benefit. Others might now buy more unit linked plans and other debt instruments like ppf, pf, etc. So the total amounts invested in mutual funds may actually go down.

Mutual Fund houses: this is a funny game! At any point of time there is some marketing guy’s (or gal’s) ego involved in creating AUM so they will continue to pay 2% as commission in some form or the other. It will either be a straight 2% upfront commission or 1% for all and 2% for the bigger boys or some such form. All mutual fund promoters believe one day some buyer will come and pay 8% of AUM and buy the business they have built.  The worry is one day if UTI or Hdfc Amc gets listed…and at a price less than 3% of EQUITY aum the lid will be blown. It is also possible that some shareholder will get impatient and pull the plug. That day we will all ACCEPT that the king was not wearing clothes.

Mutual Fund Distributors (big): The big daddies like Citibank, Hdfc bank, Icicibank, Standard Chartered bank, State Bank of India, etc. will refocus on life insurance in the immediate short term. They will E-enable their clients to invest in mutual funds through an electronic platform. This will save them servicing costs. Some of them will charge the client (who will sign the one-time fee form!). They will go to fund houses and create new STRUCTURED PRODUCTS with a ‘fee’ model – the fee will be deducted from the clients account directly. This should not be difficult to do. Anyway many banks had brought down the share of mutual fund to 20% of the sales and about 10% of the revenue – so they really will not be hurt much. Apart from this they will charge ‘use of branch space’ ; ‘advertising fee’ – for posters in branches, marketing expenses, …AND any other expense that can be taken directly from the NAV. Frankly these guys are not too concerned. In a worst case scenario they will sell only their own schemes – for Icici, SBI, Kotak – the money stays in the same P&L and B/ Sheet. In case of Hdfc the income on distribution goes to the bank and the amc fee goes to the amc – a sister concern! It is also possible that the banks who are more confident about their relationships will charge a fee – which could be a %age of the sum invested. The question is not whether the customers will pay, but how the banks term it, whether the media writes about it, and how the customers react!

continued… keep reading

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PPF , PF, EPFO , Mutual Fund Pension Schemes, Retirement Planning products from Insurance Companies, bank fixed deposits and post office schemes. A very small part of the population created its own customized Individual Products. This could be a couple of extra properties creating rental income, shares creating dividend income etc. Many people of the earlier generation would be dependant on their children – willingly, unwillingly, happily or unhappily.

Welcome the NPS -  the new Avatar for Retirement Planning. Created by the government of India it has Some major advantages of the NPS. Let us look at them.

Costs Involved:
i) The total costs involved in terms of % are minimal – cheapest in the world.
ii) The charges are under various heads such as CRA Charges, PoP Charges, Custodial Charges and Fund   Management Charges.
iii)  Flexibility to choose the fund manager, Flexibility to choose the asset allocation.
iv) Portability across the geographical location, Transparency.

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