Free debt counseling

I would be providing debt counseling to individuals who are debt ridden or have liquidity crisis. Please respond to this post along with your recommended mode of communication:
1. Email
2. Phone
3. Meeting in person (currently only feasible in Bangalore)
The idea is not to be selling any financial products/ponzi schemes but to help one set realistic financial goals and work towards achieving it. One of the biggest problem I see in India is mis-selling of products by agents who care only about their commissions. As a result the pyramid schemes are sold as entrepreneurial ventures, the saving schemes are sold as insurance and tax saving schemes rob the individuals of their precious little savings.
If this initiative is successful then probably I could rope in a few more friends to provide a similar service in Delhi and Mumbai. Also you could be doing a great service to your friends and colleagues if you could request your HR to permit me hold a seminar in one of the company’s conference halls or maybe even man a temporary booth in your cafeteria. I would be glad to provide my credentials for the same.


Pension Funds in India

HDFC recently tried to sell me “Classic Pension Insurance Plan”
Here are some of the salient features of the plan:
It is a 30 year plan where for the first 15 years, I would have to shell 1Lakh rupees every year and after 30 years (Nov 2041), I can expect:
1. Guaranteed benefit of 2,488,809/-: Now that is not really a return because it works out a return of 2.135% I guess my savings bank account can deliver more.
2. Same can be said about life cover because the returns one gets a return of 6% on the investment irrespective of the fund performance.
3. If the fund delivers 8% p.a. returns then after 30 years you get a 4.8% return or 45Lakh.
4. If the fund delivers a 10% returns then after 30 years you get an 8.7% return or 109Lakhs.
5. There is a surrender value: You invest 3 Lakhs over 3 years and you get 1L guaranteed in the 4 year. Even if your fund delivers 10% returns, you get 2.8Lakhs. So basically there are severe penalties for premature withdrawal.
Here is my analysis:
1. PPF gives me 8.5% guaranteed. So my returns from PPF match HDFC’s optimistic scenario.
2. If I die even 29 years 11 months and 29 days from the start of the policy, instead of getting 109 Lakhs return, I get only 55 Lakhs. So HDFC will ROB me of 50% of my savings.
3. PPF allows me to take loan/do a premature withdrawal (after 4 years) without any significant penalties. While in HDFC I do not only lose my interest but also the money I have invested.
4. PPF allows me to set the contribution level based on my financial situation. While HDFC will charge a huge penalty if try to delay/reduce my annual payment.
All these make me wonder WHY on EARTH will I invest in HDFC? But again there is no dearth of fools in the planet.
PS: Although PPF is a 15 year plan, you can extend it in 5 year blocks till your end of life.


Bonds Explained: Part II: Bonds vs. Debt Funds

This is in continuation with the Bond vs FD post. Please refer to it for some technical jargons.
Contrary to popular perception, one can actually lose money in a guild fund. When the interest rate goes up, the bond becomes less valuable. (as bonds offering higher interest rate are available in the market) For more details please refer to Macaulay Duration ( Also fund managers are required by law to disclose their portfolio and they usually don’t churn their portfolio frequently enough. So if I were you, instead of investing in a guild fund, I would invest directly into the individuals bonds and save on the Fund Management fee, exit fees etc.
Why my financial planner never told me about them. Simple look at who is paying them…. Usually it is the firm selling the financial products. So if you invest in a 15 year bond then he/she can be assured that you won’t touch that money for the next 15 years. So there goes all the commission that could be made when you switched from one fund to another every 6 months.
PS: There is a slight difference in tax implication in various instruments, but since I don’t have an official degree in Tax, I would advise to consult your tax planner.


Property Prices

I am sure you guys must have read at least 1000 articles on property prices right now. So consider this article as a musing/ or notes to myself.
Being 28 years old with a stable job and a family’s future to secure, I am under tremendous peer pressure to invest in real estate. However I have second thoughts in investing 40L (about $100,000/- USD) for a small 1000 square feet big apartment or 1,200 square feet plot.
If I look at the affordability metrics, then I believe anybody earning 6L p.a. should be able to afford a 2 BHK house by paying no more than 40% of basic (or about 30% of his post tax take-home). So that is about 150,000/- INR per annum or 12,500/- per month. The rental for a decent 2bhk is around that value (this includes maintenance), but the opportunity cost on the house value is not of this level. Because by this calculation a 2BHK should not cost more than 15,00,000/- which is about 40% of the current valuation.
The primary reason for this mismatch is inflation/property appreciation. Rental in India is about 3% of the property value (i.e. a 10,00,000/- property would be rented out for 30,000/- p.a. or 2,500/- per month) and the owner expects that the rent and property value should increase for 7% per year (for an apartment).
But these days I have beginning to doubt this very hypothesis.
Firstly being a firm believer in the affordability pricing theory of assets, I would say that an antique, an autographed book, or even a stamp is worth what an collector can afford to pay. Land has become so expensive that no longer it is possible for someone to buy it unless they are ready to commit 60-70% of their income in housing. That includes lost interest on your own money; bank EMIs, maintenance of the property etc. So unless the salaries continue to grow at 15-20% per year for eternity, I don’t see housing expenses going down to 30-40% of take home, which to me is the worldwide average (and also the comfort zone for most individuals).
Secondly, I have beginning to doubt the very notion that an apartment is an asset. A land might be an asset which appreciates over time, but I know for sure the concrete structure crumbles over time. Periodically one has to pay to keep it from crumbling down and yet it will not last forever. Any civil engineer will corroborate, but no-one designs the structure to last for more than 60 years. With the quality of construction that our contractors do in order to meet their schedules and cut coroners, I would be surprised if they lasted for more than 40 years. After 20 years the apartment is labeled as old-fashioned, not too much attractive etc. and its value goes down. So after 20-40 years what is left is part ownership in a tiny piece of land. Surely that is not what you would intend to leave for your kids as your legacy and their inheritance.
Thirdly, the notion that the land prices will increase and the city will keep on expanding indefinitely forever is not what I am comfortable with. Pick any city and you would see the most coveted areas shifting over time. Old areas become too crowded for the rich and affluent people to live in. New malls/commercial centers/offices cause a shift in people’s commuting habits. Metro/ring roads/flyover encourage people to locate near them etc. Hence if I buy a prime property today, it might not be so much valued after 10-20 years. Buying land in the outskirts and hoping it to appreciate become the city would move in its direction is akin to speculation. My parents bought a house in Greater Greater Greater Greater Noida… So even though he calls it in Delhi, it took me 3 hours from the Railway Station (Connaught Place) to reach the spot. I if soon builders would be quoting land in Jaipur by saying just 6 hours away from Delhi… would be recognized as part of Delhi in another 5 years.
Remember whenever you buy a house look at the average occupant. If he/she cannot afford to pay the interest on the property price, then probably the property is overvalued.
It might be return of the saying “Fool make houses for the smart to rent into” but then I have not seen the future and I might be wrong. Comments/directions/guidance are more than welcome.

education Investing

Personal Financial Planning

A friend asked me yesterday how one should plan his/her finances. At what stage in life where should the money go and how best to plan my taxes.

After spending a couple of hours listening to his idea, this is what we came up with:
1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 🙂
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?


Financial Planning

I was giving my regular financial advice to a friend of mine when I happened to ask him under whose name does he invest?
and to my surprise he said in the name of the sole Bread-Winner.

So I inquired around and asked other folks who are married to a housemaker and to my surprise I found very few of them actually did a regular investment in the spouses name. I wonder why?

The reason why I would invest in my spouse’s name would be:
1) Indian marriages are more or less stable and wives are more tolerant… so the risk is low.
2) In case of an premature demise, all unsecured loans would be settled against the assets owned by the male member… the spouse’s money cannot be touched. That way you can secure a decent living for your family.
3) Over time your investments are going to grow by leaps and bounds.

eg: the rent from a small 800sqfeet apartment can easily by 12k pm which is a salary in itself.
So by dividing your income over different members of the households you can save a lot on tax, and also prevent yourself hitting the highest IT Bracket and surcharges. Personal tax exemption limit enjoyed by a male taxpayer is Rs 1.10 lakh (Rs 110,000), while it is Rs 1.45 lakh (145,000) in the case of women taxpayers.

4) As per the IT Law, you can claim IT rebate only on 2 houses during your entire lifetime. However if your housewife is also an IT payer (because of rental, interest, stock market income) you can claim it double the number of times.