Conducted session on "Bitcoin - Past, Present and Future" for "Vadodara Individual Financial Advisor Association".

Future of GOLD is glittering???

Just thought of sharing some interesting facts about gold today.

There is roughly 7000 years (beginning of civilization) of history of gold.

We all seek permanency and gold comes near to that.

Gold does not get corroded or rusted. It is not soluble in any acid. It is very difficult to demolish.

Most of the gold digged from time immemorial is still in circulation.

So we may even be using the some of the gold (recycled) that was used in the times of Rama, Krishna, Buddha and Jesus.

It is very soft that you can beat the gold down so thin that sunrays can shine through it.

The quantity of steel poured in an hour in our planet is more than what has been poured for gold since the civilization. That is how limited the availability of the gold is.

It is estimated that total gold available (in circulation and storage) in the world is 1,65,000 tonnes.

1 tonne is 1000 Kgs. At Rs.3000/- a gram, the cost of 1kg of gold is Rs.30 lakhs. So 1 tonne of gold is worth Rs.300 crore.

Indians privately own anywhere between 15,000 to 20,000 tonnes of gold. Even pegging it at 15,000 tonnes, the value comes above Rs.45 lakhs crore.

Since I cannot not talk about equity, the entire fund management industry in the country only manages Rs.6 lakh crore worth of equity assets.

Indian government owns only around 550 tonnes of gold.

No one knows how much gold the Indian temples have.

Tirupathi is estimated to have gold worth Rs.90,000 crores. Around 4000 kgs of gold is offered annually by his devotees to Lord Balaji. Interestingly as per legend, Balaji borrowed from Kubera 1.14 crore coins of gold for his marriage. Marriages have always been expensive in this country. By any standard, Balaji’s wedding with Padmavathi is the most expensive marriage that has ever happened so far in our world.

Till few years ago, we never knew Lord Padmanabha is so rich. Is that why he is very relaxed (ananda sayanam)? The very conservative estimate suggests that the value of gold in his abode is around Rs.4 lakh crore.

Reading various estimates and guesstimates looks like we (including deities) may have even 30,000+ tonnes of gold in our country. So we own around 20% of the entire gold in the world.

This means at today’s price, we have Rs.90 lakh crore worth of gold. India can be amazingly rich and poor at the same time.

Since gold is so malleable, just one gram of gold can be beaten into a sheet of one square metre.

The entire gold available in the world today can easily fit within a cube measuring 67 feet. Just one good shipping container would do. Golden Voyage!

75% of the gold available today has been extracted only after 1910.

The U.S.government (Fed Reserve + FortKnox) has close to 10,000 tonnes of gold.

During great depression, in 1933, U.S. government banned private holding of gold. People were ordered to handover the gold they have and were provided instead with dollars of equivalent value. Once the process was over, the government devalued the currency by over 40% eroding people’s wealth overnight. This coupled with high inflation was an extremely tough time for its citizens.

This ban was subsequently lifted only in 1975 and Americans were again allowed to own gold.

Since China has lot of dollar or dollar denominated assets; they understand the above risk better than anybody else. Chinese people were not allowed to own gold for more than 40 years and possessing gold was a severely punishable offence. Sometime during last decade this ban was removed and China has been encouraging its citizens to buy gold and silver.

Talking about silver, Buffett who rarely touches commodity, purchased 37% of the entire silver available in the world (yes, you read it right) in late nineties and sold it some time in the middle of the last decade. I think that considering the growing industrial demand and limited supply then, he saw value in purchasing the same and selling it at a very good profit. Silver was selling at abysmally low prices during the time of his purchase.

Every year, the new gold produced / recycled is consumed 50% as jewellery, 40% for investments (including ETFs) and 10% for industry. I was under the impression gold has no industrial use whatsoever till one of our client told me that electronics industry uses gold.

Though South Africa has been one of the world’s largest producers of gold, its citizens were not allowed to own gold till 2009.

For sports fan, do you know that Olympic gold medal is not made of gold! A ‘gold’ medal contains only 6 grams of gold. Only till 1912 Olympics, the gold medals were actually made of gold.

In 1991, our country’s situation was so bad that 65 tonnes of gold was taken out of the country  and mortgaged to tide over external payment crisis.

If you are worried that gold’s supply would get exhausted soon, fear not!

About 10 billion tonnes – 10,000 million tonnes (yes, you read it right) of gold is estimated to be held in the oceans of the world. An economically viable model of extraction is being explored.

Necessity is the mother of invention. If gold prices continue to rise and if the demand would only increase, who knows, a technological innovation can happen in extracting gold from ocean.

May be we can all then plan for building with our own golden bathrooms and specially bath tub so that we can have a golden bath....

What about our bappida???

Time to make some NEW YEAR Resolutions

New Year is the time for celebration, gifts, drink and dance. But it also reminds you to take some resolutions, so that New Year can be better than the one just passed by. So this year let’s make some of the following resolutions to make a better managed financial life. It will help you to reach your financial goals.

1) Contingency Planning: First thing you should do is plan a contingency fund may be 3-6 months of your expenses, depending on kind of a job or business you are in. Always create and maintain an emergency fund. This is the only source which you can access in case of emergency may be medical or job loss.

2) Prioritise your Debts: Understand not all debt is same. Make list of all your debt and try to get rid of the ones against which you are paying highest rate of interest. It doesn’t make sense to invest your money in an Fd or Mutual fund when you are paying 30% interest on your credit card due.

3) Budgeting: If you haven’t make a budget then it is the time you should start making one. Budgeting help you to plan your bigger expenses and help you avoid impulsive buying.

4) Know your goals: Our tagline is “Aao Sapno Ko TARIKH De” which means first list down your dreams and then put a date by when or in which year I want to achieve it. To start any planning we need to list down what all we want to achieve. So this new year just make a list of financial goals you wish to achieve. Then break it into 2 parts i.e need and want. Needs are the one which in any circumstances you have to achieve e.g. your child’s education, Daughter’s marriage or your retirement. The balance left out will be your wants e.g. owning a vacation home, foreign trip every year etc. From the definition it is clear your needs will be given first priority and wants after that.

5) Clean up: Every investor investment bucket is filled up with the products advised by a friend, neighbor or a relative. Just review them whether they still holds some value. There are lot of better alternative products are available especially in mutual fund space. Which are transparent as well as cost and tax efficient. So close down all such products and switch it to better alternative. May be you need to pay some penalty today but in long term it can add multiples of such penalties to your wealth.

6) Know where you money goes: Gaining control of your financial situation and using money to help you reach your goals is possible, but first you must recognize where your money goes. Evaluate your habits. Start by jotting down everything you think you spend money on during a one-month period. Within the expenses differentiate between discretionary (e.g Eating our, Watching movies, replacing gadgets more frequently etc) and non discretionary (e.g. Electricity bill, Rent, Grocery etc). Start cutting down on discretionary expenses.

7) Avoid tips or offers giving assured, fixed and high returns: Remember every extra % of return offered over and above market return comes with that extra % of risk, so try to shy away from the schemes which doubles your money in very short span. Also check investments products you are investing in are regulated by govt. Appointed regulator and avoid ponzy or tip based investment. Your friend or relative might have recommended that but it is you who loses money when it bursts.

8) Consult a Financial Advisor: It is always beneficial in long run to seek professional help. In short run it might look like a cost but over a period of time, it would help you to avoid unnecessary investments. He will guide and a hand holds you during your financial journey and helps you reach your goals comfortably.

9) Do some Charity : Lastly do not forget to do some charity, help the people who are less fortunate. Remember we are lucky that we have access to the things which atleast 50% of the population don’t have.

So let’s create a bright future for ourselves and for the country. Wish you a very Happy and Prosperous New Year.

Financial Mathematics:Magical Numbers 72,114 and 144

It is always a tedious job to calculate rate of return on various products to take investment decisions.

In financial mathematics there are certain magical numbers which would help you in calculating the rate of return for doubling,tripling or quadrupling or if rate of return is available it can help you to calculate time required to double, triple or quadruple your capital

Let us find out how :

Take an example of Mr.Doguna who has been advised by one of his agent that there is an investment opportunity whereby he can double his money in 8 years. Now Mr.Doguna wishes to calculate the rate of return of the same. 

What he need to do is just divide 72 by the no. of years. i.e. 72/8 = 9%. 

So the approximate rate of return would be 9%.Although it doesn't give an exact result but you can have a rough calculation by doing this.

Lets say Mr.Doguna got an rate of interest of 12% and now he wishes to calculate the time period required to double his amount then he need to divide 72 by rate of interest i.e.

72/12 = 6 years (approx.)

Similarly you can calculate period/rate to triple your money by dividing 114 by the available variable and to quadruple replace magical no.114 by 144. 

for example if you wish to triple your money in 12 years required rate of interest would be 114/12= 9.50%.

To quadruple your money in 16 years required rate of return would be 144/16 = 9%.

In above example if rate of return is available and you wish to calculate time period divide magical nos. by rate of return.

Hope, above nos, will help you to make certain calculations on your fingertip without depending on software, excel sheet or financial calculators to take informed decisions.

Key to WEALTH CREATION - Asset Allocation

Asset allocation plays a key role in every investors financial planning.

If, I get a chance to own a IPL Team "Dream Achievers'. How should I go for buying players,during auction.Should I buy all 15 team members as Fast Bowlers or All Rounders or Spinners or Hard Hitters. No, I need to make strategy looking at different options available, their pricing and my budget. According to that I will buy 7-8 good Batsman, 2-3 Spinners, Obviously a Wicket Keeper and 4-5 Fast bowlers, Possibly 2-3 of them being all rounders.

Depending on the ground conditions and opponent I decide the final team on the Jumping Japak Jumpak Jumpak. I might have 3 spinners and 2 pacers or 4 pacer and 1 spinner might send opener as Mr.Pinch hitter or Mr.Reliable. So I  need to put in place some strategy in buying the players as well as before start of the match.

Similarly in investments, all asset classes doesn't work at all the time, But perform in cycles. Hence if one were to invest all his savings in a single asset class then certainly he is inviting a big trouble for his future.As we all know world of finance is very uncertain and sticking to your asset allocation hold the key to success. 

Financial Planners uses asset allocation strategies not only to create wealth, but also to protect it during volatile times. It is not the maximisation of returns, but optimisation of returns that becomes the goal. This process plays a key role in determining the risk and return from your portfolio. Broadly speaking, the portfolio’s asset mix should reflect your risk taking capacities and goals. Financial Planners use different strategies of building asset allocations, some of them as follows :

Strategic Asset Allocation

Strategic allocation is typically the first stage in the investment process. Based on the investor’s long-term objectives, an initial portfolio is build. It is the backbone of any investment strategy. This often forms the basic framework of an investor’s portfolio. This is a proportional combination of assets based on expected rates of return for each asset class. For example, if stocks have historically given a return of 14% per year and bonds have returned 8% per year, a mix of 50% stocks and 50% bonds would be expected to return 11% per year. Strategic asset allocation generally implies a buy-and-hold strategy. Strategic asset allocation defines the boundary of risk, and it is these boundaries that help control portfolio risk.

Constant-Weighting Asset Allocation

Strategic asset allocation has its drawbacks as it entails a buy-and-hold strategy even if a change in the value of assets causes a drift from the initially established policy mix.The constant weighing strategy helps you to continuously rebalance your portfolio. For example, if gold was declining in value, you would purchase more of it to maintain its weightage and if its value increased you should sell it. There are no hard-and-fast rules for the timing of portfolio rebalancing under strategic or constant-weighting asset allocation. Most Planners advises rebalancing to its original mix when any asset class moves more than 5-7% from its original value or alternatively on semi annual basis.

Tactical Asset Allocation

Most of the Indian investor I have follows this allocation strategy without knowing risk associated with it. There are investors who constantly want to seek returns out of market opportunities that arise. Hence, they go in for short term tactical calls. Such tactical calls create room for capitalising on unusual or exceptional investment opportunities. This is like timing the market to participate in the fluctuations and volatility that arise due to market conditions. For example, shifting a part of the portfolio from large cap stocks to mid cap stocks to take advantage of the environment is a tactical call. Tactical allocations being opportunistic in nature, Investor are advised to always prefer to maintain clear time-based and value-based entry and exit points to ensure better management. Personally, I feel it is impossible to time the market on long term basis, it is something like predicting future and one wrong call can affect your financial plan drastically.

Dynamic Asset Allocation

It is for aggressive investors who want to ride momentum at times. So, if the stock market is showing weakness, investor sell anticipating a further fall. If it is going up, he buys anticipating a further rise. Here you constantly adjust the mix of assets as markets rise and fall. This is the opposite of constant-weighting strategy. As the entire portfolio is available for action, amateur investors may turn hyper active. Especially in the high volatile times, acting on all types of information can lead to high transaction costs. Also, the tax treatment of the returns turns to disadvantages if you churn your portfolio too much. 

Finally, victory of match depends on the strategy applied by captain in selecting the players as well as ground (market) conditions.

Similarly, to achieve financial goals as well as creating wealth every investor need to follow the asset allocation strategy and stick to it in different market conditions.Financial planners plays a big role in helping them to select a strategy which suits their risk profile and tries to bring in required discipline.

Owning a house or business "OH MY GOD"

After a long time got opportunity to watch a fantastic movie "OH MY GOD". There are certain movies like Munnabhai MBBS, 3idiots, Rang De Basanti, Tare Zameen Par , can shake you inside. It has power to bring in the change required.

Huge success of above movies confirmed that Indian society is ready to appraise the libertarian attitude and the Indian  youth is daring enough to raise the issues of collectivistic problems and is ready to denounce them, to fight against them.

I know this is not a movie review blog, but together with certain other facts shown in the movie "OH MY GOD" a very relevant point related to your financial planning is also been highlighted and that is insuring your HOUSE as well as your BUSINESS.

The biggest asset an individual builds during his life is his own house and business. A small accident can wipe out your earnings of life. How many of us have overlooked at insuring these investments? The requirement of home insurance is overlooked and understated in India.

While owning a house today, what youngsters forget is the protection of their property. The financial institutions providing housing loans ensure that the individual gets himself a home loan protection policy but no one ever bothers to insure the house that is being bought. There are many convenient options available in the market that helps one not only insure the property but also the belongings.

Let's know home insurance

Home insurance plans allow you to protect your house and household items against fire and other perils, such as theft, burglary, accidental breakdowns and so on. If you intend to buy house holders' insurance, you should buy a policy that provides cover for your house as well as contents in it.

Points to remember before buying home insurance

Make sure that you read and understand the policy coverage, exceptions, exclusions in the plan. So that you don't end up like Kanjibhai in the movie. Your cover therefore, should include your house, belongings, liability to others if some mishap occurs and your living exps., if you are forced to stay in rented house. Basically, if a disaster occurs, your policy should help you to rebuild your home and replace its contents.

Take an inventory of your possessions. If you have to file a claim, two things need to be done - prove you own certain items and verify their value. Some insurance companies advise clients to go through their homes with a video camera, walk through each room, and ensure that you have everything you own, recorded.

Always make sure that you update your policy value to cover various assets that you might add to your house as well as taking care of rate of inflation.

Eligibility

Any resident Indian who is owner and/or occupant of the property can purchase a home insurance policy.

Coverage

The covers provided are :

Fire and Allied Perils - Building and Contents , Burglary (optional), Unlike shown in movie you can also take a cover for earthquake by paying additional nominal premium.

Key features

An individual with an independent house or a flat can opt for this benefit and applicable to any residential building.It covers building against risks like Fire,Lightning,Storm, Riots, Strike and Malicious damage.

In city like vadodara an house with construction area of 2500 sq.ft considering construction cost be Rs1000/sq.ft , Total cost Rs.2500000.00 you need to pay an annual premium in the range of 1300 to 1400.

Remember to cover your house for construction cost and not for the value at which you bought, as it also includes cost of land.

So, put your house insurance to be on top priority.

Be a Lazy Investor - Saving Interest deregulated

Last week RBI came out with one of the historic decision in Indian banking history by freeing the savings bank rate. It did came out like a Diwali gift from RBI governor.I think every bank account holder would feel delighted with this decision.

Within hours of the Mr.Subbarao's announcement two of the private banks came with an advertisement about increase in Saving interest rate of full page in leading national news paper.

No doubt it will create a big hole in the profitability of some of the big banks balance sheet. But, will it really benefit account holders?

Let us evaluate:

If your average balance in a saving account remain at a level of Rs.1.00 Lac, you would get richer by Rs.166 per month and for balance more then Rs.1.00 Lac additional 50 basis points.

I think for an Lazy investor who holds such big balances in his savings account is not bothered of getting Rs.166.00 or Rs.500 per month. If he would have been really concerned might have shifted his money to Liquid funds offered by mutual funds.

These are the funds favorite with corporates but retail investor were never keen to invest in it. Liquid funds can easily fill in the gap between saving bank account and bank FD's. It gives you return more than saving account (Presently in the range of 8.5 - 9%). The only difference is you can access funds at 1 day notice i.e liquidity is available to you in 1 day instead of instantly in case of Savings account.

From safety perspective although it also bears the tag line "Mutual fund investment are subject to Market read offer document.....". But history of the fund prooves that it is as safe as your savings account the NAV of a liquid fund has never been negative for a single day in its history.(As it invest in the papers of maturiy less then 90 days)

So, as an investor if you are looking at the better returns then Saving bank should shift your surplusses to Liquid funds instead of settling at 4 or 6% of saving account returns. Additional returns can take care of your monthly telephone bills and LPG cost or a weekend with your family.

RETIREMENT - Aish or Without Cash

As an Indian we feel really proud to be one of the youngest country. But, there was time in 80's and 90's when the biggest worry for our country was rising population and because of that reason we started the campaign "Hum do Hamare Do". Today the same worry has become one of the biggest boon for our economy. 

Thanks to one of the report made by Goldmann Sachs way back in 2002 which brought this fact to limelight and resulted in biggest rally in the history of Indian equity market.

India has more than 50% of its population below the age of 25 and more than 65% hovers below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37  for China and 48 for Japan.(source : wikipedia.org)

Population by Age and Sex for India
Year	Age	Both Sexes Population	Male Population	Female Population
2011	Total	1189172906	617039156	572133750
2011	0-4	118325346	62740231	55585115
2011	5-9	117592252	62539569	55052683
2011	10-14	116948795	62170835	54777960
2011	15-19	112247754	59507362	52740392
2011	20-24	105137174	55103535	50033639
2011	25-29	99548997	51787772	47761225
2011	30-34	93102734	48164565	44938169
2011	35-39	86435208	44407222	42027986
2011	40-44	76764881	39235679	37529202
2011	45-49	64989219	33146269	31842950
2011	50-54	54272103	27595085	26677018
2011	55-59	44170733	22361010	21809723

 SOURCE : U.S.Census Bureau, International Data Base.

There is no doubt India is going to be one of the strongest economy inspite of all the global, political or domestic factors.

But while looking at sparkling and shiny picture we forget there is one more fact hidden in the above data, From the above data it is clear that in next 25-30 years almost 50% of our present population would enter retirement.

For an average human being retirement age means to depend rest of his life on retirement corpus created during working span of his life. Just to understand effect of Inflation on our household exps.(inflation@8%) The cost  of present household exps. valued at Rs.25000 per month would become Rs.251000 PER MONTH after 30 years and would be Rs.1175000 PER MONTH  i.e 1.41 CRORE PER YEAR after 50 years. It really seems funny to talk of 50 years. But it is the fact of life for youngsters who are in 25-40 age group and should be eye opener for them to reconsider the amount of funds they might require in retirement age.

 

Future value of Exps. @8% Inflation rate

Post Independence the average age of an Indian was in the range of 50-55 years. But due to improved medical facilities and newer technologies it has gone up to 75-80 years(in urban India) and don't be surprised if it moves up to 95-100 years in next 30 years.

We need to seriously consider our retirement planning at an early age of our carrier or as soon as we realise its need. The biggest factor which can help us in accumulating such a bigger corpus is power of compounding and proper asset allocation.

Illustration: Let us consider that Shahid Kapoor is an young, dynamic IT employee whose age is 30 year. He plans to retire at age of 58 and he considers his expected life to be 90 years. His present household expense is Rs.25000/month and considers it to be same even after the retirement age. He feels inflation pre and post retirement to be 8%.

Now, considering above his house hold expenses at the age of 58 would be Rs.2588132.00/Year and if he manages to get return 2% more then the inflation rate post retirement i.e 10% (Net of Tax). He would need to have a retirement corpus of 6.32 Crore.

Particulars	Amount
Total Monthly Expenses	25,000
Total Annual Expenses	300,000
Inflation	8.00%
Current Age	30
Retirement Age	58
Life Expectancy	90
No. of Years for Retirement	28
Expenses in the First Year of Retirement	2,588,132
Retirement years (life expectancy-retirement age)	32
Inflation during Retirement Years	8.00%
Investment Returns on Retirement Corpus	10.00%
Net Returns	1.85%
Retirement Corpus Required	63,216,858
Deficit (Corpus Required-Assets Utilized)	63,216,858
No of Years for Retirement	28
Expected Investment Returns	15.00%
Lumpsum Funding Required (If Available)	1,262,680
Monthly Investments Required	12,352

It seems to be impossible to accumulate the above amount during the working tenure of 28 years for an average person. But it requires much lesser then the EMI you pay for your Sedan (car) , expecting a return of 15% you require to invest just Rs.12352.00 per month. So delay your purchase of car or house by 3 or 5 years and safeguard your retirement.

As there is no social security system available for citizen of India we need to plan and protect our retirement life ourselves. Many of Central or State government or employees Covered under EPF feel relaxed that their retirement would be taken care of by there EPF account. Just showing below the value of EPF account of Mr.Shahid Kapoor present salary Rs.35000/Month and expects to appreciate 10% YOY.

Sr. No	Particulars	Values
1	Current Age	30
2	Retirement Age	58
3	Monthly Salary (Basic+DA)	35,000
4	Increase in Salary	10.00%
5	Contribution from Salary	12.00%
6	Current EPF Balance	0
7	Rate of Interest	8.50%
8	Value at Retirement	33,559,758

So, the deficit for retirement fund is huge even after considering the EPF maturity.

Although modern medical science has increased the life expectancy but has increased medical expenses substantially.What if someone meets up with some of the critical illness or might result him to be bedridden during his working tenure or Retirement age.

Now a days it's easily noticeable that in every household there is atleast one of the family member who is taking medicines on daily basis.That too 2-5 pills a day.

It is the high time that we should give priority to retirement planning , otherwise it can happen that today we are moving in a luxurious car or living in a bigger house but after retirement might need to move to a smaller house or settle for an economy car or even need to cut down on statutory house hold expenses.

Remember, if planned properly retirement life can be the golden period of our life as these is the only period when we would have ample time and if have sufficient money can do everything which we couldn't do during working span due to job, aspirations or family commitments.

SO PLAN YOUR RETIREMENT TODAY ONLY AND HAVE A GREAT LIFE AHEAD