Ensure chicken is not pecking up your investments...

There were Two grains lying side by side on the fertile soil. 

The first grain said: “I want to grow up! I want to put down roots deep into the ground and sprout from the ground. I dream to blossom in delicate buds and proclaim the coming of spring. I want to feel the warm rays of sun and the dew drops on my petals!”.

This grain grew up and became a beautiful flower.

The second grain said: “I’m afraid. If I put down my roots into the ground, I don’t know what they will face there. If I grow tender stems, they can be damaged by wind. If I grow flowers, they may be disrupted. So I’d rather wait for the safer time.

Thus the second grain was waiting, until the chicken that passed by did not peck it.

I found similar is the situation of Indian investor they are always fearful about their investments in equity. What would happen if market will go down, what if GDP growth would not be as expected, what if inflation rises, what if I would loose my hard earned money, why should I pay fees to advisor, why should invest in Mutual funds.

Now we are having almost 22 years of history of mutual fund investment, not a single fund has not given return lesser then market, inspite of seeing all the worst a economy can face in this 22 years. We have seen a government for 13 days, a communist supported 3rd front government, Asian Financial crisis,Kargil war, Sanctions imposed on us due to nuclear test, Tech Bubble,9/11 attack, Ketan Parekh scam, terrorist attacks of parliament and of Mumbai, Corruption/scams, Sub prime crisis and lot more.

Inspite, of that there are funds which has given annualised returns to the tune of 24%, which even god of investment Warren Buffet have not been able to generate consistently for such a long period. 

Which means if someone would have invested Rs.100000 in the fund 20 years back that would have been worth 80.00 Lakhs, i.e multiplied his money 80 times or have made an SIP of Rs.5000 (Total Investment Rs.11.80 Lakhs) per month would have transformed into Rs.2.51 Crores.

So let us try to reap the benefit of equity investments and not become like other seed waiting for inflation and taxes in the form of chicken to peck it.

True example of WEALTH Creation

We are optimistic about "ACCHE DIN AANE WAALE HAIN.".

If last 20 years were not good then going by above phrase next 10 years are going to be extraordinary.Last almost 20 years have been the best days an investor can wish for but the problem is we ourselves are not confident of our economy and power of Young India.

Investors confidently invest in Gold, Corporate Fixed Deposit, FD of Co-operative bank and above all real estate.But when it comes to equity they shy away from it.

Demonstrating herewith how equity mutual funds in real life can create wealth for the investors.

"Reliance Growth Fund is an Equity Diversified fund launched 19 years back wherein its NAV has moved from Rs.10 to Rs.615.59 that means investor has multiplied his money 62 times.

It is evident that there is no other asset class which can beat performance of Equity and specially investments made through Mutual fund route. Many a times investor do compare returns of equity with real estate. 

Let's see the comparison - 

If one had invested Rs.10 lacs in this fund 19 years back it would have grown to 6.2 crores that too TAX FREE and to add some other benefit is liquidity, daily valuation,transparency, diversification, part redeemable, no legal cost or hurdles, well regulated etc etc...

I leave it to the real estate investor to evaluate that how much of them can confidently claim similar returns for their real estate portfolio as a whole.

Disclaimer : Performance of fund taken only for demonstration purpose, should not be considered as our recommendation. Please consult you adviser before investing.

Undoubtedly investor should allocate funds to different assets  according to time horizon and goals.But, Investors are very comfortable with investment in FD, Gold and Real estate but when it comes to Equities every one thinks that it is a speculative asset class. History has proved that you can speculate anything for a short period, but in long term fundamental works.

Many a times the excuse given for not investing in equity is of lower risk profile, but we forget that risk profile is evaluated on 3 aspect i.e Willingness,Ability and Need. The most important aspect with most of the individuals is Need, may be they are not willing to take risk and might not have ability as well. But in today's high inflationary scenario everyone's NEED should make them a equity investor. For today's investor equity is not an option but a necessity.

So evaluate your future needs, make equity mutual funds your friend for wealth creation,but in consultation with your financial advisor.

Financial Mathematics - "Itni Shiddat se maine tujhe pane ki koshish ki hai, ki har zarre ne mujhe tumse milane ki saazish ki hai".

Very rightly said that "Journey of thousand miles starts with a single step".Same way to achieve big goals in life the first step is to start with basic i.e.decide your goals/dreams or aspirations in life.

Just list down whatever you think without thinking ki "Yeh kaha se hoga". (Had we ever thought that people would be booking tickets to travel mars).

Many a times investor tells me it doesn't make sense to plan, as I don't have any surplus funds. I ask them forget what you have atleast make a list of goals you want to achieve and as soon as you make that list and refer it on regular basis, your goals themselves finds way for required investment.

You will automatically cut down on discretionary or unnecessary expenses. It will act as an alarm "That if you buy the things which you don't need today, may be tomorrow you will not be able to buy the things you need". It will motivate you to work more efficiently to grow in your career or business.For sure, the passion and better planning will make you reach your goals Like SRK says "Itni Shiddat se maine tujhe pane ki koshish ki hai, ki har zarre ne mujhe tumse milane ki saazish ki hai".

After first step of deciding goals, it requires you to put time left and amount required for it.

Today we will learn how to inflate present goals cost to future value, so that we don't end up receiving the value which do not meet the requirement as briefed in my earlier blog:http://www.rajtalati-abminvestment.blogspot.in/2014/01/calculating-rate-of-returns-before.html#links. 

In addition to that we will also learn how to calculate annual investment required to reach that value :

Let's take an example of Mr.Sapnelal who wish to plan for marriage of her daughter Ms.Dreamgirl 18 year hence. Present exps. according to kind of wedding he wish to plan for is Rs.800000.00. He expects inflation during this period will be around 7%.

First of all open an excel sheet and go on "insert" select "Function" and in "window search for function" type "FV".Following window will open :

Inputs:

Rate - It is the rate of return/inflation considered in our case it would be 7%

NPER is no. of period - In our case it is 18 years.

PMT Payment - It asks for Periodic payments you wish to make for the goal. As we want to learn how to calculate Periodic payment in next step we will keep this as blank.

PV - This is the present value of goal in our case it is Rs.800000.00.As it shows investment (Money going from our pocket) a  -ve sign to put in front of it.

Let's insert the data in above field. The result will reflect at the bottom (above the Blue highlighted line Help on this function") under Formula result as follows :

The amount required after 18 years would be Rs.2703945.82.

Now,let's see how to calculate annual amount required to be invested or periodic investment required to achieve goal of Ms. Dreamgirl's marriage.

Mr.Sapnelal risk profile is aggressive and as the period of investment is also longer he wishes to make this entire annual contribution to equity and he expects equity to give him atleast 15% return on his investment.

So. let's calculate the per annum amount required to be invested.

First of all open an excel sheet and go on "insert" select "Function" and in "window search for function" type "PMT".Following window will open :

As detailed above put the data in fileds as follows :

Rate - As Sapnelal wishes to invest the amount in equity and expects to get a return of 15%. Enter 15% against Rate.

NPER - Enter 18 as maturity is required after 18 years for Dreamgirl's marriage

PV - Enter the lumpsum amount if you wish to invest initially together with the annual amount. In our case its nil so will keep it blank.

FV - From the first calculation we got this amount which we want to achieve i.e. 2703945.82.

Type - If you wish to make contribution at start of the year then put 1 and in case of end put 0.In our case it at the beginning of the year so enter 1.

After inserting all the above details result i.e. annual requirement will reflect as follows :

So the required amount is Rs.31004.35 it is showing as negative because it is going out of our pocket or we need to make this investment.

The best part is just by changing the figures in rate you can see the value of annual investment required. If you wish to achieve your goal by investing in a bank FD and expects to get a return of 9%. Your annual investment required will become Rs.60063..04.

So plan your investment in better way irrespective of what your name means- So being Mr.Sapnelal, enjoy marriage of daughter Dreamgirl the way it was planned.

Financial Mathematics -Calculating rate of returns before investment - Let's learn how

It's a common practice in financial industry that products are sold by projecting maturity value. Reason is human mind always looks at maturity value in today's term, but forget to measure impact of inflation and rise in expenses due to standard of living. We just get obsessed with the higher absolute value and forget the actual return it generates. Instead of focusing on maturity value if we start concentrating on returns we can take much better decision. Illustrating how just looking at maturity value can make our plans a haywire and that too when we actually in need of it.

One of my friend Vivek bought an Life Insurance policy for his son's education in the year 1999 for an 18 year term on becoming a proud father. The TOTAL cost for a good engineering course was almost Rs.40000 at that time.Let me remind you during late 90's a person at senior executive level used to get salary in range of Rs.20000 to 40000 pm. Household exps. for a family of 4 for an average middle class person was in the range of Rs.4000 to Rs.5000 pm. 

With an intention that his son should not compromise during his engineering studies he planned for an maturity of Rs.1 Lac, for which was required to pay premium of Rs.3000 equal to his one month Exp. or 75% of his monthly salary.

Inspite of planning for double the amount required. When his son will reach in STD 12th i.e in the year 2017, I doubt whether he would be able to pay even the tuition and entrance examination fees for engineering courses with maturity of above policy.

Biggest reason was he thought everything in 1999's context and he thought by paying Rs.3000 which was a big amount for him at that point in time he has secured his child's education.  As against that if he would have calculated the returns he might have understood its meager 7% per annum.

Let's learn how to calculate returns so that we do not face such problems.

Open an excel sheet and go on "Insert" select 'Function' under category select "Financial" and in window search for function type "Rate". The following box will appear after clicking OK.

Inputs ;

NPER is no. of period - In Vivek's case NPER is 18 years i.e tenure of payment. In case frequency of payment is Monthly multiply it by 12,in case of Quarterly by 4 and for Half yearly by 2.

PMT Payment - periodic payments or regular payment e.g Insurance Premium, EMI Installment, Monthly Post recurring Amt. etc.In case of an FD (Its Only 1 time Payment) so leave this filed blank.
In case of Vivek it is Rs.-3000.00. In case we are making payment that should be shown as (-) and receiving money should be shown as (+) or nothing.

PV - This field should be used in case of single or one time payment like for FD,Bonds, MF investment etc.In our case as it is periodic investment we will keep it blank.

FV - This is the desired corpus or the maturity amount product offers or required.As funds are flowing in we need not put any sign before it. 

Type - Applicable only in case of periodic or regular payment. In case you are paying in advance then you should put 1 and in case of end put 0.In our example it is 1 as we pay premium in advance.

Guess - It is not visible in above picture but in excel sheet when you will scroll down you will find it, no need to put anything in it. But in case any error comes then you should put approx. return which you think it would give. Most of the time you do not require to provide anything in this field.

Let's put above data and find the result which would be as follows :

You can see the Formula result as 7% at the bottom. In case frequency is taken as Half Yearly you need to multiply result with 2, for Quarterly by 4 and in case of Monthly by 12.

In this way you can calculate Interest on EMI and returns on FD, SIP, Insurance Policy etc...

While planning do not forget to consider effect of inflation and rise in exps. due to standard of leaving.

Great Investment opportunity for lower tax bracket or no tax individuals

Great news specially for senior citizens who are facing really hard time with their retirement funds because of high CPI inflation of almost 10%/Yr. for last 3 years and low interest rates.

RBI has atlast launched the much awaited Inflation Indexed National Savings Securities - Cumulative (IINSS-C) as promised. It is in continuation of Inflation indexed bonds (IIB) launched earlier. 

IIB's were targeted at large investors, so the markup- the additional payment over and above the inflation rate or the real coupon (interest) was arrived at via competitive bidding. RBI plans to pay this real Coupon on regular basis, then inflation component will be added to the principal and paid only at the time of redemption.

In a way it offers twin benefit first it protects the principal from inflation and you get the real value at maturity and second is an increase in cash inflow every year even when the real coupon rate remain constant.e.g. If Rs.1 Lakh invested in IIB and real coupon raet is 1.5% and the Whole sale price Inflation for 1st year is 5% then real payour for first year would be Rs.1500(1.5% of Rs.1 Lakh) and that for the 2nd year will be Rs.1575(1.5% of 1.05 Lakh).

But as the IIB were linked with WPI (Wholesale Price Index) it could not interest retail investors. As historically investors are more affected by CPI (Consumer Price Index) which is much above WPI. Like WPI for November was 7.52% whereas CPI was 11.24% i.e. a difference of 3.72%.

Now RBI has realised the same in the benefit of retail investors and has come up with IINSS-C (Inflation Indexed National Savings Securities - Cumulative) which is linked with combined CPI .Rbi has also avoided competitive bidding and markup fixed of 1.5% over CPI.

Obviously it is going to be a great instrument for the people who are in lower tax bracket or with non taxable income. I think they are the one who needs real protection from falling interest rates and rising inflation.

Appending below the scenario and benefits to investors :

IINSS-C Returns for difference tax Bracket Considering markup of 1.5% on base rate Tax Slab NIL Inflation Rate 8.00% 9% 10% Interest Rate 9.50% 10.50% 11.50% Effective Rate 8.00% 9.00% 10.00% Effective Rate due to half yly compounding 9.73% 10.78% 11.83% Tax Slab 10.30% Inflation Rate 8.00% 9% 10% Interest Rate 9.50% 10.50% 11.50% Effective Rate due to half yly compounding 8.73% 9.67% 10.61% Tax Slab 20.60% Inflation Rate 8.00% 9% 10% Interest Rate 9.50% 10.50% 11.50% Effective Rate 7.73% 8.56% 9.39% Tax Slab 30.90% Inflation Rate 8.00% 9% 10% Interest Rate 9.50% 10.50% 11.50% Effective Rate 6.72% 7.45% 8.17%

Now lets look at negative side - Interest is accrued and compounded every six months. Hence even though you do not receive interest tax has to be paid in each financial year.Looking at above calculation the IINSS will still not be that attractive for retail investors in higher tax bracket and also for senior citizen who requires regular income should avoid IINSS-C.

Instead of that it is better to invest in Tax free bonds, although it doesn't carry guarantee of Central bank.But with good credit rated bonds you have much better returns net of tax annually with much lower risk.

Shop - SMART way this Festive season

Festival time is the most delightful period of the year.It recharges you as a person, every individual  in any corner of the world try to be with his family and spend quality time with them. It is time of having  fun, shopping, socializing, Gifting and lot more....

Most of the Indian festival irrespective of religion fall in the period  August to December - Whether it is Eid, Raksha Bandhan, Parsi New Year, Diwali, Muharram, Gurunanak Jayanti, Christmas or New Year etc..

But while celebrating festivals and to enjoy its charm to the fullest we miss on the budgeting part resulting in the trap of overspending. By taking some simple steps we can save ourselves from impulsive buying and mouth watering offers.

1) Contribute for Festival expenses in advance - While planning for our expenses we break our expenses evenly for the whole year, whereas there are certain months when our expenses are lesser as compared to other months. Just make a list of such months and park surplus of this month in a liquid fund of MF or make an FD for equivalent period. We can also start an SIP in a liquid fund or open an Recurring deposit with Bank whose maturities matches with festival period.

2) Budget your Expenses - Budgeting can help you in avoiding impulsive buying. Hence prepare a list of all the shopping you wish to make during festivals. Also list out separately how much you would be spending in eating out, on Gifting, movies and shopping.

3) Delay Bigger Purchases - I remember during last diwali there was a combo offer available for purchase of Juice maker and Coffee maker at an attractive price. My wife couldn't resist and she bought it. I remember we hardly used it for a week. 

Festival is the time for big discounts, freebies and offers. Delay your purchase by 3-4 days before making any bigger purchase which is not planned and suddenly you find it available at very good bargain. It will help you to come out of frame of mind of offers and discounts and give you time to think logically that really you need it/what is the necessity of buying right now or don't need it immediately.

4) Avoid Credit Cards - Try to make payments in cash, as at the end of the day you know how much you spent. The more you spend you have lesser surplus available. Credit card is a very comfortable and safer way of making payments while shopping, but it never allow you to feel the pain of overspending. Actually pain comes when the payment is due. Have you ever realised that we always spend more while purchasing with credit card as compared to cash payment.

5) Say NO to personal Loans - Personal loans are the most expensive loans avoid it.

6) Realise nothing is Free - Realise and accept that in this world nothing comes for free.

7) Plan your investments - Always plan and link your investments to goals, which will help you in reminding during impulsive buying that you will be compromising on your child's education or her marriage or your retirement.

Just follow above simple steps and have a great Festival time.

The author of this article is Raj Talati a  CERTIFIED FINANCIAL PLANNER^CM at ABM Investment.

"SAFETY"- No such word in Financial Dictionary

As per dictionary.com meaning of safety defined as: the state of being safe; freedom from the occurrence or risk of injury, danger, or loss.

On Googling for meaning of SAFETY in financial terms, I could not find a single dictionary which explains - safety. I did found words like : safe harbour, safety net, safe heaven etc etc...and the meaning of any of them didn't matched with dictionary meaning.

Investopedia.com do define "safe assets" as 

"Assets which, in and of themselves, do not carry a high likelihood of lawsuit risk. Mere ownership of this type of asset does not expose the asset owner to a significant risk of litigation.

Assets such as stocks, mutual funds, bonds, bank accounts and your personal residence are examples of safe assets." Which is totally different from what Indian investor thinks.

The recent development of Cyprus prompted me to search for meaning of "SAFETY in financial world".

First let me take you through some facts about pattern of Investment of Indian investor - As per the RBI's 2011-12 annual report bank FD's or contractual savings(Small Savings Scheme, LIC) constitutes almost 85% of total financial savings where as currency is almost 10% leaving 4-5% for Equities. 

The obvious reason for such a high allocation to FD is SAFETY. We perceive word safety as "To get back the capital and Interest on maturity date without any volatility". That might be the reason we rely mostly on all the government institutions like : Post offices, LIC, PSU Banks.

But, fallout of some of the biggest bank and government institution in U.S and Europe are the best example that even Govt. institutions are riskier at times and we may end up losing part of our money. Why to go to U.S we have example of our own government sponsored UTI US'64 scheme wherein government did paid back money of investors but with a delay of 6 years and that too in the form of 6% tax free bonds.(Just think of condition of a father who had invested money for his son's education or daughter's marriage)

Regarding Guarantee for repayment of Bank FD, RBI portal says "The deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount upto Rupees one lakh is paid."  subject to bank have paid premium to deposit insurance and credit guarantee corporation .

Now, Let's understand what has happened in Cyprus, just to bail out economy "Government has imposed tax on bank deposits in Cyprus, they are taxed @6.75% on their  deposits less then EURO 100000.00 and @9.75 for more then that ".In simple terms one fine day suddenly government reduced your bank balances as well as FD value by 6.75%- 9.75%. Just think how would you feel if you woke up in the morning and found that government has decided to take away 6.75% of your money".

Even in case of India it is happening that our FD are reduced by almost 4-5% every year. Let me explain you how : The current CPI inflation rate is about 10.50% and Tax free FD rates of SBI is 5.78% (8.50% less 32% Tax rate). So the cost of goods which I can purchase today for Rs.100 becomes Rs.110.50 (CPI@10.50%) at the end of year whereas my FD value net of tax comes to Rs.106.00. So to buy the same goods I need to add Rs.4.50 to my FD amount, don't you think even we are paying a tax of 4%-5% year on year on our bank FD.

The purpose of highlighting above facts is not that we should not invest in FD's but we need to understand that there is no such word as safe asset class. The fall of 15% in Gold in last 3 months has proved even the safest asset class can be volatile at times.

We are now a part of the global investor community. The purpose of an investor seating in other part of the world is to make profit from his investment. Wherever and whenever he finds an opportunity he will buy into it and sells out in case of uncertainty. He is not concerned with asset class i.e. Debt, Equity,Real Estate or Commodities like Gold,Silver,Oil,Copper etc...

So it is mere foolishness to think that price of your investment in any asset class can grow perpetually or safe from all risks.

The only way to save yourself from getting in trap of any asset class is to follow a proper asset allocation strategy (Also read ;key-to-wealth-creation-asset-allocation.)

looking at above facts we can either act like an Ostrich who hides his face in the sand when attacked by a predator (assuming that if you can't see it , then anyone else also don't see you) or can take informed decision of how much amount to be allocated to FD,Gold, Real Estate or Equity so that we or our family do not need to compromise on future Dreams or Goals.

Consult your financial planner to advise you on proper asset allocation.

God to India's rescue - Strong case to overweight Equity

Mannu Singh, who was in financial difficulty, walked into a temple and started to pray. ''Listen God -I know I haven't been perfect but I really need to win the lottery. I don't have a lot of money. Please help me out.'' He left the temple, a week went by, and he hadn't won the lottery, so he walked to a church ''Come on, God,'' he said. ''I really need this money. My mom needs surgery and I have bills to pay. Please let me win the lottery.'' a week went by, and he didn't win the lottery. So, he went to a mosque and started to pray again. ''You're starting to disappoint me, God,'' he said. ''I've prayed and prayed. If you just let me win the lottery, I'll be a better person. I don't have to win the jackpot, just enough to get me out of debt. I'll give some to charity, even. Just let me win the lottery.'' Many thought this did it, so he got up and walked outside.

The clouds opened up and a booming voice said, ''Mannu, my son please please please.....atleast buy a lottery ticket.''

Similar is the situation of India. Right now we want our growth to be in place, inflation to be under control, rupee to get stronger, get rid of corruption, reduce current account deficit, reduce fiscal deficit. 

By looking at India's Pathetic situation it seems god has felt pity on us and have bought a lottery ticket and served it to us on a platter.

The biggest worry for India as of now is twin deficits i.e. Current account deficit (CAD) and Fiscal deficit. Although our finance minister is making sincere efforts to control it, by increasing import duty on gold , reducing subsidies, cutting expenses etc. etc  but all efforts are in vain. 

It seems suddenly god has listened to prayers of all the Indians.

As mentioned in my earlier Blog  "Gold : Is it really safe anymore????" ( I did pointed out that gold can't keep on increasing and would see drastic fall when positions unwinds)  In its report RBI points out, as a ratio to the CAD, gold imports were a whopping 71.9 in FY12. As a proportion of the balance of trade, gold imports were 21% in the first half of FY13. So gold import is biggest negative for our balance of payment. With recent fall of almost 15% in gold prices will breathe a big sigh of relief and will improve our CAD.

Apart from gold another big worry for India is OIL. India imports over 70 per cent of its oil demand. So a 10% rise in oil prices result in a 0.6 percent fall in growth while in the full pass-through situation, it can reduce the growth by 0.9 percent and vice versa. The Best news is that even oil has corrected to sub $100 level for 1st time in 9 months is big positive for us.

Fall in prices of Gold as well as Oil will help us to bring down current account deficit, which will inturn strengthen our currency.

Subsidy on Diesel and Kerosene adds up to our Fiscal deficit and increases inflation. So fall in oil prices also narrows down the fiscal deficit as well as inflation.

Icing on the cake is that WPI inflation has fallen to 40 month low of 5.96%.

From the above facts I strongly feel that RBI has to completely change its focus from fighting inflation to growth, which will help in generating jobs and help corporates to grow. We can expect rate cuts from RBI in policy review due on May 3rd.

All the biggest concern as far equity market is already addressed by falling Gold Prices,Oil Prices and Inflation which lays down a strong foundation for start of a new bull run. I don't say that market will start performing immediately. But, from asset allocation point of view it is time tor rebalance your portfolio and if your are into tactical asset allocation its time to be overweight on equities.