A letter to my Friend

I understand that it is too expensive to live in 21st century. These are about those few things which I learnt from my experiences and observations, things keeps on changing, you plan for something and when you reach near to that goal, actually that goal might have been shifted. But, I do sincerely understand that it doesn't mean we should stop planning.

As we do day to day planning – the time we wake up till we go to bed, why shouldn’t we plan for our future expenses?

I am very risk averse person. And I am not looking for very high returns in small periods. But Yes, I believe that we can built big corpus by small savings – Like it’s said that the journey on thousand miles starts with a single step.

I have drawn my own portfolio with small investments. I am in Personal Financial Planning and advising spectrum, it is imperative that the first experiment should be on me. That is how I can become confident in advising my investors and my clients.

This is how my first portfolio looks like,

I am going to start SIP (Systematic Investment Plan) with

ICICI Pru Banking and Financial services fund – Rs. 1000 with tenure of 3 or 5 years.

HDFC Midcap – Rs. 2000 for 5 years.

Axis Long Term Equity (ELSS) – Rs. 1000 for 5 years

Tata Ethical Plan A – Rs. 1000 for 5 years

Apart from this I would also invest in National Saving Certificate – Rs. 3000 in 5 year scheme.

I would also put my surplus in Birla Sun Life Floating Liquid scheme – Rs.  5000. Liquid funds have been considered as emergency funds. After six months I would divert strategy for liquid funds.

I will also keep on looking these funds performance in periods. If it doesn’t perform well on certain parameters I would prefer to change it too. Including this I would strongly follow to do rebalancing in a year. All the four funds are Equity funds, which would be eligible for tax benefit after 1 year under Long Term Capital Gain (LTCG).

I am not investing in Public Provident Fund (PPF) at this point. I do have account.  

As per my bank balance I am not eligible for big investment like real estate or gold.

Now the journey of thousand miles which was started with single step let us see where we are after five years.

After five years the corpus would be 1.7 L more than if you have just put in your bank savings account.

Now, If I use same strategy for the same next 20 years – till age of 50 – the corpus would be 2.4 crore, where I have not calculated real estate investment and other bonuses and commissions.

Simple conclusion is that if I start small investments like Rs. 8000 per month, we would end at 2.4 crore after 25 years.

This is the power of compounding and benefits of starting investment early.

Investment advice from an Artist

In Finance there are more than one sub sections under one word, like Banking finance, corporate finance, Accountancy, Investment finance and so on.

Since the beginning of my professional finance course at PG class, I was passionate to choose Investment finance over other finance fields. It is not only about numbers and profits; it’s beyond numbers - more I dig in more treasure I earn.  

The most difficult hurdles in investment profession are NOT technical knowledge, or valuations, or inflation & tax adjusted returns from particular instruments. The most difficult hurdle for an investment advisor is, How to convert her understanding about financial markets and related products into very simple language so that client can understand about her next investment move.

In today’s investment market I have seen, investment advisors are not very much trustworthy for only one reason. And the reason is that they have failed to communicate with their existing or prospectus clients in layman language.

How can a professional advisor expect, a client having three to four timber factories would understand that when the interest rate goes up and market finds hard times in liquidity positions, ultra liquid funds are going to fall – which could be used for working capital etc. Or how can a professional advisor expect, a retired school teacher would understand that falling rupee is good sign to add export oriented funds into a portfolio – which could be used as monthly income from high dividends.  

I sincerely believe that if we as professionals would not adapt new ways – especially creative ways to make our clients understand what they are investing in and why it is important. We need to remove technical jargons and fancy talks covered with finance phrases.

I tried to come up with a story in my blog [Why my batchmate should know this money management secret?] and tried to explain retirement concept of Personal Finance. In one of my other blog [India needs second wind phenomena] I tried to explain inflation and debt issues with my personal experience examples.  

Talk to your client in its language. Put it very straight and simple.

And above all, it’s time to use our right brain. Investment is an Art. 

High- 5 Steps for ‘Young’ Investor

I have orbited around sun 25 times. Most of my young friends are in the same age spectrum. Most of them are earning more than 700% of their parents’ first salary three decade back. India’s young generation is dynamic and full of passion, and is earning plenty of money. Now, most of you would not agree on this logic. But it’s true.  Every time we feel insufficient money in our accounts because of our high expenditures and constant increase in prices.

I met n number of young people, and most of them are confused in their own investments. They have questions like, when to start? Where to put earned income? And How to initiate?

When to start? You can start at any time, but starting early will give you advantage of compounding. In blog [Why my batchmate should know this money management secret?], I have explained why one should start investing as early as possible.

Where to put earned income? If you think you can build large corpus by just putting your income in banks savings account, my friend you are doing ‘big mistake’. It would give you negative real rate of return in high inflation. [India is an emerging country and inflation would be high.] 

How to initiate?

In simple language, one should consider these five steps before investment.

Step 1: Individual’s Risk level

When you visit a doctor they don’t give you medicine immediately, what they do is, they first check up your blood pressure and do few sample tests for particular disease.

In similar manner one should not directly jump to products, like bonds or equity or Fixed deposits etc.

First step should be to know Individual’s Risk level. If your advisor disagrees to do your risk assessment test and continue advising you without it, you better ask her to do so or you can change your financial adviser/financial planner. Risk assessment test should be done every year.

Step 2: Individual must have a Goal

After identifying your Risk level, move to further step. At young age very few astute could consider goals. Goals are like, to meet marriage expenses between the age of 25-30, child’s education expenses, dream Home or a car budget etc.

For example, Education expense for your child could be very high [Rs. 20 L – 75 L normally]. Some may arrange it through loans, and then debt becomes burden to your family. Some may have big bank balance, and it could be wiped out by high tuition fees. But all of us, young, can build education corpus for our child in the meantime.

If you don’t have goals, every one of us share mutual goal, Retirement goal. Everyone is going to retire some point in time, let’s plan for that goal. Retirement is common for working professionals and self-employed people.

Step 3: Identify your Investment vehicle

Now it’s time to choose right medicine. Investment vehicle should be considered according to your Risk level and Goals. Investment vehicles could be Mutual Funds, Bonds, Direct equity, Bank Fixed Deposits, Gold ETF etc.

All these vehicles have risk-return rewards. Through these products investor can make portfolio for a particulate goal.

It is preferable to have different portfolios for different goals. For example, if your age is 26 and you have a portfolio for a car in next 5 years, you must not mix it with your retirement goal portfolio.

Step 4: Re-balancing

Re-balancing is crucial. For example, you have a portfolio for a dream home seven years down the line. For high returns initially you build portfolio with equity products. What if at 6^th year equity crashes? Your portfolio gets affected and reality of your goal gets into trouble.

To avoid this uncertain risk, an investor should re-balance it every year. For example, after 5 years convert portfolio from equity to debt funds [or when equity gives good returns - direct interest into debt funds]. And in 6^th year convert it to ultra-liquid funds or bank RD.

And this is how at 6^th year your dream home portfolio would be less risky.

Step 5: Take advice from professional Financial Planner

If you have right knowledge and understanding about financial products and its flavors, and time to track it then you don’t need professional help.

You have to ask this question to yourself. If answer is ‘no’ then you should prefer professional advice by paying minor fees. You will get free advice also, but quality comes with value, not price.

Money management is not a luxury it’s essential tool for efficiency.

Comment your issues in money management. And How do you overcome it?

India needs second wind phenomena

Last month I resigned from my job. I put resignation 2 months before I shift to Gujarat. In the meantime, I tried to search myself and life beyond numbers.

Since beginning of my PGP course I am passionate about going beyond numbers in finance for better human to human understanding. 

I don’t have big data and complex statistical tools for research, so I decided to do it in my own way.

Every time I visited Select city mall in Saket, New Delhi or Ambiance Mall in Gurgaon I feel my understanding about money is imbalanced. So, to balance this understanding I visited streets of Chandni chowlk and Sarojini Nagar market. And I found my answer. I get this answer from stores like Zara to Shopper Stop, Blue-O to BMW showroom. From a chai wala in Palika Bazaar to Electronic shops in Nehru place. From a fruit shop in Sadar Bazaar to Ansal plaza at Palam Vihar, and many more..

And I came to a conclusion that, India is trapper by Inequality. And I believe that if policy makers will not act in a right direction this gap of inequality will widen.

Currently I am living in Sec-40 in Gurgaon, where I have seen most of the people are living on rent. Areas around Cyber Park and Phase-2 most of the working individuals or families are living on rented apartments.  I discovered very unusual things [due respect to individuals interest - views are personal], where people having sedan car not only one but two cars, without a place to park.  Some of them are having a big car than their home. They have money to pay car loan EMI but do not have money to start a SIP (Systematic Investment Plans) for retirement years. 

I might be wrong in my research, but yes, this is truly inequality, where a person chasing luxury assets at cost of basic necessity. The reasons they are unconsciously driven are, first, high expectations from future value of money. Second, illiteracy in money management, third, herd behavior [my neighbor is risk taker and she is investing in real estate, even I also do better in real estate].  Individual should take risk according to their own risk taking ability.

In the end, to narrow down this inequality gap, India needs second wind phenomena. If India fails to generate second wind  it will further drag down in inequality and an individual will suffer middle income trap. 

I am ready to bet on RaghuRam Rajan’s strategic policies and leaders like Narendra Modi, who has capabilities to create second wind phenomena. When next time game changes and ball falls in your court, take advantage of it. If we'll fail to act in our money management The next crisis will expanse our defaults. 

Next money fiasco! - Time is on our side.

Few days back I was wondering, who are the ultimate victims in this bloody bath game?  A conclusion is, we as a common people, especially at the bottom and mid-level income people.

In few of my previous posts I tried to explain that the world is so much deeply inter-connected that at the certain times it is impossible to channelize domino effect. When one country or an economy or a bank goes down it do impact the entire world economy.

In 2008 we experienced that one Wall Street bank went down and Indian markets crashed. Not only India, but the global financial system was frozen. The US government took over AIG in $ 85 billion bailout package. This $ 85 billion was indirectly tax payers’ money.

In future if there would be ever need of financial bailouts countries and governments are going to do it at any cost. And victims will be bottom and mid-level income families.  They would face problems in terms of unemployment, high costs [inflation], stagnant growth in salary income, individual high debt etc.

There are semi-strong signs that the financial tsunami could rise again in near future, thanks to free flow of cheap money [QE program].

Then what’s the solution?

According to RBI governor’s confidence and tactic approaches India has potential to stand back again. But, I do a favor to individuals that, we have time to hedge our savings and investment goals before any fiasco takes place.

I urge investors to take advice from professional investment advisors. According SEBI (Investment Advisors) Regulations, 2013, investment services are going to strengthen in dynamic ways for investors and financial industry.

I do understand that India faces problems in terms of corruption etc. but financial regulators like Reserve Bank of India [RBI] and Securities and Exchange Board of India [SEBI] are working to enhance better financial system.

If we will not act on our individual financial planning right now, time would not be on our side next time. 

Cyber world and Human world

Few days back friend of mine asked me a question. What if I get all the investment and financial advisory by just few clicks on internet? In coming few years why would people come to you for financial planning or investment advisory?

At some extend she is correct. All the information is available on internet. Software and websites has been built, which can create your financial plan based on manual inputs and goals.

I appreciate her views and upgrading trends in financial algorithms & technology. But ask yourself, would you really put your future dreams or goals or savings and trusting cyber world 100%?

In upcoming few years you will have all the information available on internet, but how will you differentiate those information – related to financial planning or investments – according to your unique goals and risk taking ability. Out of n information, how will you know which is right for you? For this, believe me you will need a human touch.

We all thrive to grow faster than time, riding on fast paced improving technologies. But at the end we all are mankind; we can feel the present moment and take bold decisions based on situations.

However, I am taking ‘advantage’ of latest technologies and internet information and financial trends to improve my clients service better and better with smile.

What are your views about connections between cyber world and human world?

How an individual Indian can avoid India’s middle income trap?

How an individual can avoid India’s middle income trap? And why it is so important priority to act now?

In this blog, I have given a glimpse of macro-economic connections with India followed by how an individual can avoid middle income trap.

In last couple of decades, more than two time world economy fall through gaps VERY BADLY. Some can argue upon Asian Crisis end of 1990s than Dotcom bubble, 2008 Lehman Bankruptcy etc. 

Did India learnt anything from it? Did India took any radical path to hedge itself, according to its own demographic traditions, culture or people’s attitude and mindsets? 

Dr. Ruchir Sharma tells in his book, ‘Breakout Nations – In Search of the Next Economic Miracles’, India will be able to put all young people to work because of education system, entrepreneurial zeal, and strong links to the global economy. But India is already showing some of the warning signs of failed stories, including early-onset overconfidence. 

According to a research paper, ‘What Caused the Asian Currency and Financial Crisis?’, current account deficit and foreign indebtedness, growth and inflation rates, savings and investment ratios, real exchange rates, etc..

Many of these factors exists in Indian system, and some had been taken care by Reserve Bank of India.  

According to my view, this current period could be far worse than post-Lehman crisis. In my blog, ‘Past 2 years <- ‘?’ -> Next 2 years’, in third ‘?’ I have shared views. In these times people are addicted to spending, thanks to growing income levels – both in private and public sectors – and consumers’ confidence, see chart 1 – GDP per capita growth y-o-y. 

Source: Trading Economics

But it also supported double digit inflation. And Reserve Bank of India is taking crucial steps to curb inflation at cost of growth. In near future if Fed Chairman Mr. Bernanke stick to his words – taping QE 3 – then scenario would be worse for India. And it is more likely to happen. 

Now, what can an individual do to in such situations, where the pay hike in the next future would be probably low?

My views are,

Step 1: List down your long term (3 to 5 years) future needs and goals. Like buying a house, child’s education, set aside emergency funds, building corpus for particular needs etc.

Step 2: Try to avoid taking pure liabilities by mortgaging valuable assets. Like Loans, other mortgage liability etc. 

Step 3: If possible try to get rid out from luxury, by controlling current life style by some percentage. Income inflows does not matter, where you divert it makes difference. 

Step 4: Stop fooling yourself – I am strong; my inflows are strong; I’ll overcome the tide by myself. Sorry to say but you have neither strong exposure nor time to track your financials. One of my famous saying is, ‘When it comes about money you have a choice to avoid risk, by just paying little premium – in terms of insurance or financial planner.’ 

Step 5: Get in touch with financial advisor or planner, who can help you to build strong corpus and portfolio according to your risk assessment. 

Think on it! Share your views and comments.