24 May, 2011

When does equity make sense in a financial plan…

My daddy can run 5 kms with ease, bragged Kaushik to his friend Dhiren. Dhiren was not to be upended by such trivia and promptly slipped the information that his father did the full marathon. This is common among children like them, one would think. But then, it is quite common with adults as well.

Some have honed it into a fine art that their bragging is honey smooth and one may not even realize that they are slipping promotional material below the radar. It can be anything from their cars, to their prowess with the opposite sex, their connections, their ability to pick up winning stocks etc. And talking about this ability, we tend to hear a lot about this from our clients.

Milind has made so much money in stocks that he was able to buy a house with the profits, Gopal wistfully told the other day. Good for him. Most people don’t reveal their mistakes; they only talk about their successes.

Gopal, my client, hence wanted to invest in stocks, first and foremost. He was not getting why we are not suggesting him stock investments for him. He thought if he comes to a Financial Planner, we will use our midas touch to make him millions. We had a lot of work to do.

Financial Planning is a blueprint to achieve one’s goals in the optimum manner. The important thing here is to manage cashflows properly and ensure best choices for the client, after considering the investment horizon, liquidity needs, stage of life of the client, their goals itself etc. Some assume that the best choice is the one that gives the maximum returns. It is not. However, one can make the correct choice from among similar instruments which may all be suitable and ensure the best fit in their situation in terms of returns, liquidity, ease of management, flexibility etc.

This ofcourse did not convince Gopal… he agreed that all these are important, but… what about shares? See Milind – how he has turned around his fortunes. Why don’t you chumps understand, he seemed to say. We got the hint. We had to address this now that we knew the planning process will otherwise not move forward.

Firstly, investing in equity is a high-risk, high-return proposition. The risks are high Gopal… you need to realize that. A stock that is seemingly doing well, may languish for any number of reasons. And it may crash, like it happened in case of SBI after the 99% profit plunge in Q4 results. It did not help matters that the provisioning was probably a one-off thing. Gopal would have fallen off his chair as SBI nose-dived 8% on a single day. The first thing then to appreciate is that the stock market is not some gravy train to Richie-rich land. There are as many pitfalls as there are opportunities.

Secondly, investing in stable, market leading companies is no guarantee of good returns either. Ask anyone who has invested in Reliance Industries and they would probably change the topic in a hurry and exit without as much as a good bye… for Reliance industries has given -13% returns, in the past one year. Does that mean Reliance is not good? Hardly. It is the biggest private sector company, has the largest market capitalization and is a company with huge potential. But when investing, mistakes do happen.

Now come to promising sectors. Microfinance was one such sector till about mid 2010. The industry went through a turmoil due to regulations on Andhra Pradesh and now Malegam committee recommendations. SKS Microfinance was a torch bearer. It had it’s own internal issues to exorcise as well. The upshot – the price is down over 70%.
Investors treat investing through IPOs to be a gilt-edged strategy. DLF & Reliance Power are prominent examples. One research showed over two thirds of the companies are quoting below their IPO price.

Ok genius, Gopal was saying… tell me how Milind made money? I told Gopal that Milind’s methods are a closed book to me. However, Gopal, in Financial Planning we look at equities only after covering the flanks.

The bedrock of the investments needs to be good debt instruments – like PPF, PF, FDs, Bonds and the like. That stabilizes the ship. The growth instruments preferred would be Mutual Funds. Gopal winced, as I never tire of mentioning this. The same thing allover again, his face said. I continued undaunted. Mutual funds offer unparalleled diversification as even a small sum of money invested in a fund would offer the same diversification as the entire portfolio. It is managed professionally, gives decent returns overtime & ensures liquidity – all this at a lower risk profile compared to Equity shares. The other cherished possession would be a home. As part of the Financial plan, that needs to be provided for too.

Now, when do you recommend Equities, Gopal wanted to know. I was actually coming to that. Equities are to be considered only after sufficient investments & security has been built through debt instruments, Mutual Funds and appropriate insurance. Then, Equity selection should be done to take exposure to specific companies that have good longterm potential. There is no point in buying index stocks again as they would anyway be represented to some extent in Mutual Fund schemes, in which one might have invested. Selecting promising sectors and investing in hand-picked companies hold promise. But in all these cases, one needs to give the investments time to bear fruit. Milind would have certainly given his investments time to bear fruit, I concluded. Gopal remained unimpressed. I was done. So, I suggested that we pop around to his favourite restaurant and have some pav-bhaji. Gopal brightened up immediately, he being a foodie. We walked with a song on our lips. Mine was – All is Well!

Article by Suresh Sadagopan ; Published in DNA Money on 24/5/2011

23 May, 2011

Buying a property

Seema could not contain herself after a look around the property and the amenities. She particularly liked the layout of the home and the fact that it was overlooking a waterbody. According to Vastu, it is a good sign. She almost saw herself living in that home. Rakshit did not share her exuberance. He was calculating the overall price to be paid and the loan they would need to take, to buy this home.

Rakshit was as interested in buying a home as Seema. Only, that he was being pragmatic. The couple have been wanting to buy a home since they got married about a year ago. But the prices were way above what they could afford, due to which they postponed the decision. Now, again they were bitten by the bug and here they were…
Seema & Rakshit were both working. Rakshit was earning about Rs.35,000/-pm after deductions and Seema was getting about Rs.21,000/-pm, post deductions. They did not have any dependants. After initially looking around, they had given up. They were investing the money so that they could use it for the home, at a future point. They had accumulated about Rs.3.45 Lakhs now. Rakshit can get another Rs.2 Lakhs from his company at low interest rates. That’s all they have now. But, this home they have set their sights on, would cost them Rs.57 Lakhs. Now, that is way beyond what they could afford.

They were worried. Everyone around them is telling them that prices of properties will only go up in future, when it will be even more expensive and unaffordable. They were in a state of panic and despondency, when they came to me.

After understanding their situation, I wanted to know how long they might be in Mumbai. They were not sure. I knew that Rakshit was from Kanpur and Seema from Delhi. I was then intrigued as to why they wanted to buy a flat in Mumbai. I tried another tack. Will they be willing to shift to another city if they get a good opportunity, I wanted to know. They were clear, they would. Then, I wanted to know the logic of buying a home in Mumbai. They wanted to save tax, they said. Also, their logic was that the rent was going down the drain, but the rent plus some more investments would create an asset.

I then queried them if they are claiming the rents for deductions. They said, they were doing it. If they move into their home, the rental amounts would go and along with it the deductions. They also accepted that. The tax deduction on the EMI would be much higher, they felt, as they would pay a considerably higher amount ( compared to rent ) as EMI. I had to dash the cup from their lips… I informed them that they could claim only upto Rs.1.5 Lakhs of interest component, irrespective of what they are paying as interest, in case of their residential home. This surprised them, as they thought they are going to get full tax deductions.

Secondly, I also drew their attention to the fact that the EMI would be impossible to service with their current income. Even assuming that they did, if they want to move to another city, they will have to continue to pay the EMI and also the rent in the new city. I offered that the rent in the new city may be compensated by the rent they may get in the home they plan to acquire in Mumbai, subject to the property being ready to be rented out and their interest in renting it out. But, if they move to the new city and stay in a rented place, it beats the purpose of taking all the trouble of to acquire their own home.

By this time, they were really down. I knew I had punctured their most cherished dream. I resolved to apply the balm. I informed them that property may grow at a longterm rate of about 8% or so and they need not despair that they cannot buy it in future, provided that they invest their surpluses judiciously and build a corpus. A proper investment portfolio could yield higher than 8% returns and hence even if you want to invest in future in a home, they will have a corpus which would have taken care of the inflation in property rates. “I get the drift”, Rakshit said. “Guess, it is a sensible option to continue in this house and invest in a home later when we have dropped down anchor”, Rakshit added. I couldn’t have put it better. I just smiled.

Article by Suresh Sadagopan; Published in Moneycontrol.com on 7/2/2011

Lord the guide and counsel

Raman was a silent participant in a discussion in the canteen, about savings taxes. One of them was lamenting that the pitiable Rs.1.5 Lakhs deduction for interest payment, was not even one third of what he was actually paying. Another was cribbing about the low thresholds for savings taxes under Sec 80C. It set him thinking.

When he went back to his seat, he started a bit of googling and reading on finance related subjects. Even when he reached home that evening, his thoughts were still dwelling on finances. He switched on a Finance Channel and was intently watching it. There was fevered discussion about the direction of the market. He had finished his dinner on his way back home itself… for his wife and kids had gone to his in-laws place, for two days.

He heard a muffled knock on his door. He went to the door and found Lord Krishna himself standing there. His brow knit with confusion… who could be fooling him at this time…? He wanted to know who he was. The Lord just told him that he had been thinking of paying him a visit all these days and chose this quiet day, when no-one was around. Raman though unconvinced, let him in. He still wanted to find who this person was, who was playing the fool. The Lord continued," I'm able to see lot of confusion on your face. Why do you worry so much about Finances? You are well provided for”. Now , Raman was stunned. How did he know what was going on… was he really the Lord?

"There are expectations from this budget. Whether it comes to pass, Pranabda will decide. But, let us see what will appeal to a common middle class person. Firstly, the amount of Rs.1 Lakh is seen to be too small. Making it Rs.2 Lakhs would give some relief to many people and at the same time ensure that people save. Secondly, the limit for claiming interest being paid towards a home loan, is now capped at Rs.1.5 Lakhs. That is too low as your friend Sandeep was pointing out today afternoon. With the property prices being what they are, it would be great idea to increase it to between Rs 2.5 Lakhs – Rs.3 Lakhs." Raman was clearly reeling. How does he know about what Sandeep said in the canteen. He looked intently to see if it was one of his colleagues, pulling a fast one on him. But, there was no one who looked like the person before him.

He excused himself and went to pick up a glass of water. When he was back, the hall was empty. He went into his bedroom, bathroom, the other bedroom… they were all empty. Then he went to the kitchen. There he was standing before the small temple, which housed the figurettes & pictures of Gods. How did he come here, he thought to himself. “This is in answer to your prayers that I have come. You have always prayed to me for wealth & prosperity. You have them too…", said the Lord mysteriously. Raman had a hundred questions by now, in his mind.

"Coming back to the subject of what Pranabda can do for the common man, he can give relief by elongating the tax slabs. The 30% tax slab could start from Rs15 Lakhs, instead of Rs 8 Lakhs. The 20% slab itself can come upto Rs.8 Lakhs. Income upto Rs.3 Lakhs can be exempt from Income Tax. Rs.3-8 Lakhs can be taxed at 10%. That would give much needed relief to citizens. Senior Citizens can be given relief upto Rs.5 Lakhs, as they would have paid taxes all their lives, as it is".

"The other area is regarding medical expenses. Sec 80D gives relief upto Rs.15,000 a year for premiums paid towards medical insurance policies. But many of them spend from their pocket on various medical related issues. There is another Rs.15,000/-pa for medical reimbursement which is not taxable. But, in many cases, there are ongoing requirements on medicines and tests. In such cases, it goes much beyond Rs.15,000/-pa. Also, ongoing medical expenses incurred on parents are not covered by medical insurance can also be substantial. Hence, this non-taxable medical reimbursement, should be available till Rs.50,000/-pa ( against bills ) and should cover the family and parent of self and spouse”, the Lord said.

By now, Raman was convinced that this is the Lord. "Longterm conrtibutions to pension funds should similarly be deductible separately ( apart from Sec 80C), to the extent of Rs.1 Lakh. Rs.20,000/-pa in Infrastructure bonds which they introduced in the Budget is a good idea. That could be continued with a limit of upto Rs.50,000/-pa. Conveyance charges that are non-taxable are very low at Rs.800/-pm. That can be increased to Rs.4,000/-pm", the Lord said. None of his colleagues knew so much about Finances. He knew he has met the Creator himself. "Are you saying that all these things will come to pass”, Raman wanted to know.

“These are some of the things the Government could do for it’s people. The Government you have elected exists for itself. It is a parasite. A parasite benefits without giving anything in return. When you all are paying so much tax, it stands to reason to get some benefits. I have just specified what areas are ripe for adjustments. What Pranabda is going to do, you would know by the end of the month”. The Lord went on to say that we get the governments we deserve and more of educated, well intentioned people should come into public service. Raman was hardly hearing it. He prostrated before the Lord. When he got up, the Lord was gone.

Raman was presently staring at the wall. He was disoriented. He had got up with a start and was sitting bolt upright on the sofa. He immediately started searching all the rooms for the Lord. Then it dawned on him that it was all a dream. .. a dream where the Lord himself had outlined what changes would be beneficial for the people. He had tears in his eyes. Even though it was a dream, it touched him. He will not be able to sleep now. He switched on the TV. Pranabda was on air, talking of various reforms to be carried out…

Article by Suresh Sadagopan; Published in Moneycontrol.com on 10/2/2011

Women and Finances

Their classic aversion to finances is a byword. But they cannot afford to ignore their finances, in their own best interests.

I was recently called upon to address about women’s needs regarding finances. To set the ball rolling, the organizer started off with the important role a woman plays - as a mother, sister, wife & daughter and increasingly as an income earner.

Therefore, she concluded, it is very important for women to understand finances, given the multiple roles they juggle and the stakes they have. Fair point. But I felt this discussion was veering off from the most important fact that, everyone needs to understand finances, not just women alone – else, they would mess up their lives.

Even men play multiple roles as father, son, brother, husband. They also work for a living. It is pretty evident that they juggle with multiple hats too. They need to understand finances too. Hence, it is not a man or a woman thing. Testosterone or Estrogen does not decide whether a person has interest in finances. The need for awareness and ability to proficiently manage personal finance is needed by everyone.
Women can understand a financial product, as well as the next man. They could quite competently evaluate them and take informed decisions, if they choose to. It is not a question of competency at all. Women are everywhere today, including finance area. We have scores of them in high profile positions as CEOs of Banks, analysts, economists, fund managers etc., which are hardcore finance professions. We have a woman financial planner, in our firm. So women-and-finances-are-poles-apart argument, does not work.

The fact is that many of them are just not interested. They have switched off finances from their lives. And have given the control of that to their father, husband, whoever… Probably, that is what the organizer wanted to highlight and give a clarion call.

Confiding in their close ones, is fine; abjuring responsibility in that area or blanking out finances, is entirely another. In our Financial Planning engagements, we find that it’s mostly the menfolk who take active interest. We request for a joint meeting to make the lady of the house understand where they are and what problems they are facing and what we propose to do for them. Mostly, they don’t come. Even when women attend discussions to go through the plan, they are mere, passive observers, waiting to dash out of our office, at the earliest opportunity. Mobile phone and children present an ideal cover to slink out... and abundant opportunities are presented by the nifty gadget and the mischievous children. That saves them the trouble of stifling their 40th yawn and wiping the tear from the corner of the eyes, ever so often, with that teeny-weeny kerchief.

But, this attitude is self-defeating. We want them to understand the blue print we are creating, investments/ insurances they have, the calculations we do to arrive at certain conclusions, our recommendations for them… Financial Planning, I agree, is a bit dense.

A working knowledge of finances and a disposition to learn, helps. This will help in avoiding, say, plonking a huge sum in an insurance plan to save tax, because someone had approached all the ladies in the office and had committed to give the proof of investment, by the next morning. What the plan is all about or whether it is suitable at all, is not looked into. It happens to a lot of men too.

A poll conducted recently suggests that Indian citizens are confident and competent in handling personal finances and are near the top of the table. I don’t know how they went about their polls. But, if indeed the awareness levels can be considered very good, then I despair about the citizens of other countries, bringing up the rear. I would just say that their sample probably consisted of financially well- informed individuals and may not be representative of the entire population.

Knowledge is power. It is essential that one has a bit of financial awareness and knowledge, enough to understand and evaluate the offerings. This will enable them to take decisions that don’t backfire like the bofors gun. Last minute investments invariably go wrong. Starting off the block early, helps. You don’t have to like Finance. You have to have enough working knowledge here, to competently handle your affairs. Know to ask the right questions. Start reading the personal finance pages of magazines/ newspapers. Switch on the TV and absorb some of the discussions on Personal Finance.

You are working for money and what it can provide you with, right? Why then treat it like, what the cat brought home? Money is not a man-thing. It concerns us all. It makes the world go round!

Article by Suresh Sadagopan; Published in The Economic Times on 10/2/2011

Question traditional methods of investment

Both property and equities work over the long term.

Intuitive thinking need not always be right. Counter-intuitive thinking can also be right… sometimes so very right that you wonder if that wasn’t the intuitive thing to do. Take Steve Jobs. Instead of launching mobile phone models that cater to every group, he launched one phone - the iPhone - for everyone. Apple is world No 3 in Smart phones today.

A lots of conventional thinking is flawed. But we continue thinking that way, since it is a “comfort zone” for us. Moreover, everyone around us, our family and peer group also endorses it. The same applies to the way we handle our personal finances too. We continue to labour under the many myths and misconceptions, which have become accepted mainline tenets today.

Often, when we face a financial shortage, we wish for higher paying jobs. Conventional thinking says that if one changes one’s job for a better paying one, financial issues should be sorted out. However most fail to realise, more often than not, it is the wrong handling of current finances that leads to financial shortages. Even if the new job assures better inflows, aspirational thinking will lead to spending more money for a better lifestyle. There will be always be new and better avenues for outflows as long as the the basic problem of handling money in a prudent manner is not addressed.


Another advice that elders in the family dispense to the young is - one should buy property now since property prices will always be rising. Best to buy it now than later, they say.

Long-term growth of property is between six and 10 per cent, depending on which city the property is located. Expectations have risen as people look at the returns on property in the past six years. Some yearssaw property prices rising by 20-30 per cent yearly. But that is not sustainable. In equity or equity mutual funds (MFs), too, the returns were in excess of 50 per cent in some years. But it cannot always grow like that. The long-term average will catch up.

So, it is a myth that property will become unaffordable in future. As long as you are investing your surpluses and earning over eight per cent yearly, you will be able to save adequately to meet any escalation in future. This way, one will be keeping the options open and at the same time, can buy a home at a location of choice, in the future.

Again, property investments are seen as long-term investments and equity-oriented investments are looked at as short-term investments. The fact is that both are good investment avenues. Which asset class to invest and in what mix depends on an individual’s personal requirements. Equities, over a period of time, have given very good long-term returns.

The Sensex has given a compounded return of 18 per cent annually in 31 years. There is no reason to think equity is not a good long-term instrument. In fact, there is no other investment instrument which can beat these returns. Property investments are favoured due to their higher emotional appeal and the fact that it is a tangible asset. You can walk into your home or see the land. Equity holdings today are not even physical paper, which you can hold; they are entries in your demat account. Hence, psychologically, equities do not hold the sway that property does. Also, due to the fact that equity shares can be bought and sold very easily, it does get bought and sold - sometimes several times within a day. That does not mean it is the rightthing to do.

There are long-term equity investors who have built fabled corpus for their retirement from fairly modest beginnings.


The other well-rooted belief is that one should buy property to save taxes. Let us get this straight. Saving taxes is not an objective by itself. Getting good after-tax returns, meeting goals and having the cash flows to meet one’s requirements over time are the more important and relevant concerns. Yet, so many buy property to save taxes.

How much can one save? In the highest tax slab, the savings for a residential home on Rs 1.5 lakh of interest payment is Rs 46,350 per annum. Note that your interest outgo may be much higher, but your benefit will be restricted to this amount only. While saving this amount is fine, one takes on a long-term liability. Even rent is tax-deductible.

A rented house, though inconvenient in some ways, is not a liability if one wants to shift to another city. Many people still say they would prefer to pay an equated monthly instalment (EMI) and create an asset instead of paying a rent to someone else. The problem with this is that the EMI will be many times higher than the rent and will have to be sustained even if one moves out of that city.

We accept what we hear as gospel truth. It makes sense to validate that against the touchstone of your wisdom, before accepting and acting on it. Who knows, you may break some rules and come out smelling of roses, like Steve Jobs!

Article by Suresh Sadagopan ; Published in Business Standard on 13/2/2011

Black Money

“Nothing seems to get done, even after paying money”, lamented a relative of mine and expressed absolute disgust at being harassed for getting a simple marriage certificate, for his daughter. The fact that he lives in US, did not help matters. He told me that he was able to get his daughter’s birth certificate in 5 minutes. “Citizens rights are well protected there and such harassment is unheard of”, he added nodding his head in indignation.

Now, that is not a welcome sign to any Indian wanting to return home. With India really shining, thousands want to come back. The intrepid among them, have done it too. But there are many more who dread the system. They know they can get suitable work in the country; they want to contribute to their motherland; they want to come back. And then they hear of the bribery scandals that have rocked the country and some of them also have the mortification of experiencing the sleaze firsthand. Then they decide against coming back. We can be cockish and say that it’s their loss. It’s a greater loss to us. Our globalizing economy and industries need people with international experience. NRIs are a perfect fit here. We are scaring them away with our stinking systems. The sooner we set it right, the better the country would be for it. It is only then we will be able to get the talent home.

Now, that is the perpetual problem, we citizens face, when we deal with government machinery. Bribes are asked and given, as a matter of course. It is so engrained from the lower most level. The entire system is corrupt. Politicians have honed it into a fine art. I hear there is a system where the chief minister of the state is supposed to send a certain amount of money (like Rs.1,000 Crores ) every month to the party boss. No wonder that the targets that our politicians gun for are not developmental targets, but the ones that generate the sleaze capital. For that, they depend on all the arms of the government machinery to do the job for them. There is an elaborate machinery they have to intimidate and subordinate the citizens and businesses. They have various ministries which can change rules for or against businesses, they have various arms like excise, sales, income tax departments to do their calling and intimidate them. Those who remain foolish can expect visits from factory inspectors, pollution control / health inspectors, a visit from the representative of labour department etc. CBI has become a tool in the hands of politicians. Judiciary has also lost it’s above-board character and there have been instances where even judges were embroiled in corruption and bribery scandals. Politicians control all levers to extract money.

Welcome to India – the land of Black money.

Talking of black money evokes yawns here. It is an open secret that the tentacles of corruption has reached, right till the top. This is not freely reported, that’s all. The scandals getting reported these days seldom is less than tens of thousands of crores. We now have 2G scam of hitherto unheard of magnitude – Rs.1.76 Lakh Crores! The politicians & bureaucrats have created a crony capitalism system that is now well entrenched.

Education : Illgotten money is siphoned off into land & other property deals. Education institutions have been built by politicians with their slush money and a veneer of legitimacy is sought to be introduced in their wake. They are attracted to this as they can get huge amounts of land allotted to them in the garb of constructing an educational institution and more black money can be utilized in constructing the buildings and other facilities. They also get donations from charitable trust ( there was a controversy regarding Siddhivinayak trust allocating money to trust run by some politicians, years ago ), where they control the levers of power. This is another abuse of power. Once the buildings are up, they start off another money minting exercise. These institutions charge huge fees and offer a large number of seats in the management quota, where a suitably high “donation” is taken before admitting the student - ofcourse in cash. So, this is another black money generating machine. We have hundreds of such institutions across the country, which are ripping the people and producing students of dubious quality, who may not make the cut with the industry.

Corruption and Black money brings in huge problems for the whole country. Inflation is fanned by Black money.

Inflation : This is problem no.1 of black money. The parallel economy is estimated to be between 40-50% of the real economy. The slush economy is then Rs.23 Lakh crores to Rs.29 Lakh crores! That does not include the money stashed away at destinations abroad which is thought to be well beyond US$ 1 trillion ( for perspective, our GDP is US$1.3 trillion ). Every passing year, more money gets added to this hoard.

Inflation is a consequence of this. Inflation occurs if there is too much money chasing goods. Prices go up across the board in this case, unlike in the case of demand / supply mismatch where the price of a particular commodity/ item alone, will go up. For instance, if there is a poor crop of sugarcane, only sugar prices will move up. Unaccounted money however, pushes up prices across all categories. The only categories that don’t get affected are the hyper competitive categories like TVs and other white goods.

This affects everyone. It has affected the aam aadmi the most, in whose defence they keep mouthing platitudes. Prices of basic food articles have shot through the roof. In some vegetables, the prices have moved up by upto 200% in the last 2 years. And the prices have plateaued at much higher level compared to the levels earlier. Aam Aadmi is the worst affected as most of his budget anyway is spent on food and since this has shot up, he is unable to allocate money to anything else.

Real Estate : Black Money affects people in different other ways too. Land prices and property prices have gone through the roof. Politicians have invested in a huge way in real estate. It is said that hundreds and thousands of acres of land have been bought by the politicians in every locality across the country, from the slush money they generate. The reason why it goes into real estate is that huge amount of cash can be ploughed into these transactions. Part of the reason why the land and property prices have shot up is black money and the inflationary pressure it is exerting on the prices of land and other property.

This affects the normal citizen, who finds the going really tough, in view of the astronomical rates being quoted for real estate. The middle class citizens finds that they need to go far out to buy anything within their budgets. So, they need to take huge loans which they need to pay all through their working lifetime. They have to pay huge amounts of money as an upfront payment too, which means that they will have to cash out a lion’s share of their savings for that. In many cases, they are asked for substantial sums as cash – ie. Black money.

Now comes the funniest part… the buyer draws out huge sums of properly accounted money and hands over huge sums of cash to the seller. The irony here is stark. We are forcing our citizens to convert their proper, accounted money to black money! Without that, transactions don’t happen, because the seller wants cash to pay for another property, where they demand cash payments. Hence, the more the property transactions in the country, the more accounted money is getting converted to cash! So, all of us are contributing towards expanding the black economy, though we may be unwilling participants. The system is now so well entrenched that this is an established practice.

The irony does not end there. He is exposing himself to inquiry from the taxman at any future point as to why he withdrew lakhs of rupees in that period and what was the end use. With terrorism threats looming large, huge cash withdrawals are monitored. So, a law abiding citizen can be exposed to inconvenient questioning, which he will not be able to handle… he cannot reveal that he drew cash to pay the black component, nor can he think of a way which could absorb lakhs of rupees, where he has spent on. In effect, it is choice between a rock and a hard place. By this one transaction, the law abiding citizen has placed himself open to inquiry at any point in future. When questions come up and heat is turned on, it becomes fertile ground for further corruption. He will have to pay further cash to extricate himself from the mess he created for himself by paying – cash!!!

Now look at the other part of the transaction. If a seller has received a huge amount of cash, he cannot deploy the cash anywhere. He just has to keep it with himself, at huge risk and without earning any interest… till he identifies another property. That may take six months or a year. Till that time, the money will just lie as cash, which goes against all canons of proper money management.

Gold : The other area where black money gets parked is in Gold. Now, Gold has always had a lure with our citizens. That is also a good place to park the cash. Many buy jewellery, which means it is partially an item of consumption and partly an investment. Even if bought as gold coins or bars, one still has to pay a 5 – 15% premium on the raw gold prices. But purely from an investment perspective, this will be a poor way of deploying money. The best way to invest in Gold is through Gold Exchange Traded Fund (ETFs ), where one can get the returns offered by Gold without the attendant costs, problems of purity etc. But Gold ETF cannot be bought with black money as that is to be bought in a stock exchange and for that PAN and other details are necessary. So someone with black money will invest in physical gold only.

When investing black money, one is not really looking at maximizing returns; it is more to keep the money, without getting caught. Again, partly due to this and due to the volatile global situation, Gold has become a preferred investment even for governments. This has pushed up prices for everyone.

Other asset classes : Since, in most other investments giving a PAN is mandatory, black money does not feature in Equity , Equity MFs, FDs, Bonds etc. To that extent, these sectors are clear of Black Money. But money does get into the stock market, through money coming from abroad.

Article by Suresh Sadagopan ; Published in Money Mantra on Feb 2011

Strategic & tactical considerations in financial planning

Financial Planners are misunderstood to be investment consultants, by many… not their mistake either – for many of them just call themselves Financial Planners, when all they do is offer investment advice. A proper financial plan would be a blueprint to achieve goals in one’s life, after a thorough assessment of one’s current financial position and future cash-flows. Analysing the income/ expenses, past investments, insurance, drawing up cash-flows etc., are a part of financial planning. While arriving at the optimum amount to invest and in which options, there are several strategic & tactical considerations before Financial Planners.

Asset allocation strategy – There are rules of thumb that are used to arrive at the appropriate asset allocation. That may not turn out right always, though it may be broadly right. A better alternative would be to come to an asset allocation that is suitable to the client concerned. Even, if the age and the station in life are the same, asset allocation being recommended can be significantly different based on the goals and when they are coming up, risk bearing capacity, years to retirement and other parameters.

Once the asset allocation is done broadly, we need to get into the allocations in each class. For instance, if Mutual Fund schemes & Equity has been recommended, it needs to be decided as to how much will be allocated to equity directly and how much through MF schemes. Equity shares have to be chosen so that they do not duplicate the holdings, done through Mutual Funds. The direct equity holdings should be in specific companies in which deep exposures are recommended. In others, exposures can be had based on their future potential. These may be small cap companies which are in promising industries and have the potential to become a multi-baggers, overtime.
As regards Mutual Funds, the allocation to Large, mid & small cap, sectoral, balanced, thematic funds etc. needs to be considered and fixed. After this is done, the candidates from each of these classifications can be chosen based on their long-term track record, their performance over the up and down cycles of the market, the portfolio churn , expense ratio, fund management style, fund manager credentials etc. Similarly, debt products also needs to be chosen based on the tenure, liquidity considerations, tax implications, net returns, risk profile of the product etc.

Liquidity management – This again is a very important aspect, which a financial planner would be concerned about. Generally, three months expenses are kept aside as a liquidity margin. Higher liquidity margin is suggested in case of irregular incomes. The expenses will certainly include any loan EMIs they are paying. It needs to be decided now as to where to keep this liquidity margin amount. Part of it will be in the Bank Account. How much we keep there, depends on whether there is a loan or otherwise – a higher amount is kept there if there is an EMI as we would not want any cheques to be dishonoured due to insufficient balance. Another option would be a sweep-in FD in the same bank, which would automatically be liquidated and come into the SB account, when a cheque is presented.

In other cases, we may also maintain a portion of the liquidity in Money manager funds. These funds give a higher return as compared to SB accounts. They are more tax efficient too if invested in dividend option. The other alternative is to set up an overdraft account, wherever possible. In this case, one could borrow to the extent of overdraft sanctioned and need to pay interest only for the period, for which the money is being borrowed.

Contingency Funds – Contingency funds may be required to be kept to tide over unknown situations. It may be required, for instance, if there were an elderly person who may require medical attention. Especially, if this person does not have medical cover, it becomes even more essential to have a contingency fund. In other cases, it is simply kept aside to tide over unknown situations – like medical requirements, unknown expenses which could pop up suddenly or other imponderables.

The place to keep aside contingency funds is in Fixed deposits of banks, Medium term debt funds or Hybrid Funds. A portion can also be in large cap MF schemes & balanced funds. A portion can also be in Flexi-deposits with banks. The prime consideration here is liquidity and the ability to access the funds at short notice.

For that reason, we would not suggest FMPs, NSCs etc., which are not really liquid.
Optimising longterm returns – When allocating funds, one of the considerations is to invest in instruments that give good post-tax returns. From that perspective, one needs to choose options which offer complete tax relief like equity shares or equity oriented MF schemes & PPF or choose other options where tax incidence is low. The long-term capital gains ( after 12 months ) in debt mutual funds is 10% without indexation or 20% with indexation. In case the investment is for a duration below 12 months, dividend option is beneficial as the dividend distribution tax is 14.16%. This is where these will score over the traditionally favoured investment destinations like FDs, Bonds, NSC etc.

Also, while putting money in insurance-based products, one needs to pay attention to taxation aspects. While it is true that while maturity proceeds of most insurance products in general are tax free, it is applicable for pension products. Only upto one-third of the corpus accumulated can be taken out tax free; the rest is taxable. Also, the annuities are taxable as income. Hence, care needs to be taken about which kinds of products one invests in.

It would be evident from the aforementioned points that one should take a 360 view while choosing between the various options, while deciding on the strategic and tactical options regarding one’s finances.

Article by Suresh Sadagopan; Published in Business Standard on 20/2/2011

Investing in FMPs

Inflation is a big challenge for many people these days… more so for senior citizens. They are dependant on the income from their investments, to take care of their expenses. In the retirement phase most of them keep a bulk of their investments in safe debt instruments, to ensure that there is no erosion of capital. That means most of their investments would be in FD, Bonds, NSC, KVP, Post office MIS etc. But keeping the investments in debt instruments have their downside as well.

The returns from debt instruments are fully taxable ( except in case of PPF/PF). Hence, the net returns are not that attractive, even if the returns seem to be attractive on the face of it. Secondly the post tax returns may not be able to beat the inflation and will result in degrowth of capital for the investor. This poses a serious problem for someone who has a limited corpus and due to inflation, it keeps growing smaller and smaller.

That is where, Fixed Maturity Plans (FMP) will score. FMPs are debt instruments coming from Mutual Funds. FMPs invest in Commercial Paper, Certificate of Deposits, Debentures, Bonds, Securitised debt, Money Market instruments etc. So, an FMP is also a 100% debt instrument. What about the returns in an FMP? There is no guarantee of a fixed return in an FMP, unlike in the case of FDs/ bonds. This is somewhat unnerving for some investors. There is more…

As per SEBI regulations, the portfolio and the indicative returns of the FMP cannot be disclosed by the Mutual Fund house. This has ostensibly been done so that they do not show one portfolio and invest in a different portfolio. Also, the ban on disclosing indicative returns has come in place as this return can vary with the portfolio that is ultimately chosen for that FMP. This was done in the interest of the investor.

In the absence of this information, it became difficult for a person to decide whether a particular FMP is a good candidate to invest. So now, one has to do a bit more guesswork on the portfolio and can also access FMPs that have come in the recent past. They will give a rough indication of what kind of portfolio a new FMP may have. Once this is known, a rough calculation of what could be the expected returns of the FMP can be done.

If you notice the FMPs which have come in the recent past and have noticed their portfolios, you would have noticed that their composition consisted of Bank CDs. This seems to be a trend these days. Bank CD rates are at a median of 9.6%, for about a year tenure. You could safely assume that the return will be more or less that, as the portfolio is held to maturity and is not subject to interest rate risk. Then there would be expenses, which could be about 0.3-0.4%, on an average. Reducing the expenses, the gross return comes to 9.3% - 9.4%. There are Bank FDs too, which offer these gross returns. What turns the tables in favour of FMPs is their tax treatment.

Tax treatment - A debt MF scheme, which includes an FMP, is eligible for long-term capital gains treatment after 365 days of investment. Longterm capital gains is calculated at 10% without indexation or 20% with indexation, whichever is less. Indexation concept is used to compensate for the effect of inflation and to apply tax only on the real income earned and not on all the income. So, if an FMP starts in the current year and matures in the next financial year, it is eligible for single indexation. If however, it originates this year and terminates in the third financial year ( 2012-13 ), it will be eligible for double indexation benefit where the inflation adjustment can be for two years.
Let us calculate using an example.

Suppose Ram has invested Rs.10,000/- in a 370 day FMP, which commenced on 1/2/2011. It will mature on 6/2/2012. Let us assume the inflation in this year is 8% and the Cost Inflation Index ( CII ) reflects this, and the portfolio invested after expenses returns 9.4%. To calculate the longterm capital gains, we take 10% without indexation, which comes to 8.46%. Now with indexation, the invested amount is treated as 10,800/- and the amount you get back is 10,940/-. The gains made by you is Rs.140/-. The tax is 20% on this amount, which comes to Rs.28. Now, the final amount that you get as returns are Rs.10,940 – Rs.28 = Rs.10,912/-. The returns are hence 9.12%. See adjoining table.
As opposed to this, in case of FDs, Bonds, NSC etc., the amount earned is directly added to the income and tax is applied. Even if an FD yields the same 9.4%, the post tax returns would be just 6.5% instead of 9.12% in FMPs.

This situation may not be available in future. It would be a good idea to benefit from it now. It’s advantage to you with FMPs.

Article by Suresh Sadagopan; Published in Indian Express on 28/2/2011

The business of giving

Charity and doing good is the new cause that our denizens have taken a fancy to. Almost every second or third person we do a plan for, wants to keep aside a decent pile for charity. That itself is a heart warming trend considering the number of organisations and worthy causes that need financial assistance. There are again many of them who take it one step further… they want to take up some social causes and work in the villages. Again, this is an admirable trend which requires to be applauded. For most people, it means going and teaching in a village school.

That could be the problem. Imagine a technocrat in top management going and teaching in villages… there is nothing wrong there. But, it is wasted talent. For instance, in the IT industry itself, there is a dearth of top notch talent as the industry has been growing at a breakneck pace. Now, would it not be a great idea for this technocrat to be part of this ecosystem… train, mentor and coach other people? Will it not be more useful to the economy and the country if he is able to pass on the essence of his learnings and experience to others in the industry? That will certainly preserve the knowledge, skills & talent that he has gleaned from years of work experience in the industry. Also, a person like this can be a big enabler for any organization due to the range of contacts and relationships, he would have certainly developed, over time. Now, casting all that aside and going and teaching in a village school, will be a criminal waste of talent.

If the idea is to do good for the society and the country, a person need not move out of the industry. Almost in every industry, there is a crying need for talent. Rather, he should turn an enabler, a catalyst for the industry and a teacher, coach and mentor for people from the industry. Colleges have outdated curriculum, so much so that, many times they are significantly divorced from what the industry wants. The quality of the teaching faculty in colleges, for the most part, leaves much to be desired. The reasons for that, is all too well known. Given this fact, it would be a great idea to join our education system, not at the primary level, but at a much higher level, where the contributions would be relevant and meaningful.

Plus, it is not a piece of cake to teach young children too. It requires quite different skills and someone even with years of corporate experience, need not necessarily possess them. From a pure efficiency perspective, it may make more sense to use an undergraduate to teach the basics. With some training, they can do a competent job. If they are from the villages itself or from nearby areas, they will know the language, be able to gel well and would be effective. Since they are from the area, there is no question of getting used to the place. They can be hired for modest sums and can be expected to stick around for the long-term.

It makes sense to support these teachers, who would be happy to get the job. It can simply be achieved through donations given to NGOs, who are working in such areas. This is the way to ensure social transformation in the hinterland. In the meanwhile, these do-gooders can be useful part of their ecosystems and can contribute to the industry that nourished them. This is as much a worthy cause as the other, they are passionate about. They will also earn well, which can be used to support several such teachers and students. This is a win-win deal.

Though this sounds logical, people seem to be marching to a different drumbeat. Many seem to think that they will derive satisfaction, only if they are in ground zero. As we have seen, this may not be the most effective way to engineer social transformation. If their purpose is clear, then they would get this. Probably people need to clarify what they mean by working for social causes. Instead of being the lone lamp, one could ensure that there are several lamps to light other lamps. That would bring about a social transformation. As planners, we would be more than happy to allocate for this goal too, along with their other cherished goals. For us too it will give us a lot of satisfaction, to see this goal achieved.

Article by Suresh Sadagopan; Published in The Economic Times on 4/3/2011

A little diligence can make your investments tax efficient

There is an often heard line from our investors – ‘Please suggest me an investment that gives high returns and is low on risk’. Though there is so much coverage in the media that risk and return go hand in hand, this requirement has not gone away. It’s as elusive as experiencing snow fall in peak summer. The other aspect, which investors should be focusing on, but are neglecting, is the taxation and tax efficient investments.

Everyone wants to save on tax, under Sec 80C. But, that enthusiasm does not carry forward to finding out which could be the best investment vehicles for them. They talk of NSC, 5 year plus FD in Banks, PPF , ELSS Mutual Funds & Insurance, in the same breath. But, these are different investment vehicles in many ways.

Though NSC, PPF and bank FDs are all 100% debt instruments, their tenures and returns vary – especially their returns. The returns in Bank FD would be on similar lines like NSC. The tenures are also different – NSC has a 6 year tenure, FDs can have 5 years or more, PPF has a 15 year tenure. NSC gives 8% returns , which is fully taxable. The post tax returns are just 5.53% for a person at the highest tax slab. FDs return more or less the same post-tax returns. The returns in PPF is however, much higher at 8% post tax. If we look at other instruments like ELSS Funds from MFs, they are completely tax free after their lock in period of three years. The returns are variable ofcourse… but long-term returns in equity oriented assets are expected to be in double digits. Insurance is again a different ball game. Here, the returns are tax free at maturity. The returns depend on whether it is equity or debt investment that the insurance plan has invested in.

As part of Financial Planning for our clients, apart from tax savings in the year of investment ( Sec 80C), we look at tax efficiency and the returns after tax, over time. Apart from that, we look at the fit of the product in their portfolio. For that, we look at post tax returns, the asset class to which it belongs, risk inherent in the considered investment, tenure & liquidity before investing.
A product that has emerged as a good investment option to receive good post-tax returns is a Fixed Maturity Plan ( FMP ). One year Commercial Paper and Certificate of Deposits, into which most FMPs of that duration are investing, are giving returns of about 9.2-9.3% returns now. FMPs are eligible for indexation after one year at 20%. Accordingly, most FMPs are marginally over one year duration. The post-tax yield assuming an inflation factor of 7% is hence about 8.8%. This is an excellent return not available through most other options, in a pure debt product. While considering debt investments, these aspects need to be considered before putting together a portfolio.

Again, as a Financial Planner, tax efficiency needs to be considered while making provisions for liquidity too. Liquidity Margin that is maintained is typically 3 month’s expenses. This includes all loan repayments too. While providing for liquidity, it is a good idea to give a thought to how much to keep in the bank account and how much elsewhere. In a savings account, the money will earn a return of just 3.5%. However, if it were committed to a Money Manager Fund, it could earn 4.5-6% returns. Money Manager Funds should be invested in Dividend mode. Dividend Distribution tax applies every time they declare and pay a dividend. But this is at 14.16%. The interest earned in a savings account is lower and will be subjected to the tax applicable, as per one’s slab rates. Hence, investing in a Money Manager Fund is better in terms of returns and better in terms of tax treatment. If clients are more comfortable with keeping money in the bank, we suggest investing in sweep-in deposits, which earn more than a Savings Bank account (but then, the tax to be paid is as per the income tax slab ).

There are other aspects where tax efficiencies can be brought in. Many people are interested in buying Gold, due to the dream run in the metal in the last 3-4 years. Again, investing in physical gold has lots of negatives – like one has to pay a premium ( 5-15% ) for buying physical gold, even if it in the form of coins. One would need a locker, purity of gold can be an issue and one may not get the right price, when one goes to sell. Also, in physical gold it comes under Long-term Capital Gains regime, only after three years. Also, it is subject to wealth tax. As opposed to that, a Gold ETF, is very much like investing in Gold. One will not hold Gold in the physical form. Hence, the question of purity, storage, theft risk etc. are taken care of. Also, since it is in the form of MF units, it is eligible for Long-term Capital Gains treatment, after one year itself. Also, there is no wealth tax on Gold ETF units. Even if there is an end use for physical gold at a future point, the ETFs can always be converted to cash and physical Gold can be bought.
Taking a joint home loan ( where applicable ) allows the couple to individually claim upto Rs.1.5 Lakhs each of interest paid, for deduction from Salary Income. These and other efficiencies are integral to a financial planning process. Tax cannot be avoided, but it can be reduced by proper planning.

Article by Suresh Sadagopan ; Published in The Financial Chronicle on 23/2/2011

FMPs as good investment options...

Investing in Debt instruments ( which have no exposure to Equity or Equity oriented assets ) has got very interesting now. Debt instruments like Bank FDs are giving 9.25% – 10% returns for different tenures. Also, for a senior citizen, they have additional incentives of upto 0.5%.

So this is a fantastic investment option for those who do not come under the tax net as the entire amount earned as interest ( say 9.5% ), would be their returns. This is even better for a senior citizen ( who does not come under the tax net ), as their return would potentially be higher by 0.25% - 0.5%. A 10% interest is a decent return on instruments which have very low risks ( Bank deposits are covered by Deposit guarantee insurance of Rs.1 Lakh ).

But this does not work for people who need to pay taxes. Even if one earns 9.5% interest, the post-tax return for a normal citizen in the 30% slab, is just 6.56%. See adjoining table for returns for normal & senior citizens coming under various tax slabs. That is where Debt Mutual Fund schemes can help.

Understanding the taxation : Debt Mutual Funds are subject to capital gains. Any investment less than 12 months and returns from them, qualify as Short term Capital Gains ( STCG ).

STCG taxation is at one’s marginal tax slabs. However, if one has opted for the dividend option, the income coming after dividend is tax-free in the hands of the investor. Dividend Distribution Tax ( DDT ) comes to 13.84%, which is paid by the AMC. To that extent the returns are depressed. Since, it is tax-free after that, you end up paying only 13.84% as tax, albeit indirectly.

Hence, it should be evident that it is a better idea to opt for Dividend option for those in the 20 & 30% slabs and Growth option for those in the 10% slab.

Investments beyond 12 months attract Long term Captial Gains ( LTCG ). Here, the taxation is 10% without indexation or 20% with indexation, whichever is less.

Indexation concept is to enable a correction for the effect of inflation. If for instance, one has invested Rs.100 and has got 9% returns, the actual returns are not 9% as there is also an inflation ( say 7% ) that is eating into it. The actual returns are only 2%. This in effect, is the principle of indexation. For multiple years, multiple ( double, triple) indexation, can be claimed. The tax after indexation as mentioned earlier, is 20%. The post-tax returns worked out this way, comes out to be very beneficial and way above what one can earn in a similar return FD. See adjoining table. That is what makes FMPs so attractive, which is also a debt Mutual Fund scheme.

What are FMPs : There is a knight in shining armour now – in the shape of Fixed Maturity Plans or FMPs. These are 100% debt instruments which invest in Commercial Paper ( from corporates ), Certificate of Deposit ( from Banks ), Securitised debt, Bonds, Money market instruments etc. These are coming from different sources and have differing rates and risk profiles. Though most of these instruments have fixed interest rates, they are traded and hence there can be volatility. To take care of this, FMPs are now mandated to invest in instruments which mature on or before the maturity of the FMP itself. This takes care of the interest rate risk.

Also, to play safe and compete effectively with FDs, many FMPs coming in today have exclusive Bank CD portfolio. For the purpose of understanding, it is sufficient to know that bank CDs are fixed income instruments issued by banks that give a specific return, much like an FD. Hence, a full CD portfolio is being put together these days, in many cases, to give that extra comfort to investors.

Portfolio & returns : There is one small problem. As mandated by SEBI, AMCs are not allowed to disclose either the portfolio or the indicative returns. This, they have done to ensure that an investor is not led down the garden path by showing one portfolio & the concomitant returns and actually investing in another, different portfolio. However, this is actually a serious problem today for the investor. They neither know the portfolio nor the returns. How are they supposed to invest? They would need to divine from the way the AMCs have been investing in their past FMPs and form an opinion of the portfolio construction principles generally used. They will then have to find out the returns they could expect from such a portfolio, based on publicly available information. They would also probably need to get information from others who are better informed than them ( Informal channels ) and get clarity before investing.

Tenure : FMPs have another attraction for investors. These are not very long duration products like NSC, KVP or PPF. FMPs can even be for a 3 months duration. It normally starts from 6 months and the more popular tenures are around 1 year to 15 months duration. There are also FMPs which are of 18 months to 3 years durations. Hence, these products are available for convenient terms. Hence, investors can invest based on their comfort, in an appropriate tenured product.

No wonder, FMPs have found favour with those who have understood their unique value proposition. Since these are close ended products, one can invest only when it comes up for subscription. FMPs may be available for subscription for a limited number of days only, which is one of the principal inconveniences. One can ofcourse invest in a liquid or money manager fund and wait for an appropriate FMP to transfer to, as an alternative. Most AMCs are offering this product. Hence, there is no dearth of choices.

Make merry when the season is on.

Article by Suresh Sadagopan ; Published in DNA Money on 17/3/2011

Investment options less than a year

Matching investments to the needs & the timeframe is an important aspect of Financial planning. The following article in The Financial Chronicle dwells on the subject of appropriate investment options for a one year or less period.


22 May, 2011

Child Education Planning

Child's education planning is a major cause for concern these days. The avenues open today are many. This article in India Today talks about that. Link given below -


Equity bonus for retirement corpus

This will ensure that your kitty does not get exhausted before your lifetime.

The idea of retiring had terrified Tanmay. He was unnerved at the thought of no regular income, unsure if his retirement accumulation was good enough to see him through his golden years.

He consulted a financial planner, Seshadri. He, then, suggested a certain amount in mutual fund (MF) schemes and equities, even after retirement. His point: if the corpus is fully invested in debt-oriented instruments, the growth would be miniscule or negative after considering the inflation and taxes. Hence, there was always a chance of the corpus running out before one’s lifetime. Especially since, one cannot anticipate the inflation during retirement years and expenses.

Corpus on retirement (Rs) 58 lakh
Tanmay’s post-retirement lifetime (years) 25
Wife's post-retirement lifetime (years) 30
Debt # Debt + Equity #
Return on retirement corpus (annual) (%) 8 9.4
Rrate of inflation (annual) (%) 7 7
Real rate of return (annual) (%) 0.93 2.24
Annual expenses after retirement (Rs) 2.75 lakh
Corpus will suffice for (years) 23.6 28.9
*Assumed return: debt=8%, equity=12% # Debt (100%) , Debt (65%) + Equity (35%)

However, Tanmay wasn’t sure of this. He had invested in equity in 1992-93 and burnt his fingers. But Seshadri simply pulled out his laptop and started punching the numbers. He showed Tanmay that if he invested only in debt instruments, his corpus would last just 23.5 years (before his estimated lifetime and well before his spouse’s lifetime).

Instead, if he allocated 35 per cent of his corpus to equity-oriented assets, the corpus would last for about 29 years. Since after his lifetime (25 years ), the expenses would reduce, the corpus would be sufficient to cover his wife’s expenses (assuming she outlives him by five years) as well. After seeing the calculations, Tanmay felt Seshadri’s argument was logical.


In the calculations, Seshadri had assumed a 12 per cent return on equity-oriented assets. Tanmay wanted to know how this could be so blithely assumed. After all, one can easily lose money investing in equity.

Not one to give up easily, Seshadri showed him how equity had given returns of almost 18 per cent on a compounded annualised basis, over 30 years. He explained that equities gave good returns over time, though they are volatile and can also give negative returns in the short-term. He asked Tanmay why he couldn’t invest a portion of his corpus in equity if the time period into retirement was in decades.

When Tanmay confronted Seshadri with the fact that he had lost money in 1992-93, Seshadri analysed the shares Tanmay had bought. They were all momentum stocks, bought on tips and hearsay. He infact told him that Tanmay would have made about four times the money he’d lost even if he had invested in fixed deposits. And about 7.5 to 8 times if the money had been invested in equity-oriented assets returning 12 per cent yearly.


He then proceeded to explain about MFs and their functioning. MFs invest in a good bouquet of companies, due to which there is good diversification. There is a fund manager to take care of the funds. A normal investor need not worry about stock picking and keep monitoring the portfolio. As he is not equipped to analyse companies, the sectors and their future prospects. Or one could simply invest in index funds and participate in the broad growth of the economy, without being exposed to a fund manager’s calls and also pay lower expenses.

He also advised Tanmay that that he should have sufficient medical cover. Tanmay had a medical insurance of Rs 2 lakh each for his wife and himself. Seshadri advised this cover be increased to Rs 5 lakh each. Also, he suggested that another Rs 5 lakh be set aside for incidental expenses on medical grounds. This seemed reasonable to Tanmay.

All this happened over two years ago. Tanmay has since then started trusting Seshadri’s view implicitly. He feels that he is doing extremely well financially because of Seshadri’s advice. Better late than never, he consoles himself now.

Article by - Suresh Sadagopan / Business Standard / Mumbai May 22, 2011, 0:48 IST

21 May, 2011

Simplify your investments and stay focussed to reap steady returns

Mahatma Gandhiji was the epitome of simplicity. Over the years, he had eschewed almost everything and his very few possessions were a few personal items like his watch, pen, eye glasses etc. Most of us have not learnt our lesson from him and end up complicating our lives.

Simplicity is a sublime concept, which needs to be experienced. Less is more, most times. Simplicity works beautifully. Like they say, less the luggage, more the comfort... Simplicity is even more relevant, with one’s finances.

We all invest in our favourite schemes – be it FD or Equities… We also put in money in insurance products. But many of us have the insatiable urge to diversify. That prompts many of my clients to ask me “What’s new?” – meaning if there are any new products in which to invest.

The main point is that they need to invest for their goals, consistently, in instruments which match their risk profile and return requirements. Diversification also is required till a point… but that does not mean that you need to have every product that has ever been launched, in your portfolio.

Mostly, the basic products are good enough to take care of most requirements. One needs to make a clear assessment of one’s needs and select appropriate investment vehicles. Among debt products, FDs & Debt Mutual funds, along with PPF, are good enough to cover most requirements on the risk-return continuum. Some might be tempted to add bonds and debentures to it and I’ll still smile and go with it. But beyond a point, diversification loses it’s meaning.

For instance, for Retirement planning one may invest in FDs, PPF, Equity & Equity MFs. A long list of twenty different products may not be required. Unlike what is normally assumed, a long list of pension policies is not required to secure the golden years. By keeping it simple, even the administration would be easy. Easy does it.

Even within a category of products like Mutual Fund schemes, you need not have a finger in every category from large-cap to thematic, sectoral to hybrid. Rather, you should be choosy about what categories you invest in. Once the category is chosen, zero in on the schemes that best represent that category.

But what about the structured products, guaranteed return products, PMS products with exotic payouts and other amazing constructs. Mostly, they can be ignored without jeopardizing any goals… these exotic products are generally not that amazing to the investors, as they are made out to be. Since there is always an expectation from the investing public for something new, there are those who oblige – launching such new fangled products. The craving for something new is also the reason why IPOs, NFOs always get a good response.

That is true of insurance products too. The industry keeps churning out one product after another – when their most important mandate is providing a security net. This has been forgotten by the industry and given the short-shrift by the consumers too. Insurance companies hence keep talking of investment products and obliging customers beat a path to their door. When clients come to us, they come loaded with all manner of insurance products and very little of what insurance products are supposed to provide – Insurance ! Very few have term insurance. Just taking an appropriate term cover would be the simplest / low-cost option to secure. But the simplicity of this product leads many to disbelieve the product – how can such small premium cover me for so much – there has to be a catch somewhere, people think. At the other end, others see the premium as money down the drain little realizing that in any insurance product there is a mortality charge, which do not give returns.

The product brochures make interesting reading and could tempt you or even psyche you into putting money into various schemes. That is the job of a product brochure! Some of your friends may be excellent raconteurs and may end up setting you up for a product inadvertently. What works for one is not necessarily best for another. The product selection largely depends on one’s goals, situation, time horizon, risk bearing capacity etc. Keeping it simple, works... Good old common sense should be your friend, confidant and guide. Or pull out a currency note and see if Bapu can inspire you on this front? If nothing works, the likes of us are waiting to simplify things for you – at a price!

Article by Suresh Sadagopan ; Published in The Economic Times on 1/4/2011

Simple pointers to MF investing

Mutual Fund investing is not very exciting. It is probably marginally better than investing in Post office schemes. It’s certainly no patch on direct stock market investments, where there is unbounded excitement – the rush of adrenalin and the frenzy one could experience when the stock markets soar…

Though stock markets are exciting places if you are looking for the thrills, Mutual Funds continues to be an excellent option, for normal investors. The most important criteria while investing - it should offer a reasonably good return commensurate with the risk. In Mutual funds, there is a fund manager, an expert who manages the investments, which is a positive… as most investors do not have the time or the expertise in the investment area.

While choosing Mutual fund schemes, there is a certain bit of diligence, which is required. Let’s look at them in turn.

Following the stars : Lots of investors follow the stars assigned to a scheme by various firms who rate the performance of the schemes. The rating criteria of different agencies would be different and the number of stars may be different for the same scheme, from different agencies. That would result in confusion. Also, a four or five star rated scheme may not be performing well now and may still retain the rating as the agency may have looked at the long-term performance primarily, for assigning the rating. So, if the short-term performance has taken a hit because the fund manager has changed or the scheme has started invested in non-performing sectors or has retained a lot in cash when the markets soar, that does not get factored in the rating. Investing in such a scheme may not be a great idea.

As an investor, it is hence better to do a bit of reading to find out if the scheme in question is indeed as good as the stars behind them. It is easy today to get all kinds of information on a scheme on the net, which will highlight other aspects that you would need to know before investing – like fund manager change, scheme merging with another scheme, company takeover or more mundane reasons like wrong timing, cash calls going wrong, investment theme being out of flavor etc. Look at the stars, but scan the cosmos before putting you money!

Timing the market : There is an urge among investors to time the market to a nicety! It happens in books – not in real life. Fund managers would give their right arm to get this ability! Even they do not get this right – several fund managers missed the rally that started in March 2009 and got on board much later in June/ july 2009. But still, some investors retain their cockiness – they assume they can time the market. Once, twice maybe. It’s just not possible on a consistent basis. It is far better to invest regularly on a monthly basis, through SIPs, which will help even out these fluctuations and infact help in taking advantage of the whip-saw movements. Big onetime investments can be done through Systematic Transfer to Equity funds after investing in an appropriate debt scheme. Spend time in the market instead of timing the market.

Despairing after investing : Many investors suffer from bouts of self-doubt after they have invested – especially if the market has corrected and their returns have come down or entered the negative territory. They wonder if they were much better off staying with the FD, like their bank manager keeps repeating. Maybe, the amount in SIPs could have been lower. Maybe, they should have invested in equity directly… The last bit is even more confounding as many people assume that the fund manager is goofing up big time and that is why they see poor returns and feel they could have done a better job!

The basic point is that MF investments are subject to market fluctuations, which certainly does not mean that they will not be able to deliver good returns. They will, over time. Sensex has delivered about 18% returns since inception, though there have been periods of poor to massive negative returns. After investing, one needs to give time. There is also no sense in panicking and withdrawing the money or switching to other schemes. Faith and patience are the watch words here.

Investing blindly : There are fads and sensational themes at different points. Some of these fads may actually be good and may even be worthy of investments. Some may just be a lot of hot air. Pursing all fads would only end in grief.

Also, many investors have the “strategy” of investing in all NFOs that come into the market as the NAV will be 10. NFOs start their life with a disadvantage in that they do not have a performance history and many times may be run by a brand new fund manager and may also follow a new theme. These in itself are significant negatives. But, investors chase NFOs, like cats after mice.

Friends and colleagues are credible source for investment information for investors. It does not matter that their friends and colleagues invested based on information from their other friends. In short, many times, investors seek short cuts to making an investment choice and end up with ones, wholly unsuited to them. Copy paste investments seldom work. There is no substitute to a bit of work before investing.

With a bit of spade work, one would end up choosing schemes that work well. It’s not difficult. It’s most certainly rewarding. It may not be as exciting as stock investing. But then, you could always bungee jump or do white water rafting for the adrenaline rush. Why put your money on the line?

Article by Suresh Sadagopan; Published in moneycontrol.com on 8/4/2011

Gold Funds - another good option

Gold is seen as a hedge against inflation, an insurance when currencies get debased and as an investment asset class by itself, which has low correlation with other investment assets.

When gold is bought as ornaments, the purity is compromised. Buying gold in the form of biscuits and bars is not the most efficient way either as the prices are still higher by between 5-15% than the raw gold prices. However, people buy gold bars and biscuits for investment and gifting. Large amounts of money can be parked in gold.

But physical gold has to be stored and it has its pitfalls. Since it is precious, it has to be secured properly, like in a bank locker. Insurance may have to be taken, which adds to the cost. However, there are other ways of buying gold.
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Gold ETFs: Gold ETFs (exchange-traded funds) have become popular as it does away with many of the problems of physical gold. Gold ETFs are products from mutual fund houses and can be bought in units.

However, one enjoys the same investment appreciation like raw gold. One unit corresponds to one gram of gold (in one of the cases, 0.5 gram). Units can be held in whole numbers only and fractional units are not possible. The company that manages ETFs will buy gold and hold it. This ensures that there is a direct correlation between the price of gold and the gold ETF units.

Gold ETF units can be held in a demat account. Also, the buying and selling of units will have to be done on the stock exchange like BSE or NSE. This means a person should have a demat account and should have a broker or trading account to buy and sell ETFs. This can be a problem for some. The costs here are the expenses charged, which ranges between 1% and 1.25% currently. Additionally, the stock broker may charge 0.5% on both the buy-and-sell transaction.

Transactions can happen if there are trades on the exchange. Liquidity is a factor of demand and supply. This is referred to as the impact cost, which is the bid-ask spread. Higher the volume, higher the liquidity and lower the bid-ask spread. Benchmark gold ETFs have the lowest impact cost. They are the biggest gold ETFs in the industry with a corpus of about Rs1,500 crore, in an industry asset under management for gold ETFs of Rs3,500 + crore.

ETFs also enjoy benefits like long-term capital gains after 12 months of holding and exemption from wealth tax.

Gold funds: Now, mutual funds have launched gold funds, which invest in gold ETFs. This is not to be confused with funds investing in gold and other precious metal mining companies like DSP BR World Gold Fund. These gold funds are being launched now to give further convenience to investors. It has the following benefits:

This is especially useful for those who do not have a demat account, as the investment is in the form of normal MF units.

Liquidity is assured as the asset management companies are the counter party.

Monthly investment of a regular amount by electronic clearing system is possible to be set up, for whatever duration.

The investment can be as low as Rs100 in one case and Rs1,000 in case of another fund.

There is no brokerage to be paid and the charges are capped at Rs1.5% per annum.

The other benefits like long-term capital gains treatment after 12 months and no wealth tax for units held in gold funds are the same like gold ETFs.

In summary, gold funds are a useful addition to the basket of investment options. Since gold has shown good, long-term performance, investing in this on a regular basis would be a good choice. With the low ticket size and the ability to set up systematic investment planshere, this ensures disciplined, regular investment. A golden opportunity for investors really!

Author - Suresh Sadagopan ; Published in DNA Money on 13/4/2011

Saving instruments should be goal linked

Doing repetitive things can get boring. So it seems with investing too… which could be the reason why investors keep asking for new avenues to invest, all the time. If we suggest some Mutual Fund schemes, they say that I have already invested with that fund house, little knowing that we may be suggesting some entirely different scheme, though it is from the same fund house.

Also, there is a perception that investing in Mutual Funds is for the short-term, whereas investing in properties is for the longterm. The perception is ofcourse entirely erroneous. Mutual Funds are probably treated as a shortterm investment probably because they are quoted and their prices are known on a day-to-day basis and selling them is very easy. Also, the taxation for Equity Mutual Funds is benign – Long-term capital gains after 12 months of investment is nil. Equity is treated as an even shorter term investment. It is more often treated as a speculative investment, instead of the actual long-term asset, it can be and should be. Because of this wrong perception many people resort to day trading in equities. Many others keep buying and selling in the very short term usually calculated in days and weeks, instead of years.

However, Mutual Funds and Equities are Growth assets that could give good returns, over time. Those who have invested and stayed the course, will vouch for it. Sensex has given a 18% CAGR since 1979, which is creditable. That is indicative of the kind of returns that this asset class can deliver. The perception continues inspite of knowing these statistics. FDs, Bonds, PPF etc. are investments of choice among people due to the fact that investors want to put their money where there is least risk. But, there is a risk in that too – the risk of money depreciating in real terms, considering tax and inflation.

Closer Look

Citizens chase the latest fads in their quest for new avenues to invest money. Property and gold are the latest to catch their fancy. There are many who tell me that property prices cannot go down in Mumbai. I’m not so cock sure, for one. Their outlook is coloured by the relentless rise in property prices in the last 6 years or so ( with a dip in between in 2008-09 ). But, the steep appreciations which have happened will most probably not happen, in future. Most probably, it will settle in it’s longterm average of 6-9% yearly growth pattern. Those who buy property for investment expecting major appreciation would be disappointed. Property also offers low rental potential of about 3-4% of the property value, for Residential properties. For commercial properties, it is much better at between 6-12% of the property value. Hence, investing in properties should be tempered with this understanding rather than based on the exuberance of the last few years.

Gold as an asset class has been in existence for a very long time. In the past 10 years, it has done well. The longterm performance is not as good – 8%+ CAGR for a 20 year period. Gold performance depends on several factors. Gold moves up when there is uncertainty in the environment & when the dollar depreciates. Gold is seen as a storehouse of value and an asset of the last resort ( whether it actually is would need to be validated only in such a scenario ). Gold does not have any real use other than ornamentation. It is also a speculative asset as one will not be able to get any regular returns on Gold, unlike in the case of Equity shares, Fixed deposits or properties. So, the primary reason for buying gold is in the expectation of appreciation in their prices. Any asset which is bought with the only expectation of a future price rise and not other payout is speculative ( Land investment also falls in this class ).

Starting point

Investors need to understand one fundamental fact. Whatever they invest in, needs to meet their goals. Goals have priority. A Retirement planning goal would be high priority and a holiday abroad may be a low to medium priority goal. A goal also has a time frame. For instance, one may require Rs.25 Lakhs after 10 years for child’s education. Some thing like a car acquisition may be more immediate – like a year from now. Whether the goal is short, medium or longterm has a major bearing on how one should save for them. Apart from this, the amount of money required for the goal is of major importance.

After getting these important pointers one also needs to consider the number of years one has till retirement, the dependencies that are currently there in the family and whether it is a single income or a multiple income family & health condition of family members. Based on that, investments need to be made to meet short , medium & longterm goals. Based on the number of years to retirement, the aggressiveness of the portfolio is decided. For a person who has 10 or more years to retirement, the portfolio can be aggressive. Depending on the requirements for their upcoming goals, they could invest upto 75% in Growth assets like Equity oriented assets. The nearer the goal, the amount required for it needs to be brought into debt instruments which is not subject to fluctuations and erosion. This is to ensure that there will definitely be money for the upcoming goal.

There needs to be an over-arching strategy while investing. One needs to know what & where are the goal posts are, while putting together their investments. Also, the focus should be on regular investments with a longterm orientation, instead of trying to ride the crest of the latest hot-selling product. In short, responsible investing.

Author - Suresh Sadagopan ; Published in Business Standard on 17/4/2011

It is difficult to time the real estate market

It’s everyone’s dream to own a home. Big or small, a roof over one’s head has such an appeal with people, even Rajnikant can only dream of!

But owning a house has become a distant dream for many due to spiraling prices. People have been waiting in the sidelines, expecting some correction to happen. In 2008, there was a correction. As in any downturn, there were swirling rumors of prices dipping further. The upshot – most people sat on the fence, in a wait and watch mode.

In some markets – notably Mumbai and Delhi, the property prices have risen in many places and crossed the highs hit in 2007. In many other cities, prices have not risen as much as in Mumbai or Delhi. Those who missed the bus of buying in the bust, are now returning after a long wait.

Should you buy now ?

It depends on whether the property is for own use or an investment. It makes sense to scout around for reasonable prices if the property is for own use. Homes bought for residential purposes are long term investments. It will not matter too much if the property price goes up or comes down, in the near future. In the long term property valuations are expected to only rise. Even then, value can be unlocked only if it is sold. So, if a property is found which is a good value proposition and also is convenient in all other respects, one should go for it.for investments, should you still buy?

From an investment point of view, there are many options. Residential apartments, commercial property, land, serviced apartments are some common options. Apart from this, there are also Real Estate PMS that invest in properties across the country.
In property, the prices can vary widely even in the same vicinity, from project to project. Before buying a property, one should check on the reputation of the builder in terms of delivering on promises as far as amenities, construction quality, timeliness in delivery and reputation for clean & fair dealings. Property values go up depending on the developments in the vicinity too. Property supply in the area and amenities like parks, schools, malls etc also impact the prices. All these need to be factored while taking a decision. Many times, it may be difficult to take a call on this.

For those who want to play it safe, it may be a good idea to consider a Real Estate Fund. These funds typically invest in land, residential, commercial and other developments across the country. There will be professional management and risk diversification in view of the different kinds of assets they invest in and geographical diversification.

In case of someone buying a property directly, tax savings through investments in capital gains bonds or investment in another residential property are possible. This will not be possible in a real estate fund and the income from this will be applied to tax.

Will the interest rates go up ?

That is a million dollar question! The interest rate tightening cycle has more or less run it’s course and there may be very little left. That means, the interest rates may still go up but by a small increment.

What this means is that even floating rate loans can be a good idea now, especially since floating rate loans are offered at a lower level as compared to fixed interest loans.

Is it a good idea to prepay housing loans ?

Housing loan interest rates are some of the lowest loan rates available. Currently it is in the region of about 9.5 per cent – 10 per cent. Along with the income tax exemptions available, the effective rates will be less than 9 per cent. In view of this, it may be a better idea to retain the home loan and invest surpluses in instruments which offer over 9 per cent returns. The exception to this rule is for those who may spend the money. For such people, it may be a better idea to prepay. However, while prepaying one should take note of any penalties that may be applicable for prepayment. The other exception is if the amount of EMI being paid constitutes over 50 per cent of the monthly income. In such a case, it makes sense to prepay and bring down the EMI outgo to within 40 per cent of the monthly income.
Property has a huge lure among the public. For one it is tangible and everyone understands it. Over time, property definitely appreciates and can be a great security to the family. The important thing is to be prudent when evaluating and buying property. Timing is difficult here, as in equity markets. Take a longterm view. Once you do all this, you cannot go wrong!

Author - Suresh Sadagopan ; Article appeared in Indian Express on 16/4/2011

20 May, 2011

A sane way to deal with spiralling property prices

I always used to love Asterix and Obelix comics. They lived in a village in Gaul ( present day France to Switzerland ).. a bunch of colourful caricatures, if there were one. Life was fine in the village… but they had one persistent and eternal fear – that the sky will fall on their heads!

Ofcourse, it did not fall, in any of the various despatches that I have read. Such deep seated, but unfounded fear was comical to me when I read. But on deeper reflection, I felt, we all have our fears – we persist with it even if we are proved wrong.

One such is the fear that we will not be able to buy a home anytime in future, if we don’t buy today. This ofcourse is great news for real estate industry, for that would mean people buy, here and now. The push the thing along by announcing special prices now and subtly indicating that prices are going to go up, in the near future.
The craving for a roof over the head is primal. A home of one’s own is even more important for the ladies. They feel insecure at the thought of not having one’s own home. The thought of being thrown out of a rented home – the fear – is somehow etched in their mind. Women by nature seek security more than growth. They are homemakers… they want their nice nest, even if it is small. It is still their nest.
Everything is fine, as long as it is possible to achieve the end of going for one’s home, with the earnings at their disposal. But, lot of times, the home prices have shot up so much that it has moved up, up and away… so much so that, it is no longer within reach. This is when people start despairing and panicking. I know people who are willing to sell everything and put it in a home. That kind of behavior is counter productive. Anything done in panic is bound to bring ruin. That will compromise the investments being made for the other goals.

The reason for people panicking is that they base their decision on what has happened in the past 5-6 years. Even in these 5-6 years, there was a period of 2 years when the markets corrected and the sentiment was deeply negative. The problem now is that people have forgotten those days. They did not have the nerve to put in money in end 2008 or beginning 2009. Those would have been the right time to invest. But most investors, panicked at that time. People did not sell out in real estate primarily because it is not easy to exit out of real estate. Otherwise, a whole lot of them would have even got out at the wrong point.

The fact is that real estate market is also a cyclical market. It cannot keep going up all the time. There will be periods of correction. The 20-25% increase in a year in properties is another thing being talked about. This again cannot happen, year-on-year, in the longterm. When the economy is increasing between 7-8% and salaries in the organized sector is increasing at a median of about 10%, how can real estate prices increase by 20-25%? This is such a simple thing for one to understand. Yet, many people don’t seem to get the point.

The best way to plan for a home is to start small. It would be an excellent idea to buy a small home to start with and then upgrade that to better & bigger homes over the years. This basic idea is not my own. This is what most people have been doing in the past. But, now people are looking to invest directly in their dream home. The aspirations have gone up. People want a good living space, with top-of-the-line amenities and a good address, right at the start. But, that costs a load of money. That is the problem today.

For those who do not want to do trade up over time, it would be a far better idea to rent a home in a place of their choice and accumulate savings and wait till the time the real estate markets turn. This is not as difficult as it sounds. The approximate rental for a Rs.50 Lakh property would be about Rs.15-17,000/-pm. Typically, rentals are about 3-4% of the current property value, for residential property. The returns are even lesser in smaller towns. Hence home buyers are essentially betting that property prices will go up and give capital appreciation. Hence, owners are actually giving it to you cheap. Instead of getting pressured into somehow buying a property, it is a saner thing to stay in the property of your choice on rent. Even if one has to move, one can always move in the vicinity itself. The argument that school will get disrupted is not hence tenable. Address change is a problem and will entail some paperwork. That is unavoidable. But atleast, you will not be overstretching yourself and feel like a rubberband.

The sky is not falling. Property markets have cycles. You could always wait it out and buy later. In fact if more people do this, property prices will not shoot through the roof and speculators will exit the market as it is unattractive. Think about it.

Author - Suresh Sadagopan ; Published in Indian Express on 14/5/2011