Category Archives: Investing

Personal Finance Website Update

Nine months ago I did not know what a blog is? Stuck up at home due to a back injury, I was casually chatting up with a geeky friend asking him about how to create a website, purely in jest. “Why don’t you begin with a blog and then see if you can make it bigger”, he said and gave me a link of Blogger.

300 posts later, the dream of translating it into a website seems plausible. Just take a look at what I’ve created without knowing html code! (Well, I can figure out the a href link code, but just!!) Now you know why there’s no post here. I have exported these posts to my website blog

RSS readers are requested to take this feed please: http://feeds.feedburner.com/personalfinanceforeveryone

Personal Finance 2.01: It’s a one stop personal finance website and I urge you to take a test drive. Feedback will be of immense help.

Discussion Forum: It’s a forum where you can discuss all your doubts and questions about personal finance, planning and various products like insurance, stocks, mutual funds, etc.

PF 2.01 Blog: I have started a blog focussed on personal finance and I would invite you to share your thoughts. Let’s have a real conversation of PF going on here.

Weblinks: I am regularly out on the web. When I find a great site I list it here for you to enjoy. From the list choose one of my weblink topics, then select a URL to visit.

NewsFeeds: We have some great news feeds to take a look at. Suggestions are welcome.

Financial Advisors Directory: We invite professional and net savvy advisors to register and provide the information needs. This one is a first in India to the best of my knowledge.

The design stage will take another two months after which I’ll be ready to go live. The real action begins only after then. Wish me luck.

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What is Finance?

I was in Rishikesh a few years back in the winters and one old resident told me, “The water is warm when the Sun has not risen. Try it”, with a straight face. Next morning, it was pretty dark when I waded into the “warm waters” of Ganga. Boy, Oh Boy! I did not expect the old man to be so cruel!! 🙂

But I had the bath of my life. It was invigorating and real fun! I came back and thanked the old man who had tricked me into that chilled out experience.

What’s that experience to do with Finance, you’ll say. Well, I’m an old man by some standards. (This should also mean that I’m young by other standards:). And I want you to have fun with Finance.

Let’s take a look at what Finance means and I’m sure you will find it Fun, Interesting, Nasty, gives an Advantage, Not Precise, Creative and Exciting.

Finance itself has a very wide meaning and it encompasses Business Finance, Personal Finance and Government Finance in general. Here we will focus on Personal Finance only.

Your questions in personal finance would revolve around the following:

How much money will be needed by you at various points in the future?
Where will this money come from (e.g. savings or borrowing)?
How can you protect yourself against unforeseen events in your lives, and risk in financial markets?
How can family assets be best transferred across generations (bequests and inheritance)?
How do taxes (tax subsidies or penalties) affect personal financial decisions?
Your Personal financial decisions will involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement. Personal financial decisions may also involve paying for a loan.

Phew! Are you prepared to wade into the”warm’ waters of Personal Finance? Welcome

Transparency in Mutual Funds

Open letter to SEBI by Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. I have their permission to reproduce the article.

Dear Mr. Chairman:

The fact sheet of a mutual fund scheme that is released by its Asset Management Company (AMC) is a vital source of information for investors. However, in our view, the information provided by AMCs in these fact sheets is often inadequate and/or incoherent.

At Personalfn, we have always championed the cause of investors. To that end, we present a wish list for disclosure of information in mutual fund fact sheets.

1. Expense ratio The ratio represents the expenses charged by the AMC to the mutual fund for various purposes like investment fees, marketing and selling expenses including agents’ commission and transaction costs among others. These expenses eat into the returns clocked by the investor; expenses in fact have a very significant impact on long-term returns of the scheme. Given its importance, the expense ratio should be published in the fact sheet every month. At present only a handful of AMCs follow such a disclosure policy.

2. Portfolio turnover ratio The portfolio turnover ratio is a measure of how frequently stocks have been bought and sold by the fund manager. The same can offer investors an insight into the fund manager’s investment style. Of course, a higher ‘churn’ also has an implication on the expense ratio. There is a need to ensure that AMCs disclose portfolio turnover ratios in the monthly fact sheet. More importantly, the same needs to be computed in a standard manner. Among the AMCs that choose to reveal portfolio turnover ratios, some make use of a rolling 12-Mth period for the computation, while others consider the financial year as the starting point.

3. Average portfolio maturity It is common to find debt fund fact sheets mentioning the portfolio’s average maturity. As the name suggests, the figure denotes the time to maturity for all the debt instruments in the fund’s portfolio expressed as an average. Conversely, there are others which simply mention the duration (the unit for which is a time period i.e. days/months as well). However, duration (albeit vital) is a distinct measure from the average portfolio maturity. Duration is the tenure for which a portfolio of bonds or a bond must be held, for the investor to be immune to interest rate changes. There is a need to ensure that all debt funds disclose both their average maturities and durations in their fact sheets. Also a standard computation method must be followed so that investors can conduct a meaningful comparison between like schemes across fund houses.

4. Fund manager profile The fact sheets should unambiguously declare the fund manager responsible for every mutual fund scheme along with his profile. Similarly, the period for which he has been managing the given scheme should be mentioned as well. This will prove particularly relevant in situations wherein a successful fund manager, who was responsible for an impressive performance, has been replaced by another fund manager. Investors who are about to get invested in the scheme based on its track record, should be made aware that a new fund manager is now in charge.

5. Is the fund manager invested in the scheme? It is always comforting for consumers to know that the “cook eats his own cooking”. Similarly, a fund manager investing in a fund managed by him can be source of confidence for investors. The monthly fact sheet should have a disclosure in terms of whether or not the fund manager is invested in the scheme.

6. Unambiguous investment objectives Investment objectives like “to achieve log-term capital appreciation” are commonplace in the mutual funds segment. Such objectives are inconclusive and offer no aid to a prospective investor who is contemplating investing in the fund. An ideal investment objective must be unambiguous and comprehensive.
For example, the objective could read, “a growth-styled fund, the fund aims to achieve long-term capital appreciation by investing predominantly (at least 70% of assets) in stocks from the large cap segment. Long-term being defined as at least 5 years and companies with a market capitalisation of over Rs 50 bn (Rs 5,000 crores) at the time of investment qualifying as the large cap segment. The fund can also invest upto 30% of its assets in debt/money market instruments for defensive considerations”.

A rigidly defined investment objective ensures that the investor is decidedly aware of the investment proposition offered by the fund and can make an informed investment decision. The regulator should make this mandatory. Furthermore, the Board of Trustees can at preset time intervals (say semi-annually) offer their comments on the AMC’s adherence/success in achieving the stated investment objective.

7. Portfolio disclosure AMCs have increasingly stopped disclosing entire portfolios in their fact sheets (the printed versions, which are sent to investors). For example, in the case of equity funds most fact sheets simply reveal the top 10 stock holdings. So the fact sheet for an equity fund which holds say 50% of net assets in the top 10 stock holdings doesn’t reveal half the portfolio. Similarly there is also a case for more meaningful disclosure. Related sector holdings can be clubbed to reveal the true diversification levels in the fund’s portfolio. For example, holdings in related sectors like Auto and Auto Ancillaries can be clubbed and shown under a common heading i.e. Auto.

The regulator should make it mandatory for schemes to disclose their complete portfolios and also to follow a standardised classification of companies into sectors.

We believe that the inclusion of the aforementioned disclosure norms will go a long way in furthering the cause of investor empowerment.

Power and Magic of Compounding

Simple maths tell us more about the power of starting early and investing regularly rather than any rants. Check out this simple calculator by Hugh where he gives an option to compare two savings/investing options.

I have taken the following case:
Case 1: You start now with a yearly investment of Rs 1000 and stay invested for 40 years.

Case 2: You start after 20 years from now but invest Rs 2000 instead for 20 years.

In both the case, the amount invested is Rs 40,000. Assuming a common growth rate of 10% in both the cases, in case 1 , the accrued balance works out to Rs 442,593 . The accrued balance in case 2 is Rs 114,550.

Why don’t you work it yourself and take away your learnings.

Financial Literacy Drive Treasure Post

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

You need to be Lucky and brave!

As an asset class, Equity stocks offer the best returns. But so many of us have burnt our fingers in the process?

How is it that very few investors can make real profits, grow their networth and consistently beat the market? That’s because it often takes one or more of the following rare traits…

The vision to identify breakthrough products, leaders, and brands
The knowledge to spot an undervalued gem in a sea of glass
The courage to buy and hold when others are running scared

Occasionally, you’ll come across an investor with one of these valuable characteristics. And it’s likely that person does quite well. But I can’t imagine a person who can offer all three.

That would take two very different and even contradictory approaches…

Sounds scary? But fortune favors the brave only!!

Picking up stocks: Real Estate/ Construction

One of the questions to my earler post was how to pick stocks? It is allright to say that, ” You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them.”
But I guess, it’s good in theory. How about doing an analysis of a sector and then take a look at some stocks of that sector. Let’s take a look at the Real Estate/Infrastructure sector which is so much in the news.
So when we do an industry analysis, what are the things we look at? Companies producing similar products are subset of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd. etc. belong to the Power Sector/Industry of India. It is very important to see how the industry to which the company belongs is faring. Specifics like effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this as Industry Analysis.
To start with, let’s look at some macro facts and observations about the industry.
The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($ 1 billion = Rs 4,400 crore).
There is a steady growth in Housing Finance sector of approx.30 % over last four years.
The rate of interest for housing finance has become reasonable and affordable which has resulted into more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
Income of the urban buyer has grown substantially.
There is tremendous scope and growth in the Infrastructure Development.
Foreign investment by way of FDI has been approved.
Emergence of professional builders in the market with proper accounting standards.Emergence of rating systems for building projects.
The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
The award of ultra mega power projects and privatisation of airports demonstrates a committment at the highest level. So the momentum to build up roads, ports and urban infrastructure is building up for sure.
The JawaharLal Nehru Mational Urban Renewal Mission (JNNURM) initiative in 63 cities and urban transport projects will also drive up Investments in Infrastructure. Water Supply projects and sewerage projects would be part of the JNNURM.
So what do you think about the future of Infrastructure stocks in India? Ready to take a call?

There are three major stocks in the Infrastructure sector which is worth talking about. 1. Nagarjuna Construction (NJCC) 2. IVRCL and 3. HCC

Remember, do not go by the order book size alone, which is what many people do without understanding the intricacies. We need to understand the execution period of the order book, and the kind of margins that the company would make, given the kind of raw material prices at which it has booked these orders.

Even though it may look daunting, a lil bit of research helps you in understanding the stocks as well as improving your general knowledge.