Money Management Article on WSJ

The Wall Street Journal has started a couple of columns that deal with investment and insurance. From the few articles I read, they are level headed and seem to make sense.
Here is the links:

WSJ - India, Home Page
An article under the column Maximum Money
Another article on Insurance under the column India Article


Let me know your views on these.

The Indian Woman

Perhaps I have been a little unfair to the women readers of my blog. You see, I have been writing from my perspective. But when I look back at the 40 odd posts in this blog I am not at all surprised to conclude that all of these apply to women. In fact more so. Being financially well-off is a goal that every women should strive for. An old woman is more vulnerable that her male counter part.

The Indian woman who always - almost always - puts family before self. I am pretty confident that the 70-10-10-10 rule will help them as much as it will help the family. The male ego may put up a little resistance, but once the benefits are apparent, you will see the change.

In fact, every post on this blog applies to the family as a whole. The unit for financial prosperity is the family not the individual.

On my part, I will keep the family in mind in all my future posts.

Before you take a home loan

In my post yesterday, I talked about reducing your debt. This post is focused totally on reducing your debt created by your home loan. Having a roof over your head is a middle-class dream (actually everybody's dream - who wants to shuttle from one house to another every 11 months).

Here are a few aspects that you need to consider before you take a home loan:

1) Do not take loan from the first bank you approaches you. Talk to as many banks as you wish to. And let the banks know that you are talking to many banks.

2) It is not necessary to take loan from the same bank as your friend did.

3) Negotiate, negotiate, negotiate. Every aspect is negotiable.

4) If you tell one bank that the other bank is giving you the loan at a lower Equated Monthly Installments (EMI), the first bank will reduce its EMI to match. (Hint: Ask the first bank to better the offer; not just match.)

5) Floating interest rates are always better than the fixed loans. Remember that the fixed loan is not really fixed for life. If there is a huge upward difference between what was offered and what it is now, banks are within their right to hike your interest rate upwards. They will never reduce it downwards though.

6) Don't bother about interest rate. Instead find out what will be your EMI. There are many EMI calculators available online. Check out your EMI from that calculator and compare with what the banker has to say.

7) Always go for loans where you can make advance payments - in part or in full - without penalty. If all the banks offer pre-closure of loans with penalty, find out the penalty amount. Get this in writing.

8) Your insurance company, such as LIC of India, may also offer loans that also covers your death or disability. This is a good option, if you are already not covered adequately. There is a huge advantage in this. In case of your untimely death - God/Nature forbid - your dependents will no longer have to repay the loan.

9) Most of the time, you will be talking to an agent of the bank. The agent will promise you the earth. The bank may not follow it up. Maintain a note book and note down what each agent has promised you. When the bank gives you the loan letter check if all that was promised is included in the letter.

10) Do not burden yourself with the maximum offered home loan. Take on as less as possible. See Reduce your debt

Do you have some tips that I missed out?
Please leave a comment.

I will cover the "after" part of the home loan in my next post. Till then take care of your investments and your family.

Public Provident Fund of India

The most interesting instrument of growing money with the least effort - at least in India - is the Public Provident Fund (PPF) route. Other countries will have its equivalent.

This is how it works. You open a PPF in a bank (I have one in State Bank of India). You can also open a PPF account in the Post Office. It is a 15 year scheme. You need to deposit at least Rs. 500 every year. The maximum you can deposit every year is Rs. 70,000. The scheme has other facilities like loan and partial withdrawal. I would advise against it. Keep the money in the PPF scheme for 15 years.

If you deposit Rs. 5000 a month (Rs. 60,000 a year) for 15 years, then at the end of the 15th year you should have - assuming 8% interest - about Rs. 17,59,457 in your account (i.e., 1.95 times the amount you actually save). In addition, you get a tax exemption on the money you save. Assuming you are in the 33% tax bracket, if you take the tax saving into account, the effective increase in your money is 2.91 times)

Some more details are available here.

Doesn't actually make you a multi-millionaire (what do you expect from a no-effort scheme?), now, does it? But every bit helps.

Systematic Investment Plan

An important ground rule in your path to becoming rich is to understand that high returns are always associated with high risks. Always. So, if someone is promising you high returns but telling you that there is no risk, then that person is making a quick money - from you. So, please venture into high risk-high return schemes only if you have excess money and/or if you are young.

And then there is always the Black Swan.

A relatively safe instrument of making money from stock markets is what in India is called the Mutual Fund Systematic Investment Plan (SIP). This is particularly affective when the share market is in an upheaval. The most important think to remember in an SIP is that you need patience.

The way it works is similar to a recurring deposit schemes. You put in a fixed amount of money to the scheme every month. When the share market is down your money will buy more units. When the share market is up your fixed money will buy you less units. This averages out the fluctuations.

I actually did an experiment. I invested in a mutual fund where I paid a lump sum outright at the beginning and at the same time started investing in an SIP. After a year, the outright payment has given me a return of -14.3% (a loss) and the SIP actually gave me a return of +13.5%.

You will get more information on SIP here and here.

I see SIP as a long term investment plan. I intend to keep it up for about 5 years to see how well it works.

I also see SIP as having better Return on Investment, if you consider the effort and time required to follow the share market directly. Direct investment will most definitely fetch you much better returns, but you need to invest lot more time to understand the share market.

As long as you do not put all your money in SIP, you should be fine.

The rich are not bad

Flip through up any language text book.
You will notice that the rich are
(i) cunning
(ii) cruel
(iii) exploitative

Most of my childhood, teens and early adult life, we can visualize only one path to become rich. You need to exploit the poor farmer or the trader mercilessly and grab opportunities with scant regards to humanity to become rich. The rich has his vault full of pawned goods that the poor farmer deposits in lieu of money to buy seeds. The rains fail. The rich insists on his money., Where would the farmer get the money from. His land is usurped by the rich. You get the idea!

So who are the heroes of Indian tales - the educated man who impresses the king with his wisdom, the poor brahmin who earns name and fame because he is learned, and the cunning housewife who saves the day by fooling the cruel carnivore. Yes there are benevolent kings and kind moneylenders. Yes, the good always triumph in the end, but you come away with a bitter taste in your mind for the rich.

It did not help that early independent India plunged headlong into socialism. Since the rich exploit, the state would step in to save the day. Thank goodness for the givernment otherwise the profiteers would have sucked India dry.

The divide between the haves and the have-nots in India is accentuated by another factor: the varna (incorrectly translated as caste) system. You could either be a learned brahmin or others. The educated could not be rich; the rich could not be a learned brahmin. Indian mythology supports this to the core. The two sisters, Saraswati - the godess of learning - and Lakshmi - the godess of wealth - cannot see eye to eye. Any one of them will stay in your house. You got to choose between Saraswati or Lakshmi. 'Running after money' is as great an insult as any. The only honorable means of earning money is to get educated and go about earning money honestly.

It was not until early adulthood that I realized that the businessman is the driver of any economy and the resultant prosperity. They create jobs. They create opportunities. They create wealth. But this knowledge came in a bit too late for me. Even today, and I am 44, my initial reaction is that of shock when I read that high court and the supreme court judges - nor all of them fortunately - are involved in scams. It takes me a while to recover from news of corruption in India's defence forces. I have to hello-anybody-home? myself before I can proceed.

So what is the lesson?
The rich are not bad people. Seeking and exploiting opportunities is not the same as exploiting people. Stories are just that, stories.